This week is a cage match of a pod, going point/counterpoint on every Alt from private equity to fine art to digital assets with Phil Huber and the knowledge he’s about to drop in his upcoming new book ‘The Allocators Edge: A modern guide to alternative investments and the future of diversification’. Phil is the Chief Investment Officer at Savant Wealth Management. As a Chicago native, we talk with Phil about his start in investments with his interests in the family business from an RIA wealth management background and decided to sink his teeth in. We dive into his book talking about everything from how the actual writing of it went – to what’s being said in it – from the current issues with the 60/40 portfolio, his blog bps and pieces, why sometimes the juice isn’t worth the squeeze, the thin line between traditional and alternative portfolios, his periodic table of investments, reviewing a huge list of Alternative Investments, including private equity, real estate, fine art, digital assets, style premia, real assets, trend following, and more, the state of Indiana sports, 80’s-90’s pro wrestling, and Chicago pizza. Join us on this interesting Alt-tastic ride as we dig into what really is an Alternative investment by cracking open that “Other” bucket on the client statements.
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Find the full episode links for The Derivative below:
Check out the complete Transcript from this weeks podcast below:
Attaining an Allocator’s Edge with Phil Huber
Jeff Malec 02:08
Alright happy November everyone. I am not rocking the Movember mustache every year I want to and then chicken out. So maybe next year, but anyway, we have a cage match for podcast today. We’re getting into why that’s apropos but uh, talking with Phil Huber, whose new book allocators edge caught our eye. Not so much for the title. But for the subtitle, which is a modern guide to alternative investments and the future of diversification. Says right in our wheelhouse listeners, and happy to bring on Phil to talk it through Phil’s Chief Investment Officer for savant wealth management. He’s a CFA, a CFP, and live sort of in Chicago up in the northwest suburbs. So welcome, Phil, thanks for coming on.
Phil Huber 03:11
Thanks so much for having me, Jeff. I really appreciate it. And thanks for squeezing the wrestling reference into the intro there.
Jeff Malec 03:18
So northwest suburbs, which one were you?
Phil Huber 03:22
So despite my Midtown uniform that I’m wearing today, I’m actually located in north or Chicago suburbs. I live in Glenview. But I’m working out of our Lincoln Shire office today.
Jeff Malec 03:34
Nice and you born and raised this area what you went and actually
Phil Huber 03:37
yeah, funnily enough, I the high school I attended is like a half mile down the street from the office here. So I grew up in this general area. I went to school at Indiana University in Bloomington so spent four years at IU and then came back to Chicago lived in the city for well over a decade now we’ve lived in the burbs for about three and a half years now. So
Jeff Malec 04:00
know what happened to Indiana football this year. They were back there pretty good last year, right and then just went back to reverted to the mean this year.
Phil Huber 04:09
I’ve always been used to the Indiana football program being mediocre to lackluster so I try not to ever get my hopes up too high.
Jeff Malec 04:16
And who’s your basketball? They’re gonna turn that thing around.
Phil Huber 04:19
Hopefully one of these days yeah, I mean such a storied history for the university. I unfortunately, my attendance there couldn’t have come at the worst possible time. So I, my first year was oh three, but that was the year after they went to the 2002 finals. Led by Mike Davis. It was largely Bobby knights kind of recruiting team still. So yeah, they lost to Maryland that year, but then it was sort of a little bit of a steady decline. For my four year tenure, there was a lot a lot of fun go into games. We never quite had a real contender for Tim.
Jeff Malec 04:49
I hear you. So get into your background a little bit to call you an author’s a little bit unfair and I’d say you’re a practitioner who’s also an author. So give us a little bit of the non author background, if you can, culminating in savant there.
Phil Huber 05:06
Absolutely, yeah, definitely. First time authors, I probably wouldn’t put that as my primary occupation but happy to have that as an additional kind of feather in the cap today. I grew up my whole life around the IRA wealth management industry, my dad wasn’t is a financial advisor. He founded an RA back in 1988, called Huber financial advisors. I joined there a little bit. About a year after graduating college I spent a brief cup of coffee is a internal wholesaler for a mutual fund company at a school. But by and large, kind of generally knew at some point, I’d enter the family business and always grew up knowing, you know, even if I didn’t know necessarily the inner workings of what he did day to day, I always knew that my dad loved his job, and found a lot of fulfillment. So it always seemed like an attractive career path to me. But I do, I did want to spread my wings a little bit after college. And so for unfortunately, for myself, the timing of graduating in 2007, and about a year into work, we are kind of about to enter the teeth of the financial crisis. And being in financial services at a fun company is probably not a great place to be. So I found myself, Midway looking for a new opportunity. Unfortunately, my dad was on to, you know, take a bet on me and give me an opportunity. And fast forward. About 12 years later, I spent there until we merged with savant March of 2020. So about a year and a half ago, so but I think in my tenure at Huber financial, it was I kind of came in as a utility player, so to speak, I came in recall exactly what my initial title was, it was basically like, do everything that we need you to do. You know, it was a very, very small organization. At the time, I think I was the employees, we had a handful of advisors, a couple of client service and operational people, but it was still a relatively small Ra, especially by today’s standards, I think we had a few 100 million under assets when I when I joined in a way and so we continue to grow that and build that, over time, my role, morphed over time to become very much more investment focused. And I realized a few years in that what I didn’t want to do was be a full time client facing advisor. I did that for a certain portion of my role. But I just was always fascinated and interested in the investment side of our business, we’re very much a Planning Center. Organization, that’s what we lead with. That’s our value proposition is comprehensive wealth management for clients. But I saw an opportunity to add leadership in the investment area, which was largely at the time kind of decision by committee. And everyone kind of pitching in, but nobody really taking ownership of that area. And so I thought that that was something that I would probably do well, and so I adapted to that. And about five, six years ago, became the CIO of Huber, and then have retained that title unroll, as we transitioned into savant recently.
Jeff Malec 08:04
So it sounds like your golf game just wasn’t good enough to be client facing.
Phil Huber 08:08
I don’t know that I’m, I’m a complete rarity in the wealth management space and that I literally never golf. I get invitations all the time to go out and play around. And I always feel weird declining, but I just never caught the golf club. My dad’s a huge golfer, most of the other folks in the office golf to some degree but never caught the bug.
Jeff Malec 08:29
And then is your dad still in the in the base? He’s still there? He’s Yes, yeah.
Phil Huber 08:33
Yeah, a big part of our, you know, joining forces was, was him staying on for at least an extended period of time, but, you know, like many founder RAs, you know, he’s in his mid 60s Now, I still got some juice left in the tank. But you know, it was looking for kind of that glide path of not necessarily a full stop, you know, retirement at some point but like, transition my career to go back to doing what I love, which is you know, first love in this business I got into it was managing relationships with clients and, and being around people I think the size of our firm at Huber before we merge almost got it got away from him, but became larger than he ever anticipated growing it to just sort of happened organically over time. And, you know, it was never his intention to be managing a 30 person billion and a half dollar operation. It was like, Yeah, I really like working with clients and helping them with their financial planning and other financial needs. And so, but wearing the CEO hat, he had to deal with all the other operational, you know, burdens and aspects of running a business and it’s I think he was very happy to partner respond much like we all were and kind of shed some of those responsibilities and get back to what he loved doing in the first place and kind of write out the rest of his career doing that.
Jeff Malec 09:49
Yeah, it seems like that’s the RA playbook these days right to find an older, ready to, you know, retirement is somewhere in the future, not necessarily right then except but somewhere out there merge bring them in house seems to be the normal playbook. And let me ask you, sir, as an RA? It seems like the old model used to be kind of stockbrokers, right? Like the advisor has relationship with the client, the advisor is also the one helping them pick the investments and doing all this stuff. And it sounds like correct me if I’m wrong, you guys are more of a top down approach of, hey, there’s CIO, there’s a process, we’re looking at these investments, and then that’s coming out to the clients instead of a single, you know, the good golfer guy is also the guy who’s really good at putting portfolios together.
Phil Huber 10:37
Exactly, yeah, the way I would frame it is we have a centralized investment, you know, research department, as well as a broader Investment Committee that acts as a, as a decision making arm for the firm in terms of our, our asset allocations, or fund selection, and all of our due diligence, etc. And so are advisors across the firm, regardless of which state they’re in which office location, and they’re tapping into that centralized resource for the portfolios, they can offer their clients and so sort of takes that responsibility and burden off of their plate, which, which many of them, I think, are happy to relinquish. That’s not what they want to be doing is picking funds and building asset allocation models. Their focus, you know, our advisors, I would say, are very much more the CFP oriented as opposed to the CFA types. Whereas we have plenty of CFA types within the investment team. And so it’s good to have a centralized resource like that. So we’ve got 20 ish, or so offices now spread across seven states. But the investment research team is also kind of spread out. We’ve got myself in the Chicago area, we’ve got a few analysts in Rockford, which is our headquarters couple in downtown Chicago. And then our Director of Research Gina bl, she’s actually worked remotely for many years out of San Diego,
Jeff Malec 11:55
California. She’s the smart one,
Phil Huber 11:58
remote work before it was cool.
Jeff Malec 12:01
And do you think that’s a new model for all RAS or it’s already there, it’s not even new,
Phil Huber 12:05
like for larger IRAs, that’s kind of how the playbook runs these days is that you want people focused on their highest and best use. And so for those that we have, managing client relationships, and doing heavy financial planning work, you know, not everybody can be a jack of all trades. And so we have a number of specialists areas within the firm that we want our advisors to be able to tap into. It’s not just investments, it’s areas like tax planning, and preparation and kind of estate planning and wealth strategy. And so we’ve got resources across the various, you know, wealth disciplines within the firm. And our advisors are kind of more general generalist, but they’re a lot closer to the client, situation and client experience on so they can kind of deliver that, you know, end deliverable
Jeff Malec 12:48
guy ever, you ever get pushback on the name, like let me talk to this savant? Which one of you is this savant?
Phil Huber 12:55
It’s actually a hiring criteria, everybody in the firm has to be an actual savant.
Jeff Malec 13:00
Alright, how do you test that the Rubik’s cube.
Phil Huber 13:04
Now we’re, now we’ve got plenty of really, really sharp, intelligent people to name and just really indicative of what we’re hoping to provide, which is, you know, our tagline being wise counsel, ultimately, that’s what we’re here to do.
Jeff Malec 13:23
So on to the book. And I want to talk briefly just about the process of writing. And if you’re willing, I’ve got a book that’s meant very similar to this one that’s been 10 years in the making, and never can get out of, like, second draft form. But so just tell us like, what was the impetus? What’s the reception been so far? Why’d you want to write it? Kind of.
Phil Huber 13:44
So my experience getting the book published might be a bit different from most, and that I didn’t really have a book sort of in draft, I was actively writing and then shot that out to different publishers, I had been blogging for probably a handful years or so I’ve got a blog called bits and pieces. And that was really just a wave. I’ve been doing a lot of the content and writing for your financial back when I started it. And that was, you know, there’s a very much a difference in my opinion of writing from the firm, you know, voice and firm point of view, as opposed to the independent individual point of view. And I like the blog idea. There’s a few other bloggers I really liked, and follow them and enjoy what they’re doing. So I wanted to kind of throw my hat in the ring there. So I just found that to be a really cool creative outlet. So I enjoyed doing that a lot from doing them from having sort of an active social media and Twitter presence. My one or more of my posts got in the hands of Craig Pierce, who’s the editor at Herrmann house, and they do a lot of books within our within our industry. And he reached out this is going back, maybe 2017 or something like that. And just was kind of curious, hey, look, you know, great to meet you. Would you ever be interested in doing a book and I was, you know, very flattered and uninterested, but at the same time, like, I had no idea what I would read a book about Apple. Yeah, she’s just a blogger here, I don’t know, the first thing about writing a book, and he was like, That’s okay, like, let’s work together, let’s, you know, let’s go back and forth on some concepts and ideas and see if anything sticks. And if something does, then we can, we can move forward. And so I love to be I didn’t have any immediate plans at the time. But kinda like you I’ve got a big bookshelf at home filled with investing and finance books. And so I the idea of having you know, my name, I’m my own book, one day was a very much a bucket list item that I wanted to cross off. And so I was like, you know why I should, this is a great opportunity to have in front of me, I want to take advantage of it. So I proposed a couple early ideas. And those actually, then they kind of fell flat with the publisher in terms of like, it just didn’t see a book coming out of those. And so it was sort of back to the drawing board. And then things got busy kind of life and career wise, stepped away from it for a bit. And then we just sort of circled back a year later. And we’re like, hey, any interest still here? And so the more I thought about I was like, okay, like what? What can I what topic? Can I write about that? A that I’m, you know, endlessly curious and fascinated by an area that I think I can add value in that I think there’s a need for from an education standpoint. And then, of course, from the publisher standpoint, something that they think has, you know, any sort of commercial viability to it. So the more I thought about more ideas, and looked inwards, like what are the conversations I’m having internally at our firm with, with the advisors that I support with the clients that we work with, and I can’t, I kind of came across this dynamic where if you kind of think, just generally speaking, we were managing portfolios that had 20% or so on average allocated to, broadly speaking alternative investments, I found, anecdotally that they accounted for typically about 80% of the questions that would come up from clients, and about 80% of the pain points that advisors are relying on. So I felt that there was a really telling opportunity, where I think, you know, it’s well documented some of the longer term challenges that traditional types of portfolios are going to be facing in the decades ahead. And so, you know, ways to address that involve incorporating other types of diversifying asset classes, investment strategies, into a broadly diversified portfolio. And the challenges have been around the experience of doing so. And the comfort level and confidence that many advisors have been communicating and explaining these strategies to clients and getting them to actually stick with them. Over time was a challenge as well, just inherently a bit more complex, at least at the sort of operational level, maybe not conceptually, some alternatives are very intuitive and simple. Conceptually, just the implementation that’s quite complex at times. And I think it’s just it’s, again, it’s areas that are generally a bit higher costs than the, you know, essentially a free kind of beta that you can get for using index funds and ETFs. These days, I think, the higher costs the maybe limited liquidity in certain areas, and just the general unfamiliarity of some of these alternatives, has kind of, you know, as much as people can recognize the math, staring them in the face of low starting yields on bonds and high equity valuations, not necessarily being a recipe for great perspective for looking returns, few have kind of stepped off that comfort level of, you know, that kind of canonical 6040 type portfolio for a couple reasons. It’s, it’s treated them very well. And so it’s become a bit of a security blanket, why mess with the good thing? Why, why fix if it ain’t broke sort of thing. So that’s been one area and I think it’s just the, again, the era that we’re in where it’s, you know, very much the trends towards passive and low cost. Many alternatives are not very low costs. And so I think that’s, you know, another key factor and so, I think, I think the other challenge has been, I think, you know, look at all it’s gained a lot of popularity after the global financial crisis of oh eight or nine, very much akin to shutting the barn door barn door after the horses have already, you know, gotten out of the table and so I think that you know, it was very much a environment of okay, we’ve just seen equity markets collapse and the financial system kind of blow up. Now let’s now and things are priced actually attractively for equities, let’s go look for ways to hedge tail risk and, and add uncorrelated assets. And so I think the timing was wrong, that advisors have kind of dip their toe in but perhaps didn’t know exactly what they’re getting into. Maybe they had a bad experience. Maybe they either set in proper expectations themselves, or their clients had different interpretations of what to expect from alternatives and it just didn’t deliver for it for you know, whatever reason and so I think some advisors were kinda like, you know, Fool me once shame on me fool me twice, shame on or shame on you fool me twice, shame on me and maybe just been a little bit more skeptical to space based on a prior experience they might have had. So I think and I think another element variable there too, is just a lot of product development. Just knowing there was a lot of demand for liquidity. I think a lot of fun companies responded to that by providing the supply and perhaps some firms that had no prior experience, you know, offering alternatives to clients or just hey, like, there’s demand for this, let’s roll product out. And there’s just a lot of kind of garbage out there and early anime. And not to say there isn’t some garbage out there still today. But I think generally speaking, the universe of alternatives has gotten a little bit more, you know, skewed towards more higher quality, the ones that have delivered well, and had staying power. And so I think there’s, there’s less, maybe noise out there than there was in those kind of mid 2010. Type yours.
Jeff Malec 20:36
Love it. And we’ve I’ve been living that the whole tenure sent, right. So managed futures was one of the huge proponents of that, right, but the only thing that was up in a way, and all the liquid salts had managed futures on the cover. You know, our firm was always digging in of like, hold on, this is just on the cover, not necessarily inside the inside the product. And just quickly, like a bunch of people have been on this pod a bunch of the names on here, you know, that I read through in the book of Corey Osteen, Ben Hahn, MEB Faber, like, where they kind of your muse is that some of the what you mentioned some of you reading that kind of stuff?
Phil Huber 21:14
Yeah, I mean, you could say, you know, music, in many ways are just, you know, really smart people that I know and followed and learned a ton from like, certainly wanted to incorporate some of those learnings into the book as well. Some of that was just reflected in the kind of editing and fine tuning of the actual draft of the book. And it’s nice to have friends like Cory and like mad, who were willing to take a look at earlier drafts and provide their, you know, comments and feedback that was very, I think, instrumental and getting the book to its ultimate final state, and making it better along the way, like Cory was fantastic. I said, he cracks me up, like I sent him a, it was a Friday, end of the day Friday, I sent him a draft like hey, like, whenever you have a chance, if you don’t mind taking a look at this and like, okay, maybe I’ll hear from him in a week or two, when I wake up that Saturday morning, I’ve got an email from him with, you know, just a volume of notes and comments. So he went, you know, he, like many others that helped along the way just kind of went above and beyond. So I think, for me, it was awesome to have that kind of, you know, input Rolodex, so to speak of really thoughtful smart people that were is very willing to lend a helping hand and I’m just helping me make the output as best as it could be.
Jeff Malec 22:24
How’d you get cliff to write the prelude?
Phil Huber 22:28
So to quote, Michael Scott, quoting Wayne Gretzky, you miss 100% of the shots you don’t take? Yep. So I you know, as I thought about, you know, whether there should or shouldn’t be four, I thought it’d be great to have one in there. And I kind of thought about, I could pick one person on this planet to write the foreword for this specific book 100% would have been clubbed. Yeah. And you know, when I think about cliff and maybe AQR more broadly, I kind of look at the genesis of my interest, and fascination with alternatives can kind of be traced back to them, you know, or in the early 2010s, as they were kind of introducing some of their liquid strategies to financial advisors, you know, that they went a long ways in building out educational curriculums and programs for advisors to tap into. And so they had an event called AQR university, that they you know, have done kind of on an annual basis since then. So I went to the first one, but at the time, I was very, very new in the industry still didn’t know the first thing about all so I was going in extremely, kind of wet behind the years. And just like an open book, like I just want to learn here and, and so that I look back at those early AQR universities as kind of my initial introduction to kind of just broadly speaking alternatives and the role that they can play in a portfolio. And I’ve just been a great admirer of Cliff and his team over the years and you know, he sits on my kind of Mount Rushmore of you know, investors and someone he’s just been kind of a investment hero of mine so I I knew it’d be a long shot but I kind of threw it out there and you know, for whatever reason he was he was willing to do it and I thought he did a terrific job on the forward and so just to have to have his name attached to this means the absolute world to me so cliff if you’re listening I don’t know I don’t know if I can thank him enough time but yeah, thank you cliff because it kind of made the whole thing kind of come full circle
Jeff Malec 24:23
for me right it’s like he’s forgotten more about all this than most of us will ever know. Right? So it’s it’s good to have his footprints he’s coming on the part eventually we keep we keep working that want to get him on here. You talked a little bit about the problems I might skip over some of that. You know, and it’s well worn that there’s this problem out here equities at all time valuations rates at all time lows. What I don’t think you had an interesting take that people are all talking about it but nobody’s really doing anything about it. Right? That’s stats tell, stats don’t lie. So like, here’s where all the money is why if there everyone’s so worried about it, why isn’t the money shifted? So you touched briefly on that, but expand on that a little more of what you think’s happening.
Phil Huber 25:11
Yeah. So I mean, the whole first chapter of the book, and the title of the chapter is Hindsight is 6040. And all the things I discussed, and they’re like, I’m not necessarily treading any new terrain there, this is all stuff that’s been well written about well documented that, you know, as we know, it stocks, you know, very high extreme valuations tend to be, you know, tend to forbear low expected returns over a long period of time, it doesn’t really tell you much about the next year, two years, but, you know, you can kind of infer, you know, lower than average returns coming off of high valuations. Similarly, for bonds, you know, low rates are indicative that, you know, your starting yield is likely a good approximation of what you can expect to earn over the next 10 years. And so, it’s a rare occurrence to have both, you know, that the really high equity valuations and probably speaking more specifically to kind of US centric or US dominated 6040 portfolios in other parts of the world, maybe not as obscenely, you know, valued today. But rare to have that that extreme stock valuation alongside, you know, low starting bond yields like we had today. So I think, when you blend a 6040 portfolio together of those two asset classes, you know, you reach a pretty, you know, you’re kind of in an extreme in terms of low perspective for looking returns. But if you look in the rearview mirror than the opposite, you’ve actually had a 10 plus year period of abnormally high returns relative to average and lower volatility relative to historical averages. So it kind of speaks to like, yeah, like, it’s almost obvious, like, why people, or why most allocators, I should say hadn’t done much about it, because like, why bother clients are happy returns have been good, like, I’m not gonna introduce, you know, foreign or different things to the portfolio that I got to then, you know, spend extra time learning about and figure out how to, you know, weave that into my story about how I talk to clients. And so it just kind of like went when you’re, you know, kind of most advisors or allocators are benefiting, or evaluating through the kind of the cost versus benefit lens. And this might seem like, hey, the juice isn’t worth the squeeze on adding all these, you know, extra components in like, I just want to keep it simple, I can do this all at rock bottom fees. And so it’s easy to understand why there’s been, you know, such an anchoring to this type of 6040 type portfolio, and we use 6040 is very much a simple example, it could be here 7030, or any kind of variation of a balance.
Jeff Malec 27:32
They think that anchoring continues the cycle and like him, right, I almost think like, they’re all clever by half, right, like all these people looking at alternatives and doing diversification. And they’re the underperformers by large margin. So the other guys, you know, they could say the dumb and simple approach is outperform last 510 1520 years.
Phil Huber 27:54
I mean, if they’re, if there’s an investment lesson of the past, like, ample years, the dumber, the better off you
Jeff Malec 28:03
guys, I mean, the sell 10,000 units on Mars this quarter to make their valuation good. But, but
Phil Huber 28:11
it’s even just within traditional portfolios, sort of evidence based type of ways to sort of improve upon market cap weighting, or embedded embed factor tilts or employee geographic diversification. And those have all been things that have been a little bit of a headwind for returns versus just on the US or on the largest stocks or, you know, these sorts of it is challenging in that sense. And that sort of less data backed and less evidence based your approach has been the better off you’ve probably done in at least in the past few years. So I you know, it’s understandable why those challenges have been there. And I think it’s good to understand too that things like starting low yields and things like high valuations we think often people look to those as timing signals like Oh, stocks are expensive signed to materially reduce my equity exposure, or get out of the market completely or I should note any bonds because yields are low it’s like no, that’s not the necessarily the takeaway here because we can we can look back as early as the mid 2010s unseen stocks are looking fairly expensive based on pick your favorite valuation multiple or rates are already at or near historical levels. But I think what we’ve learned is valuations can go higher yields can continue to grind lower. And so it’s, it’s less about, hey, like completely abandon these core building blocks of a portfolio, it’s more about just maybe, you know, open up some portfolio, real estate or some other diversifying areas that offer the potential for uncorrelated return streams, or maybe things that can do well, at times when traditional, you know, stocks or bonds might be suffering. So it’s really just about expanding the opportunity set.
Jeff Malec 29:53
And then and I love the one piece in there, which I don’t hear that take very often of the the 6040 combined The yield of that, which is both the yield of the bond component and the dividend, the yield of that is at an all time low, as well, right? So I don’t hear much that we hear a lot about, everything’s super expensive. But even if you look at it as a yield play, it’s not very attractive.
Phil Huber 30:15
Yeah. I mean, it’s always you always want to look at things at the aggregate portfolio level. And also recognize to like, like, relationships between that, you know, asset classes that we maybe take for granted, or that we assume are kind of written in stone or maybe not so and so I think everyone’s grown accustomed to the last 2030 years of bonds being a great diversifier in equity down markets. But that, you know, there’s been historical precedents of that not being the case. And so I think, you know, inflation is a variable that we have to, you know, factor in if we continue to see, you know, materially high, you know, inflation that we’ve been accustomed to, that could be a negative both stocks and bonds at the same time, and might not offer that that offset relationship that we’ve been used to.
Jeff Malec 31:01
And then I think it was Corey about a year ago was putting out how do you? How does an RA charge 1%? fee when their bond, right, if they have 80% of the portfolio in a bond yielding 50 pips or something? So there’s a little weirdness in that math from an advisor standpoint as well.
Phil Huber 31:18
Yeah, I mean, I would say that, you know, it’s always hard to lump all of the fees that RAS charge, directly to the portfolio piece, because we offer a lot more services to client beyond just, you know, building a portfolio and trading it and rebalancing it, there’s a lot of separate from the portfolio, financial planning work that goes on in not just our organization, but many RAS that, you know, if you’re charging an AUM base fee, it’s not, you know, people aren’t paying us for that, you know, portfolio management, a lot of
Jeff Malec 31:51
advice, planning, and coaching
Phil Huber 31:53
and all these other sort of disciplines that are connected to people’s financial lives that we’re taking an active role in. So I, you know, I think it’s a, it’s an interesting point, because yields are so low and so but at the same time, like, it’s not a direct apples to apples,
Jeff Malec 32:08
yeah. And I didn’t mean to call your out your fees, but like, in general, right, like, pensions, endowments have costs. And so there’s just so low levels, you have to seek out other things just to in order to pay the bills, so to speak. Yeah, yeah.
Phil Huber 32:22
Yeah. And I think there’s, there’s plenty of, you know, people that go beyond like 6040 tends to be the where people kind of, you know, average into, but like, see plenty of portfolios for really conservative and risk averse investors that are, you know, 70 to 80% fixed income, and that do that, you know, but unless they have, you know, very, you know, they’ve already kind of won the game, that’s one thing, but that’s just a recipe for negative real returns.
Jeff Malec 32:52
So, oh, let’s talk Alts. Love the conversation of you know, and I couldn’t agree more with your dive into the issues around categorization. It’s never been done correctly since the get go. But for some reason, we keep kind of pushing these labels on them. So dig into that a little bit, what’s an alternative investment for you? What the most people get wrong about that label?
Phil Huber 33:20
Yeah, and I don’t have a perfect solution to the label, you know, either. Unfortunately, the, the challenge is that a couple things, number one, it’s open to interpretation. And to the definitions always changing, you know, history, seen plenty of examples of things, one sort of viewed as alternative that become over time a little bit more mainstream and commonplace. And so that’s, you know, to be expected over time. CLC I like to highlight examples, like, you know, publicly traded REITs and commodities and high yield bonds and emerging markets is kind of, you know, more satellite asset classes, but you tend to see them as fairly permanent fixtures of a lot of diversified multi asset, you know, model portfolios, they tend not to be viewed through the lens of being an alternative. But in their earlier days, that was very much how they were kind of implemented and adapted was sort of this alternative bucket. So things do have a history of transitioning across candidate chasm of alternative to traditional over time. The other point is sort of like, you know, in being in the eye of the beholder. I like to use the example of Bitcoin here. Depending on the demographic or age of the person you’re talking to you Bitcoin could be viewed as a highly, you know, speculative alternative or just like, oh, yeah, I trade crypto alongside, you know, stocks in my Robin Hood account. So it’s like, the millennial Gen Z view of digital assets might be completely different than their parents or grandparents. And so they’re kind of, they might think of it as just sits alongside my stacks and it might not be an alternative to them because they’ve kind of grown up with it and around it. Whereas you know, folks might absolutely bucketed as alternatives. I think that’s an interesting example, particularly given the decency of Bitcoin and crypto being, you know, effectively a teenager relative to things like stocks, bonds, real estate that we have centuries of data on. More of a toddler, but okay. Yeah, yeah, financial behavior at times. So I think the way I think of it is, there’s often a very thin line separating a traditional and alternative investment. And so if we can kind of strip out like, what is that one or more variables that make, like, why is this alternative, but this is not, I found a few examples. One is, is liquidity. So you know, the easiest one here to point to is public equity versus private equity. These are both equity asset classes, but private equity very much, you know, gets categorized as alternatives by money. And it’s really just due to that illiquidity component. So that’s certainly one variable that can make something, you know, move from traditional to alternatives, if you just take away the liquidity component. I mentioned kind of Bitcoin earlier, but this idea of like perceived novelty, just things that people aren’t generally used to using inside of their portfolio, you know, makes it a bit of an alternative. old wine in new bottles is another theme, I come across a lot where you might have things like well used catastrophe reinsurance. Firms, like Swiss Re have been doing that for centuries. Yeah, nothing new about, you know, reinsurance or insurance, it’s the ability to access it in a investor friendly type of vehicle that makes it alternative. Because until that became an option, this is not the type of risk that people hold on their personal balance sheet. You know, so it’s, I think, it’s like, things like that, where you have a new struct fun structure or way to access something that’s been around for a while, or just hasn’t been democratized for most people, um, unconventional implementation might be another way to think about something like, you know, again, kind of like long short equity, if I want about, you know, no one’s gonna, if I buy a bunch of cheap stocks, no one’s gonna tell me that I’m an alternative investor, if I go along cheap stocks and short, expensive ones in a long, short and a way and then use derivatives or shorting or anything, or leverage or what have you, you know, if I’m using these unconventional implementation tools that suddenly take something that was traditional, and makes it alternative, and I guess the last thing I would mention, to kind of look at as a potential alternative variable would just be it would just be unfamiliar terrain. So not so much the case today, but like things within existing asset classes that are maybe less traffic, like emerging markets, at one point, maybe frontier markets today, you know, still stocked, and maybe just in countries that are less developed, and so less people allocated there. So, so a lot of different ways you can sort of look at a particular, you know, one or more things that might make something alternative, but there’s no cut and dried definition. It’s a very, you know, sort of green
Jeff Malec 38:01
line. But there’s also like part of the problem, right? So in the adviser world, I think believes everything you just said. And there’s bribe because they do these different methods or liquidity, but in the kind of quant world, right fund to funds allocated, where they’re saying no, like, if it has different return drivers than stocks and bonds. It’s alternative, right? So private equity, no, it’s not alternative. It’s still in the equity sleep. private debt even No, it’s still in the bond sleep because it has the same return drivers a little different flavor of it, but still the same return drivers. So just curious, like, did you go down that path at all with the book or how you have like, right, there’s a kind of a quant answer. There’s a mathematical answer. And then there’s also just the practical answer that advisors don’t understand it. And it’s different. Right? It’s vanilla with Caramel Swirl. So they want to call that alternative, even though in my mind, hey, it’s still 90% Vanilla.
Phil Huber 38:57
Yeah, I mean, what one potential solution would just be exciting. There’s a habit of like, from a recording standpoint, with clients is just saying, here’s the alternative allocation, and maybe showing the different subcategories and holdings underneath. But it could be a hodgepodge of different, you know, asset classes and strategies, which probably doesn’t do a lot of justice to the role that each plays inside of the portfolio, you know, a potential solution to that would be to just get a little bit more granular. So instead of having an alternatives bucket, maybe you’ve got a credit sleeve and a real asset sleeve and a you know, insurance linked securities, the even a diversifying strategy. So you might include things like trend following style premia, and other kind of multi asset long short tape type approaches. So you know, getting more granular could be an option to get around that and maybe having different benchmarks for each category. But yeah, there’s no right answer. I think advisors have to do what works well for them and for their clients. But at the end of the day, fine. You know, it’s all it’s all become semantics at some point, but those things can matter when it comes to Communication. So I think as long as you’re clearly, you know, conveying to clients, what they own, why they own it, what the role is in the portfolio when you should expect it to do well, and when you should expect it to do not so well, like those sort of things all need to come with the education.
Jeff Malec 40:15
It sounds like as an as a practical matter, the clients understand the stock and bond, well, there’s not gonna be a lot of questions there. Everything else is kind of in their mind already segmented as other as alternative. So why not kind of leave it be and help explain and educate to them of like, okay, there’s this main bucket, you know, and then there’s the secondary bucket that you don’t know. So well. We’ll keep we’ll keep Dooley on my side and your side trying to solve that. crack that nut? Yeah. One day, we’ll get there. Right. And so love the one piece in the book, the periodic table of investments. He kind of walked through and have a little system for what its return drivers are kind of back to what we were saying. And then kind of tying them together. So cash is near credit is near debt securities. So it seems like a useful framework, how’d you come up with that framework? And how do you kind of use it on in practice for clients?
Phil Huber 41:17
Well, the framework I came up with, probably going back like five or six years, I had one of our summer interns at the time helped me like kind of build, build the table in Excel, not knowing what we would do with it, I just thought it would be a really cool visual, if we had kind of the full spectrum of asset classes and sub asset classes on kind of one, periodic table looking visual. And then this idea of like, within each square in the periodic table, identify for each asset, what the primary and secondary sort of objectives are there. So things like capital appreciation, or income generation, or inflation sensitivity, or tax efficiency, or diversification, or some sort of liquidity premium, I think those are the six that I use. And granted, this is not you know, it’s not a perfect science. And I’m sure someone take you know, a little bit of objection to how I maybe categorize things or, or what the what the actual objectives should be. But by and large, it was really just meant to illustrate this idea of portfolios are a combination of underlying components, much like a chemical compound is a combination of individual chemical elements. And if you combine different elements together, you get different compounds. And similarly, if you combine different assets together, you get different portfolios. And so this idea that, ultimately, the recipe that we’re trying to, you know, make with the ingredients that we have, should be designed to fulfill one or more objectives at the investor level. So I thought, for the analogy of like, you thinking of building a portfolio through the lens of like, combining different elements together to achieve an objective or an outcome, you know, seemed appropriate. The other idea I liked about the table was that, you know, if I think back to like, when I was in grade school or high school, and they would show us the periodic table chemistry class, like, by and large, it’s the full table, all the elements that we know, and are used to do that. And there’s 118 documents and chemical elements that’s on the periodic table. But that wasn’t always the case. You know, if you go back to thing I looked and did some Googling around this for the book. But in 1718, there was only 13 discovered, you know, elements in 1860, there were 63. So it’s like, it I can’t like is it a conveys this idea that things aren’t static things evolve over time, in the chemical world, similarly, when it comes to investments and portfolio management, we know a lot more today about building diversified portfolios than we did 10 years ago, and 20 years ago, and 50 years ago, our understanding of different return drivers and the discovery or implementation of new asset classes, or the use of new tools is only continued to expand the investable universe that we have. So I thought that was a really good visual way to pick that So long story short, I kind of built the periodic table for a brochure we ended up doing in my old firm, like an investment brochure. But as I was writing the book, I was like, Oh, I kinda want to bring that cat into the books, I think it’ll help illustrate this idea that I’m discussing in in one of the chapters and just the evolution of of asset allocation and the democratization of alternatives over time.
Jeff Malec 44:27
So if I was your marketing consultant, I would have said put a put a link in there download this table or order the poster, right like that would look cool. And a lot of officer
Phil Huber 44:37
there may or may not be a poster one day, they had a few people reach out to me about
Jeff Malec 44:42
that, like, put it up on the website, say click here and fill out this form. Give us $2 for postage and we’ll send you a poster.
Phil Huber 44:51
I might need to edit it a bit just to get need some input and approval from volatility Twitter on
Jeff Malec 44:56
I know so I got to mention I was finishing up reading the book last Tonight, and I posted on my personal Twitter love this table of this periodic chart. And Chris sitio, who we know and love said, Hey, what the heck? Where’s longball? Um, so was that a conscious omission, or I would
Phil Huber 45:15
say, No, just a subconscious omission. At the end of the day, I couldn’t include every single thing on there. And it probably does deserve a square of its own. So I promised Chris and others out there if I, if we do in a second edition of the book, I’ll be sure to update the table to be more reflective of the more diverse nature of volatility type strategies
Jeff Malec 45:37
got, as you do have VRP in there. So you kind of have the, what you call variants risk premium, which we call vol risk, but same idea of your selling ball. So yeah, there’s a there’s a whole world of guys out there buying that, taking the other side of that trade.
Phil Huber 45:53
I think I had a real relative value square, which is a bit big, but you could probably interpret that as like a volatility arbitrage or some sort of relative value. Strategy. But yeah, I’ll make sure to add long ball for the next iteration.
Jeff Malec 46:08
Yeah, and the right, we could go off on a whole tangent, I’ll send you a good piece by Ben, I’ve heard on the right, like adding this thing that goes down over time, the rebalancing premium and the when it pops when the other things don’t adds a lot of value. Let’s talk through some of the specific goals. So you know, good two thirds of the book or half the book is going through all by all, what they do, how you should think about them. We mentioned private equity, I just wanted to mention like you, you’re kind of saying in the book, do you think that’s going to become more and more mainstream more available to individual investors, Vanguards getting into the game? So my question for you Do you think that’ll be like Vanguards actually going out and buying private companies? Probably in that scenario, but also, I know, a access has a venture capital replication mutual fund, it seems like the easier way and probably you’re not going to get that much tracking or would be sort of these replication strategy.
Phil Huber 47:09
Yeah, I would say it depends on the investor’s objectives and you know, the world in 10 years in terms of access to private investments could look a lot different than it is today. So it’s hard to paint with too broad a brush, I would say like, you know, there I think there’s going to be more opportunities for accredited investors to have access points to actual true private equity. We’re seeing a handful of those today, either through vintage type annual vintage type programs, or even you know, registered for AP funds typically tender offer funds that offer private market exposure. So it’s a growing area like Vanguards involvement, I think they’re partnering with harbor best I believe, is the actual, you know, manager, their strategies and their the distribution of that at least today. But yeah, again, just have Vanguard sort of stamp on any asset class is a bit of a recognition of its adoption into the mainstream. And so I think, you know, there’s been folks like, like Dan Rasmussen for dead is written about, hey, you can you can kind of replicate, you know, I’ll be with more volatility, you can kind of replicate private equity, historical returns by just buying, you know, cheap, small, illiquid public stacks. And sort of gets a similar type of return profile over time, that might not be for everybody. But for those that that plays a premium on liquidity in the want to deal with the kind of operational headaches a pure, True Private Equity, that could be a solution. You think that
Jeff Malec 48:40
you think those worlds blend, like the more money that comes into it, the less private it’s going to be? And it’ll, right, it feels like it’ll be more, it’ll look more like public equity markets than private equity, you’re already
Phil Huber 48:51
seeing that sort of overlap, and just the proliferation of crossover investors that play in both public and private markets. I think it was just Sequoia, like maybe this past week that is kind of rethinking their whole strategy as a VC firm, whether instead of having a bunch of, you know, the fundraising cycle of a new fund every three, four years, and then having a closed, no finite life, or they have to figure out exits for their portfolio companies, they’re just kind of shifting to one pool of capital that will effectively be like sort of an evergreen type of structure where they don’t have to exit their portfolio investment just because they’ve IPO and traded publicly. Because if you have some significant material upside, you know, in public markets as well, so I think here’s, you know, again, just the growth of crossover investors, you know, not to take a public stance on SPAC, but just again, the interest and growth and Spax is another just, you know, kind of sign of increased interest and from retail investors to participate in some capacity and kind of private to public markets. And so I think doing You’ll find more and more avenues. And I think it’s gonna get a little bit more, you know, again, there could be some negative externalities of that broaden access. But by and large, I think it’s a, you know, a bit unfair structure today that only the, you know, the ultra rich can go into private equity and venture and most investors, it’s a bit off limits still. So I think that’ll continue to, to move the other direction.
Jeff Malec 50:24
Cool. And rightfully so real estate, you sort of list as an alternative, but sort of also say, like, not that alternative. didn’t talk at all about how it may be super high valuations, right, especially for Canadian counterparts, but just talk through that quickly of like, Don’t most investors already have real estate? Is it really an alternative?
Phil Huber 50:47
Yeah, I think I mean, yeah, most investors have real estate like, are you referring to like their residence? Like your own?
Jeff Malec 50:56
Yeah, or owning REITs? Or owning? I mean, maybe I’m in a weird spot of the people I know, of, like, I own these buildings. And this and, you know,
Phil Huber 51:04
yeah, I mean, I mean, I think it’s one of those I mean, real estate’s probably is older than stocks and bonds. So for some, it’s like the original asset class. Yeah, I think for most people, their, you know, access point to real estate is through publicly traded REITs. And so that by and large, I think if you just own like a total stock market index fund, you’re getting some allocation to reach there. So again, that’s a very kind of, depending on who you ask, it may or may not be an alternative, I would say, private real estate would definitely be more in that alternative bucket, just given the liquidity involved in it. And I think what you see, you know, and I mentioned this in the book is, the growth of alternative property types is grown significantly, and actually more so I would say, in the public space than in the private space. So things like cell towers, and data centers that are, you know, more critical to kind of digital infrastructure are a huge component of publicly traded REITs today, and then you’ve got just a lot more breadth of other types of property sectors outside of like the core for like, you know, multifamily and office and, you know, industrial and retail you there’s self storage and medical office and life sciences, buildings, and just a handful of other categories. So depending on what sectors within real estate, you might be trying to access, it might not be one direction or the other, whether you focus on public markets or private markets. And I think for a lot of folks, there could be an opportunity to blend the two together, because you don’t have to be in one camp or the other could be, you know, complementary benefits to having a public and a private market in a real estate allocation. So I would say like the, you know, for for clients that own a handful of building, maybe it’s apartments that they rent out, and that’s kind of something that they can manage, you know, more day to day operationally like that. Yeah, certainly serve as a real estate allocation. But I, you know, not many individuals are operating, you know, data centers, you know, yeah, there’s a again, for those so that just because somebody has significant real estate holdings doesn’t mean they shouldn’t have some allocation to publicly traded REITs because there’s might not be as much overlap as they think they’re in terms of the underlying asset exposure.
Jeff Malec 53:13
And when I hear publicly traded REIT, I think shopping mall thing, death, right. So, like, those got crushed. But you’re saying they’ve kind of morphed and now they’re
Phil Huber 53:23
like, yeah, like, I think if you looked at just like the broderie indices today, like they’re all at half or more in what most would deem to be alternative, like property types. So it’s, if you just started looking under the hood at like a top holdings and like the cap weighted, you know, REIT ETFs. Like you’ll be surprised how little there is and things like malls and retail and you know, office and things like that. So,
Jeff Malec 53:51
next up, so I’m going fast style premia so quickly extent explain what that is. I usually think of it more in terms of the banks giving access, but I guess you’re saying a lot of individual investors can get some access.
Phil Huber 54:06
Yeah, I mean, there’s plenty of asset managers, whether it be you know, AQR, some of the other shops are really even Blackrock or, you know, Vanguard might surprise people, they’ve got kind of style premium oriented type funds. It’s me that’s just multi asset multifactor Long, short type strategies that try to capture in a very sort of pure way. Very commonly known factors and investment styles, things like value, momentum, quality, carry, you know, low volatility, those sorts of things and that, you know, in doing so, not just an equities but ending on the fact that you’re looking at it might be applicable in interest rate markets, credit currencies, commodities, etc. And so, you know, trying to do so in a very diversified fashion. Understand that there’s, you know, plenty of history supporting both data supporting their results, but also kind of economic intuition as to why these styles should work overtime. And then the ability to implement it in a long short way would just be kind of stripping out and hedging out hedging out that market bit and being left with kind of that pure style exposure as a diversifying asset. So that’s what’s meant by style.
Jeff Malec 55:21
Yeah, I think that the tide went out a little bit on those in March 2020, right lap got smacked a lot of investors, I know, like, oh, well, someone basically needed to be managing that, instead of just putting a couple chips down on each of these things. When it all went down at the same time there. It was a was an issue. But
Phil Huber 55:41
yeah, the lesson learned there, I mean, would be that these types of strategies, and this goes for a lot of other alternatives to they’re, they’re not a panacea, they’re not a silver bullet, they’re just going to make money in all markets. And so I think they were much like any, you know, holding in stocks or other asset classes, these are, these should be viewed as kind of long term, if you believe in them, they should be long term investments, and that short term trades, because, you know, if you’re just viewing them, viewing them in the short run, you’re gonna, inevitably just be disappointed at some point. So I think there’s some validity to that a lot of these discovered backers kind of post academic publication. And as they become more widely known and adapted, like, you see some decay in that in that premium, but I think the handful that do have staying power, you’ll see some degradation that in the future returns, but not enough to make them totally disappear, provided that they’re supported by some sort of, you know, risk premium or Behavioral Anomaly or structural, you know, impediment that would make it unlikely for it to go entirely. I think what happens is, you see, you can see some pretty bad years, but I think that is almost a necessary evil when it comes to these types of strategies. Because if they if they never had a poor run even more money with Russian, yeah, and then we get arbitrage away a lot quicker. So I think you have to, you know, know, going in, you’re gonna have some challenging times, but depending on your confidence level in the in the diversifying nature and future expected return potential of some of these, like, you know, there’s could be a strong case there, especially now, after they’ve come off a little bit of a tough stretch.
Jeff Malec 57:25
No, yeah, I think and you mentioned in the book, the resolve paper that was kind of pointing out, like, once a factor becomes known becomes, I don’t wanna say useless but less useful, as all the money floods in and kind of takes away the premium of that factor.
Phil Huber 57:38
Yeah, but then eventually sort of finds a new equilibrium. Yeah, that sort of settles around. So I think we’re probably seeing some of that, you know, today, like, you know, those products became pretty popular for a number of years. And lastly, your was, it was a tough one the year prior was a tough one. But if you look at most of those in 2021, it’s actually been a pretty strong rebound. So again, you get you kind of have to stick with it, to benefit from the eventual
Jeff Malec 58:04
recovery. Love it. Cat bonds, so I’m not sure if you listen to my pod with Chris McCann, and Vantage risk.
Phil Huber 58:13
No, I haven’t yet. But I saw that on there. So that’s, that’s my cue. I want to check. Yeah, I’ve always been super interested.
Jeff Malec 58:17
I’m friends with someone in that space. And I’m just like, Did you pay out? Did this hurricane pan? No, did this one no. So most like, you guys got the best job in the world, you sell this stuff, and you never have to pay up. But he sent me straight on how that all works. But just from an allocator standpoint, how do you how do you view those? Yeah, we
Phil Huber 58:37
view broadly speaking, like ILS insurance and securities is one of the few truly structurally uncorrelated diversifiers. That exists. There’s not many asset classes out there, like that, like that, that have very unique return drivers that are, you know, wholly unrelated to financial markets. And so, you know, we’re advocates of incorporating a portion of the portfolio to ILS based strategies. There’s a handful that are available in 40x format that, you know, advisors and their clients can access, depending on the liquidity preferences. There’s, there’s a number of different types of ILS out there, there’s cap funds, which represent the more liquid part of the spectrum. And so you can offer that in a daily liquid mutual fund. And then there’s things like quota shares that are illiquid annual contracts, that obviously you can’t really just own a ton of inside of a daily liquid. So interval funds are generally a better vehicle for that type of strategy. So depending on whether you wanted to emphasize cat bonds or quota shares or a blend of the two that might influence your, your product selection there. But regardless, we think we think there’s merit to the category inside of the portfolio just again, it’s not a hedge. It’s a diversifier like there’s environments where you can have negative returns and stocks and negative returns and reinsurance depending on whether you know, a big catastrophic event coincides with an equity market drawdown but generally it’s It tends to be pretty diversified. And that, you know, a spike in rates or, or session is not going to trigger her earthquake or hurricane or something like that.
Jeff Malec 1:00:10
And the scary thing for investors, right is it’s binary, you either make a yield, or you lose the whole investment, right? For the most part depends if they have different pieces. And yeah, depends
Phil Huber 1:00:21
on the underlying portfolio construction. But yeah, certainly, you want to be highly diversified in the category as well.
Jeff Malec 1:00:27
And then you handle that from your side by just portfolio sizing, right? Like, yeah, we’re not going to
Phil Huber 1:00:33
how do we size the portfolio, and then making sure that the funds that we’re going to use our properly diversified in currently as well?
Jeff Malec 1:00:40
Love it. And then next, real assets. So always a line item on all the endowments and pensions, but a sell me if you could on why I should use real assets instead of just a healthy dose of commodities, trend following commodities. But yeah, I mean, you could you could do
Phil Huber 1:00:58
both, I think it boils down to investor objectives. So things like farmland and timberland and infrastructure, you can you can access those private asset classes through interval funds today. And so that’s going to be a much more kind of stable, lower volatility return profile, higher income component, whereas like you mentioned, something like trend following commodities might be a nice, inflation sensitive type of asset class, I think there’s room for both in a portfolio, I think the mix of those and the preference maybe for would depend on the investor and mother there can tolerate more volatility or more focused on stability and income. So I don’t think they’re mutually exclusive by any stretch, but I think just both maybe components of a larger real asset program that, you know, aims to deliver positive real returns and have a higher degree of inflation sensitivity in stocks and bonds.
Jeff Malec 1:01:52
Yeah, my issue with that my view, kind of some of those real assets, especially infrastructure is like pro cyclical, right, needing a strong economy where the other side will usually do well, if there’s a weakening economy, a recession, etc. So it’s a little bit like, yes, it’s kind of a pro cyclical inflation hedge.
Phil Huber 1:02:12
Sure, yeah. And it just, again, speaks to the benefits of it doesn’t have to be either or there’s maybe together that maybe kind of insulates you a little bit there.
Jeff Malec 1:02:24
And now, you had so many of these were trying to go through them. So I got five more if you just do a quick sentence or two and not
Phil Huber 1:02:30
sure. Yes. I won’t go too long.
Jeff Malec 1:02:33
Yeah, no, I love it. There’s so many good ones. I wanted to touch on this. So private credit, we touched on it briefly used to be peer to peer lending, like just how do you view it in general?
Phil Huber 1:02:43
Yeah, there’s a few different areas within private credit, it could be middle market, direct lending, so kind of, you know, we think of that as like a just a private version of non investment grade credit. So in our view, a better alternative to credit than high yield bonds or syndicated loans, more of a yield premium, and less marked market volatility with stock markets. So but beyond middle market, direct funding, there is like you mentioned peer to peer marketplace lending, it’s more consumer small business focused, and then even areas like nit kind of niche credit. That looks to areas like litigation, finance and intellectual property royalties. There’s a wide gamut within private debt. But there could be some interesting opportunities for investors there.
Jeff Malec 1:03:27
The general idea is higher yields, and you’re going to get with corporate bonds or government bonds. Collectibles, so this this include we’ll go, we’ll talk about NFT. Separately, but collectibles, we’re talking comic books, gold coins, or is that undergo
Phil Huber 1:03:45
anything these days, I mean, there’s so many, it’s crazy, the types of assets that are becoming popular within collectibles, like things like you know, seals, video games is becoming a popular category. And trading cards has always been a big one. But like apps like rally and others like it, there’s a pretty wide spectrum of collectibles out there now. So this is not an area that we allocate to for clients at the moment. I just think it’s me, it’s an interesting like, this is part of a chapter I had in the book and when I view to be kind of, you know, the future of the potential future investable universe, you know, things that are a bit novel today that might become a bit more mainstream as time progresses, but are too early stage for us to consider for clients. But there are some cool, you know, platforms and apps out there that, you know, if I do this a little bit personally, it’s kind of like I’ve orality accountants, it’s fun to go on there and kind of pick different assets.
Jeff Malec 1:04:34
The dispersion could be returns
Phil Huber 1:04:36
are all over the place depending on the asset so I try not to get too concentrated or it’s a pretty small part of my overall portfolio, but I think it’s a it’s kind of a fun hobby area.
Jeff Malec 1:04:47
A fine art.
Phil Huber 1:04:50
Yeah, fine art to kind of learn, maybe, you know, you could kind of put that side by side of collectibles like, not for most people, but you’re starting to see the emergence of some kind fin tech platforms offering again not the ability to house the art inside of your home, you’re not owning the full piece, you’re kind of owning a fractional share of a expensive piece of artwork. But, you know, there’s some history of art being a pretty, you know, good diversifier and strong returns for kind of blue chip art. So it kind of a similar area more FinTech, today and more for the individual if they’re interested, but, you know, a lot less a part of our personal lives.
Jeff Malec 1:05:27
Too much shared home equity contracts.
Phil Huber 1:05:31
Yeah, just kind of this idea that a lot, a lot of people are sort of house rich and maybe cash four times are or just find a better use of the unlock some of the liquidity in their home equity. And so there’s a few companies out there trying to facilitate this, where you’re selling off a portion of the upside participation in your, your houses appreciation, and you get some immediate liquidity and that can just potentially, you know, dealer, you know, deconcentrate your balance sheet a little bit and maybe use that liquidity to for other purposes. And so this idea that, you know, we finance pretty much everything else in life with the option of equity and or debt. But with homes, it’s always been tough. So I think this is an interesting, new area, but pretty early stages.
Jeff Malec 1:06:13
And lastly, income share agreements.
Phil Huber 1:06:16
Yeah, kind of similarly, like, as opposed to somebody financing their, their, their education through that it’s almost financing through equity in themselves. And so I think, particularly in some areas, like nursing are coding and coding schools there, it’s an interesting area that could see some growth as an alternative to the borrower to taking on student debt. And then from an investment standpoint, it can be a potentially diversifying type of exposure as well. And then
Jeff Malec 1:06:47
the infamous or famous right of with athletes that this is done, but that has a little bit of a politically charged, you know, this is indentured servitude, and all of this stuff. So I think there’s a, there’s a moral hurdle to get over there as well. And maybe not for everybody. And just talk through like, so all these things, the goal is, we can’t get yield anywhere, right? We need yield. So all these new avenues, and some of them aren’t new, like you said old wine and a new bottle, but all of them are there to to generate the yield. That’s not their normal stuff. Yeah, you know,
Phil Huber 1:07:21
people are looking for yield, return potential diversification, all the things that they’ve always looked for, they’re just harder to come by in traditional markets today, you know, what I hope like him to do in that middle section, part of the book, where you get the different chapters and all different categories is really to take readers through a past, present and future of alternatives, progression, and try to make it as comprehensive as possible. So it was by no means was meant to be a blanket endorsement of every single category that I wrote about it was more just kind of give, give the reader the information they need to, you know, at least make them more informed, you know, evaluate the pros and the cons make it somewhat, you know, balanced. But I think I think hopefully that kind of came full circle, this idea of your yours. Here’s our alternatives, where here’s where they are today, here’s where they may be going in the future.
Jeff Malec 1:08:07
Yeah, just it stuck in my brain, like, would we have gotten from here to there? If rates were 7%? Maybe not. Right? Maybe some of these platforms never get funded? They never get off the ground? Because I don’t need it. I’m getting I’m getting an actual savings right at my bank. Exactly. So maybe, maybe that was the fence unintended consequences in a good way of, okay, we’ve created all these jobs and platforms for people reaching for you. So I guess,
Phil Huber 1:08:34
I guess a lot of the Fed to think of my books to success, exactly.
Jeff Malec 1:08:42
digital assets, we could spend a whole nother part on that. But just from your standpoint, like personally, and as a firm, are you guys recommending them? Do you put investors into them? Are you just on top of it? Because it’s being talked about?
Phil Huber 1:08:57
Yeah, I personally invest in crypto. To date, we have yet to recommend it for clients. I think there’s still a bit of a gray area where we’re actively having conversations and exploring it with clients. You know, there is, you know, obviously, as you would expect, when prices are doing what you’re doing, you know, we get a lot of inbound questions and inquiries from clients about the space. I think the challenges come from implementation standpoint, I think there’s some features that we don’t really particularly care for, and some of the kind of 40 Act products that are out there or the ones that traded the major custodians, you know, obviously the SEC has yet to prove a spot Bitcoin or spot either ETF and so I think for you know, depending on whether it whether it’s tax related or slippage related to the underlying spa performance and in the futures based products, have some flaws there that might not make them appropriate vehicles for clients. The you know, sort of gray scales of the world with premiums discounts that have impacted performance materially, and maybe the higher management fees like that, that can be a bit of a challenge, I think, you know, by and large, the thinking is that, you know, if their clients want to go into this category, like we need to properly arm them with education and have them better understand what they’re getting into, other than my neighbors getting rich off, this seems to just do nothing but go up. And at same time, I think we want to make sure that we’re not just like sending them off, like, you know, it’s one thing to say, hey, well, if you’re interested, go up and open a Coinbase account or Gemini accounts, that’s the most efficient way to get exposure, because then they might, you know, go on that account and buy some bitcoin and they might say, Oh, like this Shiva, you know, coin is doing really well, maybe I shouldn’t, so that they can go down a rabbit hole pretty quickly. So I think we’re actively interested in offering an on ramp to clients that are interested, and potentially having more visibility internally and what’s going on there, maybe providing more guidance around allocation within the Digital Asset space. But we’re not at a point yet where we’ve kind of drawn a line in the sand that we do or do not advocate this in client portfolios, but setting it is not quite at the level that other you know, strategies are at within our alternatives. sleeve where we think we’re comfortable making a blanket, yes or no endorsement on behalf of all of our clients. I think it’s it can be very client specific still. Not for everybody, I think we’re just we get to find comfort level and the most efficient way to get access. So I, you know, it’s a hot topic of conversation internally, within our Investment Committee, we’re spending a fair amount of time there, but you know, time will tell what we end up doing there.
Jeff Malec 1:11:37
And I, you know, in the book is just the latest, I’ve seen a lot of these have like, Oh, if you put two and a half percent, or 2%, or 5%, or whatever, and rebalance, like it’s always awesome. Yeah, I’m like, Well, if it had gone, if it goes completely to zero, all you lose is the 2%. So I can see that logic. But I’m also like, what if you did that with this biotech stock? Or right, like, I think back to my sports, gambling days of right, if you always do tenting parlays? Yeah. If you hit one the returns great. If you don’t, you’ve just keep wasting 2%. You know, Dana?
Phil Huber 1:12:12
Yeah, like, you certainly wouldn’t want to have half your portfolio in these sort of asymmetric iPads that have sort of, you know, more binary type outcomes.
Jeff Malec 1:12:21
My point is, yeah, I don’t even know if you want 2%? because it adds up. Right? Like,
Phil Huber 1:12:27
again, it’s the it depends on your strength and conviction of the the underlying invest investment thesis of crypto or bit new Bitcoin more specifically, depending on how you’re looking at it. So yeah, you know, not for everybody, but it does, you know, again, it’s a limited data set, it’s still a very nascent asset class, and, you know, there’s no, you can’t just extrapolate what’s happened over the last 10 years into the next 10. Like, it’s largely going on that look, the same way that we can, you know, be honest with ourselves. So, you know, the future still uncertain there that there could be a lot of opportunities still, but you just don’t have the same type of historical evidence that we can examine with other asset classes. Agree.
Jeff Malec 1:13:07
So along those same points, and the book with some portfolio construction ideas, the one I latched on to is the 1010 Was it or was really 1010 1010 1010 10.
Phil Huber 1:13:21
Look at that I borrowed that from Ross Stevens, he’s the CEO of Stone Ridge, asset management. And that’s really just kind of a simple framework. It’s not necessarily like what we do or what someone has to do. It’s just like, if you’re kind of, you’re new to alternatives, and you’re trying to figure out like, okay, like, we’ve now reviewed, like, 20 different, however many questions throughout this book, like, how do we make sense of all this? Like, right, that’s
Jeff Malec 1:13:44
my problem of like, I like it all, how do I do it all.
Phil Huber 1:13:47
And that’s where the challenges can lie. And it’s, you can get really, too cute too quickly, in terms of trying to, like optimize, at the end of the day, if you’re saying my entry is 10%, or 15%, or 20%, portfolio, two alternatives broadly, you know, at the end of the day, like the whether you to do 2% Here, or 3%, to the swan, like it’s going to matter less if you’re trying to if you’re trying to incorporate a pretty broad swath of alternatives. It’s hard to argue with something simple, like an equal weighted approach, not see as the right answer is just at least from a from a framework way of thinking like, hey, I want to I want to find ways to improve the diversification of my portfolio. Whether I do 10% 20% or 30%, let me just think about the alternative separately for a minute. And just think of this idea of like, there’s power to having diversifying components in there. So let’s just try to collect 10 different risk premiums, each sort of intuitive, each that can deliver different types of return trains and let me just, you know, equal wait them out. Okay. So that’s one way to do it. It’s not necessarily the right way and just kind of want to
Jeff Malec 1:14:54
point 50 of them at 2% rise. There’s some lower bound were like okay, this it’s not a meaningful exposure.
Phil Huber 1:15:00
But the idea is like start to go beyond 10. And maybe you’re starting to get a little too thin and not material enough. You know, maybe it’s sort of such as idea, like maybe not putting all your eggs in one or two different categories and spreading it out a little bit more. So I think it’s a helpful framework to get somebody started maybe isn’t in the weeds quite yet. But, you know, there’s certainly other approaches you could adopt as well.
Jeff Malec 1:15:25
And what Sam, like I want to invest in everything in the book, what’s my account size got to be like some of these, even though they’re available individual investors, it might be at a million dollar minimum or? Right, so do you have any thoughts on what that account size would look like?
Phil Huber 1:15:42
It’s talking because I mean, the night we wouldn’t even necessarily recommend that, you know, someone do everything in the book. Yeah, I think the depending on whether you’re a qualified purchaser or an accredited investor, that, you know, if you’re under those requiring levels that might limit your universe of opportunities, at least today. So things like hedge funds, and private real estate and private equity might be off the table for you. There’s, I would say, for the kind of bulk of the chapters and section two of the book, things like alternative risk premia, alternative credit, real assets, insurance and securities, you know, by and large, you can implement that today with 40x, you know, mutual funds and interval funds. And so those don’t have credit investor apart requirements. So you don’t have you know, portfolios of most sizes could have could accommodate most, or all those kind of core alternatives.
Jeff Malec 1:16:35
And then I have to mention, on behalf of all my long ball friends that they probably view, especially that pie of 10% in each was in my mind, like 90% offense 10% defense, with the 10% defense being managed futures, which isn’t even necessarily always defense.
Phil Huber 1:16:51
But I think I’ve seen from Chris Cole at Artemis, he’s got that just basically like everything. Like instead of there being like, dozens of asset classes, everything’s either short ball or long haul. Yes, exactly. Yeah, I think I think that would make for a pretty boring periodic table. Arrow chart, sure. short ball long ball, but
Jeff Malec 1:17:10
but the investors like I’m right, at the end of the day, they might need some of that long, but they need something that’s going to do well in all those other no matter, you know, because it’s vanilla, Caramel Swirl, vanilla, chocolate chips, vanilla with this, right there, if they all melt at the same time, you need that defensive piece.
Phil Huber 1:17:26
Yeah, I think trend following can be a good component there. I think something like insurance and securities, like it’s not a hedge, it’s not something you’re going to like bank on, it’s going to do well, when equities are doing poorly, I think it because it’s uncorrelated enough that, you know, it can be doing quite well. And I think to what we’re advocating in the book is not this idea of just get rid of the 40 altogether from a 6040. It’s sort of just like, let’s be emphasize it. But you know, at the end of the day, if we if there’s a you know, depression type scenario, or a huge deflationary type, you know, environment that, you know, could still be in an area where high quality fixed income and treasuries, you know, do quite well. So we still want to own some maybe not perhaps as much as we’re used to owning and prior decades.
Jeff Malec 1:18:13
And then, last bit, the last chapter, you talk a bit about the advisors struggles with all this right? And what you mentioned before of the I had the wrong numbers, but you’re saying 80% of his time on 20% of the allocation? Yeah, this is my, you know, no, but I’ve run into that before. And we’ve actually sold all this before, like, Hey, let us RCM help you. Right, you don’t need to spend 80% of your time on this will help educate the clients for that 20, you know, 10 20%, but just doesn’t that part need to come first, like this, you need to fix the advisor part where they can achieve,
Phil Huber 1:18:49
it definitely has to come first, which is funny, because it’s the last chapter in the book. But
Jeff Malec 1:18:54
I didn’t mean that kind of first, but just Yeah.
Phil Huber 1:18:58
I think the reason I placed it there, I thought it was like a an appropriate closing word for the book to talk about communication techniques for clients. Because at the end of the day, regardless, if you’ve read the entire book up to that point, and you buy into everything that I’ve said, it’s kind of all for nothing if you’re not equipped with the confidence, to be conversant in these strategies and to get your clients comfortable with them, unable to stick with them for the long run. Otherwise, it’s all for nothing. So I think it’s the only way really to close out because that’s the final necessary step to make you an effective allocator using alternatives is you’ve got to have this ability to, you know, simplify the complex to make the unfamiliar, familiar, and to sort of translate these concepts and ideas in a way that your end client can understand and interpret and get on board with. So I think that was really the focus and trying to tie it tie up on things there was you know, we understand why 6040 has been a security blanket for for investors and for advisors. And we know why it’s been so difficult to get off of that. Let’s evaluate some different ways you can try to communicate these strategies so you can, you know, get out there and feel comfortable making it.
Jeff Malec 1:20:15
And lastly, where can they get the book? Where can they find you?
Phil Huber 1:20:19
Sure. Yeah. So the release date for the book is November 30. So just under a month from now, you know, Amazon is primarily where most people I assume are gonna order from Amazon, Barnes and Noble to if you happen to shop, they’re happy to entertain and if there’s an interest in a full quarter for any reason, we can talk directly with my publisher there. You can find me online at on Twitter at Lipson pieces, BPS and pieces is my handle. It’s also the name of my blog bits and pieces cam. Our firm is about wealth management and our website is sabbatical calm. So generally, that’s where you can find any. If you’re interested in learning more, I keep my DMs open if you have any questions, but yeah, just very much look forward to the book coming out here soon. And hope you all
Jeff Malec 1:21:10
awesome and we’ll put all that in the show notes of where they can get all that good stuff too. So we finished about the pods with some personal favorites. Quick, rapid fire. You ready? Alright, let’s do it. Favorite professional wrestler.
Phil Huber 1:21:29
favorite all time Shawn Michaels favorite currently Brian Daniels?
Jeff Malec 1:21:33
Well, I know neither of those guys, wherever they’re wherever their screen names or their stage names.
Phil Huber 1:21:38
That was so Shawn Michaels was the Heartbreak Kid Shawn Michaels. That was his screening. Bryan Danielson you might have known him as Daniel Bryan he was the yes guy. Oh, yeah, yes chance but anyway, so he’s a different company now. So he’s got to go by his real name. So the WWE name so his real name happens to be Bryan Danielson.
Jeff Malec 1:21:57
You’re too young to probably remember. I think his name is Terry Taylor the rooster or not.
Phil Huber 1:22:02
I know I remember the Red Rooster.
Jeff Malec 1:22:04
He went to Vero Beach High School in my hometown Vero Beach. Play my favorite. And then of course I’ll Cogan you gotta like hawk and superfight suka was one of my favorites
Phil Huber 1:22:15
when I grew up, you know, kind of in the 80s era and early 90s area for wrestling. So that always holds a soft spot for me.
Jeff Malec 1:22:24
Favorite quote in the book you have all these every chapter begins with some great quotes it was it like a labor of love to pull all those are you had those in a notebook your whole life? All the intro?
Phil Huber 1:22:34
Quotes man, I don’t know if I have a favorite. But I will say that was one of the more fun aspects of the book was like trying to find quotes that were relevant. Like the each chapter starts with two or three quotes. And my goal was to make them sort of implicitly about investing and the topic of the chapter, but not explicitly. Yeah. And so it was kind of fun to search around and dig for those. And I thought there was a few, a few good clever ones in there. So without spoiling too much, hopefully, that’s a nice easter egg for the potential readers
Jeff Malec 1:23:06
for sure. So you don’t have a favorite. You have a favorite that didn’t make it in the book.
Phil Huber 1:23:10
Oh, maybe my favorite was for chapter two, which is about the site. The whole chapter is about alternatives being a loaded word. It was that that that quote from The Princess Bride, which is that word doesn’t mean what I think
Jeff Malec 1:23:22
you think, like me go Montoya. Yeah, exactly. Favorite investing book. It’s not your own? No.
Phil Huber 1:23:31
I’ve actually written a blog post on this my favorite investing book. And it’s a very, it’s not necessarily a book for novices. But it’s expected returns by anti dominant who now works at AQR was previously at Revin. Howard, I think when he wrote it, just a very thick, you know, that’s textbook on asset allocation and portfolio construction. And alternatives. It was very much a deep dive to me and a lot of the things that I, you know, just found very interesting. And so I think, more than any other book, it kind of changed my thinking about what goes into building thoughtful, well diversified portfolios that are built for the long term so that you know, that book is very much influenced me and not necessarily something I would call retreating, or something I would I would share with like end clients or you tell investors but for professional allocators, I try hard to think of something better than that favorite Chicago pizza place and I would I mean we we’ve been in the birch for a few years now and so our pizza selections not as great but back to my city days I would say you know whether Spaccanapoli and peace and peace quads those are all a few that I liked over the years but in terms of what we’re getting now for is getting delivery the house. Party go wrong with thin crust. Luma Luma
Jeff Malec 1:24:53
um, yeah, P quads is the only right answer although I think they changed owner someone said it’s not as good they said um and Lastly favorite Star Wars character.
Phil Huber 1:25:03
Oh man, you’re gonna kill me here so as much of a nerd I am with professional wrestling I have to admit I’ve actually never seen the Star Wars
Jeff Malec 1:25:11
never one but surely you know some of the character
Phil Huber 1:25:13
yeah so I guess I can just I’ll go Han Solo cuz I don’t know anything
Jeff Malec 1:25:19
he’s cool he gets the job done
Phil Huber 1:25:23
though he’s I use my entire nerd a lot and I’m wrestling I didn’t have any nerd leftover for any other you know, hobbies.
Jeff Malec 1:25:30
And then did it Mike morphed into MMA Are you sticking?
Phil Huber 1:25:33
Pretty, pretty discipline?
Jeff Malec 1:25:35
Got a well, thanks. Well, it’s been fun. We’ll look you up next time around North Shore there and grab a coffee or something and looking forward to seeing the book coming out.
Phil Huber 1:25:46
Thanks a lot, Jeff. I appreciate you having me on. Thank you
