[00:00:56]Pierre Daillie: Rodrigo, great to see you. And thank you for agreeing to do this.

[00:01:00]Rodrigo Gordillo: Yeah, great to see you too, Pierre. It has been a while. I have been pretty busy building a couple of businesses. But really excited to be talking about this particular topic that is near and dear to my heart. I have been investing this way for a couple of decades now, and finally putting something together for people to be able to take advantage of.

[00:01:21]Pierre Daillie: You are not just the Hair Club president, right? You liked the company so much, you bought it, right? Before we kick things off, tell us a little bit about the arc of your career, where you got started. What was it that shaped your experiences and your approach across that span?

Backgrounder

[00:01:44]Rodrigo Gordillo: I know I have told this story in the past before, but every one of us is formed by our experiences in our formative years. I was born and raised in Lima, Peru. I was very lucky to be born into a family where my father was already bringing the leading edge of computers and computer science to our household. I am a family of three brothers. I am the third child. But my father was always big on ensuring that we knew how to use computers.

We knew how to do programming, knew mathematics. He was a math professor at the University of Lima. He was actually one of the men responsible of bringing the first computer room to the Peruvian Navy when he was part of the Navy. So things from that perspective were going well in Lima and Peru.

My dad started a software development company that was leading edge, and what that meant was writing code so that cash registers can do the math. That was a great business at the time. Anyway, money went into the bank, safest bank in Lima. And sadly, in 1989, there was a transition of government, and Alan García decided to start printing money and say to the International Monetary Fund (IMF) that they were not going to pay their loans.

And inflation went from a moderate level in Latin American standards, which is around 23 percent, to 7,200 percent in six months, and whatever purchasing power that cash had in the account went to zero. And so it forced us to make some decisions, and we immigrated to Canada.

When we got to Canada, my father bought a house for five percent money down, which is what we had left right before—I know a few people will remember this—but the Toronto housing market went down 55 percent from 1989 to 1994.

And of course, we moved back to Lima in 1994, so we had to sell that at a loss. Did my high school years there, got back to Toronto. My brothers invested, my dad starting to put his money to work again. He knows tech; that is the one area he does know, so can’t lose, right, right before a 75 percent tech drawdown. So by the time I graduated from Commerce, Finance, and Statistics, I knew I did not want that to happen.

And I just went to work. I did not care about Warren Buffett’s style of investing. I saw the 80 percent drawdowns that he had in his live investing. I just wanted to not lose money.

And that brought me to unique concepts of maximum diversification, risk weighting, Risk Parity, Permanent Portfolio, and so on, that basically paved the way so that I can invest in the way I did.

And also being on the quant side, finding quantitative strategies that added—people talk about a third leg of the stool, well, these things add a fourth, fifth, and sixth leg of the stool that had been around for decades back in the 2000s when I started, continue to be around, but very few people use it correctly and apply it.

[00:04:49]Pierre Daillie: You have also talked about your experience going through the Global Financial Crisis (GFC) bust in 2008 and 2009. So, it is amazing how that stuff gets burned into your memory. I wonder, also, there are a lot of advisors, there are a lot of investors out there, especially in the younger set, who have never experienced anything. Even 2008 or 2009, they have not been through it. They sort of just, some of the older millennials sort of maybe started their investing experience after that.

So, that is part of the reason I am so excited to talk to you about this because I think, even looking back over time, there were times where I wondered and wished, it would be so cool, so wonderful if there was something you could do that would check off all those boxes that are so hard to predict and so hard to prepare for.

[00:05:56]Rodrigo Gordillo: The real issue today is that the vast majority of investors have focused on an asset allocation decision based on their lived experience. Their lived experience, for the most part, has been the last 40 years, of which the vast majority of time has been spent with equity markets going up, right? Let’s forget about the 2000 to 2010 period, but from 2010 even up to now, we are seeing nothing but easy investing with low cost and maximum value from doing that.

How do you create balance and minimize FOMO? Well, you have to be able to compete with the horsepower that equities have, and the way I see it is standard deviation or volatility. Global equities run at 15 to 20 percent volatility. Most portfolios that are well diversified, because of the diversification, run at five to eight percent. That is a tough thing to win most years.

But if you are able to scale your overall exposures and your balanced exposures up so that you match the level of risk to equities, but you expect to be three to four times higher units of return for that risk, then all of a sudden you now have what everybody has been clamoring for, which is a hedge-fund-style investing that can actually, or has a shot of beating the index.

And I think we have been stuck in a place where anything that was different from the S&P needed to be low volatility. I have decided that I am not interested in that. I will take the short-term pain of volatility so that I can show some long-term gain while being balanced.

So, that is the problem. And so, it is trying to solve, creating an equity line that has a good shot of being upward-sloping in any decade, and also reduce the FOMO of the gravitational pull of not doing as well as the equity market.

[00:08:01]Pierre Daillie: Very interesting. I think it is attractive from the standpoint that investors desire equity-like returns from all their investments. So, when you can structure a strategy that aims to provide that equity-like return, but with substantially less risk, less downside exposure, you can see where that type of strategy becomes very desirable, especially in the context we are in today.

[00:08:38]Rodrigo Gordillo: What I have done with this is I want to offer the same long-term volatility, same risk, but like you said, do it in such a way where the worst outcomes for equities are not the worst outcomes for this strategy. So, the depth of corrections are more tempered. And we also said equity-like returns; we are actually aiming to do better than that by virtue of diversification scaled up to equity risk. So, the goals here are to give people the risk that they have been used to, but try to do better.

[00:09:15]Pierre Daillie: So, you are backing into the context of Adaptive Asset Allocation, which is actually the context of the book that you, Adam, and Mike actually co-authored, which is a terrific book. It gets into the real-world concepts of risk budgeting and risk balancing a portfolio, as opposed to what we commonly have, which is the 60/40, which when you actually do the risk X-ray on, is more like 85 to 90 percent equity risk.

So, risk balancing is where a lot of the concepts that we are going to talk about are based, which is in using thoughtful, modest amounts of leverage to balance risk across all these various asset categories. So much of investment programs are based on high-conviction prediction, market calls, making directional bets on things that are happening in the market trends, but in a very superficial way. What does that actually mean in portfolio design terms?

[00:10:33]Rodrigo Gordillo: So the basic thing that I think people need to understand or relearn—because I think we have all learned this concept of if you hold equities long enough, they are going to make you money. If you hold Bonds long enough, they are going to make you money. People have been skeptical about gold forever, but if you just look at the empirical data, if you hold gold long enough, it is going to make you money. That, I think we can all agree on, right?

We can agree that it is up and to the right. And so, the basics of let’s start building a layered cake, the basics is we need to all agree that that is true, that we should expect these things over a full lifetime to be up and to the right, for reasons like risk-taking, requires a higher expected rate of return on the equity side. Taking risk on duration demands a higher return than cash for taking that duration risk.

Gold—we wrote a white paper on gold on the Return Stacked® side if anybody wants to read it—really does make a case for the fact that gold was non-risk from a retail perspective before the ’70s. But once it got decoupled, the risk was transferred over to the individuals for taking global political risk and taking the risk that there won’t be inflation. And so when there is inflation, you get paid, and that premium is very similar to what we see in equities.

And so if we truly at least believe that, then you can create a more balanced portfolio because it turns out that all those three asset classes respond differently to different things.

The last category that people may disagree on is whether non-correlated alternative strategies that are directional, like Managed Futures, Trend Following, Carry strategies, or Systematic Macro strategies—which is what we lean on here on our fourth asset class—whether that makes money over time.

Now, there has been an index around since 1997 that shows that it does make money, and it actually does as well as equities, bonds, and gold over a long period of time, or in that same realm of returns of excess returns.

You can go back even further with the Turtle Traders; it is just we can empirically observe that that is true.

And so, that is the basic. The basic is equities are not the only thing that can make you money. And if any one of these can make you money over time, can you predict which one of them is going to make the most money based on your prediction model or geopolitical models? We do not think so. We have yet to find a way to predict what is going to happen over the next 12 months.

And we used to write a newsletter every year that was called “Bold, Confident, and Wrong,” where we would assess all the predictions from the big banks of what was going to happen in the next 12 months and how they were wrong.

So, the premises are: there are asset classes that make money over time. They do not make money at the same time. It is really tough to predict the future. So, the first step is at least creating the “do no harm” portfolio, which is something that is an equal risk weighting between those assets. We have added Bitcoin, which is a bit more contentious, but we can talk about that later.

So, we are not predicting; we are just creating a fundamental diversification with risk balance.

So, making sure that the maniacs are not taking over the asylum, and not giving too much weight to high volatility, giving more weight to things with low volatility so that we can create that “do no harm” portfolio to start with, and then you can start getting fancy.

Rather than trying to predict which one is going to do better this year or these next 10 years, it is something you can kind of put in place, fall asleep, wake up 10 years later, and you will be confident that in that 10-year period you probably did okay.

[00:14:31]Pierre Daillie: Rod, which major asset sleeves are you using—and you just went through the list—and what role, more importantly, what role does each play in different growth and inflation regimes?

[00:14:44]Rodrigo Gordillo: If I zero in on this graphic, we talked about four different categories of investments, but we did not really explain why it is important and why those things move differently from each other. But when you understand how markets work, markets work based on the interconnectivity between inflation and growth. Periods of high inflation, low inflation, intersected by periods of high growth and slowing growth, will define which asset class is likely to do well.

And this is kind of intuitive, right? If you have a period of rising inflation and slowing growth like a stagflation environment in the ’70s, Pierre, what would you expect to do well in that environment?

[00:15:23]Pierre Daillie: First of all, I would expect, I think low-hanging fruit would be anything floating would do well, Cash for sure. Cash, definitely. Cash would be a great asset. Commodities.

[00:15:42]Rodrigo Gordillo: Yeah.

[00:15:42]Pierre Daillie: Energy, things like that.

[00:15:44]Rodrigo Gordillo: So, the commodity markets are likely to outperform even that big cash.

[00:15:48]Pierre Daillie: Real assets.

[00:15:56]Rodrigo Gordillo: Real assets, and strategies that can go long those things and short the other things, right? Like Systematic Macro and Managed Futures, Trend Following.

And so, we can do this exercise across the board. If we think about accelerating growth and low inflation, well, that is good for businesses, right? So, if it is good for businesses and there is no inflation, well, commodities are probably going to go down, and you are probably going to see equities do well and bonds do well.

And if you are going to see a period like 2008 where credit dries up and there is illiquidity and slow growth and low inflation, well, that is when people are going to go towards bonds and sell out of equities and commodities. So, all of these are intuitive things.

And when you look at that second page here, where we show examples of periods where we saw inflationary stagnation like the 2022 period, inflationary growth periods like 2003 to 2007, bust periods like the credit crisis, and disinflationary growth periods like 2011 to 2020, you see that play out.

You see that in an inflationary stagnation period like 2022. We always knew—we had been talking about this before 2022, Pierre—that when rising inflation is slowing growth, bonds and equities were going to lose at the same time.

And you will see that bonds here lose a lot. It is because we here use the long-term Treasury market, so the 20-to-30-year. I think what we use here is TLT, if you guys want to take a look at that. In 2008, it made 22 percent. In 2022, it lost 41 percent because rising rates are bad for both equities and bonds.

What did well? Gold did okay. Systematic Macro, which can trade commodities and go long and short commodities, currencies, bonds, and equities globally over dozens and dozens of markets, they tend to do well.

And then we can just go on, in inflationary growth, gold did really well, did the best. Equities second, and bonds okay. Weight equities down, bonds up, gold up, Systematic Macro up.

And disinflationary growth is the best for the 60/40; that is what has dominated the last 40 years. Thirty of the last 40 years have been this. You are seeing Equities be the best performer and Bonds be the second best performer. Not surprisingly, everybody has a 60/40 portfolio.

But we have got to think about all decades, not just the decade we have lived or 40 years that we have been investing in. And that is why I am—that is what this is trying to show: that you want structural diversification, and you have got to be okay with the fact that diversification means that you are always having to say you’re sorry about some elements of your portfolio. But ultimately, it is, in my opinion, the safest way to put portfolios together rather than focusing on equities alone.

One of the things, if you are okay with me talking about risk balance, I want to get into here, is that there is this view in the marketplace that has permeated across advisors and individuals and boards that you have your equities for high returns, and you have your bonds for moderate returns and protection. And that is just not quite correct. Bonds can be just as good long-term as equities; you just have to be able to get exposure to bonds that provide the same level of risk as equities.

And you don’t have to do anything fancy here to see the value of that. You simply can buy that long-term government bond ETF, TLT, to see how it did from 1999 to June 2024.

For most of my career, people were like, “equities, I want to buy, no, we need to have an equity portfolio.” And I kept pointing to this black line that outperformed equity markets from 1999 all the way through 2021, and not only that, but made money during the tech crisis, made a lot of money in October of 2008, made money during COVID.

This is what happens when you put your risk goggles on and say, “Hey, if this is an interesting thing to invest in and I believe in it long term, what can I do to scale it to the same level, to the risk that I am okay with, and then do an apples-to-apples comparison?”

So, this is close, that long-term Treasuries, equities, and gold are roughly exhibiting the same volatility, but not quite. So, putting together this in an equity line, I believe everybody should have this as their base portfolio before they meet with any advisor, before they talk to ReSolve Asset Management or anybody else.

[00:20:58]Pierre Daillie: Mm-hmm.

[00:20:59]Rodrigo Gordillo: If people come to me and say, “What should I do?” I say you should consider having these three asset classes and putting them together, but not in equal dollars.

I think equal dollars is misleading, because it is like—the way I describe it is you have a three-piston motor, but if you do equal dollars and one piston is thicker than the other piston, then you are going to have a three-piston motor that is not balanced.

You need to actually modify them so that each one of these three differentiated pistons has the same width and provides a balance to how the motor runs.

[00:21:36]Pierre Daillie: I think the concept of risk balance is something advisors and investors—a lot of advisors, not all advisors, but a lot of investors and advisors—are simply not familiar with, which is the risk X-ray. What does your portfolio risk balance look like versus your labeled diversification that you have in your portfolio?

I think when you look at that chart, and on an even simpler note, if you talk to bond people, people who are actively trading in the bond market, they will tell you exactly what you just said: that you can make as much money in bonds as you can with equities. And if you talk to equity-biased people, you are going to hear equities forever. And if you talk to gold bugs, you are going to hear gold forever, right?

[00:22:31]Rodrigo Gordillo: And if you talk to equity investors on Black Monday of 1987, they will tell you that they jumped off a bridge. If you talk to bond traders in 1987, they never made more money in their entire lives. So, it is still—we continue to not understand that. We have been trying for 20 years to change that, but it is slow-moving.

[00:22:56]Pierre Daillie: Well, it is because you have to overcome those biases that have been created by the industry itself.

[00:23:04]Rodrigo Gordillo: Correct.

[00:23:07]Pierre Daillie: About the roles of different assets, then risk weighting them, right?

[00:23:13]Rodrigo Gordillo: Right. So, if you really wanted to have a strategic portfolio of those three assets, instead of doing 33 percent across each, what you want to do is you want to look at the volatility and then do what is called inverse volatility. With all the AI models, you can just search it up: “How do I create an inverse volatility portfolio of three assets?” and it will do it for you.

But the numbers here over that period are that you want to have a little bit more to Treasuries, in this case around 39 percent, 31 percent to gold, and 30 percent to global equities. So, not a wild deviation, but a little bit more. And this may seem like, oh my god, so much risk to bonds. But in reality, it is equal risk long-term.

And when you put together a portfolio that simply, you actually end up with the dream, right? That equity line that everybody talks about, which is: how do you smooth out sequence of return risk? How do you mitigate the chances that the day that you retire, you are going to have a lost decade? And for those people just listening in and not watching, just imagine what happens when you have a three-piston motor and every day puts out some output, and it is a much smoother ride. It is a much smoother equity line.

And so, that to me is the OG way. This is not anything new. Harry Browne came up with this in the ’80s. He added some cash in there, but then the volatility is way too low for my taste. But that is a good place to start, and that should red-pill a lot of individuals, a lot of advisors to say, “Okay, yeah, this seems better.” And then we can build on that as to how to then make it so that you are competing with equity markets.

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 have been talking about put into practice, please do go ahead and check us out at www.investresolve.com. Now, back to the podcast.

[00:25:48]Pierre Daillie: Practically, Rod, how are you measuring and balancing risk across—I know we just showed balancing risk across global equities, long-term bonds, and gold. But now when you add in commodities and Commodity Trading Advisors (CTAs) and Systematic Macro, Trend Following, how do you incorporate that element along with those three? Do you use the same inverse volatility risk budgeting, risk balancing model?

[00:26:26]Rodrigo Gordillo: Yeah, so just, again, not to get too deep on what Systematic Macro is, but it is using systematic signals, like: what is the trend on coffee? What is the trend on German bonds? What is the trend on gold, and so on across dozens and dozens of global markets?

And trend might be one thing. You could also look at seasonality. Is it a good time to invest in gold right now? Yeah, good trend, but is it a good time from a seasonal perspective? What about mean reversion? Has gold gone crazy, should we take some back? What about things like the yield I am getting to hold gold, the futures contract, is it positive or negative?

So, all these different well-known factors that you can harvest over time, they are all imperfect. But when you grab those signals, add them all up, and then say, “Okay, I have gotten all of the opinions from these systematic models of what my position should be in each one of these markets,” you aggregate it and then you decide that day to go long or short.

Once you have your portfolio, then once again, you can decide how much risk you want to take on that portfolio. So, in the sense of we just talked about gold, equities, and long-term bonds and equal risk, you can then create a strategy that targets a specific risk up, and then you have a fourth piston that acts very differently than the other three, that has an equal width to all these other ones, and that creates a powerful motor that is also more balanced. So, that is how you add those alternatives.

[00:28:10]Pierre Daillie: So, I think what you are getting at, Rod, is that the three core elements—long-term bonds, gold, and equities—are the core of the portfolio, and the Systematic Macro is an overlay.

[00:28:33]Rodrigo Gordillo: It is the Return Stacked® portion.

[00:28:36]Pierre Daillie: Right.

[00:28:36]Rodrigo Gordillo: And it will depend. There are different iterations. So far, what we have discussed is that. Those allocations I gave you, we are not selling those down; we are simply stacking that other Systematic Macro strategy on top of those three. So, this is very doable using derivatives, and that modest leverage that you talked about.

[00:29:02]Pierre Daillie: Okay. So, let me ask you the question: how do you think about the trade-off between diversification and gross exposure?

[00:29:12]Rodrigo Gordillo: So, the trade-off between how much leverage you use or not really comes down to: are you doubling down on the same risks, or are you using leverage in order to use it from a defensive perspective? We call that defensive leverage. And there are limits to the amount of leverage you can use.

But if you are looking to, like I say, most people are used to investing in equity-like volatility, or at least when people choose to do something different, they will sell their Equities to buy that different thing, right?

[00:29:47]Pierre Daillie: Well, that is the perennial problem.

[00:29:51]Rodrigo Gordillo: Yeah. We want to have, if we are selling a motor with a certain horsepower, we want to replace it with equal horsepower at the very least. Hopefully a more efficient motor, but at least the same horsepower, one that does not break down as much and so on, just to push the analogy even further.

But the amount of leverage that is used will vary over time, especially on the Systematic Macro side. As things get riskier, you reduce allocation. As things get less risky, you increase your allocations to maintain that level of risk targeting that you are using.

We wrote a piece that really has a nice little acronym, and when it comes to leverage, you want to avoid LICE. L stands for leverage, and I stands for illiquidity. So, levering illiquid assets is a risk that you need to take into account.

You want to reduce concentration, right? What the world of retail has been scared over the last couple of decades on are these two times, three times levered ETFs that are doubling down and tripling down on the exact same risks.

And I think we have all learned what the disadvantages of just keeping that invested and never rebalancing out of it are, and what type of—you are tripling the risk, but you are not tripling the return because of rebalancing issues. You are getting larger drawdowns. So, that is leverage that you want to avoid—excessive leverage, like a three-times levered S&P. Not a good idea.

When we go back to the concept of All Terrain, what you are levering is non-multiplied; it is additive. So, let me say that again: you are not multiplying the same risk, you are adding different risks. And when you are adding things that zig when the other ones zag, what tends to happen is the leverage is increasing, but the risk remains, or the volatility of the portfolio can remain the same, or lower.

And the peak-to-trough losses can also get lower if you put the right pieces together, because if one or two markets are suffering, if you are diversified enough, the other three, four, or five pieces may provide the offset.

The key is in avoiding LICE, and the key is in defensive leverage. And once you put all that together and then you decide how much risk you are really comfortable in taking, then those are the levers you can now pull rather than just taking what you are given. And you are really creating a robust model that I have not invented, by the way. This is a Nobel Prize-winning concept from William Sharpe that I have piggybacked off of, and many institutions have been actively using for decades.

[00:32:36]Pierre Daillie: In a nutshell, borrowing to buy diversifiers, true diversifiers, assets that behave differently from your core.

[00:32:45]Rodrigo Gordillo: Correct. And what we do as a society is we borrow money to live with the same risk. People do not know it, but when you look at the S&P 500 and you go all the way down to the balance sheet, those companies are borrowed two to three times what they are actually worth. So, you are implicitly borrowing by buying equities.

When you buy a house, you are using leverage. You are putting $20 down to buy five times the value of something. And when you create a real estate portfolio, you are just doubling down on that.

When you buy private equity, there are a number of studies that show that it is around 1.6 times levered small-cap equities; you just get to not see the volatility. So, leverage is all around us. Sadly, it is very often illiquid, concentrated, and excessive, in our view. And you want to diversify away from that if you can use leverage.

[00:33:36]Pierre Daillie: Well, it enables us to do things we would otherwise not necessarily be able to do, first of all. And secondly, what we do with that enablement is what really matters.

[00:33:49]Rodrigo Gordillo: Correct.

[00:33:50]Pierre Daillie: There is thoughtful and prudent use of leverage, and then there is the imprudent.

[00:33:54]Rodrigo Gordillo: “With great power comes great responsibility,” they say.

[00:33:59]Pierre Daillie: You are also employing additional risk management filters where you would reduce or divest from assets with negative trends. What does that process look like in practice, and what are you actually responding to?

[00:34:13]Rodrigo Gordillo: Yeah, so these are things that have been around forever. You look at things like Global Tactical Asset Allocation, where you want to let the equity, bond, gold, and in our case, we add Bitcoin—and again, Bitcoin does not get a 33 percent weight here; it gets a significantly lower weight, very, very small weight. But in those major asset classes, you want to let those portfolios be. We believe that they are going to make money over time, but sometimes there are some clear and available signals.

I think “The Ivy Portfolio” from Meb Faber was the first time I encountered something that I am like, okay, something that simple can add such tremendous amount of value, particularly in just getting out of the way while that particular asset class is being shaken.

And it is not that complicated. You just want to have long-term filters here so that you can benefit from the long-term upward-sloping returns of each one of these asset classes. But you also want to have a certain point where you can just get out.

And much like our *Adaptive Asset Allocation* book leaned on momentum and trend for the long term for these asset class holds that we want to just do very little trading, but be able to get out, we use momentum filters to simply sidestep the worst of it.

And then we also have some mean reversion systems when things go too crazy on the upside, like gold did in October and February, where we are able to see, okay, this is probably going to come down very quickly, let’s at least take some off the table. And so, that is kind of the first layer of extraction from what we just talked about.

Up until now, we have really talked about something anybody can implement in a non-levered way. The next level is then to say, okay, I want equity-like leverage. How do I do that? Well, you do not do it by going to equities.

Remember, in our framework, we want balance. We want those pistons. We have created a motor with three pistons; maybe the motor has little horsepower. Now, we want to create a bigger motor with the same piston configuration.

And you do that by scaling all those asset classes to a certain level of risk. Now, with that horsepower comes some craziness, and you want to mitigate those potholes as much as you can.

And that is when, the first level is, you scale the portfolio using derivatives that you need a derivative manager like us to manage. And the second level is then to say, okay, add a filter for trend so we get out of the worst periods.

And once we have that in place, that is your levered Global Tactical Asset Allocation portfolio that on its own is already pretty neat. But it does struggle in periods—what do you do when 2022 happens, and all three assets, including big four assets, are out? You are just sitting in cash. Where else can we make money? And that is where we get into fancier stuff like Systematic Macro.

[00:37:14]Pierre Daillie: You have a history of employing Systematic Macro and Managed Futures as components in portfolios that have a history of helping during inflation shocks and equity crashes.

And I think that is the part that investors and advisors would stand up or light up to know more about, because that is the very thing that we seek to avoid, other than owning bad investments in the first place, or negative-trending investments in the first place.

And so, I think it would be very instructive to talk about how you implement Systematic Macro into this portfolio. Where do you fund it from, is the big question. I think the perennial problem people have, investors have with diversification, is having to subtract from their foundational portfolio in order to do these things. And that, of course, is where the Return Stacked®/portable alpha strategy comes into this conversation, which is that you do not have to subtract from your foundational portfolio to do this. You can do it. Please talk about that.

[00:38:37]Rodrigo Gordillo: Yeah, look, the simple thing. On the Return Stacked® side, people’s foundational portfolio is 60/40, right? So, everything I do on the Return Stacked® side is about keeping your 60/40—that is your base beta portfolio that everybody loves. No one is in love with, but let’s be honest, the majority of people are not going to move away from maybe 80/20. And then we are able to then stack these diversifiers on top.

How do we stack the diversifiers on top? Well, most people invest in indices, index investing, and they buy, let’s say, an IVV or a SPY ETF, and an AGG in the U.S., AGG ETF for bonds, and that is our portfolio. That is a way of getting exposure to 60/40.

Another way is for us to sell, let’s say, 20 percent of SPY, and we have $20 in cash, and we buy a futures contract. For me to buy 20 percent of exposure to the futures contract, I need a couple of dollars, a couple percentage points of that in order to get full exposure and margin, similar to buying a house.

When you own your house, you do not own your house, right? You like a house, you give the bank 20 percent down, or sometimes five percent down at times. But what you are getting is full exposure to the returns you are going to get on that property over time. It is the same thing for futures contracts. It is simple. It is exactly the same analogy.

I can sell down my SPY ETF, which is $20 of a hundred. I can go to the market and say, “I want to buy $20 of exposure to the market again, but I only want to give you a couple of dollars.” And so then you buy that futures contract, and it gives you that full exposure.

So now, you are back up to 60/40, but you have all this cash left. What can you do with that? You can buy a diversifier, whether it is Merger Arbitrage, Systematic Macro, gold, or Bitcoin. You just buy in. And what you have in essence done is created a portfolio that is 60/40/20, and that is using capital more efficiently.

Buying a house is using capital more efficiently, and that is why it is called capital-efficient strategies. We rebranded it to Return Stacked® because I think it is just intuitive. We are making it easy for you to do 60/40 plus 20. Now, the reason I bring that analogy up is because the world has decided that 60/40 is their best market portfolio, and I have decided what I think the best market portfolio is. And that market portfolio is equal risk across global equities, bonds, gold, and Bitcoin. That is what I think.

And then I have said, because they are so low-correlated, I need more juice. I need to create a bigger motor, so, I am going to scale it all up. But that leads to drawdowns that are still better than just buying any one individually. But I want to minimize those through Global Tactical Asset Allocation. And those are—you are not trading all the time, a couple of times a year maybe, maybe less than that. Sometimes you can go years without getting out of an asset.

That is my starting point, versus a 60/40 plus Systematic Macro that I just described. My starting point is that first balanced portfolio, and now I am going to add the fancy stuff that moves very quickly, that Systematic Macro that has a bunch more opportunities to make money in bad inflation periods or bad bear markets.

So what is—actually, let me just go through, let me show you the assets that it can trade. In the world of futures contracts, you can get exposure to nearly anything you want. And what I am showing here on the screen is dozens of bond markets, energy markets, equities, foreign exchange, grains, livestock, softs like cocoa, coffee, cotton, metals, rates, volatility assets, big digital assets.

All of these are available to trade with that same framework of: “I want a full exposure to corn, but I only need to give you a little bit of my money in order to get that full exposure.” So, futures contracts are naturally capital-efficient and allow you to stack all of these things on top.

And again, we can go long and short; that is also futures contracts allow you very easily to take the opposite direction. And so when you grab all of those and then you say, okay, I have this asset class set that is already more diversified than anything you have in your portfolio, and then I allow it to trade daily, and I can be net long all of those things, net short all of those things, or net neutral. And I can be long one day, and then three days later, I will be short—so, much faster-moving.

What does that look like? The Systematic Macro Index from Pivotal Path is what I am showing here in dark blue. The key highlights here are that it has zero correlation to global equities—zero, negative 0.02 to be exact—and a 0.05 correlation to bonds. So, that is not negative correlation; it is just independent of bonds and equities, which is what we want.

What other characteristics does this asset class tend to have? Well, if we look at periods like 2000 to 2002, 2008, and 2020, you will see that it has reliably provided double-digit positive outcomes during periods where most assets, or all assets lose money. Is that surprising from a structural perspective? Probably not to most.

If you could short, then you can find signals that say, “Yeah, it is a good time to short bonds and equities and a good time to go long energies.” You are probably going to come out on top in those periods.

Now, why doesn’t everybody own this? Because when you look at this equity line, it has done the same as equities for the full period of the index being live. Well, because like gold and like bonds and like equities, it can go through decades of dormant, low-returning periods.

And you see this throughout the index time, especially the FOMO that people are going to feel if they have to sell their equities to make room for an equity line like this. And you go through a period like 2004 to 2020, you are going to have a lot of clients really be upset.

And so, the benefit of putting this equity line on top of your favorite market portfolio, so that you get the full market portfolio return, and if it goes through a five-year period of doing single digits, it is single digits on top, not subtracted.

[00:45:16]Pierre Daillie: Exactly. You did not sell something in your foundational portfolio to do this. It is actually on top.

[00:45:29]Rodrigo Gordillo: Precisely. And then you get the benefit of when it is time, when there are clear trends and they are robust and everything is going down aggressively or going up aggressively, that is when it shines.

I am highlighting three periods where equity markets went down aggressively three times: Bond markets and equity markets in 2022 went down aggressively together, where Systematic Macro made a lot of money; but it can also make a lot of money if commodities do poorly for a long time, and that is 2014.

That was a—you can see it there on the chart. It did really, really well. Why? Well, because the energy complex was getting a clear signal to go short, and the vast majority of these managers were able to capitalize on that.

So, you add this fifth piston to the portfolio, and you make it so that the motor as a whole has equal horsepower to equities, but a much more efficient and more robust system. You are in good shape, I think. So, that is the second-to-last fancy thing that goes into our framework. And then the final thing is tail protection or long volatility strategies.

[00:46:44]Pierre Daillie: Right.

[00:46:44]Rodrigo Gordillo: But any questions on this, Pierre?

[00:46:48]Pierre Daillie: No, I think it is nifty how it works. I think most people will be surprised to see that line. I mean, when things are talked about in isolation—what I think is really misleading is all the talk that occurs around CTAs and Trend Following about the last 10 years of underperformance. I mean, it is the same thing that happens with value versus growth.

There are always going to be folks in the market who are growth people, and they say, “Well, growth has trounced value for the last 10, 15 years.” And there are going to be folks who say, “Well, equities have trounced Managed Futures for the last 10, 15 years.” But that is not the point.

The point is not—and what they are often leaving out of those phrasing or that turn of a phrase is that value did not lose money, it just did half as well. Managed Futures did not lose money, they just did half as well, right? And that is the problem: that is being left out of the asset allocation conversation, often by folks who are more dismissive of that because it does not fit into their realm.

[00:48:04]Rodrigo Gordillo: And I, by the way, I feel the pain, right? It is tough to not participate in something that has done so well. And the answer to that is to not sell your favorite toy to make room for these diversifiers.

[00:48:20]Pierre Daillie: It is that neighbor alpha.

[00:48:24]Rodrigo Gordillo: And again, I think this in large—the whole Return Stacked® concept in large part solves the behavioral issue. If you loved your traditional portfolio, you can just stack whatever you want on top and add some extra alternative betas that are non-correlated, that help create a better portfolio. And then you don’t get that FOMO as much.

There will be periods where whatever you stack on top is negative, but you are still participating in all the upside. The difference here is: if you sell 10 percent of your equities to buy, let’s say, Managed Futures/Trend, and equities are up 20 percent and Managed Futures/Trend is down two percent, your opportunity cost there is massive. You literally cost yourself a 20 percent return for that allocation.

The concept of saying, “No, no, no, you get to keep your 10 percent of equities, so you got the full 20 percent, and then stack the negative two percent on top.” So, you only did 18 percent instead of 20 percent. That is a different conversation than just doing two percent. And so, the stacking—I think most advisors have been pitched Managed Futures in the past, and they are all like, “Yeah, the theory is great. I can’t stick to it. I’m sorry, every six months I’m getting calls. I want to avoid that.” The concept of actually stacking it provides that benefit.

[00:49:51]Pierre Daillie: I can only guess that when you actually get the opportunity—and I am sure when you go around presenting to or meeting with advisors on this, or speaking to a room, I can only imagine that at first blush, people’s reaction is, “Wait, what?”

[00:50:09]Rodrigo Gordillo: Yeah, it always is.

[00:50:11]Pierre Daillie: “Okay, I didn’t see that. I didn’t know you could do that.”

[00:50:16]Rodrigo Gordillo: And you wouldn’t have caught most institutional players selling their equities and bonds to use Managed Futures. Most institutional players were doing Return Stacked® back in the day, and they continue to. It is the retail space that, because of regulatory reasons, was unable to.

That has changed in the last three to four years. You can do it now. You can actually invest like an institution for a hundred bucks if you wanted to. So, it is that unlock, right? It is a massive unlock, and people are just starting to understand and learn about it, where they can apply the theories that everybody in finance learned in the first chapter of their finance textbook and quickly forgot about. Now, we can actually say, “Oh, the Nobel Prize stuff actually works, and I can use it.” That is a huge, huge unlock.

[00:51:10]Pierre Daillie: I mean, it used to be in theory only, and now it is in practice.

[00:51:14]Rodrigo Gordillo: Yeah. And the Return Stacked® ETF suite is about providing the picks and shovels for advisors and individuals to do it themselves in the way that they see fit. It is the thing that I wanted to put together for decades, but was an indulgent thing because nobody would want to have a full-stack solution. Turns out it is pretty popular.

[00:51:41]Pierre Daillie: I know you have been sort of tiptoeing and walking along the edge of that mountain range for a while.

[00:51:49]Rodrigo Gordillo: Yeah, no, I am very happy, very pumped about it.

[00:51:52]Pierre Daillie: I imagine.

[00:51:53]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 spend a lot of hours trying to get the right guests, and we do a lot of prep work to make sure that we are asking the right questions. So, if you do have a second, just hit that Subscribe button, hit that Like button, and Share with friends if you find what we are doing useful. Thanks again. Now, back to the podcast.

[00:52:15]Pierre Daillie: What do you think is the right mindset here? And I know we have touched on it throughout our conversation today, but what do people—to get to the place where this makes a lot of both behavioral sense and logic, what do you think people need to believe about the future path of inflation and growth? I mean, if you have a high conviction about either, it might not interest you.

But if you have, on the contrary, an uncertainty about what the future holds, you are just plain worried about both or neither—about geopolitical risk, inflation, growth, recession.

[00:53:14]Rodrigo Gordillo: Yeah, look, we always talk about—there is a kind of a range of how confident you are in your view of the world, right? Is it 100 percent? Is it 90 percent? Is it 50 percent? Everybody seems to have a very strong and visceral view. Maybe some investors don’t, but most people do, and oftentimes they meddle and they change the shape of their portfolio.

Now, it is really tough to actually track the decisions you made with your gut or your intelligence over time to see if it actually added value or not. But I think a good rule of thumb is: ask yourself how confident you are about your point of view, and give yourself a number between one and 100.

And if it is 80 percent, and you are uncertain about 20 percent, then an All Terrain portfolio—which is more agnostic and just designed to be balanced across regimes—is probably a good idea as a hedge against your confident point of view, right? So, that is the way I kind of help people along.

You are never 100 percent. If you are 100 percent, then great, you are crushing it. It is on you; you feel in control of your portfolio. Wonderful. If you don’t, then you want to hedge out some of that risk.

I think this concept of All Terrain is the most neutral approach to different economic regimes, and hence, a good solution. As Peter Bernstein puts it: “Diversification is an explicit recognition of our ignorance.” Identify what you are ignorant of, add this in there, and I believe that will be a decent way of managing that risk.

[00:55:06]Pierre Daillie: Rod, in your back tests, an All Terrain-style portfolio delivered higher returns, similar volatility, and shallower drawdowns than global equities alone. How should investors translate those stats into realistic forward expectations?

[00:55:24]Rodrigo Gordillo: The way to see this is really to—again, it may seem unrealistic, but let’s just do some simple math, okay? Let’s say that you believe that you have no real crystal ball into which one of these asset classes are going to do well in the next three or five years, and maybe you don’t care.

You have a 20-year time horizon, and you expect all these assets to make some return, right? Let’s talk about the equity risk premium, right? Equity risk premium is the return above cash, and that is between three and a half and four and a half percent, depending on the market. All right, so you just collected—that is going to be something that you think you can count on.

What is the term premium for the 30-year note? Well, it is about the same. Okay, so now you are stacking it on top again. With the advent of leverage, remember, we are not beholden to the 100 percent line.

So now, let’s say I put 50 percent in equities. Now, I am going to put 50 percent in long-term bonds. Now, I am at the 100 percent line. Let’s say I add 50 percent on gold. Gold is about 3.5 percent equity risk premium as well. Now, I am stacking another excess amount of return. What has Systematic Macro done in the years, and can I count on that for returns above cash? Yeah, okay. Now, I am stacking another couple percentage points on top of that.

What about Bitcoin? Do we think Bitcoin has got some sort of risk premium? You wouldn’t put 50 percent; you put five percent. That goes on top, so you are literally Lego-blocking returns.

If you are limited to the hundred-dollar line and you are using short-term bonds and low-volatility stuff, you are hindering your absolute return. But if you keep on collecting different line items above the 100 percent line, and because they are non-correlated, even though you are using more exposure than 100 percent, the volatility is still moderate, then the intuition is that you can achieve a higher rate of return than just a portfolio that is 100 percent in equities.

I have 100 percent equities with an expected excess return of four and a half percent, and I have a 200 percent portfolio with an expected excess return of double that, and the volatility is the same. That is the intuition. It is not magic; it is not an outlandish belief system. It is just math. It is as simple as math, under the premise that we believe that every one of these asset classes has a high likelihood over a full lifetime to do positive returns above cash.

[00:58:17]Pierre Daillie: One of the interesting things about what you just talked about is the fact that we are so married to the 100 percent portfolio.

[00:58:27]Rodrigo Gordillo: It requires a completely different reset of how we think, and we continue to have to talk about dollar exposure, but that is not how institutions talk. If you talk to the Canada Pension Plan (CPP), Teachers,’ pensions, anybody at the top, they don’t say, “Here is your limit, it is a hundred dollars. You get five percent, you get seven percent, you get 22.” That is not the discussion they are having.

They are saying, “We are allowing 15 units of risk to happen to us. You get two units of risk, you get four units of risk, you get 10 units of risk.” And so all of a sudden, leverage is not the discussion here. It is: “Are you using leverage to give me more returns per unit of risk while within your budget that I gave you? You cannot exceed this two percent.”

And so, those are the guardrails. The guardrails are no longer the hundred-dollar mark. The guardrails are: you get two percent of the 16, and the overall guardrail of the pension plans is 15 percent annualized standard deviation, or 20, or 10. They set that guardrail, and they let allocations happen. They don’t really get bothered too much about leverage.

You have to keep an eye on leverage, you have to do it right. You have to have experience managing derivatives and all that, of course, but the reframe is: how many units of risk do you want to take on? And then what happens underneath is less relevant. Do you understand what I am saying?

[01:00:06]Pierre Daillie: Absolutely. I mean, it is more of a problem-solving mindset, right? Which is, like you said, “Here are your guardrails. Now, you figure out how you are going to do it.”

[01:00:17]Rodrigo Gordillo: And Pierre, have you heard about the new up-and-coming hot topic, which is the “total portfolio approach” for pension plans? Have you heard this yet?

[01:00:26]Pierre Daillie: No, maybe not in that way, but go ahead.

[01:00:28]Rodrigo Gordillo: It is exactly what I just discussed. It is going from, “You are the equity manager and you get your own silo, and you get X amount of dollars,” to the total portfolio which is like, “Hold on a second, why do we care so much about the silos? How does your silo interact with the rest of the other silos?” It is everything we have been discussing.

This is a brand new concept. Institutionally, we were like, “No, equity needs to talk to Bonds. And we need to know whether their allocations are actually going to make the overall risk of the overall portfolio better or worse. And are they going to complement each other, or is the credit manager taking excessive credit risk that is very similar to equities right now, and we don’t want that?”

The idea of the Total Portfolio and also their risk budgeting—if you look up pension plan Google words, that will be through the roof. And I am sitting there looking at that and being like, “Nice, fancy new word. I like that.” But it is what we have been talking about for 20 years.

[01:01:32]Pierre Daillie: Yeah.

[01:01:33]Rodrigo Gordillo: I have been talking about it for 20 years.

[01:01:34]Pierre Daillie: That is hilarious. I think when you force the stakeholders to talk to each other about the combined portfolio, that is pretty amazing. I mean, because in a way, the allocator is saying, “Well, no, now you have some skin in the game, too. If you can’t pass your risk by all the other allocation stakeholders, you are not going to last.” So basically, everybody has to do their homework, and everybody has to talk to each other about the homework that they have done. And that has got to be fascinating to see in action when they all get into a room together and start hashing that out.

[01:02:24]Rodrigo Gordillo: Yeah, absolutely. It is going to be wild to see. And we are going to be writing about it quite a bit at ReSolve because I think it is topical, and consultants are all over it. We will be hearing a lot more, and I am sure it will trickle down to the advisor space, especially now that they have access to capital-efficient instruments where they can really deploy the total portfolio view and risk budgeting view. That is the future.

[01:02:48]Pierre Daillie: That is absolutely fascinating. I was not aware of that scuttlebutt that is going around. That is pretty wild actually, because most competitors don’t talk to each other. They just RFP, they do their thing, and then they leave it to the allocator to make that final decision. But now the allocator sort of woke up and realized, “Why aren’t we just getting them to talk to each other as well, instead of coming and pitching us all the time?”

[01:03:21]Rodrigo Gordillo: Yep, 100 percent.

[01:03:26]Pierre Daillie: Rod, thank you. It has been great to see you and catch up with you and all you are doing. It is fascinating.

[01:03:32]Rodrigo Gordillo: I appreciate you taking the time to go through all the minutiae and details. I think we always have an opportunity to do that mainly here in your podcast. Hopefully, people found it useful. If anybody wants to see what we are up to on the ReSolve side, go to investresolve.com, and then returnstacked.com. There is a little widget there now on the front page of returnstacked.com that people can explore what happens when you stack them. It might be super fun to explore.

[01:04:05]Pierre Daillie: Very cool, Rod. Thank you.