Talk Your Book: Investing in the All Weather Strategy

0:00Today's Animal Spirits Talk Your Book is brought to you by State Street Investment Management Go to statestreet.com slash allweather to learn more about the Spider Bridgewater All Weather ETF. Ticker A-L-L-W, that's allw, statestreet.com slash allweather to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

0:38Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:46Welcome to Animal Spirits with Michael and Ben. The ETF wrapper, one of the best financial inventions ever. That might be a stretch, but maybe not. I mean, of the last 50 to 70 years, I think you'd have to say almost definitely. Yeah. Well, the all-weather approach, which Ray Dalio invented along with his team in 1996, has now made it to the world of ETFs. And the demand is obviously strong. They launched this earlier in the year. And as of Monday, September 15th, it's already got almost$400 million in assets, which is pretty remarkable. What a launch. It's not like Bitcoin or anything, but given that it's a relatively boring by design strategy, holy cow.

1:33Yeah, it's a diversified portfolio. I'm guessing the brand recognition, not only in Bridgewater, but AllWeather itself, probably has a lot to do with this. The AllWeather thing. I remember, I think I looked, they released the white paper in 2012. And I read it right when it came out. And it's, I don't know, it's a pretty long paper. Not to brag, I read the whole thing by myself. No chat GPT back then. And I still remember that. I'm going to guess you skimmed. No offense. No, I still remember the whole framework of it. And it's, it is, I mean, the whole idea behind it is, is interesting. And it's one of those things where I think there's some very extreme opinions on it.

2:10Some people like can't stand the idea of using leverage and levering up bonds. And some people like, no, this makes sense because you're, you're putting things on an equal playing field in terms of their volatility and you're utilizing leverage in an, in a intelligent way. And I just think it's a really interesting way to look at portfolio management. So we talked to Matt Bartolini. He's been on the show a bunch of times from State Street Investment Management. We also had Chris Ward on, who's a portfolio manager at Bridgewater Associates, and also the lead architect and portfolio manager for the ETF.

2:38So it's the Spider Bridgewater All Weather ETF, ticker ALW. How do you, what would you say it? All W. Because you're so good at these things. So all W. All W. So here's our talk with Matt and Chris.

2:53Chris, first question is for you. So Bridgewater Associates all-weather strategy has been around for a while, decades in fact, and got its start in the institutional world. And now you are bringing the all-weather model to the ETF market. Talk about the evolution of where the strategy came from, what is it designed to accomplish, and why the ETF wrapper now is the right choice. Yeah. So first of all, thank you for having us today. We've been excited about this for a long time. And I do love starting with the story of All Weather because it provides great grounding for what the strategy represents and what its goals are.

3:30So over 30 years ago, our founder, Ray Dalio, and the Bridgewater team were studying the question of, is it possible to build a portfolio that can perform well in any type of economic environment? One that has similar long-term returns as equities, but without that boom-bust return profile that you have to take. And All Weather was our best answer to that question. And I know it hasn't happened for a while, but believe it or not, stocks can go down and stay down and remain down for a long period of time, right? Longer than what we've experienced recently, but it does happen. And it's not just equities.

3:58The same is true for bonds, for real assets and any asset. But when stocks go down and stay down, it's not random. It's because you can go through extended periods of time where the fundamentals are really bad for equities. And those fundamentals can be really good for other assets. And so that's what All Weather is trying to capitalize on that insight. In the 90s, we we discovered that if you hold a risk-balanced mix of assets that do well at different times reliably, different types of economic weather, you can really minimize your vulnerability to losing money due to adverse shifts in the economies.

4:27And that if you do this with thoughtful, capital-efficient portfolio engineering, you can be more diversified and still seek to achieve the types of equity-like returns over the long run that most investors are chasing. You don't have to choose between diversification and returns. Diversification doesn't need to feel like eating your broccoli. All Weather tries to create both. And so that's what we built. All Weather is our optimal approach to long-term strategic asset allocation. It's the best way we know how to collect risk premiums from the market in a way we think is going to be more resilient and more consistent than traditional approaches.

4:57Now in 2025, we're thrilled in partnership with State Street to be bringing the approach to the widest possible audience in an ETF format. It's really a great fit for the wrapper, in our opinion, and so we're excited to do it. So I read the white paper, I don't know, it must have been 12 or 15 years ago about the all-weather. And it had the matrix in it. And that's the thing that stuck on my mind ever since I, every time I hear about the strategy, it was kind of like growth and inflation on one piece and then rising or falling on the other. And it just showed which types of asset classes do well under which scenarios, right?

5:26Rising or falling inflation, rising or falling growth. And it's kind of trying to hit each of those boxes. And obviously, that's the whole point of the all-weather. But I thought maybe you could just kind of explain, you know, which asset classes perform well or unwell in specific environments and how this strategy seeks to pull that all-weather nature out of the fund? Yeah, so I think you're referring to the four bucks framework. We've been sort of publishing that visual basically since we launched the strategy. And so in terms of what assets perform well and differently at different times, I think I want to start by just giving some grounding for why we choose growth and inflation to begin with, right?

6:03So logically and from our study of history. We think growth and inflation changes is the best way to categorize different markets in terms of how to diversify yourself. And the reason we do this is because all assets implicitly discount a future scenario, right? Sometimes it's easy to see like bonds, it's just the forward path of rates. Sometimes it's more imputed, like estimating implied earnings growth for stocks. And then what causes those prices to move and tend to lead to good or bad returns? So either actual conditions are different than expected or the expectations change. And usually it's a mix of both, right?

6:35And this should sound pretty familiar. Just think about earnings season, right? A company misses on targets, the stock goes down. That's conditions being different than what was expected. Or a company could issue a much more optimistic forecast, right? The stock goes up. That's a change in expectations. So at the micro level, it's all about the individual company results. But at the macro level, we think that growth and inflation are the key drivers. And the reason for that is growth is really changing the volume of cash flows produced by economy. Inflation is changing their price now and through time.

7:04And because every asset class is just a different style of claim on those cash flows, changes in growth and inflation impact them differently. So some assets like government bonds typically do well when growth disappoints and inflation is falling. Some assets like commodities typically do well when growth is hot and inflation is rising. There's that complementary relationship there. Two assets with complementary offsetting relationships to changes in growth and inflation. And so identifying and exploiting these relationships is really the foundational idea behind all weather. Going back to that four box framework, this is how we build the portfolio.

7:37Once you understand these relationships, you can use that as your building block. And so we put 25 % of the risk in the portfolio in assets that do well when growth is better than expected, which in this portfolio, all W is equities and commodities ex gold. We put 25 % of the risk, not capital and assets that do well at the opposite time when growth is worse than expected. And for us in this portfolio, it's nominal bonds, inflation-linked bonds, and gold. And then we do the same thing for inflation. 25 % in rising inflation assets, commodities, gold, and tips, and then 25 % of the risk in falling inflation assets, which is for us nominal government bonds and equities.

8:12And the idea is that if you get the mix right, you're in theory creating a portfolio that has no vulnerability to adverse shifts in growth and inflation. Some assets might go down when others go up, but we try to be balanced on both sides as we collect that risk premium you get for being an investor. You mentioned that the strategy marks its inception back to 1996. Global warming hasn't just impacted the economy, it's also impacted the market. Things change, markets evolve, strategies evolve, people evolve. Is there anything different about how asset classes react to the various buckets that's made you either reconsider or evolve your framework over time?

8:51Because the market really does look a lot different than it did in the past for a myriad of different structural reasons. Obviously, there's some cyclical reasons, some temporary reasons. But what's your thoughts on how markets evolve over time and how that impacts your strategy? We think that a lot of these core ideas are pretty timeless. And that's not to say that the strategy doesn't evolve. We don't have new learnings and we don't integrate those learnings in the portfolio. But at the end of the day, we think something like a government bond, right? A fixed claim on cash flows has a pretty timeless relationship to that looks better when growth is worse and those cash flows are more scarce and it's more valuable.

9:27And it's pretty timeless that that claim on fixed cash flows is going to look worse when growth is booming, right? And there's lots of more cash flows being produced in the economy. And so you don't necessarily care about that fixed claim as much. And you can make the same argument for inflation. Now, that's not to say that you can't go through sort of unique periods of time. where some of those timeless relationships do come into question. And I think a decent example of a time period like that comes with government bonds. And so if you look at government bonds, when Treasury bonds are 5%, if we were to go through a big recession, I feel pretty good about their ability to deliver useful, meaningful returns for us if we go through a drawdown.

10:04If Treasury bonds are 0%, I feel much less good about that. And so we do have game plans for these types of decisions that are informed by managing the strategy through a lot of unusual times in the past 30 so years, including managing it through the financial crisis, through COVID, through extreme low rates. And you can think of the rules that we're running in our process as basically saying, what assets do we want to hire to perform this specific job? We don't have a fixed target to something like government bonds. We don't have a fixed target to something like tips. We're running our rules to decide, are the assets that I have at my disposal to access returns in the environments when I need it, the right ones to hold?

10:39And we will make those sort of strategic changes over time to the portfolio if we think it'll better position us to sort of get the protection in the times that we need it. But no, we don't think that there's been a sort of wholesale change in how assets fundamentally relate to the economy. It's more like you just need to adapt and adjust to when you do face some unusual circumstances out there. So Matt, I'm curious how you and your team at State Street have decided to take the Bridgewater approach and map it out into an ETF framework because Chris mentioned that the The portfolio is not equal weighted.

11:09It's weighted by the risk, so the volatility, I guess. So how do you take that framework and turn it into a usable strategy? Yeah, I mean, from an ETF perspective, working with Bridgewater as the sub-advisor in building the portfolio using instruments that we have at their disposal to create that balanced portfolio across those different economic environments. It really just takes a look at it of how to create this portfolio, but also with the taxable investor in mind. And I think some of the choices that are being utilized within the portfolio are hitting right at that. So, for instance, individual single commodity futures, those are largely a tax inefficient asset class for an end taxable investor because of the production of K-1 associated with that.

12:00As a result, to obtain that commodity exposure, a total return swap held within a Cayman trust. These are very operational components to it are utilized to get that exposure to rising growth, rising inflation asset like commodities, but do so with a logical choice for that taxable investor to not have such adverse tax consequences. And those type of choices are continuing occurring throughout the portfolio, even within, again, that rising growth bucket. Owning something like emerging market credit spreads would be one way to potentially hit at some rising growth bias. However, for that taxable investor, the way to achieve that would be to either own an emerging market bond and then hedge that out with futures.

12:46And for the taxable investor, that is largely not the greatest of outcome. So making those relative value choices within the portfolio for the taxable investor relative to the, say, the non-taxable, I think those are some of the choices that Chris and the team at Bridgewater made and that are being implemented within the portfolio as well. Chris, is this a substitute for the 60-40 portfolio or is it a complement? And if so, where do you think it fits into either a client or an advisor client portfolio? Yeah, I wouldn't call it a substitute. You know, if you kind of step through the design and the thinking behind All Weather, it is sort of crafted as an alternative to the 60-40.

13:23But we know that's not how most people have invested in the strategy over the years have used it. And so they've really used it as something to sort of fit in alongside as another source of good, good, efficient returns that is at least different. It's different than just being as reliant on the equity beta. And, you know, they can fund it in a flexible way depending on, you know, which goals they're trying to achieve. we do think that, you know, maybe in the 2010s, a lot of clients turned to all weather as their bond replacement, right? When yields were so low and clients had larger return targets and, you know, they couldn't sort of stomach the idea of just sitting that and writing that out at 2 % yielding government bond, they would go to all weather as a source of return, but also still a diversifier in the portfolio.

14:00And then I think today we're seeing probably more clients moving towards all weather from stocks, right? Some anxiety about the pricing in the U.S. and the concentration in the US with a lot of the dynamics going on in the world. And so AllWeather is a place where they can go try to get that incremental diversification without really sacrificing much on long-term returns. We've also seen clients use it as sort of a kind of gateway into alternatives, right? You know, clients who are less familiar with alternative structures, alternative approaches, alternative instruments, they've moved to AllWeather as a sort of way to dip their toe in the water before perhaps going further into that space.

14:35I mean, I think at the end of the day, like the reason I'm so excited about AllW in this channel is that it's just, it's really a one-stop shop line item that can help investors plug a lot of gaps in their portfolio. You hear a lot of things in the news today about is international back or, you know, should we worry about US exceptionalism or what about inflation and real assets and all these things. If you go to AllWeather, you've got a capital efficient single line item that packs a lot of diversifying assets in there that I think can really help investors improve their portfolio resiliency while letting us handle a lot of the work.

15:10So the one big pushback I've seen on all weather over the years is the fact that you're essentially levering up the bond portion, right? Because bonds are much less volatile than stocks. If you want to get the volatility to an equal weighting, you have to get the bond piece up somehow, either by over-allocating to bonds or by using leverage. I'm curious if this strategy employs leverage in some way and what you think about that critique? Yeah, I think leverage and using capital efficiency like that is pretty commonly misunderstood in the marketplace. And so just to hit the headline first, all W is capital efficient.

15:42If you invest a dollar in the ETF, you are getting about a dollar and 80 cents of exposure to assets. That's going to change and move around over time. But it is trying to do that where it's trying to make sure that when you own bonds, bonds are there to give you real returns when you need it, not just dampen your losses by not being stocks. And so I think one way to think about how we think about using capital efficiency in portfolios is I think, again, I made that point earlier about diversification can feel like eating your broccoli, right? Because when investors in a world where maybe you have$100 of stocks and you think, okay, I'm going to take$5 and I'm going to move that into bonds, right?

16:17You made yourself more diversified, right? But you also probably lowered your expected return in the portfolio. And so Bridgewater's approach is more like, Like, why not move$5 of stocks into$10 of bonds, right? You're probably getting more diversified because those bonds are actually carrying their weight more in the times that you need them. And you're really not sacrificing unexpected return when you do that, so long as you're keeping the risks consistent. And I think that, you know, the bond thing sort of gnaws at some people, particularly because the question they love to ask is like, what do you do when stock and bond correlations go to one, right?

16:51If stocks and bonds go to one, are you going to be in trouble because you're using this capital efficiency. And I'd say, first of all, why they go to one matters. And there's a big why, which is something we've prepared for, which is stocks and bonds have very similar relationships to inflation. Stocks and bonds, we expect to be very diversifying to one another when growth is driving markets. And that's what we've seen really for the last 30 plus years. And that's strong negative correlation. But if you go to history well before 1980, you actually saw a positive correlation between stocks and bonds because they have the same kind of fundamental exposure to inflation.

17:23And so that's why we have real assets in the portfolio too. It's not just 2022 is the nightmare scenario, obviously. Yeah. 2022 is a difficult year for approaches like this. And look, I think that all weather is not a silver bullet, right? There's two types of periods where stocks and bond correlations can move together. One is when inflation volatility is driving markets, right? And another is when you encounter one of those sort of short-lived periods where cash is king and all assets underperform. It could be a large tightening like it was in 2022. It could be in a spike in risk aversion. And when all assets sell off and there's nowhere to hide, we'd expect all W to lose money as well.

17:57Like we know this. It happens from time to time. And importantly, we think you're compensated for that risk. We think that's the risk you all take as investors. And we think that these cash is king periods tend to be short because policymakers have huge incentives to not let this go on for too long. Because in a capitalist system, prolonged periods where cash is king and all assets are selling off causes real problems for capital formations that has consequences in the real economy. On the other hand, you can get meaningful adverse shifts to growth and inflation that are sticky and durable and create lost decades for an individual concentrated asset class position.

18:29It's why it's so easy to see this through time, whether it's the last decade for bonds, the 2000s for stocks, or the 1970s for bonds and stocks. You can go on and on. So I think that, yes, we are taking a little bit of that correlation, go to one risk by holding larger than 100 % allocation to gross assets. But we just think that that risk in the grand scheme of things tends to be shorter lived. And in many ways, it's like less of a sort of longer term wealth compounding problem than any sort of directional bet on growth and inflation you implicitly get in a concentrated portfolio. Also, another thing like in real time, right?

19:00So after AllW was launched, you had Liberation Day. And that was a period where you saw risk premiums widen across the globe. And in that type of period where risk premiums are widening, all assets share those premiums. And they started to see risk assets, stocks and bonds fall. And we saw long term treasuries really fall right after that. And then you had, as Chris was referring to, policymakers have somewhat of an incentive to blunt some of the volatility that they perhaps even created. And all of a sudden, we then had that post-liberation day rally, and you saw the cash is king trade that was only in fruition for maybe like two to three days, all of a sudden revert and risk premiums started to compress.

19:41So I think that's a real tangible example, believe in just an all W's brief history as well as an ETF. So how did all weather perform during that short period of time? Yeah. So in looking at it, right? So it shares risk as in holding all assets, right? And if it fell, right, it was not impervious to the impact of risk premiums widening, but it fell less than stocks, fell more than bonds, right? So, and that's what you sort of think about if it's going to have equity-like returns with more stability. Again, that's a very brief time period, but it was able to rally back right off of that and sort of act as that diversifier from a full portfolio perspective.

20:17So Matt, you mentioned how you get the commodity piece. Is it similar in how you get the leverage for the rest of the portfolio? Like how are you getting the$1.80 for a dollar worth of invested? How are you guys actually doing that? Like what instruments are you using? Yes. I mean, that's probably a better question for Chris to weigh in. I mean, there's a lot of different type of vehicles that are being utilized, ETFs and futures. Obviously the ETF won't give you leverage, but some of the futures will. So I know, Chris, if you want to walk through some of that? Yeah. Outside of the commodities, the overwhelming majority of futures, the overwhelming majority of the leverage comes through plain vanilla futures, mainly for the government bond portion of the portfolio.

20:56We are using a small amount of futures for our equity positions as well. For better or for worse, investors do think about strategies as a relative thing. They compare it to what they could have gotten. And let's just say that at this point in time, the comparison is the S &P 500. It's been the best performing asset class for most investors, assuming that outside of kryptons and things like that. So is there a type of environment in which somebody would look over and not just like a liberation day, 20-day type of return, but like a three to five-year period? What would make them feel really good about having chosen this?

21:34Would it be US stocks chill out? Would it be like US stocks are in a bear market? what would be the trigger point where they say, wow, I'm glad I did this? Yeah. So, you know, one of the, one of the hallmarks of all weather for us is we think it's consistency, right? That if you do have a Goldilocks environment where stocks are doing better than everything else, right? We think it's more likely than not that all weather does fine, right? But there's a decent chance it's going to underperform stocks. And for us, like that's okay. And the reason why it's okay is that you can have a lot of other, you know, types of decades, or if you take a decade like maybe the 2000s, which was really a sort of disappointing period for equities, but not necessarily disappointing for all asset classes, something that's balanced and diversified like all W can also do very okay.

22:20We think that if you have a shift towards a more stagflationary impulse in markets, not meaning going back to the 1970s here, but just, you know, a shift where like, you know, that trade-off between growth and inflation is, you know, sticky and problematic for a long time, that you can have enough assets in all weather that help to deliver, you know, good, solid, average, positive returns for you over time, right, when equities are starting to suffer. And so look, like we're not naive, right? When you have a period like we've had recently with U.S. equities being the best asset for as long as it has, we know that virtually any move towards being more resilient has come at a cost.