E262: The 50-30-20 Portfolio: How Institutions Are Rebuilding 60/40

0:00Alfred, you've had one of the most interesting career arcs. You were the ETF strategist at BMO. You ran fixed income at a$30 billion fund. You even worked at Bank of Canada during QE, quantitative easing. How did those experiences affect how you think about building an asset management firm today? I have a lot of luxuries in my career, right? I think I was very fortunate in many different ways. So at BMO, I was very fortunate to work with a lot of talented individuals that I guess we all came up in the career or, you know, in the business together where we can learn the industry. A lot of those individuals have gone on to very influential positions within the industry up here in Canada.

0:39But more importantly, I think I've worked with a lot of good bosses that encouraged us to learn more than portfolio management, but also learn about the asset management business in general. So you mentioned the$30 billion mandate that I was in charge of in terms of leading fixed income portfolio management and also trading. So the good thing of that is I got in at the ground level and I basically was managing everything from governments, corporates, high yield, credit derivatives, emerging market tips and preferred shares or anything that was fixed income related. So the benefit of that is I got to understand fixed income on a macro level, but also understanding the plumbing and the market structure as well.

1:18After the Bank of Canada secondment, actually, I came out and oversaw the index equity business, which was pretty much a$50 billion mandate. So overseeing index equities, but also factor-based strategies and also some thematic and sector-based strategies as well. So, you know, when you look at a lot of portfolio managers, they don't have the luxuries of basically, you know, seeing both sides of the aisle, so to speak. So I got the luxuries of learning both sides of the business. But, you know, going back to my bosses that were very influential in terms of growth, I think one of the key aspects is that, you know, I learned how to take an idea and basically create a product out of it, work with legal and operations to get it up and running, also managing and trading it.

2:01but also coming up with the value proposition, the sales and marketing, going on the road in marketing and growing the assets. So very excited to come over to QWealth where we almost get to do it all over again. So in the last 12 months, working with one of our co-founders, Larry Berman, basically set the foundation in order to get the business ready to scale. So super excited about it. Maybe you could double click on this idea of taking an idea and building a product around it, launching it and scaling it. Give me an example of how you did that. What are some best practices? So a good example is, you know, we were very involved in terms of launching the product.

2:41So working with our product team, but also, you know, a good example is, you know, we launched a gold bullion fund and we had actual vault underneath the building. So just working with, you know, basically the operations in terms of the custodian, getting everything to flow from, you know, the vault to the custodian, working with a subcustodian and getting everything up and ready, right? But also doing the due diligence and checking out, you know, the vault and the operations as well. That was pretty cool as well, right? So we actually got to do a tour of the, you know, the vault. So basically just holding the gold bars and the silver bars.

3:20So very interesting and very cool as well. Now you're in the seat of QWealth Partners. For those outside of Canada. Tell me about QWealth Partners and what are you trying to achieve? So QWealth Partners is essentially, I would say, the Canadian equivalent of an RIA aggregator. So up here in Canada, we actually don't have RIAs, right? So it's a different registration. I would say the closest thing to an RIA is portfolio management firms, which we deal with. So we're essentially very similar to, let's say, a Hightower or a Focus Financial. We're essentially providing the turnkey solutions for investment advisors, portfolio managers, and family offices that want to go independent.

4:01So if you want to go independent on your own, it's actually very difficult to do so. You have to go out and find a custodian, set out the legal and compliance framework, set up your investment. So it's very difficult. So we essentially provide the turnkey solutions that allow investors or investment advisors to have not just the legal and compliance, also the sales and marketing, the operations, the technology, and also more importantly, the investment platform as well. So what we want to do is essentially create a partnership and make it easy for those that want to go independent because we are seeing a big push towards that independence up here in Canada.

4:38And within a context of being the back end, for lack of a better word, for these wealth managers and helping them build their relationships on the front end, you're the deputy chief investment officer. How do you think about portfolio allocation when you think about these kind of independent advisors trying to build portfolios for their end customers? It's an open architecture, right? So, you know, portfolio managers are able to build portfolios the way they want. However, they have to fit within the framework, right? So the regulators will see, you know, for example, what does a balanced portfolio look like?

5:12They have the flexibility in order to create a balanced model the way they want. However, there is guardrails that govern each and every one of the partner firms. So we do have many different ways in which advisors could put together portfolios. Again, as I mentioned, it is open architecture where they could use external funds such as ETFs and mutual funds. We have a pool fund structure where we allow basically advisors and we basically approach a lot of the fund managers to get institutional pricing. But essentially, when we put together portfolios, we also launched asset allocation models based on different objectives, whether it's, let's say it's income and growth, but also tax-efficient income, no matter what the objective they're looking for, we actually provide almost additional guidance if they need.

6:02And like many asset managers, you're extremely bullish on alternatives, private equity, private credit. Tell me about your views on alternatives and how does one go about building a portfolio Q4 2025? We like alternatives. When you look at portfolio construction as a framework right now, you look at the public side of the portfolio. Obviously, I come from the public side, dealing with ETFs. But the challenge with generating alpha from the public side of the market right now is becoming more and more difficult. So this isn't really, you know, an active versus passive debate. But when you look at the underlying market, for example, it's very difficult to generate alpha, right?

6:45So you look at information flow, for example, it's not the 80s and 90s anymore, right? Where, you know, if you see a headline hit, you know, back then it doesn't hit the headlines until, you know, you turn on the six o 'clock news or you pick up the newspaper the next morning. So today you have not just the internet, but you have social media, you have Twitter or X, anything is priced into the market almost instantaneously. You add in the fact that you have things like high frequency trading, algorithmic trading, and you look at the general investor, even your do-it-yourself investors, they're so much more knowledgeable at this point, right?

7:18So mispricing, there's a lot less mispricing in the market right now, right? So generating alpha is much more difficult. That's not to say that I don't believe in active management. We do allocate to a lot of active managers that we believe have a lot of skills that could consistently generate alpha. Having said that, however, I think that when you look at portfolio construction and where you want to dedicate resources, you look at the private side of the business and it's almost like the information is more asymmetric on that side of the business. So if you have a strong due diligence team, you have a strong legal team that could go through a lot of the financial statements, a lot of the legal covenants, it's almost as if you can extract alpha more easy on that side of the portfolio.

8:00And just one more thing, just in terms of, you know, when I look at the correlations in the public side of the market right now, you know, having, you know, a background in both fixed income and equities, the correlations in both of those asset classes are increasingly going to be more elevated. And I think a big reason is that, you know, up until 2022, your general kind of market sell-off was economic conditions worsen, central banks jump in, ease interest rates, expand balance sheets. Now it's almost like you look at the growing debt levels of not just the US, but globally, I believe we're in this debasement regime where we're going to have bouts of inflation.

8:38So in that kind of environment, central banks may raise interest rates rather than drop interest rates. So I think fixed income and equities are going to become increasingly correlated in this environment. It's top of mind. I just recently chatted to Baljish Srinivasan for, I think it was almost a three-hour interview. And he talks about this idea of the dollar losing value versus Bitcoin, some astronomical amount over the last decade. Yet, if you look at the 10-year inflation numbers, they're at about 2.5%. That's what's expected. How do you explain this disconnect between what people often feel in terms of their purchasing power going down and these kind of official numbers that we get from the Federal Reserve Board, but also from universities and other independent parties?

9:23Well, there's a big disconnect, right? So when you look at a lot of those CPI numbers, it's really based on the basket that, you know, some government body sets. I don't think a lot of those baskets are reflective of, you know, real life costs. So as you mentioned, you know, anecdotally, when, you know, just, you know, just from my own living standards, like going out to, you know, vacations, or even, you know, everyday living has become more costly. We actually just got back from vacation. I was just talking to my wife, how much more these vacations cost compared to even 10 years ago, right? So the general cost of living has gone up.

9:56I don't think a lot of that is captured in CPI. But when you look at, you know, real assets, for example, whether it's Bitcoin or whether it's gold, that continues to go up, right? So I do believe, you know, as I mentioned, we are in this debasement regime where you look at government debt, especially the US, for example, where, The U.S. obviously wants to maintain that reserve currency status of the world, so they can't default on their debt. And the only way out is to debase their currency. And we're clearly seeing that reflected in things like gold prices, but even digital currencies as well.

10:28I've had the CEO bitwise, the CIO bitwise, many people talk about crypto. Most of them obviously are very biased in terms of that's their role and they want as much Bitcoin adoption as possible. But you're in the seat where you're helping, you know, thousands of underlying portfolios get to their efficient frontier and building the right portfolio for the right individual. What's the what's your philosophy when it comes to having Bitcoin and or gold in your portfolio? How do you think about that? The way we see it is that, you know, we don't have a specific Bitcoin exposure. So right now, you know, partners can allocate to Bitcoin and gold individually in their own models, in their portfolios.

11:11So we probably won't introduce something that's gold specific or Bitcoin specific. I think if they want those specific exposures, they could go and get that through an ETF much more efficiently. What we want to do, however, is almost create solutions that make it more efficient for them to get that exposure. Right. So introducing almost like a one ticket solution that provides exposure to real assets. So creating one ticket solution that provides exposure to things like real estate, maybe things like farmland, but also things like real infrastructure and also things like precious metals like gold and having a little bit of Bitcoin in there.

11:47I think that's the proper way of putting together the portfolio. Again, if they want that pure exposure, they could more efficiently get that through an ETF. The most underrated aspect of investing is actually behavioral finance, which is the decisions that people make, not necessarily trying to outsmart the market and get that extra 100 % basis points on some public company. But it's like, how do we build the right decision making so that people don't make these behavioral mistakes? and one of the behavioral mistakes I see over and over is trying to be too smart versus directly correct. And what do I mean by that is I've had people over the last decade ask me essentially like what crypto to buy.

12:26Should I buy Ethereum, Solana, Bitcoin? And my answer is always the same, which is buy a basket and just make sure you get exposure. And the reason I give that advice is because I know that they're going to get in their own way and they're never going to pull the trigger. And although Solana might have a 30 % return and Ethereum might have a 20 % return. The biggest mistake is actually not having exposure to either. How do you think about that? Like basically building a basket versus trying to pick individual stocks or individual investments? Well, that's our approach all together, right? I mean, you know, when you frame it in terms of the context of crypto, especially, we're not crypto experts by any means, right?

13:04So for us to provide exposure to something like crypto, you know, we would probably provide exposure to the entire complex, right? So whether it's Bitcoin or whether it's things like Ethereum or Solana, but we would provide exposure not just to those digital currencies, but mixing it into other real assets in general. So as I mentioned before, we're not specific experts in digital currencies. What we want to do is embed it into a portfolio where they're going to get exposures to very similar assets, but based on a certain theme. So again, we are thinking about launching kind of more targeted one-ticket solutions, and this would be more based on that kind of debasement regime and that kind of inflation regime that provides almost like a bolt-on to a traditional 60-40 portfolio.

13:50And have you started giving thoughts in terms of what percentage digital assets should have in this traditional 60-40 framework or a next iteration of this framework? We haven't got to that point yet. It's something we're probably going to launch in the new year, December, January at that point. We usually have the opportunity to launch a few new kind of private pools for our partnership. This is something that I've been kind of thinking about, but, you know, we haven't really come up with a percentage yet. But, you know, as I mentioned before, it's going to be mixed in with other kind of real assets and kind of other debasement themes as well.

14:22And, you know, I'm not a crypto expert, but again, we buy diversified exposure and tuck it into other real assets. I think that's the way we're going to approach it. In that same vein, when you're looking, you know, 60-40, it might have been our parents' portfolio, 60 % equity, 40 % fixed income. What's your model portfolio today, given the rise of alternatives and how much more access the individual investor has to alternatives? It's probably something like 50-30-20 is probably what we would use to replace a 60-40. But obviously, you know, it's going to be geared towards your different risk profile, right?

14:55So someone that is going to be less risky will probably have some other kind of different allocation. In our model portfolio, obviously, you know, some clients are not comfortable with alternatives. Those that are, however, we want to tuck in some alternatives into the portfolio, right? So what we find is that we have a lot of partner firms that join our partnership. And usually what they do is when they come on, they have a 60-40 portfolio, right? So as you mentioned, it's kind of like our mom and dad's portfolios. But what we do is, you know, we have an internal kind of portfolio management team.

15:27part of their function is to optimize their portfolios, to look through their models and just kind of rework how can we improve these portfolios. And I find, you know, the instant upgrade in terms of joining our platform is that we could tuck in some alternatives into their asset mix, right? So whether it's privates or whether it's things like multi-strad or even things like discretionary macro and CTAs, I think that's the proper way of putting together a portfolio, right? So as we saw in 2022, you know, fixed income inequities became poorly. And I think we're going to see more of that going forward.

15:58But if you have things like discretionary macro, for example, we have a discretionary macro manager that after April, for example, after Liberation Day, when markets sold off, he actually returned positive returns. So I think that's a proper way of getting that negative correlation or at least uncorrelated assets into your portfolio. I had the ex-CIO of Northern Trust and he did this whole exercise on equities and fixed income. And to your point, 2022, they were correlated. So all things being equal, the only reason you have fixed income is because in theory, they're supposed to be negatively correlated.

16:34Stocks go down, fixed income goes up, and then you could rebalance it. What he found is the reason for a lot of the correlation was that people were seeking higher return from their fixed income. So instead of doing treasuries, they kept on going lower and lower in quality down to junk bonds, trying to get a higher return. The problem with that is that those junk bonds were very highly correlated with equities. So instead of having something that's higher performing and negatively correlated, they had something that's essentially lower performing than the equities and as correlated. So he created a product around treasuries and around levered treasuries.

17:10But this aspect of correlation is something that I think people don't double click on and think about because this is in many ways the reason to have a 60-40 portfolio. If there was 100 % correlation, you would just have 100-0 portfolio because that 100 would give you higher returns during normal times and then it would be as correlated as something that was perfectly correlated between the 60-40. Yeah. Yeah. And we used to have a saying, you know, back in my old work when we managed high yield and other credit related products as well, right? So credit essentially is equity on training wheels.

17:42So they are highly correlated to other risk assets in the portfolio. That's not to say that I'm bearish against fixed income. Having a fixed income background, I obviously see value in terms of fixed income. I just think in a normal sell-off at this point, relying on just duration exposure isn't going to provide that ballast. But having said that, I do believe that a proper portfolio should have some fixed income exposure in the case that we do get an easing cycle, as we're probably going to see in Q4, probably benefits portfolio, you know, based on different regimes that we enter. Without really saying it, you're looking at crypto, as you mentioned, as a real asset, almost as a comparable asset to real estate, which is kind of inflation protection.

18:27I think a lot of times in asset management, people look at the tools, call it private credit, private equity, almost as ends in of themselves versus part of a balanced portfolio. How do you think about the different modules within a portfolio and what are their purposes? So what's competing with what, what's grouped together, and maybe you could map the industry for me. In terms of the portfolio construction buckets, we almost map it as if there's three buckets. There's equities. Under equities, we have different flavors, obviously. You have passive, you have active, and then you have the components in between, which is factors.

19:05On fixed income, you have duration, you have credit, but then you have different buckets within that credit risk as well. You could have things like CLOs and other kind of exposures as well. Then alternatives, we kind of bucket into everything together. So that's privates we put in there, things like discretionary macro, as I mentioned before, CTAs. And that's where, to me, there's actually two types of alternatives. There's alternative assets, which is things like infrastructure, privates, but then you have alternative strategies as well, right, which could invest in public markets, but could go long short.

19:40So that return profile is very different than, you know, public's. But from my perspective, I think, you know, when you look at privates, you know, you talked about behavioral investing a couple minutes ago. And I think that adding that privates into a portfolio is actually beneficial because, you know, I come from the ETF world where, you know, you ETFs are basically mark to market per nanosecond, right? the private side, it's basically mark to market much less frequently. And a lot of people will say, well, when you have privates in a portfolio, that's essentially volatility laundering, which is true to a degree.

20:16Exactly, right? But it is true to a degree. But when you look at portfolio construction on a long-term basis, I believe usually when you look at investing, staying invested is the right course of action, right? So when you look at an ETF and in a market sell off like 2020, 2008, you're going to see that portfolio tick down, tick down, tick down. So when I look at my statement, when I look at the markets and your first reaction is, you know, I want to stop my losses right here. So you're going to sell it when in hindsight, you probably should have just held onto it with a private side of the portfolio, because it's not marked to market, it almost removes some of the behavioral elements to, you know, that, that, you know, needing to sell and stop those losses.

20:57So, you know, there is kind of a behavioral element to it when, when you're constructing these portfolios. Just to put some more meat on that bone, I've talked to some of the top investors in crypto in terms of LPs, like institutional, think about endowments, forward-leaning pension funds, single family offices. And one theme, probably 90 plus percentage of the cases, their best investments came in their illiquid structures where they couldn't sell at the wrong times. So not only was illiquidity not a bad thing, it was the one thing that had driven their returns more so than to go back to our previous example, picking Solano versus Ethereum or Bitcoin versus versus another asset.

21:35It was actually not selling at the wrong time and keeping your money in the game, which was what led to their returns. This this behavioral constraint, I call it the virtue of the liquidity, kept them from their own mistakes. Absolutely. And you know, the thing is that, you know, when you look at privates, we had a few funds up here in Canada that have been gated. It's made a lot of headlines because, you know, a lot of people will say, well, you know, it's gated, now we can't get our money back, which is true. However, you know, that is a function of the asset class, right? So a lot of people will say, you know, I want to earn this illiquidity premium, or I want these higher yields from privates, which comes from that illiquidity premium.

22:14But then at the same time, they want daily liquidity as well, right? So it's almost like you can't have your cake and eat it too. I think for privates to function properly, it needs to be gated from time to time. Because think of your, you know, if you are a manager allocating that capital and all of a sudden three weeks later after you allocate it, you know, investors want that back, right? So that's, you know, coming from an ETF background. I know the ETF industry is pushing into the private space. I actually, you know, disagree with that. I think the ETF structure is very good for the public space.

22:45It's the best structure for it. But for the private space, I don't think it's a good structure because there is that liquidity mismatch. This is a known concept in the private world, which is if you have the right LP base, they will actually back you in difficult times and redouble and triple down even though your returns are technically down a they might be relatively up versus other managers but that might be a buying opportunity and your lps will back you the endowments are famous for this backing managers during difficult crises and they end up getting these these incredible returns the same obviously could happen uh on the public side as well i want to though double click on this whole function of assets in a portfolio.

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