Episode 334 - Magnus Reitan: Managing (Significant) Family Wealth

0:03This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision making from two Canadians. We're hosted by me, Benjamin Felix, Chief Investment Officer at PWL Capital and Cameron Passmore, Portfolio Manager at PWL Capital. Welcome to episode 334. And Ben, this week we have a very interesting and special and kind of inside baseball conversation with Magnus Raytan, who is the CEO of Raytan Capital. And listeners might remember that back in episode 321, we had Hakan Kavlion, who is the CIO of that family office. And this is the group, the people that invited me to join in their inaugural investment conference in Norway a month or so ago, which was an incredible event.

0:48And we talk about that at the back end of this conversation with Magnus. Incredible story, incredible family. They're a storied family in the retail and grocery convenience stores across Scandinavian countries. and we thought it'd be interesting to have Magnus join us just to give us his perspective as someone in a family that has capital to manage that comes at it from an evidence-based perspective. Kudos to you, Ben, for reaching out to him to have him on after Hawken joined us, which was also a very solid conversation. You call it inside baseball, Cameron, but it's a different kind of inside baseball because Magnus sits in the seat of the asset owner.

1:26He is himself an investor managing money on behalf of his family businesses, similar to many listeners who might be managing money for their spouse and maybe their kids, but on a different scale, obviously. But the interesting thing about Magnus is that he's in that seat and many people who are in that seat and have large amounts of capital to invest end up getting really complicated portfolios, taking the advice of financial institutions to invest large amounts in illiquid assets and private equity and private credit and all that stuff. and Magnus has not done that. He's kept a super low cost evidence-based approach to managing this holding company's assets.

2:02I just think that's really impressive because it's not easy. As he mentions at one point in our conversation, he is like everyone else at that level of wealth, bombarded by pitches from asset managers about why they should be making their portfolio more complicated by adding other asset classes. Based on his own personal investment philosophy and clearly some discipline, he's been able to build this thing out in a super low cost evidence-based manner, similar to the Norwegian Sovereign Wealth Fund, which we also talk about and how that has influenced what they've done. I just think his perspective on this is really interesting as an asset owner who has kept things simple.

2:39And built consensus in the family as to the policy, the investment policy and the investment philosophy of the family. That is also can be a challenge. Hats off to Magnus and the entire family. Very thoughtful organization. Yeah. Getting buy-in from family members as a committee is no joke. I agree. All of it is impressive. I think it's interesting and relevant conversation to anybody who's taking charge of managing their family's wealth. Yeah. Here's our conversation with the CEO of Rayton Capital, Magnus Rayton.

3:15Magnus Raiton, it's so great to welcome you to the Rational Reminder podcast. Thanks for having me. Great to see you again. So off the top, Magnus, what is the story of Raiton family? Well, our story started with a small grocery store in Trondheim in Norway in 1948, which my grandfather opened. And over decades, we've expanded to become one of Norway's largest companies with over 3 ,600 stores across seven countries. And we are 45 ,000 employees. Today, our business includes discount grocery stores and gas stations in Norway and Denmark, convenience stores across the Nordic and Baltic countries.

4:02and one of Norway's largest real estate investment companies, in addition to Retan Capital, which manages a globally diversified investments portfolio. That's incredible. Can you talk more about how Retan Capital fits into the broader Retan group of companies? Our holding company, which we have simply named Retan, exercises active ownership through independent business areas. We have three business areas, Rettan Retail, Rettan Eiendom, and Rettan Capital. Rettan Retail operates discount grocery stores in Denmark and Norway, and convenience stores in the Nordics and Baltics, and the energy and gas stations that I talked about earlier.

4:47Rettan Eiendom is our real estate investment company, focusing on city center properties in the three largest cities of Norway, which is Trondheim, Bergen, and Oslo, as well as logistics, industrial, and retail properties across Scandinavia. Rettan Kapital is the newest and currently the smallest of the three divisions. However, the group's long-term goal is for the three business areas, Rettan Retail, Rettan Endom, and Retan Capital to become relatively equal in value. So in other words, Retan Capital is not just the source of capital for the other business areas, but it's also a business area in its own right, which we plan to grow aggressively going forward.

5:32Can you talk about the genesis of Retan Capital? Retan Capital was born from a desire to safeguard and build financial wealth for the broader Raytan Group and for future generations. So the intent was to consolidate and professionally manage the excess liquidity generated from our operating businesses, applying disciplined, evidence-based investment philosophy. And it's important to understand that we are not only safeguarding and building financial wealth for future generations of owners, but also for future generations of employees and franchisees, because we want our 45 ,000 people to go to work each day with companies, knowing that they have a financially secure employer, one that can weather tough times and seize business opportunities when they arise.

6:30You touched on it there. How does Raytown Capital define risk? For us, risk is measured by volatility and maximum drawdown or tail risk, which perhaps is more important than volatility in the long run. So we aim to build a portfolio that over time maintains the same level of risk while seeking to generate higher returns than our benchmark. And we try to achieve this by diversifying even more than the benchmark, which helps us reduce the overall portfolio volatility without sacrificing expected returns. So this allows us to reintroduce slightly more risk to the portfolio to meet our volatility targets, creating a portfolio that aligns with the benchmark's risk profile while generating higher expected returns.

7:27At least that's a theory. I'm curious, how do the operating businesses define what you call excess liquidity, which ends up flowing to Rayton Capital? Excess liquidity represents the funds beyond what is required to sustain and grow our operating businesses. So this surplus is channeled to Rayton Capital, where it is managed to generate optimal returns and support the broader financial strategy of the Rayton Group. We're going to talk more about your role with Rayton Capital in a minute, but I want to ask first, how did you develop your personal investment philosophy? My interest in financial markets began during business school.

8:10And I think like for many others, I was initially drawn to stock picking. It's fun. It's intriguing. It's exciting. However, as I quickly learned through personal experience, it's also very humbling. And the more I delved into it, the more I realized just how challenging it is to consistently generate alpha through stock picking. So I think this realization shifted my focus toward asset allocation. I was introduced to research showing that roughly 90 % of the long-term risk and returns is driven by the strategic asset allocation. In other words, decisions about how much to allocate to equities, bonds, and other asset classes, while only 10 % comes from the individual stock or bond selection, or perhaps tactical allocation.

9:05So I think this insight convinced me to dedicate 90 % of my efforts to getting the strategic allocation right. And from there, I just focused on finding the cheapest and most efficient ways to gain exposure to the major asset classes, primarily through low-cost index funds. Love it. How did the family decide on your role overseeing Raytan Capital? Raytan Capital was my initiative. The company likely wouldn't have been established if not for my personal interest and passion for asset management. And I think as a family, we are fortunate that one of the three owners has a personal interest in this area, as it's not always common in family businesses.

9:54So I think in all major profitable, at least family enterprises, excess liquidity inevitably builds up and requires professional management. And often I see families outsource this function to external managers or sometimes hire hotshots from the investment industry, often based on what they read in the financial press. And the challenge with this approach is that without a deep understanding or personal interest in asset management, many families fall into the trap of investing in expensive and poorly diversified funds or investment strategies that may have delivered strong returns by sheer luck over the, say, past three to five years, which is a dangerous strategy, I think.

10:47So by taking on this role personally, I've ensured that Rettam Capital is managed with a disciplined, evidence-based approach that aligns with our families' values and long-term objectives. The example you gave of families outsourcing and ending up in high-fee products is it happens everywhere. It's crazy. And it's not just families with wealth. It's also institutions. It's unbelievable. I agree with you. And it's great to see you taking that role on. Can you talk about how managing the assets of Raytown Capital on behalf of your family as a business is different from managing your own personal portfolio?

11:23Yeah, I think managing Rettan Capital involves balancing the family's collective objectives with a disciplined and scalable approach. In contrast, personal portfolios may prioritize individual preferences and are often less constrained by formal governance or the collective goals. The Datum Capital has humbly taken on the responsibility of managing the financial values that have been created by more than 45 ,000 people over the past 76 years, which feels like a tremendous responsibility. But most of all, it's an incredible honor. So it feels much more important than just managing my own wealth.

12:08On episode 321, Magnus, as you know, we welcomed your CIO, Hakan Kavli, onto the podcast for a great conversation. I'm curious, what made you eventually decide to bring in a CIO that was not part of the family for Rayton Capital? In the beginning, Rettung Capital was basically just me. We started in 2016, and it was basically just me, and I wanted to keep costs as low as possible and the structure as simple as possible. However, as the complexity and the scale of the return capital grew, it became evident that additional resources were necessary. So in 2023, we brought on Sindre Drevland to focus on manager selection and Håkon Kavli to lead the asset allocation part.

13:00So Håkon joined us from Sturebram, which is one of Norway's largest asset owners and managers, where he was already a senior portfolio manager. And it quickly became clear to me that Håkon is an exceptional investment professional. Later that year, he was appointed as CIO. I believe that our current team, we are only five people in Rettan Kapital, and this team is highly scalable. We are well-equipped to manage two times or even five or 10 times the capital that we handle today. And we take great pride in operating as a small, cost-efficient, and highly skilled team. That is impressive. You talked earlier about your personal investment philosophy and basically using low-cost index funds.

13:50Can you talk about Raytown Capital's investment philosophy? You just mentioned manager selection, for example, which is obviously different from buying an index fund. We follow an evidence-based investment philosophy where investment decisions are driven by research and data rather than assumptions, speculations, or anecdotal evidence. This includes analyzing historical return data, understanding and respecting market efficiency, applying modern portfolio theories, and using statistical methods to assess risk and return. And we have defined four main principles for our investment philosophy, which are long-term perspective, diversification, liquidity, and low costs.

14:36We have a long-term perspective. In fact, eternity is probably our perspective, which increases our risk tolerance. We can manage short-term volatility and drawdowns and viewing them as the price we pay for long-term excess returns. Diversification is the only free lunch in investing, as we all know. And with a well-diversified portfolio, we expect the same or even higher returns compared to a less diversified one, yet with dramatically lower volatility and drawdown risk. So our equity portfolio is exposed to roughly 10 ,000 companies across all industries and geographies worldwide, both listed and unlisted.

15:25And our fixed income portfolio is a global mix of government and corporate bonds. And additionally, we've included alternative sources of diversification also, such as catastrophe bonds, music rights, art, and also market neutral multi-asset strategies. The third principle is liquidity. All excess cash from the RATAM group is channeled into RATAM Capital. Capital flows in and out of RATAM Capital on a weekly basis. RATAM Capital serves as a buffer for all group companies during challenging times, and we also provide liquidity when exciting opportunities arise. So Raytang Capital needs to maintain high liquidity with a maximum of 20 % of the portfolio in illiquid assets.

16:16And we aim for 60 % of our assets to be accessible within three business days without incurring significant transaction costs. And in our discount grocery stores, low costs is our most important competitive advantage. And principle number four for Raytang Capital is also low costs. We believe that low costs are just as critical in investing as in any other business. And if you incur unnecessary costs, say$1 million, you not only lose that$1 million in returns for the year, but you also lose all future returns on that million forever. So the compounding effect of$1 million today over eternity is infinitely high.

17:02You mentioned the alternatives. So there was music rights, art, and market neutral funds. Roughly how much of the portfolio would be in alternatives as opposed to stocks and bonds? Not that much. We target small allocations to those diversifying resources, mostly because the fees are higher and our belief in the excess return is perhaps lower than in some of the more broader asset classes. What role did the rest of your family play in defining and also agreeing to the rate on capital investment philosophy? Before establishing the rate on capital, I spent considerable time with the rest of my family trying to manage expectations mostly.

17:46I demonstrated how a similar portfolio would have performed historically in terms of returns, volatility, and maximum drawdowns. And I also emphasize that expected returns going forward are likely to be lower than historical returns for various reasons I won't elaborate on here. And additionally, I prepared them for the possibility of drawdowns exceeding 40 % or more. So since our inception in 2016, we have navigated several challenging periods, a falling market in the second half of 2018, the COVID-19 pandemic and the inflation and interest rate surge in 2022, which impacted both our equity and bond portfolios significantly at the same time.

18:36But despite these setbacks, there has been no sign of panic or pressure to abandon our long-term investment strategy, demonstrating the family's alignment and commitment to the agreed-upon philosophy. So interesting. So what is Rightline Capital's actual asset allocation? While the benchmark for our portfolio is 60 % global equities and 40 % global fixed income, our actual portfolio can differ substantially from these weights. So the key objective is not strict adherence to the benchmark allocation, but rather ensuring that a portfolio's overall risk measured by volatility and maximum drawdown aligns with the benchmark over time.

19:24So within this framework, we aim to generate excess returns by leveraging evidence-based investment strategies, ensuring that we achieve our financial objectives while managing risk effectively. Currently, our equities allocation slightly exceeds the benchmark 60%. The majority of our equity portfolio consists of global index funds and ETFs that collectively mirrors the MSCI All Country Lowly Investable Markets Index, which includes emerging markets and small caps. And additionally, we have incorporated a minimum volatility ETF and allocated roughly 5 % of the equity portfolio to equity. The bond portfolio, while primarily made up of passive funds as well, is much smaller than the benchmark's 40 % allocation.

20:16And this is to make space for more diversification. They made room for alternative strategies, such as the ones I mentioned earlier. And some of these strategies have low or even zero correlation with the broader portfolio, helping us to mitigate risk while enabling a slight overbait in equities as well. How did you choose the 60-40? We started initially with a 30 % allocation to equities and 70 % to fixed income. At that time, the portfolio was much smaller and represented a smaller proportion of our overall wealth. So consequently, our priority was to ensure that the limited excess cash that we had was relatively stable and liquid.

21:04So in case it was needed for acquisitions or to support our core business during challenging times. So as Retang Capital grew and became a more significant part of our overall wealth, we were able to take on more portfolio risk. Despite this, the 40 % fixed income allocation we have today continues to serve as a substantial and stable liquidity buffer for the system. The current benchmark allocation reflects our overall risk tolerance and our long-term financial goals. Makes sense. Have you felt any pressure or need, obviously you've had some alternatives like we talked about, but beyond that, any pressure or need to add more complexity to the portfolio through less liquid assets or other alternatives?

21:50Yeah, lots of pressure, especially from financial institutions that are really trying to push these solutions on us. But we have deliberately maintained a relatively simple portfolio. Our philosophy prioritizes simplicity, transparency, and evidence-based strategies, which we believe lead to better long-term results. That said, as previously mentioned, we have made small targeted allocations to alternative assets to enhance their diversification without compromising the portfolio's overall simplicity and efficiency. How do other large asset owners who, as we've talked about earlier, tend to have more complex portfolios, how do they respond when they learn about the relative simplicity of the rate on capital portfolio?

22:36Yeah, I think many are surprised, but also intrigued. We often use this as an opportunity to explain the advantages of simplicity, including lower costs, increased liquidity, and reduced operational risk as well. Is there also an element of peace of mind too, like keeping things simpler? Yeah, it's easier to understand our portfolio. It's easier to know what kind of risk we're taking on when we understand all the strategies that makes up the total portfolio. If we go into something alternative, we will spend a lot of time trying to understand the strategy, trying to understand the asset class.

23:22Keeping it simple makes it easier for us to know what risk we are taking on. How do you communicate the benefits of evidence-based investing to other large asset owners like yourselves? We don't aim to convince others of the merits of our approach. Instead, our goal is to share ideas and to foster dialogue with other asset owners. And many of them follow investment strategies that differ significantly from ours. And we remain humble to the possibility of learning from their methods, while at the same time, we hope they can also gain valuable insights from our approach. It's funny you say that.

24:04Cameron and I decided probably 10 years ago that we wouldn't try and convince anyone that what we do makes sense. And instead, we would just put the information out there, which ended up being part of the purpose of this podcast. But you can't change people's mind by beating them over the head with it. You could just give them the information. That's true. How influential has your proximity to the Norwegian Sovereign Wealth Fund, which is a pretty famous, very large, basically index investor? How influential has that been to how you manage your portfolio? The Sovereign Wealth Fund, commonly known as the Oil Fund, has been a significant influence on our approach.

24:36They openly share their research online, free of charge, providing valuable insights into evidence-based investing. And additionally, they are willing to engage in discussions and share their experiences with other Norwegian asset owners, including us, which has further enriched our understanding and investment strategy. And in many ways, Rettan Capital is Rettans own oil fund in miniature. Just as the sovereign wealth fund is tasked with ensuring financial security for current and future generations Norwegians, Rettan Capital's mission is to provide financial security for current and future generations employees and franchisees and owners.

25:21Do you think there's something about Norwegian culture that's conducive to evidence-based investing? Christian Nguyen, Norwegian culture emphasizes pragmatism, long-term thinking, and trust in research and expertise. And I think these values align closely with evidence-based investing. And we also have the sovereign wealth fund, which is a great representative of evidence - based investing, which I think all Norwegians look up to. Robert Leonard Really is an incredible program. And the fact that you guys are doing something similar, it's really interesting. That's why we had that culture question.

25:55In Canada, it's the opposite. Our pension funds are famous for employing huge amounts of active management. I don't know what that says about Canadians, but anyway. What are your main sources of information for learning about portfolio management and financial markets? We try to rely on high-quality academic research, preferably peer-reviewed, to ground our approach on evidence-based insights. And additionally, we draw valuable knowledge from respected institutions, such as the Norwegian Sovereign Wealth Fund. I could mention AQR, Dimensional, and other asset managers as well. And our professional networks also play a crucial role, enabling us to stay informed and continuously refine our strategies.

26:39Last month, you were gracious and kind enough to welcome me to your inaugural investor and investment conference that you hosted for around 100 of your peers in the Norwegian investment community. I thought the event was spectacular. I'm curious, from your perspective, Magnus, what is the main benefit of that conference? I think it has been the significant expansion of our professional network. Asset owners, both in Norway and internationally now, reach out to us to discuss evidence-based investing. This aligns closely with our primary reason for hosting the conference to foster dialogue and collaboration.

27:19With a team of only five people at Rettung Capital, access to external expertise is essential for enhancing our knowledge and improving our strategies. Most of the time, we are invited to conferences hosted by fund managers or investment banks and where they are usually trying to sell products, whether it's a fund, an investment strategy, or perhaps one of the many conferences focused on macroeconomics, specific industries or companies. And we wanted to create something different, a space where asset owners could come together, discuss the art and science of portfolio management. And the feedback shows that the participants found it both engaging and valuable, and that it encourages more frequent dialogue among asset owners moving forward.

28:11Really smart idea. Personally for you, what were your biggest takeaways from the inaugural conference? There were many, but Antti Ilmanen, who had a speech on expected returns, I think the key takeaway was the sobering reminder not to expect future returns anywhere near the levels we've experienced since the financial crisis. Professor Marcus Lopes de Prado. He highlighted how machine learning can enhance portfolio optimization techniques and offering valuable insights into its practical application. Erik Hilde, who is responsible for selecting external managers for the Norwegian Sovereign Wealth Fund, he surprised the audience by stating that he doesn't even consider past performance when selecting managers.

29:00There's a collective gasp when he said that. Yeah, it was. Lastly, of course, Cameron Passmore did an excellent job of bridging the academic insights with actionable strategies for asset owners, making the content highly relevant and practical. Thank you, Cameron, for your contribution. Thank you. I thought the event was phenomenal. The people were so interesting. And to say there was conversations, putting it mildly, the event after the lovely dinner you hosted afterwards. It's your incredible property. It was a real special event. So final question for you, Magnus, how do you define success in your life?

29:37That's a huge question. I think for me, personally, success in life is simply about living a happy and fulfilling life. Perhaps a bit boring answer, but since we spend the majority of our waking hours at work, having a genuine passion for what you do at work is essential to achieving that happiness. And I'm feeling incredibly fortunate to work every day with a great team in a field that aligns with one of my greatest passions, which is evidence-based investing. Beautiful. Well, great to see you again. And thanks so much for coming on the pod this week. Thank you very much.