Welcome to the Orion Portfolio Solutions portfolio recipe Webinar for September of 2022. I'm Rusty Vanneman, the chief investment strategist at Orion Portfolio Solutions and our portfolio recipe this month is the all weather portfolio. Now our motivation for the all weather portfolio is really so the title says, just think about the range of opinions on the market right now. Are we past peak inflation or is inflation going to remain really high? Yeah, are we going into an economic recession or are we able to withstand some economic weakness in the near term? Either way, this portfolio recipe is that all weather portfolio recipe I think in many advisors and investors are looking for. A couple of housekeeping notes. First of all, the the standard format for the portfolio recipe is that each strategist will speak for 20 minutes and then we'll do 20 minutes for questions and answer regarding questions. In the lower right hand corner you can submit your questions. If for some reason we don't answer all of them, we will after the webinar. In terms of other good materials, after the webinar, a couple hours afterwards, we will send out an e-mail with the replay and also some of the resources including the slides to this presentation and the lower left hand corner. You will see various resources regarding this webinar. Three more items of point out and you'll also notice in the right hand corner is there is the link to our weekly podcast series called Orion's the Weighing machine. Both firms have been guessed including one of our guests was one of our highest listened to podcast which was great. There's also a link to share today's webinar with colleagues and also there's another link to sign up for next month's portfolio Recipe Webinar. Now let me introduce the speakers because really the show is about them and. We have some really high quality material and speakers here from two different multi decade veterans in the industry. First of all, we have Stanley Moy from Capital Group, AVP Multi asset investment product management and we have Danville align, a global cohead portfolio solutions group from a QR Capital Management. So I'm going to hand the ball off to you, Stanley. Welcome. Thank you. Thanks, Rusty and thanks everyone for the time today. Happy to be here and even more excited than our core American funds models are being featured in this latest edition of the recipes. So in line with the theme, you know, when cooking a quality recipe really comes down to the ingredients, right? So you know here at American funds where we're premier active manager, we've got some of the best underlying ingredients out there or underlying funds. Recognized by Morningstar with 18 out of 22 of our underlying funds rated bronze or better. And eight of them recently being recognized on their terrific 30 list, I think is what they're calling it now that recognizes strong management, strong results and low cost amongst other metrics, so. I know this slide is dense with words, but you know basically what we're trying to say here is that all that you're familiar with and love about our American funds and how they are managed, you're also getting that from our model portfolios as well too. So the capital system, we believe in a team managed system. There are no star managers because we think that independent decision making and diversity of thought leads to better outcomes and is a secret to our long term success. Drawing parallels, you're also getting that from our models too. We have a 7 member Portfolio Solutions Committee that builds and manages these model portfolios. The deep fundamental research here at capital, we've got a large footprint in terms of investment research that kind of feeds the decision making of our equity and fixed income portfolio managers. Same applies to our models as well too, where we have a dedicated team of multi asset research analysts that support that Solutions committee. The long term view, well, you know, obviously we build our models to help our clients achieve their objectives over the longer term. Now you see the the puzzle pieces of these boxes here and what we're trying to convey here is that you are getting an active layer in terms of management from our underlying funds, but you're also getting that second layer of active management in the form of our Solutions committee and the and the research analysts that support them. Here is here are those committees that build and manages those solutions. We split them up by product set. So our portfolio Solutions committee, they are decked against specifically our model solutions, but then we also have a target Date Solutions Committee that manages our glidepath solutions, including our target date and our 529 College Savings plan. We've also got separate committees for our custom solutions and global solutions. Now, I know it's tough to see, so take my word for it. There are three members that sit across all of these different committees, Samir Mathur, Michelle Black, and Wesley **** that. Give them a line of sight into our entire solutions. Process, we think that's important because one. In ensures that decisions are made in isolation and two, in the spirit of idea sharing. If one thing is good for one committee, it can be good for another committee as well too. Now specifically focusing on the upper left, the Portfolio Solutions Committee, it is comprised of seven of some of the most tenured investors within Capital Group across asset classes, equity, fixed income and multi asset. And if you look a little bit deeper into those names, the equity and fixed income members are also portfolio managers to the underlying strategies of our model. Again, we think this is an important and a differentiator because they're bringing their deep asset class knowledge along with the daily trading and research from the front lines to these committee meetings and again, in the spirit of IPS sharing. In terms of the team that managed that supports this Portfolio Solutions Committee, we call them the Capital Solutions Group. So on the far left there you'll see a team of eight. They're highly quantitative folks that is constant that they they are constantly doing research on our portfolio solutions. And it's not the type of research from. Your or your typical research analyst, they're not doing research on individual equities or bonds or anything like that. They're doing multi asset research, things like how do people save for retirement, what are their contribution rates, how do they spend in retirement and what do they spend on. In addition to updating our forward-looking capital market assumptions along with enhancing our modeling approach to. Now. We always joke, wouldn't it be nice to have a rocket scientist on the team? Well, we've got that now too in the in the form of an associate with a PhD in physics. Now. This focus is less so on rockets now, but really it's kind of providing these innovative modeling approaches for our multi asset solutions. So for example. As you think about as we build our model solutions, we're taking the decades of history and track record that we have for our underlying American funds, overlaying that with our capital market assumptions to come up with our model allocation. Now, as you know with it, we use an optimizer. But as you know, with an optimizer the flaw is that you know it assumes that your assumptions are going to be known with certainty. And what we've been using is what we call a neighborhood search optimizer. That helps kind of. Maneuver through that in that it constrains the optimizer and it looks for alternative asset allocations for these models. Now those allocations are brought up to the committee. They are researched and debated amongst them and finalized once they feel that the underlying allocations match the the the individual model objective. Now this team along with that Solutions Committee again was recently recognized by Morningstar. They had upgraded our people pillar to a high which resultingly upgraded our model set into a gold analyst rating. So we're very pleased about that and kind of being the only actively managed model provider out there, please, but yet humbled if you consider how many other active providers are out there. Now in terms of processes, I'll just touch upon it a little bit. You know you're going to get on a quarterly basis that rebalancing, very typical for any model series, but then also you're going to get what we call the strategic allocation rebalance. Now what? This is a risk mitigation tool. That the committee applies in terms of monitoring the portfolios to make sure that across our model solutions risk isn't creeping up outside of the ranges that they set for. Perfect example, as last year, even though it's a distant memory when equities continue to run up, what we saw is that equity percentages and our underlying funds ticked up a little bit. As a function of deploying cache finding opportunities in a low rate environment which caused the model asset allocation to tick a little bit higher in terms of equity allocations outside of the ranges that the investment team was comfortable with. So what they did was just make some minor rebalances, 100 to 200 basis points from equity over to fixed income. Again not a short-term tactical trade by any means more, more so long term strategic, but then timing wise we made these. Changes and rebalances in December of last year, right before. The volatility that we've been experiencing up until now hit. Last process that you're also getting from, you know, the people that I highlighted is what we call these research driven enhancements. That team, that Capital Solutions group that's constantly researching these portfolios, from time to time, they will uncover opportunities to enhance our models. And we'll make these enhancements to our models usually on an annual basis. The perfect example is kind of some of the enhancements we've made this year through their research and monitoring. Obviously they uncovered the difficult fixed income environment right right now. And what they did this year and throughout last year as well too was make allocation changes and slot in allocations to our more flexible fixed income funds, multi sector income fund that has an expanded opportunity set across credit sectors and strategic bond fund that. Has more levers to play with as it comes to rates and duration, so making those enhancements so at the model level they can maneuver through the difficult fixed income environments a little bit better. Now lastly, and we mentioned these types of enhancements, but I also wanted to mention the bottom up flexibility of our underlying funds now. This is interesting because it's a different take than of what a lot of providers are doing out there, right. We are not making the top down tactical short-term adjustments, but what you are getting from the underlying funds is that through their flexibility is that they are adjusting to the market environment from a bottom up basis. And that's because we prefer that our underlying portfolio managers who are experts at their fields determine when and where the best investment opportunities are and or mitigate risk in real time. So that is our approach in terms of addressing the market environment, the fast moving market environment and giving the the latitude to those underlying portfolio managers and that's why we implement underlying funds like American balanced and global. Bounce back is flex up abroad equity and fixed income asset class level but then also new perspective fund and new economy fund that can also flex at the US non-us equity level. Their collective bottom up flexibility will affect that top line model asset allocation. Which is again a different take than what many other providers are doing out there now. So I guess to wrap this up and kind of tee it up for Dan, I would reiterate the word core because you know the people and process that we covered today are really core to the value ad that we're bringing. And coincidentally enough that the models that are in focus and Rusty's recipe today are what we call the core American funds model portfolio. So to throw that word out one more time, we think having our models as the core allocation in this recipe is prudent because we are focused on being that long term strategic. And focused on kind of the value add through active fundamental security selection. So let me stop here. Thank you for the time and I look forward to the the questions after the session. Rusty, I'll pass it back over to you. I do have one. So great stuff. Obviously the Capital Group story, the American Fund story, the capital system story are all great. In fact, I I think that honestly one of my favorite books in the industry and I think it's probably because of the focus on all those things we talked about and the focus on the advisor is Charlie Ellis's book called Capital. So it kind of breaks down to all those different things. Now the question I have is you did sort of touch upon what I'm going to ask about, but I was hoping you go a little more granular because I think I would be fascinated. To be in one of those committee meetings, but when it comes to the Capital Solutions group and making decisions on how to change allocations to the funds themselves, obviously it doesn't happen very often. But what would be those triggers or catalysts? I mean, what are some of the variables, biases or preferences that that committee has to make those kind of trades and how often would you see them? Yeah, sure. I would, I would point out kind of the two different processes that I highlighted, right. For one it's going to be a risk mitigation kind of tool. So if they are seeing risk creep up in the portfolios they will come in and make a change pretty standard there. But then through their research you know as I mentioned kind of uncovering. With the tough fixed income environment that was on the horizon at that time, which made sense to kind of slot in a more flexible fixed income approach, but other, but I would say the ideas that weren't implemented right, I think earlier this year inflation was obviously top of mind. It still is. So I mean I think a knee jerk reaction would be like oh we got to get into tips or something like that, but you know you also have to and that's when we kind of leverage John Queen who is a member of that investment committee. But then also underlying portfolio manager, fixed income portfolio manager who pointed out to the committee that like hey that makes sense in the short term, but we're building this, these models to achieve the objectives over the longer term, so while. Having a dedicated allocation of tips may have kind of eased some of the pain, I think also pointing out that you would have been crushed as rates continue to rise compared to let's say being shorter to ratio, so a peak into kind of the conversation that the committee has and also leveraging their specific asset class experience in coming to their decisions. It would be fun to peek into one of those committees at some point. And it does sound like you're not using any 20 day moving averages. So cool, all right. Well, thanks. Well, I'm gonna hand the ball off to Dan now. I've had a sneak peek, of course, at his slides and there's a lot more cool stuff ahead. So, Dan? The floor is yours. Great. Thank you so much, Rusty. Thank you. Stanley. Stanley. All of this mention of core makes me think I need to work on my abdominal muscles more. So you kind of made me feel bad about myself even before we started, but what I'd like to do for the next I'll cap it at 20 minutes is. Well, I first want to motivate, you know, why do we think a recipe, a portfolio recipe? Why do we think that it might be in need of new ingredients? So the first thing I want to talk about is how a QR views traditional markets today. For those of you who are kind of on the nerdy side of the spectrum in investing, you'll probably recognize the second word here, beta. Beta just means market risk and what I wanted. What I want to show you is, is some evidence. Some. Some indications that beta that market risks are unlikely to treat investors as well as it has over the past decade. And then I want to say, OK, well if that is true, then what do you do? What ingredients do you add to the portfolio recipe to try to do a little better than average? OK, we were, you know we were joking before this got started at the massive disclosures. HQR will go toe to toe with any firm who thinks they can out disclose us. Let's get started. So what I want to talk about is 2 things, two things that make the current environment uniquely challenging, uniquely fraught for most investors. The first thing I want to talk about is expected returns or or forecasted or or forward-looking returns. Now. To start, I want to, I want to introduce you to this, this chart, this idea of a real yield. And the way to interpret this is this is basically what a traditional investor, in this case 6040, but but the lines would look about the same for a 7030 or 8020. What they would expect to get just for showing up. Let's say you're kind of in the died in the wool Jack Bogle passive investor. How should you think about the expected returns? Traditional assets. And So what this line tells you is OK, well. What is the medium to long-term expected return of a 6040 portfolio? Now, the line bumps around a little bit, but the way to interpret it is when it's high, that means traditional assets, traditional markets, traditional betas are are cheap and when it's low, it's expensive. Oh, So what do we see well? Over the past few decades now, there's been some bumps along the way, but the general direction has been toward richening, and this has tremendous ramifications for building a portfolio for today. The first thing is you want to be clear that one of the reasons the future is unlikely to look as good as the past is because the past is kind of biased positively. If you hold something that's kind of gotten these windfall gains, it's gotten richer. You want to make sure that you don't set your expectations based on what you've seen over the past. 1020 or 30 years, OK, that's the past. Let's go to the future. So there's three things that could happen from today. So what I've done is I've kind of squished the chart over to one side of your screen and now I want to consider what are the three things that could happen. OK. The first is that markets which are already rich today continue to get even more expensive, continue to get richer. So you can think of bond yields going even closer to 0 or stock prices, stock valuations getting even more rich. Investors to some extent. Traditional investors certainly are kind of hoping for this to be the case. Most market participants, most researchers think that this possibility of markets continuing to RIDGEN is the least likely outcome from here. A more likely outcome, we believe, is that markets just sort of stay at around this level of richness. OK? What does that mean? Well, we think that's pretty weak average returns for the next 5 to 10 years here we think about 3% over cash. That's probably lower than most investors return objectives. On the other hand, if markets mean revert, evaluations go back closer to historical averages, that's bad news for beta, that's bad news for markets. That's already what we've seen so far this year. You know, if you look at that chart, that's the little blip that goes up is market revaluation, market mean reversion. What happens then? Was assets get repriced beta, traditional asset classes due poorly? OK, what does a QR think? Well, a QR thinks the yellow kind of markets are a stain as expensive they are is the most prudent base case assumption. There are plenty of other managers who think red is an issue regardless of which one of those two it is though. Investors are likely, we believe, to see lower returns than average over the next 5 to 10 years. OK, so that's problem one. This is sort of reason one for adding some ingredients to your portfolio recipe. A reason too has to do with risk. And risk is, you know, if you, if you ever want to get folks in this industry into an argument, ask them to define risk. So what I'm going to do is I'm just going to take some kind of a macroeconomic perspective of of a portfolio risk. And so the first thing I want to do is I want to say, OK, well. Let's take the average return of a 6040 portfolio and say, OK, well. How did that return to you? How did that portfolio do when macroeconomic growth was positive or negative or inflation was positive or negative? And that's what I have here. So each of these boxes that I'm filling in tell you how traditional assets, traditional portfolios tended to perform in each of these macroeconomic environments. So if you look at the blue box, the blue is, is sort of everywhere. It's the Goldilocks scenario. That's what you're hoping for, positive growth. And benign inflation. The dreaded opposite corner is stagflation that that's the red growth down, inflation up. And so these are just historical facts. These are how traditional portfolios behave in each of these macroeconomic environments or macroeconomic risks. The next question is, well, how often do these things happen? You know, if it's the case that the red box hardly ever comes around, yeah, maybe we don't really need a new ingredient in our portfolio to to deal with that risk. OK, so I'm going to show you 2 pictures, the 1st. Is how often have each of these four boxes occurred in the past decade? And that's here the past decade you think back it was could be pretty well defined by central banks trying to stimulate economy, all of this liquidity going into the system and unable to generate inflation, they were kind of trying to stoke growth, but it ended up being kind of a growth down environment like the green box without inflation. And so if you were to evaluate how risky is My Portfolio today by looking at the recent past, you're unlikely to get a good sense of how portfolios actually behave, how macroeconomic risks actually affect portfolios because this next bar is how markets work on average historically. And I just want to highlight kind of two environments, inflationary up environments. This is when inflation risk is high or rising or surprising to the upside. Of the little 4 quadrants, these are the two that you don't want to see for a traditional portfolio. History tells you to expect these about half the time. The past decade saw him come in only about 1/6 of the time. Portfolios are riskier than most investors have gotten used to, and this is reason #2 for introducing some new ingredients to a portfolio. OK, enough doom and gloom. I'm I'm not a pessimist by nature, but you might think that just based on this slide so far. So let's get to 2 solutions. I'm I'm just going to provide some sort of high level intuition for for what they are. These two are ones where we have seen a lot of interest over the past year and I'll try to explain both what these things do and why investors seem to be. Searching more for for solutions like this. The first thing is called managed futures. This is one of these terms. This is one of these strategies that has a lot of different names. If you think of trend following or CTA's or directional macro strategies, it's all the same thing. So let me, let me explain, let me define kind of how these things work, and then I'll talk about why they're useful. OK, what I'm showing you here is the simplest managed futures or trend following strategy that we know of. I've got 2 lines. The red line is sort of the theoretical, you know, true fundamental value of some security. Well, let's say this is a stock. And the blue line is it's actual market price. Now, the story being told here is that the fundamental value of some stock is just sort of the same. The same. All sense of positive news comes out, maybe, maybe a positive earnings surprise, and the fundamental value goes up. How would a trend following strategy or a managed future strategy take advantage of this fact well? Let's go through the life cycle. So catalyst, fundamental value pops up, so positive earnings news, let's say. What you find then is. Investors tend to under react to that news that you know the price goes up, but not all the way to its new fundamental, call it fair value. So this is the start of a trend. So a trend following manager or a managed features manager would say, OK, well it looks like the price is moving up, I'm going to go long. All you're doing is if something is going up, you go long, if something is going down, you go short. And what you find next. Is that the trend very often continues even past fair value. And this is sort of a famous behavioral economics result. Of of of hurting and overreaction. Kind of getting on the bandwagon. I'm not a big sports guy, but I sort of become one during playoffs and I get accused of this behavior a lot at this firm. So I am intimately familiar with the accusation. And then all trends must come to an end. So the last stage of this is when you start to see the reversal, the trend following manager, the manager features manager exits. That's how the strategy works. Now you might be wondering, OK, well then why is this simple strategy so useful as an ingredient in a portfolio? Well, it's because this strategy has returns that tend to be particularly strong, not only when assets are going from kind of good to great, but also when they're going from bad to worse. So I'd like to next show you some evidence of how effective a trend following types of strategies are. Managed features, types of strategies. Have been when it comes to drawdowns for traditional assets. OK, this is. I'm assuming one of the longest term long term analysis you've ever seen. This data set goes back to the 1880s. And what I'm doing is I'm just saying what were the worst peak to trough drawdowns? For a 6040 portfolio. And then I'm asking, in those same periods, how did a simple trend following strategy do? Now, it's not perfect, it doesn't work every single time. But the vast majority of the times? Trend following or managed future strategies have shown this sort of. Valuable characteristic this characteristic of hedging of positive returns when most needed. This is by and large certainly true today. If you look at different trend following managers, different managed features managers so far this year, I expect you'll find a very strong positive returns from them. Exactly during those periods amid market losses like we've seen so far this year, I would expect if we, if we all got back together next year, I'd I'd have a new set of bars to add to this chart. OK. That is ingredient #1. I've got some other things to kind of talk about it, but but maybe during the Q&A if you if you guys want more details on how managed futures works, we can get to that. Let's hop right now to. The second ingredient that I want to talk about and that's long short equity. So longshore equity, very much like managed futures or or trend following, is another liquid alternative. It's one that's been around for, if not as long, then even longer. And this is another one where we've seen a lot of interest lately. OK, so the first thing I want to look at is let's take let's examine the track record. So the lines that I've got at the top here is just a simple cumulative return whose growth of a dollar for two indexes in green is just global equities and in blue is a long short equity. Index now. A cumulative return chart is great, but it does hide some valuable information when it comes to understanding what are the actual risks of of owning either of these two lines, and so that's what the table at the bottom tries to describe there. Now, again, you know, I said if you want to get people in an argument, ask them to define risk, but I'll take a couple of cracks at it here if you look at the table at the bottom. Annualized volatility. You know, I should have calculated this exactly. It's a little bit more than half, but you know not not far off in terms of how much lower volatility long short equity strategies are than equities. If you look at maximum drawdown, I think this is a very practical measure of riskiness of an asset. You see a -, 22 compared to a -, 54 though this is better than half in terms of if you define risk as Max loss over a period. And then the very last column in the table the the beta, just a fancy word for sensitivity to global equities is is less than half. In other words, global equities go down by 10%. If you wanted to get just a guess of how much long short equity would be down, you just multiply that 10%. That the beta, in this case the .4 and so you would guess that's about. Make minus four. So less risk than equity markets by and large. And this is one of the reasons this is becoming a solution, a portfolio ingredient that is garnering a lot of interest from investors today. Once we're kind of realizing, you know what, maybe we have too much equity risk in our portfolio. Maybe our portfolios were survivable in the past decade but might not be in this next one. OK. So that's very high level in terms of how long short equity. Umm. Returns. Have looked. I want to just spend maybe one minute on on how a QR does it and then one minute on if you are looking for a long short equity manager, what's something that you should look for? I'm going to try to keep that kind of a QR agnostic. OK, first thing, how does a QR think about equity long short? Well it's it's a stock selection strategy. A QR, even though the Q stands for quantitative, we are a fairly thematic, we're a fundamental organization. We just use calculators to come up with weights for things. That's that's where the queue comes in. The first thing we do is we come up with an investment thesis that we think is sensible. So looking at this page, we're looking for companies across the developed world that are offered at attractive prices that have improving fundamentals, et cetera. The hard part, the cue part, the quantitative part is how we actually measure these characteristics and how we compare these companies to other companies. What's a peer for each one of these? So separately, we compare companies within the same industry, we look at industries versus industries, you know, do they look attractive to each other? We look at companies that share some sort of economic tie to another. So you can think of evaluating a company's strength across its entire supply chain. We're looking kind of at competitors. How does the strength of 1 company correspond to ones that it has sort of the direct competition with? And also comparing industries across the world, so think of, say, German versus the Japanese automakers. Complicated in terms of implementation. Pretty fundamental, pretty straightforward in terms of themes. You know what we look for. OK, my last slide I want to talk about is. What should you look for? What do we think is the low hanging fruit when it comes to equity long short strategies today? Value. What I have here, if you remember my first slide, I I kind of showed that 6040 traditional portfolios can go from the expensive to cheap and and today they're expensive. I'm doing kind of the same thing here, but looking at value stocks versus growth stocks. And when the line is high, it means the cheap stocks. Value stocks are really, really cheap compared to growth stocks. In other words, if you think of value investing, how attractive is it today? Could be a value investor versus a growth investor. OK, so this line as it goes up, it means value as a factor, value as an idea, value as a theme is cheap. In other words, we believe it means that value has higher than normal expected returns or future returns. Where does this measure leave us today? Basically at the peak of the tech bubble, never before have we seen a value opportunity like this. You'd have to go back more than 20 years to find even something in the neighborhood. So as you're looking to incorporate new ingredients to a portfolio to the extent those ingredients include stock selection or active management, we would suggest a huge source of low hanging fruit today is to make sure that your managers. Have a value bias. OK. With that, I think I did keep it just under 20, so I'll hand it back to you, Rusty. Thanks, Dan. And I, you know, looking at your presentation here, I think you do have the longest appendix we've had on a portfolio recipe webinar. So quite a few pages here coming up, but again some really great material. So the recipe that we are proposing here now actually I want to go back to Dan's chart, just kind of keeping a perspective, talking about the different economic regimes, looking at growth and also looking at inflation and also keep keeping in mind that valuations are much higher than they used to be. So in terms of expected returns. Lower than they have been or last 10 years. Volatility probably higher. That would suggest multi asset portfolio is aggressively diversifying. It would also suggest looking at alternative strategies as well that do better in some of those economic environments we really have not seen the last 10 years and I also think it makes a strong case for active management. So obviously the firms we're talking to today are known for active management and strong diversifying strategies. So it makes a lot of sense. So bringing it together for all weather portfolio, you can see that we have the American strategies again really. As the core and then we put 20% up to 20% of the portfolios in diversifying exposures. It really depends on the risk characteristics of how we sort of blended these all together, but these are some suggested all weather portfolios. Now before we take questions and answers again, the questions you can answer are submit in the lower left hand corner. Again, just talk about resources, particularly all the portfolio recipes we've done in the past. You can go to orionportfoliosolutions.com, we have the resource drop down menu and there you'll find all the portfolio recipes. You will also find a lot of the monthly commentary and videos we do. Our weekly commentaries are. Are are weekly bullets? Are weekly podcasts. We also do a monthly chart pack. Ohh, basically everything is right now preaching the virtue of diversification right now. So let's open up the questions here and we are getting some good ones here. So the first one is really I can throw a both of you and I'll send it to Stanley first. So the question is really regarding that. Performance obviously in the markets has immigrated this year and if expectations are still low, what are some of the ways in your opinion that? We can help our clients if they need money sooner than later. What are some of the ways we can enhance returns? Faster, if it's that possible. So Stanley, it's an easy question. I give it to you first. We want to be reached by December. I get the meatball, I wanted I guess kind of use one of our models construction as an example, right. You can get sweet some yield out without taking excessive risk just again using one of our retirement income portfolios or let's say that moderate growth in income portfolio that we highlighted just before, Rusty I mean. You get yields from dividend paying equities right now that is a specific differentiator that we have in our models where we kind of shift the types of equities that we use for the more conservative models. We do implement more dividend paying equities, you know through let's say a Washington mutual American mutual fund that focuses their stock selection on those dividend payers. So you're going to get kind of a natural yield there, but let's not forget fixed income too. Yes, there is a lot of pain with the rising rates. But I mean you are able to stay conservative but then also get let's say A7 or 7 to 8% let's say yield in high yield and emerging market debt. Obviously don't overweight it too much. But I think you know diversifying that and then in conjunction with your equity components you can get more yields now with you know potentially longer, longer term positive returns. But I get it, I mean it is, it is painful in this current environment. Right now, Dan, how would you respond to that question? Yeah, I I I think this is 1 where. Anyone who has an extremely confident answer to the question is probably lying to you. I mean, this is 1 where I don't think. None of the firms represented here today believe that markets are perfectly efficient, but I would bet that all of us who've been at this for a while would agree that they're reasonably efficient. There are no sure things, perhaps the surest in, in my opinion, and I think this is supported by decades of of research and humble careers. Is diversification is is adding sources of returns that you don't already have in your portfolio. What we are seeing at a QR is really a forking of paths when it comes to how investors have decided to navigate this environment. 1 split is doubling down saying OK well I know the thing that hurt me is now a little bit cheaper than it used to be so maybe what I need is more of it. Because I'm contrarian oriented, or kind of evaluation based. Our CIO, Cliff Asness just put out a piece in the in the FT last week called still not cheap. And the thesis there was yes. Even though traditional assets are cheaper than they were at the start of the year, they are not cheap from a historical perspective. That's why path two is probably the more prudent one and that is to add sources of returns that aren't already in your portfolio. In terms of, you know, sure thing, I don't know. In terms of sure, Rist thing I would say that. Value this this picture I showed at the at the very end, we have scoured the investable, the liquid investable universe far and wide. This seems to be the only thing that is screamingly cheap versus its history, or screamingly high expected return versus normal that we can find now that doesn't tell you if it's going to revert in a month or in three years. The only other comparable data point we've ever seen is the tech bust. And you can see, you know, just kind of eyeballing the chart looks like it took about two years to come back down to normal. Those were wonderful times to be value investors. And so that's where we're seeing a lot of folks looking to take path to add new things to their portfolio. This, this seems to be a pretty good bet. Yep. We are getting a lot of really good questions here, so let me see. I'll kind of package a couple of them into one. And this is really for you, Deanne, regarding diversifying exposures. And that's really how to size them. Now, in my recipe, I basically capped out at 20% to diversifying strategies. That's been kind of my rule of thumb. I realized that, you know, depending on market conditions, you could throw stuff into an optimizer, get much heavier weights. There's also sort of that maverick risk or tracking error risk that you put a really unique exposure in that some people really can't hold big. States. What is your general guidance regarding how to size a position in either long short strategies, manage futures, or just diversifies in general outside of traditional fixed income? This has been one of the biggest surprises to me in my professional life. I love diversification, yet I've realized that it is one of the hardest things to to survive to hold for the long time. For the long term, we I think we all know that the book unconventional success. Diversification is by definition by nature unconventional. You are looking to do stuff that is different than what the rest of the portfolio has. Being different is hard, being long-term different is even harder. So when it comes to the specific question of OK, well, let's say I believe in diversification, how much of a diversifier do I want? I think the answer is not so much that you're forced to sell at a bad time. So even if the optimizer rusty to get to to the example on the page here, even if the optimizer said you want. I'm just make up a #23.7% of your portfolio in a diversifier I would always air to in terms of practically implementation to have less than that. It's better to have a little bit of a diversifier that you can actually have through a whole market cycle and a lot of a diversifier that doesn't make it through the whole market cycle. The 10% allocations here I think are quite prudent and in practice these levels from from 10 to 20%. Are what we find in a QR's kind of more sophisticated client portfolios that seems to be a survivable, a livable kind of a holdable level for the long term. These questions for both of you, but it's just sort of related to Dan's comments. If you think about diversifying the exposure is another thing are real assets, particularly commodities and kind of look at the commodities as an asset class in long term, it's beautiful how it squeezes out overall portfolio volatility, particularly when it's working, when it's not working, it's a pretty tough horse for many investors to ride. What is each of your view on commodities, real assets? I'll send it to you firstly, Stanley. Firstly, Stanley, how about that? I like that. So in terms of real assets in any of our multi asset portfolios, we don't have dedicated allocations to it just because look you we prefer that optionality and that flexibility, right. So leveraging our bottom up stock selection. So we're going to get that indirect exposure through the mining companies and and whatnot. And I think we prefer that than having kind of that dedicated exposure because when you do kind of the the back testing I think diversification wise. It looks good, but I mean when you factor returns which are also important to client portfolios, it just doesn't bring that that value. So I guess to your point then having that diversifier, but then also balancing out with what it brings to the portfolio is very important. So our approach is to kind of get that indirect exposure through the security selection. Excellent. Yeah. And I think you know we we might differ superficially on that, but I I broadly agree with Stanley, I'm going to, I'm going to push this one slide out. This is the one with all the animations. Commodities are useful for a few reasons. Chief among them probably is if you look at the right two blocks here when inflation uncertainty is on the rise or coming in higher than expected. Traditional assets just don't do as well as average, and commodities are one way to address that. Now. It doesn't mean you need to actually have, you know, physical commodities. There's ways of doing it either via futures or, like Stanley said, via. Kind of real or commodity related stocks, but what we find when we analyze most portfolios is that they tend to exhibit a preference for benign inflationary environments. IE it shouldn't be too surprising that a lot of asset allocations have struggled so far this year. Diversification for whatever reason and maybe it's because of the benign decade that we just saw. Don't really seem to be built for that risk today and I think it's something that people are going to have to revisit going ahead of the two strategies I mentioned, the managed futures or trend following. Almost always this of all the managers I have seen will have a allocation to commodities. Now it can be long or short commodities, but it will tend to position itself long during inflationary shocks. You know, again, regarding real assets, of course, so commodities, I always consider a little bit like cayenne pepper. It really doesn't take much to feel it in the portfolios and too strong of a weight might just be too much. And of course if you do individual securities and commodity producers right now, a lot of those. Stocks are still, if you look at relative valuations going back last 2025 years, they're still pretty cheap. So that is another potential way to play it, Stanley. When it comes to core equity exposures, another common question is how much should we have an international? The dollar has been so strong this year, do we need international? I will say having just come abroad, it is a nice time to go out there and spend the US dollar because you are buying. A lot more when out there because of the dollar strength, but in terms of let's call it. Are global. Portfolio you know that is a 5050US non-us equity portfolio that is specifically kind of geared towards those that are interested in global investing. But you know across the rest of our portfolio is what we have seen is just a lean more towards US more recently. And you know if you think about just the risks that are out there right now, the 0 COVID policy in China, the war in Ukraine and and whatnot I think. Powerful underlying portfolio managers are seeing just more of an opportunity here stateside than they are seeing internationally now late cycle, but still more of an opportunity compared to let's say you know the international equities that that they see out there doesn't mean you give up on that allocation. You know across our model portfolios you do see on average about a 20% allocation to international equities and that is you know, again based on being a diversified portfolio. Of of equities. So Stanley, what do you think would be, I guess it probably just the opposite of some of the factors you just mentioned, but what would be some of the catalyst to increase positions international equities whether it's developed markets or in emerging markets or if you could even be emerging credit, would it be some of the the factors do you think that the Capital Group would be looking for? Yeah, I mean I think I don't think I have an answer to that. I mean as it relates to emerging credit, I think that's why we have kind of slotted in so those flexible fixed income funds to kind of push that decision to those underlying portfolio managers rather than have let's say a dedicated allocation to emerging market debt or high yield or something like that. That multi sector income fund does lean in and out as they kind of see opportunities. Yeah, Dan, I got a question for you and that is going back to manage future. So one thing you did talk about are some of the things they look for in a long, short strategy. What are some of the things you should look for in a managed future strategy? What are some of the characteristics about it? OK. I was, I was hoping we would be able to talk about this because Rusty, I know you are a music fan. I know that's the first question in your podcast. And so I have. I have embedded a song lyric where I've kind of twisted it in the subtitle here. This is Candice reference. That's good for a Midwesterner like me. Thank you. I I apologize to anyone who now has that song stuck in their heads. This is this is a question that we have addressed recently and and you can find it on on on the a QR website if you want kind of the gory details of it. But anytime a strategy becomes popular you end up with a lot of bells and whistles attached to that type of strategy in order to sort of attract additional interest. And we think in the case of trend following or managed futures the industry has gone. Got somewhat awry. Now you don't have to read regressions and so forth to to interpret this I'm, I'm going to kind of just call out a couple of statistics that I think are particularly relevant. So the blue column here is what we think of as a as a pure trend following or managed future strategy compared to the industry and what you find are these two betas, these these two exposures to risk, the first is equity beta and the 2nd is. Carry strategies. OK, so what's wrong with that? What? Why is it problematic that some managers, in addition to doing trend following and managed futures, why is it problematic that they also have equity risk and exposure to carry strategies? Carry is one of these sort of famous or infamous strategies that sort of picking up nickels in front of a steamroller? Well, the problem is during drawdowns during episodes like what we are seeing today, strategies, alternative strategies that have these embedded betas don't do as well as they should. And so here's the consequence. So what I've done here is I've I've picked kind of the three worst drawdowns. We have seen since HQR started kind of formally managing dedicated trend following strategies or managed futures strategies and what I'm plotting is kind of three things. The light blue is how a 6040 portfolio did. The dark blue is how a pure trend following strategy did. And the middle blue is how the industry on average the average trend follower did. And what you find is in each case, the industry on average didn't do as well as it should have. And we think the reason for it is because the industry in its attempt to innovate on the strategy ended up innovating in the wrong direction. They ended up adding some equity beta, some equity risks. They've ended up adding some carry strategies. And that's kind of antithetical to the whole point of managed futures. Managed futures trend following strategy. They're supposed to do 2 things. One is work on average, give you positive returns over the long term. The 2nd, and this is sort of the special feature, is work especially well when most needed. You kind of want them to do better than average when markets are doing worse than average. And we found that a lot of managed futures managers have sort of compromised that second objective as this. As the space has become more popular and so that's something I would kind of encourage all folks here today if they're trying to get their head around like, oh what, what's this person do? Is this better for the portfolio or this take a look at the performance when you need it most and and see which funds are are are delivering. You know, one thing I think about managed futures is that. They come in all different shapes and sizes. I think when shopping for a managed futures, a type of exposure is one you need to look for a discipline approached. And because I think a lot of them, you know, qualitative, it's more about manager skill as opposed to just really using a factor such as trend which you really want that factor in trend. I think the second thing too is the risk characteristics of these strategies can also vary widely and in the particular case the way a QR manages it, the risk characteristics are actually pretty attractive. In it diversifies portfolios really well as opposed to some strategies which could actually be taking more risks on the global equity market, so. On that point, what is been the historical volatility of your managed future strategy? OK, so. You know how earlier I said diversification is is is really hard and that's sort of been a lesson learned. We have in terms of our mutual funds, our managed futures mutual funds. We actually have two versions. One is a 10% target or average volatility. The other is 15. And the reason we have the two, you know, Russ, you mentioned earlier that commodities are sort of like cayenne pepper. You know, you don't need a whole lot in order to give some kick to the meal. A higher volatility, kind of a higher level of risk diversifier. One of the benefits of that is, is you don't need to make as much of an allocation to it to have the same impact to a portfolio. Now of course, the challenge with the higher volatility version is. It's like cayenne pepper. It can be pretty hard to stick with. And so the reason we have sort of the 10% volatility in the 15% volatility is really for an investor to kind of choose, OK, well, what type of line item risk can I actually live with? It also can be used in terms of the funding source, you know. So let's say I only have stocks and bonds in My Portfolio and I'm thinking of allocating to something like managed futures. A great question is OK well. Do I sell bonds to buy it, or do I sell stocks to buy it? Or do I sell both to buy it? For investors who are looking to sell stocks to get managed futures, that's another reason that we have the the 15 volatility 1 because that's about the same volatility as as stocks. You're you're kind of not changing the overall. Think of it as kind of risk allocation that that that you're taking in the portfolio. That said, the 10% volatility version is far more popular in terms of AUM than the higher Octane 1 great. Well, thank you, gentlemen. I know we have one more question. I think it kind of had a roundabout way was was answered in the sense that I think there is some concern about always buying a strategy after it's come through a hot period. But I think as an investor and advisor, if you understand the investment reason for owning that strategy sort of the economic underpinnings for it as well. And again just the sizing of the position, perhaps keeping it smaller to get started is probably a good way to sort of introduce a position in the portfolio if you understand the reasons for owning it. So again, thank you. For your time, gentlemen, today, again in October, our portfolio recipe is the balanced portfolio and that will be in the last week of October. And I got to have my show my disclosures. We only have the one page as opposed to dance 37 pages. So again, Dan and Stanley, appreciate your time. Thank you very much, gentlemen and thank you everybody for your time and trust and Orion portfolio solutions. And we will see you next month. Thank you. Thank you guys. _1732322725911