TOL - 24th Sep, 2024
Building a robust portfolio from the best ideas of Livewire Live 2024
We ask two leading asset allocators hey they are shaping portfolios in the current market.
Imagine you have $1 million (or more, if you want to really dream big). Sounds like a nice dream, doesn't it? But you know what sounds better than $1 million? $2 million. Or $3 million. Or $10 million.
In order to accumulate that kind of money, it pays to be a shrewd investor, appropriately diversified across a range of asset classes. We've made that often challenging task a little bit easier, with the help of one of Australia's leading financial advisers and one of the country's top wealth managers.
At Livewire Live, James Marlay sat down with Alexandre Ventelon of Morgan Stanley Wealth Management and Charlie Viola of Pitcher Partners to answer your questions about asset allocation and give you some tangible ideas on how to apply the lessons and insights from a full day of fantastic conversations. This panel summarises their views.
Ventelon and Viola's takeaways
Ventelon's three key takeaways:
- The growth vs value debate is alive: "What is good is expensive and what is not so good is very cheap. And so it depends on how you want to position and where you're going to try to find earnings. I think that's important at this stage of the cycle."
- Appetite for AI and private markets remains very strong
- The opportunity cost of not being invested is as high as the reality we are likely late in the economic cycle: Remember, the S&P 500 is up 18.5% this year.
Viola's three key takeaways:
- AI "scares the sh*t out of me" - The comment was in reference to a story Munro Partners CIO Nick Griffin shared on an earlier panel. Griffin's story, in short, involved a robot changing a light bulb. But more than that, the bigger takeaway from the AI story is that "bigger is better." As Viola put it: "It's looking for those companies that have got the capital and have the ability to get it done."
- No one agrees where we are in the "bubble" - "[Having] a personal view around that is important. Asset allocation is really important and making sure that you're holding good quality assets, that you understand what they're doing and they keep pushing cash into your bank account," he said.
- Finally, when asked, "How are you putting portfolios together?", Viola provided the following response:
"Honestly, let's just roll Todd Barlow from Soul Patts and have him explain exactly what they do."
"He went through a process of explaining that they put portfolios together by having a good base of good quality, large-cap equities, that are producing revenue.
They have some powder dry to take advantage in private markets. They do lots of due diligence in private credit.
They make sure they hold the best quality assets through the cycle, generate revenue, and look for earnings growth.
That's how you put portfolios together - asset quality diversity, hold some powder dry and just hold really good quality assets and make sure that they're generating revenue."
To hear more from Soul Patts, you can watch this interview between CEO Todd Barlow and Bell Potter's James Unger:
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What follows for the rest of this wire are Viola and Ventelon's responses to audience questions.
What is the most "sensible" asset mix for the next two years?
Viola said that his clients tend to invest with a 50-year time horizon in mind, rather than chasing any hot new thematic. Nonetheless, beyond the obvious of being long equities over the last two years, this is how Viola and his clients are investing:
"We're looking to take some value. We, like everybody else, feel like some of the risks are tilted to the downside.
We have had a reasonable exposure to private debt, which now we are moving away from and starting to take a little more exposure to private credit because we believe those good quality companies who are taking on that debt can grow."
When pressed for percentages, Viola said:
"I think once upon a time, portfolios were all made up of 60%-70% equities. And it's just really because you could have just bought Commonwealth Bank (ASX: CBA) and BHP (ASX: BHP) shares and had good returns since 2009 because markets have done nothing but go up."
"We are down to more like 30-35% in equities. We've got probably private debt and private credit exposures of 10-15%. We're holding a little bit of powder dry. We do expect that there's going to be a bit of dislocation. We do expect there's going to be some weakness and opportunity come along and we want to make sure that we are there to be able to take that. And we're looking at the rest on a case-by-case basis, looking for good opportunities in private markets, which make up the other 25-30% of the portfolio."
When is the right time to use ETFs?
Ventelon says there are three main times to use an ETF in a portfolio:
- As a core position in markets where outperforming is difficult (e.g. Australia)
- As a tactical macro play to express a view on a particular country (e.g. Japan)
- As an expression of style (e.g. growth, value, or quality)
As for when is the right time to use passive products versus active products:
"Where we have more passive investments is often in fixed income, where we want to retain the duration positioning and the split between credit and government bonds to make sure that we have the exact right exposure.
"I think within equities, it's good to have a mix but I think direct stocks are fantastic.
If you want to have a long-term holding of a company where there's a structural long-term story, that can add a lot of value to a portfolio as well. And they (direct stocks and ETFs) all can co-exist within a portfolio," Ventelon said.
Viola added that another time to use ETFs is when there are deep sell-offs in markets. After all:
"The reality is that you probably don't need to take the thematic risk or the stock-specific risk at those points in time because if everything's been sold off, then everything's been sold off," he said.
What is the most important trend happening in wealth management?
Over the last 20 years, credit managers have grown by the dozens as ex-investment bankers have found a new and smart way to make money. The only problem? You'll never meet a dumb manager (obviously.) Viola says the most important thing is to do your due diligence - ask good questions and get to the crux of why they are making the decisions they are.
Ventelon offered that moving into private markets is the most important trend. As he put it, "we looked at what Yale was doing, then the Future Fund got inspired, then the super funds et cetera, all loaded up on private markets."
When is too much of an allocation to private markets a bad thing?
To cut a long story short, "too much" often only becomes apparent when the sell-off is happening and the liquidity withdrawal window has already shuttered.
"When there's a deep sell-off in markets and in some of these funds that had evergreen monthly liquidity, but then get gated and you get a liquidity window six months or one year later, et cetera. And you don't know the NAV that you're going to get," Ventelon said.
And this, Ventelon reminds us, leads back to a fundamental question that every investor needs to be able to answer.
"For every investor, it's very important to know how much liquidity you're going to need by when. And that's the one question that we ask all our clients to [work out] before they invest money," he added.
But what is the right allocation?
Ventelon said that the average investor in Morgan Stanley's client base tends to only have a little bit of their portfolio in private markets.
"We like to own, for an average balanced client, probably around 5 to 10% in illiquid assets, but we have a lot of Charity Endowment Foundations that would have probably 30 to 40% or even more," he said.
Viola shared a different take, arguing liquidity is not as much of a concern.
"Our view is that those portfolios should have 25 to 35% in terms of private assets. We're not too worried about the liquidity, to be honest," he said.
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Hans is one of Livewire's senior editors, specialising in global markets and economics. He is the creator and presenter of Livewire's "Signal or Noise".
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Hans is one of Livewire's senior editors, specialising in global markets and economics. He is the creator and presenter of Livewire's "Signal or Noise".
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Hans is one of Livewire's senior editors, specialising in global markets and economics. He is the creator and presenter of Livewire's "Signal or Noise".
Expertise
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