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Episode #413: Antti Ilmanen, AQR – Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least – Meb Faber Research

Episode #413: Antti Ilmanen, AQR – Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least


Guest: Antti Ilmanen is a Principal and Global Co-head of the Portfolio Solutions Group at AQR Capital Management. In this role, he manages the team responsible for advising institutional investors and sovereign wealth funds and develops the firm’s broad investment ideas. His newest book is Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least.

Date Recorded: 4/27/2022     |     Run-Time: 1:23:25

Summary: In today’s episode, Antti provides a blueprint for investors as decades of tailwinds are turning into headwinds. He highlights timeless investment practices and what the empirical evidence says about things major asset class premia, illiquidity premia and style premia. He shares his thoughts on home country bias, the value / growth spread today, and what he thinks about diversifiers like trend following.

One theme throughout the episode is Antti’s advice to endorse humility in tactical forecasting and through diversification.

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Links from the Episode:

  • 2:04 – Welcome to our guest, Antti Ilmanen
  • 8:38 – The shared relationship between investors (in both public & private markets) and power laws
  • 13:25 – How much of writing his new book was driven by the pandemic; Investing Amid Low Expected Returns
  • 22:58 – The current unappealing state of US stocks and bonds
  • 25:37 – Origins of the 60/40 portfolio strategy
  • 31:52 – Home country bias
  • 38:27 – The appeal of value investing today
  • 42:57 – Antti’s preference: value or momentum?
  • 47:32 – Antti’s thoughts on alternative assets, including CTA’s
  • 52:31 – How we should think bout the ultimate Antti portfolio
  • 54:46 – A strategy he would suggest that would be surprising to traditional investors
  • 58:36 – What Antti believes that a lot of his peers don’t;
  • 1:06:26 – Thoughts on the chart from page 213
  • 1:10:53 – Thoughts on a strategy of quality minus junk
  • 1:12:52 – Jeremy Grantham episode; An important piece of advice for a rough start to 2022
  • 1:14:20 – What’s on Antti’s mind as he looks out to the horizon
  • 1:17:33 – Antti’s most memorable investment
  • 1:19:35 – Learn more about Antii;;


Transcript of Episode 412:

Welcome Message: Welcome to the “Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit

Meb: What’s up, y’all? We got a really fun show today. Our guest is Antti Ilmanen, Principal and Global Co-head of the Portfolio Solutions Group at AQR Capital Management, an author of the amazing new book, “Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least.” In today’s episode, Antti provides a blueprint for investors, decades of tailwinds are turning into headwinds. He highlights timeless investing practices and what the empirical evidence says about things like major asset class premia, illiquidity premia, style premia. He shares his thoughts on our famous home country bias, the value/growth spread today, and what he thinks about diversifiers like trend following. One theme throughout the episode is Antti’s advice to endorse humility in tactical forecasting and through diversification. Please enjoy this awesome episode with AQR’s Antti Ilmanen.

Meb: Antti, welcome to the show.

Antti: Thanks, Meb. Looking forward.

Meb: This is going to be a blast. You just got a new book out, for those watching this on YouTube, it’s here. And I’m going to tell you a fun story. So I don’t know if you view it this way, but you can tell me if it is or not, sort of a successor book to your prior “Expected Returns.” This one’s called “Investing Amid Low Expected Returns,” and Antti is climbing a mountain somewhere in the European Alps, it looks like. So I was here in Los Angeles, beautiful outside, and I went to a local restaurant to highlight some of the things I’d seen in the book, sat down at the bar for lunch, which I haven’t done in, like, two years to kind of spread out, have some food.

And I start marking up the book and there’s probably, like, 50 dog-eared pages, and one of the commenters on Twitter was giving me a hard time because I was highlighting with a pen, like, a ballpoint pen. I was so engrossed in the book, there was something that got into my head that I was thinking about. I pay the check, go to the restroom, leave, go grab a coffee, and I’m heading to a park where it’s beautiful out in Los Angeles. Now, I was heading to the park where I was going to finish reading the book and I realized I left it behind. I was so immersed in your writing, so then I had to go back. It was, like, half an hour later. I get to this giant restaurant, this poor bartender, sitting at the bar was the book totally splayed open, you know, my pen’s still there right on the page of stocks and bonds.

Antti: It’s almost like beach reading.

Meb: Yeah. So, listeners, pick up a copy. It’s awesome. We’ll dive into it today, but first, where do we find you? You’re across the pond, crystal clear sound, but where are you today?

Antti: Yeah, I just flew in from London to Germany. I found, in my Chicago PhD years, a German wife, and promised that if she waits for my PhD, this is where I’ll try to stay. And I’ve always found jobs that allow me to mainly work abroad, but have a base in Germany.

Meb: I’ve had a few plans to get to Europe over the past couple years and they continue to get thwarted by the virus versions. Although I just got back from Legoland in California, so I probably have, like, all five variants wrapped into one after that experience, but let’s talk about you a little bit. How would you describe yourself? Would you say you’re a quant? Would you say you’re a systematic investor? What sort of, if you had the label, Antti, what would it be?

Antti: Yeah, I’m extremely even handed on lots of things and have done discretionary for a long time, but yeah, I would say I am systematic at that. And actually, this is a geeky, I’m blue collar quant. So basically what Fama and French said, like, they were my dissertation advisors, that there are some real theoretical market stuff, and then there’s something which is pretty straight for trying to understand markets in relatively simple ways. And that’s my kind of blue collar finance, but quant definitely. Yeah.

Meb: You were at a few shops, AQR now, with that whole crew, but you were at a few shops early in your career, Salomon, Brevan Howard, where those were probably…and back then, the word quant and the attitude toward it, it was a little different, I feel like, in decades past. And for those shops, certainly were not, I wouldn’t say, quant focused, perhaps, at the time. Tell us a little bit about the early days, pre AQR.

Antti: So all those places, certainly, and my first job was actually a central bank portfolio manager in Finland and all those were naturally discretionary roles, but I was drifting in all of them to more systematic roles. And, I’d say, trying to be bridge between academia and practitioner or trying to learn things and then educate others. So that’s still something that’s there. And I think systematic sort of fits in that educational stuff, but I’ve always had also some heart in trying to think of the world from discretionary perspectives, but still more and more, especially then when I was a portfolio manager at Brevan Howard. Like, it’s primarily a discretionary place, great one at that, but being systematic misfit there. The cultural mismatch is interesting, and I think it is really difficult to bring those places together.

Maybe the simplest thing would be that everybody gets their bad times. If you’re a discretionary trader in a discretionary place, you may get away with telling a story why things didn’t work out and, “I’ll do better next time.” If you are systematic, you have to change the models. It’s not enough to tell that bad things happen to good strategies, you’ve got to change the models. And we found, I think, that in many cases, it was difficult to sustain this types of consistent strategies. So when I came to AQR, I really felt that I came to my natural home. It also helped that the founders of the place were my fellow students from Chicago.

Meb: Well, it’s kind of, like, coming full circle, you know. And before we kind of move on to the book, like, what were some of the challenges during the early part of your career, ’90s, 2000s, with some of these shops? And it may be not challenges, just, like, experiences. You mentioned discretionary, systematic, sort of bumping up against the narrative driven subjective world. What was it like at the time? Yeah

Antti: Yeah. Well, another feature is I certainly have broadened my plate all the time wherever I was. Let’s get back to you and that one as well. So I was very much a bond guy. First, a bond portfolio manager, I was a bond specialist. I wrote my dissertation on duration timing type of topics in Chicago, wrote my, I don’t know, maybe my first claim to fame at Salomon, I was writing, “Understanding the Yield Curve” paper, trying to make sense of what drives the yield curve. And then I broadened gradually from bonds into currencies, country allocation. I’ve never been a stock picker. Like, I’ve never focused so much on that one. I think, even that, if I look at it, I look at it from a systematic perspective.

Meb: You mean until you opened your Robinhood account started trading GameStop and AMC?

Antti: Yeah, yeah, yeah. Sorry. So, there, I didn’t… So I did broaden, besides all the liquids, now, in recent years, I’ve even looked at illiquids and it is… So there, like, I’m thinking of you as well. You look at similar types of systematic strategies as I do, but somehow, you’ve broadened also to venture capital and so on, which I do find it fascinating diversification, because it’s so different. I just read the power laws, so I’m all for diversification and in one…and I think you too, but then venture capital, all about getting those some bits right there in the portfolio, and it’s much more stories than numbers. So in so many ways, it seems different.

Meb: As you think about this sort of broad universe of systematic and discretionary and areas where kind of one of the things you’re referencing thinking about, areas that are similar, but often you find very discreet communities. Like, we love to label people in our world. There are the gold bugs, there are the Vanguard indexers, and there are the quants, the discretionary. And then you’ll find, like, entire populations where the philosophy is such that it’s very similar to another group, but there’s, like, no overlap. And we used to always talk about this. I feel like it’s more well established now than it was in the past. And part of this is because of some academic papers, but certainly a lot of the startup and angel VCs really appreciate the concept of power laws. And I think the public market crowd appreciates it, but sort of in a different way. Then lastly, is the long vol trend following crowd, which is also really about the big winners, you know, on and on. And so there’s, like, these Venn diagrams, but very rarely, unless you’re, like, the sort of CIO allocator, do you kind of appreciate that, “Hey, these people are actually, like, cousins?” Like, I got German ancestry, you and I, Antti, we’re probably cousins somewhere down the line.

Antti: Oh, and in-laws, okay. Unless you get your Finnish heritage somewhere, so yeah. Personally, like, I’ve never really invested in illiquids, but I’ve tried to understand them because they are increasingly important, of course, in many investors’ portfolios, and I try to see why that’s the case. And I confess I am somewhat skeptical, I do think that they are overrated. Like, I always love, I don’t know, the transparent, I started in government bonds and they are really transparent. Anything I do in illiquids is still pretty transparent, then when you get to the illiquid world, I don’t know, there’s not too much sunshine.

Meb: Well, the liquid versus illiquid is always fascinating because you guys have written about this and I’m not sure where it falls at AQR. Maybe it’s just Cliff ranting about it, but, like, talking about the private equity world that claims certain things like super low volatility or like, “Hey, we got a volatility of four, but that’s because you only look once a year.” The concept of, well, we could transform the S&P into a vol of four by also only looking once a year. And so some of the ways we think about it in structures are wonky.

Antti: I have got some friends and colleagues who think that those raw returns on illiquids that they are just nonsense and you shouldn’t even look at them somehow. I think that they do matter. They are reported and investors benefit from the smaller drawdowns. And so, both, I don’t know, for some official reporting and then mentally you are less likely to capitulate when you don’t see some ugly losses, but what I’m then saying, and I think, Cliff is saying as well, that benefit doesn’t come without a cost. It means that whatever amount of illiquidity premia that would seem fair for locking your money for many years, you may get only a fraction of that, if anything, because there’s this smoothing feature that we all appreciate and we sort of pay something. We accept smaller or no illiquidity premium because of that. So I think that’s something, which whenever I talk to investors, like, it resonates. Like, everybody looks in the mirror and sees that, yeah, this is how we are acting. So that makes me wonder how it’s still so commonly thought that when you buy illiquids, you are going to get some illiquidity premium. I don’t think that’s any way guaranteed. Maybe you’ll get those superior managers.

Meb: Part of the challenge too is that there is a disconnect between education on certain sophisticated managers in the investing, doesn’t even have to be retail. It could be institutional too, by the way, but things like, “Hey, I can claim a 4% vol,” and I can say it with a straight face because I know it may work. It may not work on everyone, and in some cases like me, it’ll turn me off. Like, “Dude, you can’t say that with a straight face, because that makes me want to think you’re a snake oil salesman,” but a certain percentage, it will work, and in which case, like, that continues to drive that behavior. Anyway, I want to talk about the book. So by the way, I see my show notes, what’s the nickname Polly Antti come from? Where’s the reference for that?

Antti: Oh, yeah, yeah. Yeah. Well, I don’t know whether you read this little girl’s Pollyanna, you know, this kind of prose tinted glasses, and Cliff, sometime when I’m trying… Cliff often want, like, I don’t know, world with some gloomy eyes, and I tried, when we have got some PNL challenges, then he worries more and I tend to be the optimistic one. So that’s a Polly Antti there. And it can be on some other things, but it’s on a bad PNL day that these things comes through.

Meb: So you wrote a great book a while back, you decided to just write another one. How much of that was just driven by being stuck in the pandemic? How much of it was, like, “I need to get this out?” Because this book is awesome, it’s comprehensive. You start it with the Serenity Prayer, which for listeners, if you don’t know, says, “God, give me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.” And by the way, your original book title, I love too, “Investing with Serenity.” That’s so Zen and peaceful, Antti, like, I feel like we need that after the last two years.

Antti: Okay. I’ll pass onto the critics of that one. Yeah, no, someone said it’s too new age. Yeah, but I agree. I was jogging 15 months ago and I got this idea and I just loved it, but it was sort of shut down, but I kept the Serenity Prayer. And the theme of that is, there are a couple of angles to that one, but one theme is, so we are in this world of lower expected returns and we may, like I say it with such conviction despite pretty high past returns. So we can come to that, but low expected returns, real challenge. And I’m saying that many investors have chosen not to accept it, and certainly not to accept to spend less if they have sort of accepted the idea that yes, expected returns are lower, then they have shown the courage to take more risk. So I do think that the most common answer to this challenge unless it’s ignored is to take more risk in various indices, and I do think that that’s something which we collectively cannot do, so there’s going to be some unhappiness. My one joke in the introduction is I am improving the readers’ happiness by lowering their expectations because happiness is the difference between reality and expectations.

Meb: That’s the key to life, man, low expectations, relationships, your job, dinner. You go to a restaurant and have low expectations, they can only…

Antti: I’ll tell your wife. Now don’t push too much. That’d start an argument now, but yeah, Finns are the world’s happiest country based on official statistics, and the semi-serious argument for that is it comes from our low expectations.

Meb: I like it. That’s great. You had a quote in the book, it says, “Savers and investors have enjoyed benign tailwinds for many decades, but the question now is between headwinds and no-winds.” So we’re going to start this podcast off super depressing, we’re going to bum everyone out. This is like your book, low expectations in the beginning.

Antti: Yeah, yeah. I’m boosting your long-run happiness, yes.

Meb: Yeah. Start with the diagnosis and end with the prescription. So why are expected returns low? And what does that mean?

Antti: So you look at starting yields on any asset, and with bonds, we look at yields and you can’t see except now recent months, that they are near all-time lows and you look at real yields and they are horribly negative. But it’s not only bonds, it is all assets. So equities, you can flip valuation, you just turn it around and it becomes your starting yield. So you look at Shiller earnings yields or dividend yields or whatever metric, equity yields, especially in the U.S. are extremely low. You look at real estate, you look at private equity, often, the data is not sort of volunteered to you by the people in that business, but if you get your hands on that, those yields are extremely low.

Why is it? I think, like, the first explanation is that it is coming from those low bond yields. That’s a riskless part that’s influencing all assets pricing, even if risk premium or those riskless parts were pretty normal and they probably are below normal, but if they were normal, you would still have everything expensive in this situation. And that’s where we have been quite a while.

Now, the interesting thing is realized returns have been so good. You look at last 10 years and you got U.S. equities, we just recently did a post-mortem on this one sort of after I wrote the book. We looked at in the last 10 years, we were already talking of 4% expected real returns based on those starting years for U.S. equities. Well, they delivered 14%. How did that happen? Well, 10 years ago, Shiller price/earnings ratio was a little above average, 20, more recently it touched 40, doubling valuations. When you look at how much doubling valuations does, it’s almost 7% annual returns you get from that. So no wonder we were too pessimistic because we didn’t see the slightly rich assets become super rich. And that’s what happened to U.S. equities in this last decade.

So I think it is very difficult for investors especially outside bonds where the yields… So in bonds, yields stare at your face, other assets, you look at past returns and you forget that the starting yields matter. After this kind of decade, you’ve got this situation, I think, where too many investors are looking at rear view mirror and are complacent. I think this is the time when you have to realize that gravity matters, especially in the long run.

Meb: All right, we’re channeling a little Sir Isaac Newton here. I’ll play devil’s advocate, you and I doing this podcast. So 2022, this seems fairly obvious, stocks and bonds are both off to a pretty gnarly start to the year and surprising some people off to a challenging start at the same time, and we’ll come back to that later. But let’s say we did this a year ago or two years ago, or maybe even three, and say, “Antti, Meb, here we are, you’re saying valuation just hit 40, but you could have said this a year ago and stocks kept going up. This is why valuation doesn’t work. Therefore, you both are idiots and you can’t use valuation as a way to realistically forecast expected returns, because here you guys were saying that stocks are going to do 4% real, 6%, 7% nominal, and they did 14%.” How do you respond to that? I know how I would respond to that, but I want to hear how you’d respond to it.

Antti: Well, I think you have to go and look at what happened to the returns. And I like the 10-year story that I just told, and one can take a shorter window, and look at what happened to valuations, was it reasonable? And this is related to this kind of, I don’t know, the Serenity Prayer idea that you’ve got to think, what can you forecast and what’s just random outcome? That’s another way I’m thinking of the Serenity Prayer, having the wisdom to know the difference. So if exposed, you get a big valuation increase for already expensive assets. Sorry, shit happens, and you just got to accept that forecasting is difficult. And we are not saying that these things are useful for one year market timing or something like that, but they are still about the best we have for thinking of 10 years ahead expected returns. And when you get this occasional decade, where rich things get even richer, you’ll get a bad outcome.


If people, after that, think, “Let’s just ignore that type of advice,” that’s something that has worked historically very badly, past and next 10-year returns are negatively related. So you are getting the sign of, at least with what we are talking about, that on average, you tend to get it right with these valuations. You get lots of forecasters, but on average, you tend to get it right. So we’ve got that history on our side, but still humility is very important here. This last forecast was wrong, and it’s not easy to deduce these things, but it’s the best we have.


Meb: Yeah. I mean, actually, I have that highlighted in the book, you’re talking about humility. And I was saying, that’s so important. There’s a quote that I just love this past year, I can’t get out of my head is about talking, like, “You don’t want to make your idea your identity.” And so, you know, you’re over here, you and I, or someone else thinking buy and hold stocks, or even if stocks are expensive, like, the reality of probability and stats is, like, these things can go either way and you learn to embrace and accept the markets. So you almost got to be a comedian. I say you got to be part historian, part comedian to really get it. But you said, “Look, investing with serenity is not only about calmly accepting low returns, it’s about investing thoughtfully, figuring out the best way to reach goals. We need to make the most when markets offer the least. While on this journey, investors should focus more on the process than the outcome.”


That’s interesting because it’s easy to say, but hard to do. Most investors, even the ones that say they focus on process and not outcomes, I feel like they do that on the buy decision and they almost never do it on the sell decision. And I don’t know if you’ve experienced that, a good example I always give, is I say, people, they go through this process, say, “All right, here’s my process. Focusing on the outcomes.” You underperform after a year or two, you’re fired, or if it’s not an active manager, if it’s an asset class, whatever, ETF, on the flip side, people say, “All right, you underperform more than my expectations, you’re fired,” but no one in history, and you can tell me if it’s happened to you, has ever said, “You know what, Meb? You know what, Antti? You guys did way better than expected. I have to fire you, I’m sorry.” Have you ever heard that? Because I’ve never heard that.


Antti: Yeah. There’s extremely rare cases, but there is some situations where people sort of go with that, but it’s one percentile thing where that happens. And yeah, I think it’s understandable, but the same time, the same people know that there is a tendency for, if anything, like, three to five-year mean reversal and so on, and still people are doing it. Like you said, I think discretionary decisions will tend to have this return chasing/capitulation tendency. Cliff has got this lovely quote, “People act like momentum investors at reversal horizons.” And that’s just so unhealthy for your wealth, but we all do it if we don’t systematize things. Yeah.


Meb: One of the challenges, like, there’s been plenty of times in history where, say, stocks are expensive and don’t look great. There’s been times when bonds may not look great. This seems to be, and you guys have touched on this before, a rare moment when both U.S. stocks and U.S. bonds look pretty stinky. And I’m just talking about generally the last couple years, pretty stinky together at the same time. And then you talk about, like, how does this resolve? Because, like, most people, the way they solve this problem historically is you diversify. You go stocks and bonds, 60/40, but rarely is it kind of, like…have we seen this many times in history where they both just look kind of gross?

Antti: No. So, again, both of them have been first or second percentile, so just at the tail end of their richness in recent years. And by the way, again, then drifting, if anything, then drifting to even richer levels. So which meant that this contrarian forecast, we are just getting things wrong in recent years. As you were saying, it’s rare for that to happen together. And that makes me feel even more confident that this gravity is going to hit us. I say, I don’t know how it’s going to materialize. I use this terminology, slow pain or fast pain. Slow pain is that things stay expensive and we don’t have any more of those tailwinds behind us, and then we are clipping non-existent coupons and dividends and that ain’t fun. And then the other possibility is that you get the fast pain, things are cheap, and I think we might be getting both, you know. Now we are getting some of the fast pain this year, but I don’t think we are going to get that much fast pain that is going to solve the problem. I don’t think we are going from these tiny levels to historical averages where if we get halfway that I’m already surprised, that requires a very big bear market to happen. So I think we’ll get some fast pain, but still end up with that slow pain problem with us.

Meb: I wonder, which is, like, if you just think about investors in general, mentally, which is harder to live with? Is it the crash type scenario? So maybe, like, a great depression or GFC style bust where the stock market goes down 50 plus? Or is it something…? I mean, this feels similar to, like, the ’70s where you have high inflation and things go kind of sideways with, like…

Antti: Yeah, my answer would be, nobody knows because we just haven’t had this. Then in ’70s, the starting years were a different ballpark. So it’s really pretty unprecedented what we have in this low expected returns. I mean, maybe some 1950s, but no, equities were cheap when the financial regression kept bonds expensive. And so, I do think that this is pretty unique.

Meb: In the book, you talk a little bit about, like, the evolution of asset allocation, which is a pretty fun tour. Did you ever get to the bottom where 60/40 came from, is that Markowitz? Who came up with that kind of oddball number?

Antti: Yeah. No, I was really trying to do some detective work and talk to some great pioneers on both theoretical and practitioner side and there is no easy answer. I think there’s, like, one logic, just this 60/40 turns out to give reasonable portfolio pretty much at 5% real return, 10% volatility and sort of tolerable drawdowns most of the time. So I think that sort of gradually came up then as a sweet spot, but then people only afterwards, I don’t know, found that… And then once it became the name, you got this, I don’t know, conventionality circle, reinforcing effects that nobody was having exactly 60/40, but people were having portfolios pretty close to that because everybody else was doing it.

The other thing I can say is that it started first from endowments. Like, almost everybody 100 years ago had primarily bond portfolios. And then the shift to equities started from Haynes and then U.S. endowments and corporate pension plans before they did LDI, they were taking more risk and taking more equity. So that was shifting towards that 60% then in post-war, like, ’60s, ’70s. That was big part of that history. The second big part of history, of course, is then drifting to alternative investments. So that happened then after equities, and that’s been the big story of the last 25 years.

Meb: So most people, certainly, that we talk to, but also the evidence kind of suggests they still have a U.S.-centric stocks/bonds portfolio. And we agree that that’s probably not going to hit, forget expectations of the sentiment surveys last few years, let’s just call it the traditional 8%-ish return that pension plans had expected in the past. Now, let’s come down a little bit for some, but let’s call it even that 7% return is hard to get to that number. So we alluded to earlier, one of the things that people have done other than save more and lower their expectations, they’ve moved out the risk curve, so they’ll take on more risk in areas like private equity and real estate, perhaps. Do those areas offer any nice respite from the low expected returns situation in U.S. stocks and bonds or are they problematic as well?

Antti: Yeah, they help something, but they are totally overrated because the gravity matters there as well. So again, as mentioned once earlier, if you get the yield data, you will see that private equity yields or real estate yields are near all-time lows, compared to their own history now. So they can still give some spread versus treasury, so there’s something positive and private equity may give a small edge over public equity, but it probably is clearly smaller than it used to be. So one of my favorite charts is to look at the valuation gap between private equity and public equity. It used to be massive until about mid-2000s. And I associate the change with David Swensen’s Brooke and Yale Model becoming so popular. Hey, you contributed there as well, shame on you.

So anyway, so this growing institutional and, if possible, then for wealthy individuals interested in privates created problems, and since then we have seen narrower, both expected and realized outperformance for private equity. And so, I do think that’s a problem by itself, but the second level problem for that is that it delays any fee pressures. Hedge funds have been having fee pressures for 15 years. Those fee pressures seem to be very limited in the private side. So you can still keep charging incredibly high fees there in that area, and I think that’s going to gradually show up in the performance. And so, that’s my sort of other also caution. However, you still cannot replicate that smoothing feature, and so therefore the possibility of 50, 60 drawdowns.

Meb: You can, absolutely, Antti, you just got to only look once a year. We’re going to start a brokerage account called…

Antti: Yeah, and charge higher for that one. Yeah.

Meb: We’ll call this the Sheriff of Nottingham account where you are only allowed to see your account value once a year. You can log in on your birthday and that’s it. Otherwise, it doesn’t change the rest of the year and that’s it. It’s like so much of investing, if you could come up with, like, a thoughtful way to do annuities that wasn’t super expensive and full of fees and fraught with all the middle men. And maybe you got to, we talk about narratives, you got to frame the narrative a little differently. Can’t call it an annuity, call it something else, maybe personal pension, I don’t know, but that keeps people out of the honey pot. It shocks you every time you open the account. Maybe that’s what it is. So 60/40, problematic currently, adding some of the spice from the spice cabinet that a lot of institutions have found to be their savior over the past 5 years, 10 years, private equity being one, real estate kind of in that same category. So what the hell do we do? Do we just go full ostrich and just stick head in the sand and say, “You can’t sit in cash, because cash right now is losing 7% per year.” What do we do?

Antti: Yeah. You and I are singing from the same songbook with certain value and momentum and these types of ideas. We do think that they, again, illiquids can be part of the answer, but also some ideas, some systematic strategies on illiquid, as I say, can be part of the answer. And I do think that they became somewhat liked a few years ago and now they are, again, like, not so hot, and I do think they are underrated whereas illiquidity premia are overrated. And so, I tell in the book that my beliefs are very much in these types of strategies, but if you find that all the evidence that we show and all the stories why these things can work. And so, if you don’t get as much a believer as we do and you capitulate too easily, then you shouldn’t allocate too much to them, but some allocation I think is right for everybody. Anybody who has got anything close to, I don’t know, my types of beliefs then should make meaningful allocations to those types of strategies because they are great additions and they are great diversifiers.

Meb: Here’s the problem with having you on the podcast is I’m reading one of my favorite sections of your book, and presumably this will be the same page numbers, listeners, but it’s called, “On investment beliefs.” It’s in the introduction. So page 11 and 12, but you go through, like, a dozen of your beliefs and I’m hard pressed to disagree with any of these. So I’m trying to play a little devil’s advocate here. And so, I’ll needle you a little bit in the course of this discussion and we can go through some of these because they’re actually pretty insightful, but one of the ones that I talk a lot about, and my God, did I get just raked on Twitter for this the other day, where I said basically similar to you. I said, like, “Here’s five beliefs I have,” or I’d said differently. It was like, “Here’s five mistakes I see retail and pro investors make.”

And I think they’re actually, like, really hard to argue with, but one of them was investing way too much in your local market. And you described that as we have, as others have, is home country bias and Lordy, the responses. So, like, most of my followers are American, and so, they’re like, “Well, obviously if you did anything else…” And case in point, U.S. is only, like, it’s 60% of the world market cap, which is, like, 10 times even country number two. So I’m not saying to put zero in the U.S., I was saying, your local market, don’t put it all on there. But goodness gracious, the responses, we’ll put it in the show note links, listeners, but everyone’s like, “Well, the U.S. has outperformed for a decade. You’re an idiot. It seemed to be a great stride, but just all of them.” Tell me why I shouldn’t put all my money in U.S. stocks. Why is that a bad idea? Or maybe you think it’s a good idea. That would be a surprise to the pod.

Antti: I love this little factoid that the world’s most famous active investor, Warren Buffet, and the world’s most famous passive investor, John Bogle, agree on this, U.S., U.S. And there’s something I think fair about the argument, like, U.S. exceptionalism. And even when you look at this 120 years of data from Dimson and so on, you find that U.S. has outperformed by 2%. Now, I’m getting sort of serious with the data analysts. So they find that there was 2% higher dividend growth in U.S. That came really from the growth part, and that would seem to be more sustainable, but that part, that has pretty much, I think, ebbed away over time. The U.S. outperformance over the last 10, 15 years has been richening its valuation. So it’s the same thing as in the olden days, whether we talk of public or private equity, much of it came from good starting yields or good growth. Now, it’s the richening which is giving the juice and that’s not so sustainable. So I do think that the problem with people’s conviction now with U.S. is that they don’t recognize that the outperformance recently has come from this consistent richening over the last 15 years, and that, inherently, is not as sustainable.

Meb: Well, the great said differently, like, the starting and ending points matter and wanting to cherry pick the periods, someone was like, “It hasn’t been a huge mistake to invest all your money in the U.S.” I go, “It has been a huge mistake, just not recently.” There’s been plenty of times and not even that long ago, 2000 to the financial crisis, everything else romped and stomped the U.S., but I like to play cherry picking data nerd, where I was trying to just at least show an example. And I said, “Over the last 70 years, the U.S. has been a darling, outperforming foreign stocks by, like, 1% a year,” which doesn’t sound like much, but you show the end dollar amount and it’s way higher, just the compounding compounds. And I said, “How much of that outperformance has come since the financial crisis?” The answer was all of it. And a lot of that because the foreign and U.S. had similar valuation multiples post-financial crisis. The difference is the U.S. went through the roof and the rest of the world, not so much. So wait, I’m not doing a very good job of devil’s advocate.

Antti: Yeah, but it is just one of the ways contrarian trading sucked in the last 10 years, you look at market direction, you look at U.S. versus rest of the world, you look at sectors, you look at value, they all failed in this decade. But I think it is terrible if investors now take the lesson that since things didn’t work in the last 5 to 10 years, they will never work again. I think it really is the wrong lesson to draw from here.

Meb: Yeah. Well, I tried to flip the script, which didn’t really seem to work. I said, “Okay, tell me why this is a bad idea. Everyone should put all their money in UK stocks.” And everyone’s like, “That’s crazy. You never do that.” And I said, “Well, why? Like, that’s essentially the decision you’re making. It doesn’t matter where you reside.” And I said, “Do you think it was smart for all the Russians to put 95% in their local market?” And people were like, “No, that’s crazy.” I said, “Well, they did, and so do you. It just happens to be your own country.”

Antti: I think home bias, it’s a smaller scene for U.S. investors, both because of what you said, the 60% that it is so big part of the market anyway. And then there are, I think, more credible stories of some U.S. advantages, better rule of law and business oriented…tolerance of failure, list is long. So there’s something in that.

Meb: Antti, you’re arguing with yourself here, because I could go right back to you and say you can make the same argument about Japan in the ’80s. So I would say, “Look, it’s normally not terrible to have a huge home country bias in the U.S., but because of the valuations right now, it’s particularly foolish.”

Antti: Oh, yes. So, okay, we are singing the same song.

Meb: Yeah. So what does foreign look like to you? Because, like, here’s a problem. Let’s say, “Okay, Antti, Meb, you convince me, I’m going to move away from 60/40 to 60/40, but global, but foreign stocks look cheaper in emerging markets. But if the U.S. goes down 60%, should I expect my foreign and emerging to be zero, like, flat or up? Like, is this going to help? Or is this just going to be Baskin Robbins’ 31 flavors here?”

Antti: Yeah. I do think that the stories that I just said, they are related and correlated like that, that overall market direction and the U.S. tech stocks, especially then that leadership has shown up in market direction in U.S., in tech and in value versus growth. And so all of these contrarian bets have some same roots here now. And I do think that all of them had some good justifications, but they went too far, and we are certainly seeing in 2022, some of that correction and I suspect this is much more of a discretionary view than…or valuation supported, that there is way more to go in that correction.

Meb: Yeah. I agree with you. I don’t want to make this even more depressing, so we’re going to carry on. You talk a lot about style. You alluded to, earlier, we talk about value now, and so how do you…? Like, value, it could mean a lot of things. I could say, like, pizza, but to someone, that means, like, a Detroit lasagna style, to someone in Italy, it means very specifically margarita style, nothing else on it, and then you got the crazy person down the street who puts ham and pineapple and fruit on their pizza. So you can’t just say pizza. So if you say value, like, what does that mean to you guys? How do you express it? Like, what’s the best way to think about it and why is now particularly interesting for that factor?

Antti: Well, I think a generic idea just is value is you look at current price versus some fundamental anchor and then you try…you can be pretty simple. You know, the simplest thing, certainly, it’s pure simple stocks is to look at book value, book to price, and it gets lots of criticism. And you can refine it, there’s been always talk of, “Let’s look at intangibles,” and so on, and you can improve it a little, but… Or you look at lots of metrics or you go beyond the book earnings, cash flow, sales and so on, all those, and you’ve got some fancier models to think about the fair value. So there’s many ways you can take it further. And then when you look at other assets, it’s, again, I think it is helpful for people to understand, it is price compared to some fundamental anchor and you can do lot of work with that fundamental anchor, but then you have to sort of watch out whether you are overfitting or making things a little too fancy with those exercises.

But in general, there has been the finding that value type of strategies tend to work in the long run and then they sometimes disappoint badly and especially they disappoint when you got some structural changes. And we had some meaningful structural changes recently, which probably justified some of this value underperformance, but then what happens almost always in those times is that markets take it too far. And then there’s a particularly good opportunity, and we do think that there’s a particularly good opportunity and you can see it when you look at the valuations of value stocks versus growth stocks or so on. It’s the only time where you get comparable ex-ante opportunities recently has been ’99, 2000. And actually one other fits maybe on that one is after a really unpleasant period in 2018, 2020, value strategies have done, now, I’m thinking where stocks selection, especially, have done quite well in the last year. And yet this value spread, the ex-ante opportunity looks pretty much as good as it’s been, partly because you are loading into new stocks all the time. And so, it’s possible to have nice historical performance for the last year and still be pretty much having as good forward-looking picture as you could hope for. And that’s roughly where we are with value, so I’m optimistic.

Meb: And so, yeah, I mean, if you look at…like, it’s been a lot different examining and talking about the strategy a couple years ago as it is now. The funny part is you talk to people, we speak to actually a fair amount of people who say, “I’m worried I missed the value trade. So I think, like, I see this, what’s happened and I worry I missed it.” And then, like, you see the chart of the historical spreads and this tiny little mean reversion at the bottom, it almost looks like a tiny little fish hook on a giant, the little barb at the end. How much of that, to you, is the expense of being stupid expensive, and how much of it is the cheap being really cheap, or is it both? Like, there’s two sides, because you guys in particular do both sides, which can be great when you’re right, because it gives you two chances to be great. And when it gives you just, like, a two chances to be wrong too, as both sides. So which is driving it?

Antti: Yeah. It turns out that both, when we have looked at the strategy in the long run, where do you get the gains? We find that it’s reasonably symmetric. And when we looked at the opportunities, and luckily had a really nice study couple of years ago, pretty simple, just take away sort of, roughly speaking, let’s say, fan mags or take away the mega caps or take away the TMT stocks and so on. So just all the usual suspect, the stories that could be driving this, none of them removed a story. So it really seemed from that, and the analysis that we have done, that it has been very prevalent and it has been on both sides, both on the rich side and the cheap side, and I really couldn’t tell clearly that it’s asymmetrically one way. Intuitively, I tend to think it’s more common that it comes from the, in bull markets, it comes from the rich side craziness and in bear markets, it comes from the short side craziness, but we don’t really have good data to say that’s been the case.

Meb: So we haven’t even once mentioned, I don’t think, one of my favorite factors, we talk about value a lot. People get value, you talk to your neighbor and they kind of…they get Warren Buffet. They get the concept of paying less than something worth. Momentum starts to tweak the person’s brain a little bit, I feel like. You guys talk about both, you like both, presumably. If I force you, say, we’re having a coffee or at happy hour and I say, “Antti, you got to pick, got to make a choice.” Who do you pick in a fight, value or momentum and why?

Antti: Yeah. Yeah. I think this has changed. And now this gets even a little heavier and you know this and hopefully, listeners do, but let’s just… So there’s momentum which is sort of cross-sectional and you try to be market neutral in momentum strategy. And then there’s a cousin, trend following, where you allow market directionality. So, like, the way I describe the distinction between momentum and trend is that both of them look at last few months or last year’s performance of different assets and they chase winners, so they, “Let’s buy the things that went up and sell the things that went down.” But a momentum manager says that, “Okay, I want to be market neutral. So if everything went up last year, I must sell the things that went up all year little, so that I can buy so much of the things that went up a lot, so that I can retain the market neutrality.” Whereas trend followers says, “Hey, if they all went up, I buy them all. Risk all the way.” And so, that distinction.

And it turns out…so now, to your question on that favorite strategy, so I would go with trend and another quite different defensive stock selection. So basically, strategies that have done even good long-run returns, but they have also protected in bad equity markets. Those are my favorite. So a trend has got this characteristic more than the cross-sectional momentum or value strategy. So that would be my favorite team, although I try not to play favorites.

Meb: Yeah. If you could give me both on a platter, it’d be amazing. It’s, like, the three things I’d take in a row would be cheap, hated, and in an uptrend. So something that’s just been super cheap, everyone hates it, but it’s starting that initial, like, move up. If I could subjectively pick, that would be it. I always say trend following is my desert island strategy, but often if I was looking for pure absolute returns, it’s often the really, really cheap on the value side.

Antti: If you look at values factor, value style as an investment strategy, you just described it pretty nicely. It is still cheap, it’s not hated anymore right now, but it certainly was hated, but cheap and it’s started to improve, so value and momentum. Agree on that one. And so, that’s a pretty sweet spot for it right now.

Meb: So often, the investments look terrible. A very recent example is sometimes I think this is Mark Yusko, but says, “When things go from, like, really absolutely hated to only slightly less terrible, you can have some pretty explosive returns.” And, like, looking at energy over the past couple years, you have this sector that’s been entirely destroyed, is down, whatever it was, 60%, 80%, if not more in some categories. And then you have some of the winds shift, some of the macro picture changes a little bit and all of a sudden, like, all that kindling just ignites and then you have it cheap and, and also hated, but then it rocket ships sort of, but that happens on both sides up, down and in-between. We’ve seen this in last year with a lot of the expensive stocks where they disappoint in any way and you blink and they’re down 80%, 20%, 40%, 60%, 80%.

Antti: Okay. So I’ll be the devil’s advocate to this one. And so, there’s also, how do you lose 95%? First, you lose 90%, and then you lose half of the rest.

Meb: Yeah. Those numbers, once you get down that far, usually, everyone’s, like, written it off, forgotten about it. There’s, like, the various stages of investor denial and grief. I say it usually doesn’t impact behavior, in my mind, dealing with clients on a portfolio level, 10%, you get complaints, down 20% is the inflection point to me where people start to, like, really behave poorly and everything after that is…it gets logarithmically worse.

Antti: Yeah. And we haven’t had…well, okay. So not for the overall market, I guess now in the silly growth area, we’re getting some of those numbers.

Meb: All right. So you’re a trend guy, you’re a value guy, I like it. As we think about some of these alternative assets, we’ve covered some assets that are kind of cousins of private equity, that’s kind of a cousin of regular equity, real estate sort of in the real asset category. Those tend to be, in my mind, 50 years ago, alternatives but today accepted as kind of common asset classes. Commodities are one that still feels, unless it was 2007, not necessarily embraced as a normal part of a portfolio. How do you guys think about commodities and this, like, expected returns framework or as a part of a portfolio? Like, most people, we do these polls all the time and we say, “Do you have anything invested in X, Y, Z?” And commodities are always, like, zero or it’s the Canadians and Australians. So, like, they have some, but otherwise people have none.

Antti: Yeah. I think there were some commodities were put into some portfolios around the GFC and those inflation concerns. And then it just fell so badly that basically those commodities were kicked out by 2015 or so. I do think the first thing, of course, to say with commodities is that it’s so difficult to find good inflation hedging assets out there. And they are pretty much the best of the bad lot. So I think anybody who had normal portfolio had a big disinflationary event because they didn’t have almost anything that likes inflation and they benefited from that. And now we are in this world where that doesn’t look so great, and commodities, when you look at what could help commodities are, I don’t know, well, together with inflation swaps or break even, they are pretty much the clear way.

So, this is not expected return argument, this is just, what’s the role of commodities in the portfolio? I think great diversifier, especially for inflation scenario. Okay. We have got something really interesting, I think, for the expected return part, because when you look at historical data, you find that individual commodities largely haven’t done too well, and on average, you get pretty much sort of zero return over cash is the long-run story. And now, I’m talking even, like, 100 years or so for many different commodities, this is sort of the average number you get from them. But then when you look at the portfolio, you get something like 3%. And so, there’s an old Campbell Harvey paper talking about turning water into wine, and it’s this idea that individual commodities tend to have 30% volatility and a portfolio of commodities may have half of that. And when you reduce that volatility, your compound return increases. So this is for the geeks. This is the variance … volatility drain type of argument.

And so actually our, and some other people’s analysis, when you look at 100-year or 70 years, 50 years, 140 years, that’s the longest history you have for commodity futures, diversified portfolio has a positive 3%, 4% return. This is surprising to many. So I do think that that’s a nice addition to the story that it’s as good inflation protection asset or inflation hedging asset that you can think of.

Meb: In the book, you talk about a feature that I think is actually really important, but people often don’t necessarily really acknowledge. And that is you talk about looking at your portfolio perspective on any investment over narrow framing. And so, meaning…like, I think about this a lot of time, well, someone will come to me and they say, “You know what, Meb? Okay, I get your argument. I’m going to implement trend following, and I’m going to put 1% of my portfolio in trend following.” And I’ll say, “Well, you may as well just do none.” And they say, “What are you talking about?” And I say, “Well, that’s not going to move the needle, like, this 99% you have in Doge Coin, this just isn’t going to do anything.” But the point being is that, like, you have to look at it where in many of these cases, putting in a 5% or 10% allocation, depending on the asset and what you’re doing for the reason, diversifying or potentially trying to add alpha, you need a bigger chunk. So tell me, Antti, how do you think about starting to put together the pieces? because this feels like an endless Rubik’s cube for many people where you have this…it’s, like, going to the supermarket and saying, “Oh my God, what’s for dinner tonight?” Tens of thousands of options. Like, how do you actually…? Let’s say that Finland, do they have a sovereign wealth fund?

Antti: Yeah, we don’t have the oil. We’ve got something a little bit like that, but it’s a…

Meb: Let’s say Norway says, “You know what? We’re going to partner with you anyway. We like you, neighbor.” And, Antti, tell me how you think we should start to put this all together. How should we think about the Antti ultimate portfolio? What’s the mindset and with a nod to 2022, how should we put it together? What are you going to do?

Antti: Yeah. Let me just first say to you around this 1%, so don’t make perfection the enemy of improvement. So take that 1%. If that does well, they may get to 5% one day and maybe 50%, or just somehow going the right way. And this is related to my answer. I would say if it were just my portfolio or if I were an unconstrained investor from Mars or Venus or whatever, so I would think what are the things I believe in? Few asset class premia, few style premia, maybe some illiquids, so 10-ish things where I think there’s long-run reliable source of returns and then put roughly equal amount of risk to each of these. This would be a wonderful unconstrained starting point. And now this depends, of course, now on anybody’s beliefs. So this was my beliefs, but then it turns out constraints really matter. If I’m telling that you put to 5 styles to each same amount of risk as you put for equities, start to count what kind of shorting and leverage is needed to make all of them have sort of the 15% vol that equity market gives. So it’s impossible.

So somehow I totally understand why most portfolios have got that equity market anchor and domination. And it’s just a, I tend to say that, figure out the goal and try to move towards that goal, and you will stop when something is too uncomfortable. Maybe it’s too much illiquidity for some investors, but in our areas of interest, it tends to be that too much leverage or shorting, too much unconventionality and you are going to stop allocating to those things, but it’s at least the right direction.

And I do think that that would be my advice pretty much to anybody. And then I was just telling what were my beliefs? I think it is important to recognize that most investors, like, this is the humble part I tell them in the book, that figure out what are your beliefs, things that you can stick with, because if you follow my beliefs and you haven’t really gotten my convictions, then you’ll throw in the towel after a couple of bad years and that’s a bad strategy. So you have to find out what it is. And that’s a key reason why equities are so dominant because that’s the place where people will have most long-run conviction and least likely capitulations and have to respect it.

Meb: It’s the place also, I think, that has the most warm and fuzzy…groupthink’s the wrong word, but least career risk, because, like, that’s what everyone else does. So you have a little bit, a defensibility, you can say, “Well, look, CalPERS did it. So we’re not that different.” You know, whatever I love to pick on CalPERS.

Antti: We are all in the same boat. So losing together, yeah. Wrong and alone is the bad thing to do. Yeah.

Meb: It’s funny you mentioned constraints, and I’ll get to this in a second. So if we were to look at what you would come up with on paper, say this is Antti’s portfolio, versus, like, a traditional institution, what would be the biggest thing that would jump out at us? Be like, “Oh man, he thinks we should do X.” You mentioned shorting. You mentioned leverage. Both of those sounds scary to a lot of people. Would it be a certain style or an asset? What would, like, a traditional investor see and be like, “Oh wow, you think we should do this? Okay.”

Antti: Yeah. It would be a diversified style. We’ve talked about almost… And by the way, we might return to defensive stocks, which somehow that’s, I haven’t seen you talk much about that, and I do think that totally belongs to this repertoire of things that should be considered. Anyway, so it is a combined multistep, multi-asset class portfolio, that is, you get two dimensions of diversification. You can sort of double Sharpe ratio on each dimension. That’s just wonderful, but what does it mean when you double Sharpe ratio? You are reducing portfolio volatility. So unless you are happy with some very low risk portfolio, you need to use meaningful leverage there.

And, again, there will be limits, and you mentioned Norway, any of these big investors I talk to, they can’t lever their portfolios, like, I don’t know, five times or something. They may add 20%, 30%, and some of the more advanced ones do something like this, but nobody’s doing sort of twice leverage, let alone more. So there’s going to be real world limits and you have to have both the beliefs and then some other lacks or constraints.

Meb: Leverage is funny because people they hear the headlines, they see the Archegos, the news headlines of long-term capital management, all the leverage stories where people blow up, what they don’t necessarily see is the implicit versus explicit leverage. You look at stocks that have leverage on their balance sheet. We were talking about the private equity replication earlier. They get leverage when it comes to mortgage in their house, but when it comes to certain areas, and this gets into the diversification and Sharpe ratios too, it becomes a feeling that sounds scary. And you guys also not just leverage, but shorting too, like, to many people, that sounds like something that just is emotional reaction too. How required is that for the optimal portfolio, do you think?

Antti: I think it helps sustain those opportunities because there are going to be limits to how many investors and how much they want to do those. Like, we say it’s the three dirty words in finance, leverage, shorting, and derivatives. And again, all the things that you said, it is very important to differentiate, besides embedded versus direct leverage, which is, embedded is so fuzzy and convenient and so on, but direct is the harder thing to do. But the other one is it’s so common for these problems to involve using leverage to boost your risk, whereas we are talking using leverage to boost your diversification and that distinction is a pretty geeky one… That’s the one where we should be able to educate investors better and see that we are not saying, “Take more risk,” we are saying, “Get a more diversified portfolio.”

Meb: Yeah. I mean, there was a moment early in my career when the framing of it, where they said, “Okay, look, you don’t have to accept stocks at this offered to you SPY ETF level. You could actually de-leverage that and pair it with cash or leverage it up, ditto for bonds.” And then once you start to think about asset classes on a apples to apples, say, volatility basis, it’s kind of an insight that I think is pretty profound for a lot of investors, because they don’t necessarily think that way, but then it applies to everything. Whether you’re trading the Yen, whether you’re trading wheat or shares of GameStop, it’s a way of thinking about the world that may be different than a lot of people thought about it before.

So part of what’s interesting about having this conversation is starting to think about, okay, well not just what is anti-consensus and what do you believe that other allocators don’t believe? And we touched on a few things, but also, like, what do you believe that most of your peers don’t? And there’s one article that you guys did that, to me, was fascinating because I haven’t seen anyone else talk about it. This is a nice circle back to the earliest part of our conversation, where we were talking about this concept of Venn diagram circles of communities and thinking about so many investments while described differently are the same essential risk, which is, like, equity beta. So private equity, U.S. stocks, yada, yada, on and on. And then on the flip side, you have, like, what is a good compliment to that? And so, talking about trend following was the example that I gave, from one of my favorite papers y’all did, that I have not seen anyone else talk about outside of y’all and Meb, but no one, not a single person in the entire angel, private equity landscape, even A, certainly doesn’t do it, but B, even thinks about. And I had a thread where I was talking with a bunch of angel investors and they were all just like, “Huh?”

Antti: They don’t think that they have with any beta there. So they think it’s also what they are creating there. So that’s a translation problem here though, but yeah.

Meb: Yeah. Okay. That’s fair. Tell me about what this paper was about and why it’s interesting. And then I’ll chime in with a few me Meb quips too.

Antti: No, it is just think about your investments from portfolio perspective and whenever anybody seriously studies their portfolio, they do see that the mother risk. It is the equity market directional risk that dominates, the one Cliff says 60/40 is 90/10, and you add various alternatives there and you are still at 90% risk coming from equity market direction. You know, it’s just somewhat hidden in high yields or private equity or even real estate or hedge funds. So anything that diversifies away from that could be this, again, styles alternative risk premia, so they are super valuable for the portfolio. Like, I’m even handed, again, on this one and I say, “Yeah, they’ve got their problems. We know that people have this leverage aversion, people have got unconventionality aversion.” And then the last one that we have recently highlighted is they lack narratives. I confess, I am envious to venture capital and others for the stories that they have and so on, and we just can’t compete on that front. Our stories are about combining some abstract concepts like value and momentum and then diversifying and the benefits you get from that, and most people sort of roll their eyes on this one and just don’t get any joy out of that. That’s our handicap. But again, I would flip it around and say that, “Hey, those being lacking narratives and lacking stories may sustain sort of the higher long-run Sharpe ratios for these strategies.” We don’t get so much crowding into this space as many think.

Meb: Well, so one of the funny parts, when I was talking about the private equity, I said, “Why doesn’t any private equity manager…?” Because they do assume it’s alpha. I said, “Why don’t they hedge any of that alpha away and make it, like, you can take the vol of the private equity or VC down to 10, and all of a sudden, have all this alpha juice floating around by buying puts on whatever indices you want or other strategies.” But the one you guys touched on was a trend following approach, being a great compliment to private equity style investing, but the funny part is, philosophically speaking, they’re both long vol ideas. And so, the trend followers are, like, you do ancestry, all of a sudden, it turns out they’re, like, direct relatives of the private equity or more angel and VC crew, because what you’re making is a bunch of bets, a high percentage that are losses or don’t do anything, and then a few percentage that are moonshot returns. And I’m like, that’s always weird to me, but oddly enough, they’re good compliments because the managed futures often will either be short when times are really bad.

Antti: I would maybe make…so venture capital in particular. So it’s long vol in a cross-sectional sense, it’s not… I think the difference is the trend, we are talking of time dimension here. And again, the argument that we have is more about buyout private equity than…but it might work for venture capital, but either way. So the story just is that when you think of what’s the vulnerability for private equity or illiquid assets like that? It is not the fast drawdowns because the smoothing will save them in those situations besides central banks, and then it’s the sustained drawdowns, which are a problem. And then when you study data, you find that well, that’s exactly the strengths of those trend strategies. If you get a sustained drawdown, that’s where they play well, so that’s why we call it marriage made in heaven. And it turns out actually the other way around that when trend following suffers, that has often been time when private equity does particularly well.

Meb: I’ve yet to find anyone other than Faber that really does this kind of, like, half trend, half equity beta sort of concept. You either find that people, if they are trend followers, they’re 100% in. My trend following friends, God bless ’em, but often they’re, like, kind of in the same category as the crypto folk, there is no in-between it’s, like, all in or nothing.

Antti: Yeah. We wrote that piece six years ago and I got that idea sometime in Toronto, 2015, 2016 anyway. And so we wrote it up then and we sort of forgot because, again, nobody picked up on it. But now in the last few months, we sort of brought it up again because we thought now there are so big allocations to private equity that it could catch up a little and it is getting some traction and certainly, people are loading more and maybe even some allocators.

Meb: Yeah. There’s no other strategy, probably other than managed futures that causes…and managed futures/trend broad umbrella, that causes more professional level brain melt than any other strategy I know of, and certainly gets more cyclical optimism and hate than managed futures. 2008, 2009, for the three years post that, every allocator on the planet was all about risk mitigation, managed futures, trend, ditto 2000, 2003. And then managed futures kind of peak, like, 2015 and then kind of did, like, a cup and handle sideways plateau, whatever. And once again, having a monster year as the world goes a little batty again in the last year or two. But it’s funny because you were talking about optimizations earlier and constraints and almost all the institutions I know that allocate to managed futures and even the research reports, there’s a great Goldman one where they tried to optimize blindly, strategies and assets and they kept coming up with managed futures was by far the best, but they said, “We have to cap this because this is unrealistic. No one will do this.” I said, “Well, isn’t that the point of the optimization?” You’re trying to find the best one, and when you found the answer, you said, “Well, this can’t be right.”

Antti: Yeah, yeah. You have to put the labels there. You have to know which one of those things is equity because people will want more of that equity there. And just on what you said, I do think that, well, like, we have written several times on the contrast between trend following and put buying. And with trend following, the one logic is trend type of strategies help with sustained drawdowns and put strategies help more in faster drawdowns. So that’s one issue. But the other thing is the long-run cost. So I got this one picture there in the risk money, like, I call it “the scissors chart,” cumulative performance or trend following. And the average returns is shown in a before or after that, but both of them have got very nice tail performance, but average returns are positive for trend and seriously negative for put buying. So it’s hard to stick with trend following with the disappointing 2010s, but how about another one where you lose 90% of your money?

Meb: Again, it comes back to, like… And by the way, thank you for letting me post this to Twitter without any permission ahead of time, but I argue that I sold at least three books. So it’s awash of posting your chart. But listeners, what I’m referring to is page 213 in the book, risk-mitigating strategies’ performance of the 18 largest drawdowns in the U.S. equity market. And the fun takeaway from this is that first of all, to me, drawdowns are normal. Like, stock market, crazy, Mr. Market shows up and there’s plenty of times it goes down 20, 40, 60, and sometimes it goes down over 80, that’s normal. That’s part of the process of the stock market, but then it goes to show this very universally held belief that bonds hedge stocks during a drawdown, you kind of see that it’s often, like, a pretty modern phenomenon and going back pre-2000, really, often, a lot of times, they didn’t hurt, but they really didn’t help. And to me, that is a, like, pretty profound takeaway because I think almost everyone assumes that the bonds will help, but often they don’t.

Antti: Yeah, I’ll come to that, but firstly, I’ll just say about those drawdowns, we do look at, and we learn from them and so on, but we use so much hindsight in them. So think of the COVID drawdown sort of 20% drawdown. I think it’s really helpful for people to think that if we are down 20%, there’s sort of one third chance that there’s going to be another 20% there. Maybe not 20%, central banks were as helpful as they were then. And same when markets were down in GFC, 40%, like, if you were around and, you know, there was a possibility that this would be the great depression type of minus 80%, type of minus 60%, at least. So somehow we look at those things too much with hindsight and one has to force one self to think what the alternative future there. Anyways…

Meb: That’s all too rational of you, Antti. Like, this is the problem talking to you is, like, you’re a probabilistic thinker, like, it’s too logical, man. That makes too much sense. That’s the problem. It’s too realistic.

Antti: I apologize. I actually like…I debate things with Taleb in some other things, but I do think that he’s really written very well 20 years ago about this that we really should think about those alternative outcomes to things that didn’t happen. But on stock/bond correlation, so I was sort of lucky, like, I was a young portfolio manager in ’87 and I saw the first time when stock/bond correlation, when stock crash created bond rally. Before that, in ’70s, you had those stagflations where stock and bonds were suffering together, and it is an interesting thing that we might be getting to those types of situations in the future. We are just going to write something on stock/bond correlation in our quarterly very soon. And I think it is good for the current generation of people to know that sometimes it didn’t work that way, that bonds were not always hedges.

Meb: And to me, like I was saying the other day, this is going back to the managed futures too and trend, one of the big benefits that people assume, and this is true, is that it will hedge U.S. stocks going down over long periods, but also one of the things it’ll do is, theoretically and potentially, be short bonds in an environment where bonds are going down, also knows yields going up. And so, granted you have twice as, going back to the long/short discussion earlier, you have twice as many chances to be wrong. You know, when those things are sort of whipsawing or otherwise, but those are really important, to me, buffers to a traditional portfolio that is really very biased to one outcome, to me, in my mind, which is those assets going up.

Antti: Yeah. So trend following, we like the diversification that we get in trend following doing things in stocks and bonds and currencies and commodities, but it turns out that this directional feature, this helping in bad times is pretty concentrated things. So it turns out that basically trend following has done well in those very scenarios that you showed in the table, typically because they were sufficiently persistent affairs and then trend followers could drive the bear market down with their risk-off position. And like you said, the risk-off didn’t come only from equity short, it also came from duration longs and it came from anti-currency carry and it came from favoring gold versus growth in commodity. So that benefit that we have gotten…you could take away equities, actually, you don’t have to have equities as part of the package and you would get something pretty similar, that tail protection for equity drawdowns would be there even without equities. That’s something I think people don’t quite know.

Meb: But yeah, just, like, bonds, not necessarily, you know, gold is kind of, like, who knows what’s going to happen? Quality minus junk though. That’s got a pretty good track record. What’s that story? Is that QMJ, quality minus junk?

Antti: Yeah. QMJ, quality minus junk. So it’s one way of thinking of defensive stocks. And one intuition there is quality minus junk, it’s kept slightly negative beta. I mean, one thing is that it is favoring based on very metrics, higher quality companies, but one feature of it is that it’s maybe 0.9 or 0.94 better. So it sort of makes sense that when equity markets are falling, having a slightly negative beta between your longs and shorts help. So that’s why it’s so reliable, but it is a…yeah, I think it’s a great strategy, again, because it has tended to add value in the long run and it’s best when you most need it. So together with trend following, that one is really among my big favorites.

Meb: So listeners, you got to buy the book because it’s a couple hundred pages of goodness. A gazillion things we didn’t even talk about today, including ESG and costs. And one of my favorite parts of the book is the just limitless amount of references and footnotes. You guys are known through your footnotes, a lot of footnotes in here, but a lot of links to other papers, a topic we love looking into the global market portfolio, nuances with that. We could spend an entire podcast talking about that.

Antti: I deliberately tried to leave some really good things in footnotes so that those who bother to go there, they get rewarded.

Meb: Well, it’s like Easter eggs, man. It’s, like, you leave some little things here and there. And I remember the guy that wrote “Jurassic Park,” Michael, is it Crichton? But he talked about how he had some Easter eggs in his book where, like, the genetic code spelled out his name or other things that was kind of fun. My only modern equivalent of that is that when I go on TV, I’ll use words that my son picks out, and he’s four, so the words are usually like fart or Ninjago or Legos or something, but it makes it a little more interesting to me. So footnotes, make sure you read the footnotes, listeners, because there are some good ones.

All right. Let’s wind down a few more questions. We’d love to keep you into the German evening. As you chat, you chat with a lot of institutions and we were chatting with Jeremy Grant, the challenges, not just a…we love to look down our nose at retail, but these pros and the struggles they face and a lot of the problems are very real. We talk about career risk and how crazy it is, but then you realize there’s someone at the end of that job rope that that decision that may actually be quite logical. If you could talk to people who are listening to this, that manage some of the bigger institutions that are in the scenarios they are today, is there anything we didn’t talk about today that you think is important or that you think people should be thinking about as they start this pretty rough start to 2022 for stocks and bonds?

Antti: I think they know most of these things because especially the low expected return challenge is known, but it still can be forgotten because the rear view mirror is pretty powerful. You look at those last 10 years and you wonder why we should worry. So I do think that it is important not to draw the lessons of anti-diversification, and you can just trustingly, I don’t know… Again, institutions don’t have the buy-the-dip story so much, but there are lots of these bad lessons, I think, that people have taken from the last 10 years. Don’t look at last 10 years, look at rather last 50 years or something like that if you want to draw lessons.

Meb: I like your quote, “Many investors talk diversification but walk concentration.” That’s a good one. As we look out to the horizon, now that you’ve birthed this book, set it out to sea, what’s on your brain? What are you thinking about? Is there anything you’re particularly curious about, confused about, writing about that you can give us a sneak peek at? Anything in the queue that you’re working on?

Antti: So I do think that we are in a particularly interesting situation, that’s for sure. Which is sort of frustrating when the book is very much long-term and trying not to be tied to today, but it really could be this inflection point where I do talk about it sometimes that central banks have to make hard choices for the first time. And I think that’s where we are, their credibility is on line. So I think that’s something beyond these systematic questions what I think is very interesting.

Then on the research that maybe I’ll mention, besides looking at the recent things, I do like to look at really long-run stuff, like, let’s look at not just last 100 years, let’s look further back. So I’m looking together with Elroy Dimson and couple of other co-authors, the pros and cons of looking at some of these long-run data.

And I do want to just mention, I give credit to you, you had this Edward McQuarrie last year in your show, and I thought that was really good. I don’t think most people know this, there is such clarifying equity premium has been there forever wherever we study, but then it has evolved, yeah, in 1900s, but not in 1800s. So I think that’s a pretty cool result. So some of these things where one can surprise when you look at really long-run data and that sort of raises questions for the future, I think that’s helpful.

Meb: From the perspective of the Robinhood crowd that’s trading on minutes, hours, days, weeks, talking about this long history seems like eternity. From a statistician point of view, even 100 years, that’s not that much data, like, as you think about a lot of these long-term scenarios that play out, which is kind of crazy to think about. And so the phrase, I think this is your coworker’s phrase, “The largest drawdown is in the future.” You know, like, as much as we know about the past, it’s going to be even weirder going forward if that’s possible or different.

Antti: You can look at my footnote in worst case scenario. So I have got some pretty morbid stuff there on the risk management chapter. It’s in the same spirit, as you said, that there can always be worse things than you think about.

Meb: Well, you know, the challenge is going to be, like, this book is timeless. The title is very specific to 2022. The challenge was will be when you write the companion in whenever, maybe 2022, 2032, “Investing Amid Amazing Expected Returns.” The problem is no one’s going to have any money. There’s like, obviously, Antti, it’s markets down 80%, of course, things look amazing. Like, I don’t need you to tell me this, 300 pages. I just don’t have any money. I look forward to that version coming out whenever it might.

Antti: Let’s hope that we get there. That’s going to be good for young people, again, like, this idea that for their purpose, for their help, we should get to higher expected returns. Otherwise, they will have only sad outcomes, yeah.

Meb: Yeah. That’s what I always say is, like, on the down days, I’m like, “Hey, great for the youngsters, terrible for y’all old folk,” vice versa on the up days of, like, it’s always good news for somebody. What’s been your most memorable investment or trade in your career? Good, bad, in-between.

Antti: Yeah. Okay. So not a trade, but investing in education for me. From that, I got such enjoyment, I mean, I love learning and it was pretty good. Career wise, it’s been good. So that’s my answer. But I think, like, on trade, I got this story, which dates me. I was a very young portfolio manager already in ’87 crash, and I was first year in a job, central bank portfolio manager. And I was there working that evening when the U.S. …European evening when the crash happened.

Meb: You were in Finland? Where would you be?

Antti: I was in Finland. And we were only investing in treasuries. It was just a matter of your duration. And we were underweight duration. Two year yields were 9.5%, and I, with other people’s help, figured out that, “Oh, these bonds are going to rally.” And, again, that wasn’t the lesson earlier, but that day, it became pretty clear, this is going to be good news for bonds, but bonds were not fast reacting. Anyway, I started to buy at 9.5%, I bought at 9%, I bought at 8.5%, the next morning I made my last purchases at 7.5%. So I got tickets to show that there’s 2% range of market move within maybe 18 hours. So that’s so far from what’s been happening ever since in bond markets. So I got that experience sort of in my early days.

Meb: Might only ever see that again, in some frontier market like El Salvador or Argentina or something, probably not going to see it. Well, maybe to the flip side, so from some of the zero yields going to 2%, perhaps.

Antti: Yeah. Let us hope that we don’t. Yeah.

Meb: I mean, I think that’s a great instructive point though. And, like, COVID 2 is, like, yes, we use history as a guide, but there are so many examples of things outside the realm of what we experienced. And, like, 1987, that was a crazy event that was also very real. Some quants love to say, “Okay, we’re going to do this. We’re going to exclude 87.” Like, “Well, you know, it did happen. Like, this was part of the record.” So, Antti, this has been awesome, a blessing. Thanks so much for joining us today. We’ll add all these show note links. Listeners, buy a copy of the new book, “Investing Amid Low Expected Returns.” We’ll post a show note link. Where do people find your papers, what you’re up to, what’s going on in your world?

Antti: Yeah, I think AQR website. I like to click through the tweeting and so on, so I only write papers and then…but we did put up, so there’s a page, There’s a free version of the clicks forward, the introduction. So before you buy the book, you can read those, but also look at what we will soon add there, deleted scenes. Things that I cut from the early version last summer, and I thought that it would be sort of cool to throw some of those back to anybody who is interested in that.

Meb: Yeah, this is all the real Antti X-rated material the publisher says, “You can’t say that. That’s going to be trouble.”

Antti: Yeah.

Meb: I love it, man. Thanks so much for joining us today.

Antti: Good. Thank you. Enjoy.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at If you love the show, if you hate it, shoot us feedback at We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.



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