May 22, 2025 • 38 mins
The specter of stagflation—sluggish economic growth combined with persistent inflation—looms large in today's uncertain economic landscape. While Federal Reserve Chair Powell once claimed to see "no stag and no flation," current indicators suggest otherwise. Economic growth appears to be slowing after an extended expansion, while inflation remains stubbornly above target levels. Adding to these concerns, potential tariffs could exacerbate stagflationary pressures by simultaneously hampering growth and increasing prices.
Amid this challenging environment, conventional investment wisdom falls short. The standard 60/40 portfolio, commonly touted as "balanced," actually maintains a 90% correlation to an all-stock portfolio—hardly providing true diversification when markets face stagflationary headwinds. This reality underscores the value of risk parity strategies, which distribute risk evenly across assets that perform differently under varying economic conditions.
Gold emerges as a particularly compelling asset in this context. Contrary to popular perception, gold has outperformed stocks over the past 25 years and has nearly matched global equities' returns since 1971, trailing by merely half a percent annually. During the stagflationary 1970s, gold appreciated by approximately 30% annually, highlighting its effectiveness as a portfolio stabilizer during precisely the economic conditions many fear today.
The risk parity approach offers a systematic framework for achieving genuine diversification—not by simply holding numerous securities, but by balancing risk exposure across uncorrelated assets. This means owning more of less volatile assets and less of more volatile ones, ensuring no single economic factor dominates portfolio performance. When implemented within an ETF structure like RPAR, this approach gains additional tax efficiencies while automating the psychologically challenging process of regular rebalancing.
Ready to protect your portfolio against stagflation while maintaining long-term growth potential? Explore how risk parity strategies might complement your existing investments and provide smoother returns through uncertain economic conditions.
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Episode Transcript
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Speaker 1 (00:00):
Let's talk about stagflation if there's a risk
that we're entering that, andwhat that means on various
investments Sure.
Speaker 2 (00:06):
I think there is certainly a risk.
Obviously, we don't know what'sgoing to happen, but the risk
of growth being weak issignificant.
Tariffs, depending on how itgoes, is a tax.
Speaker 1 (00:20):
The economy seems to be slowing and we've had an
expansion for a long period oftime, so the longer term trend
for gold, is it fair to say thatstagflation is sort of the
ideal kind of environment for it?
Speaker 2 (00:30):
Gold has outperformed stocks the last 25 years and
its return since we came off thegold standard in 1971, which is
when it basically became freefloating is almost the same as
global equities.
I think it's about half apercent a year behind global
equities since 1971.
I view this as a world of greatuncertainty, wide range of
potential outcomes, probably aheightened risk of extreme
(00:54):
outcomes because of all the notjust the uncertainty with
geopolitics and US politics andpolicy, but also-.
Speaker 1 (01:02):
My name is Michael Guyatt, publisher of the Lead
Lag Report.
Joining me here is Alex Chihulyof Evoke Advisors, the man
behind the ARPAR risk parity ETF.
This is a sponsoredconversation by Evoke and I know
we've done this a few times.
Alex, I'll put your background,but I want to get right into
the more pressing thing which Ithink is increasing on people's
minds, which is the risk ofstagflation.
(01:24):
There was a juncture sometimelast year where Powell said I
see no stag and I see no flation.
I don't even know what thatmeans, but Powell said it, so it
sounded smart.
Let's talk about stagflation.
If there's a risk that we'reentering that, and what that
means on various investments,sure.
Speaker 2 (01:42):
I think there is certainly a risk.
Obviously, we don't know what'sgoing to happen, but the risk
of growth being weak issignificant.
Right, Tariffs depending on howit goes, is a tax.
The economy seems to be slowingand we've had an expansion for
a long period of time.
So, as we all know, thebusiness cycle, it's a cycle.
(02:05):
So on the growth side, there'scertainly risk that growth could
slow.
On the inflation side, inflationis sticky.
It's higher than the target.
It's been higher than thetarget for some time.
Tariffs could.
It's interesting.
Tariffs are stagflationary,right.
They hurt growth and theyincrease inflation.
(02:27):
So, depending on how that playsout, that could have an impact.
But there's also a lot ofsecular shifts that could
potentially be more inflationaryand on the other side you have
AI and the potentialproductivity gains from that.
So maybe that pushes inflationdown.
I'd say, on net, there is riskthat inflation is higher than
(02:48):
expected and if we look atwhat's discounted, it's not very
high in terms of looking at thedifference between nominal
yields and real yields, so whatthe market is discounting.
So it's not that high.
So I think there's certainly arisk of stagflation and I don't
know if it's like the 1970sstagflation, but I'd say there's
(03:08):
definitely a risk of that andwhat's interesting is, most
investors don't have a lot ofassets in their portfolio that
is designed to do well in thattype of environment.
Speaker 1 (03:18):
Well, you could argue , maybe to some extent.
Nor should they, because it's avery rare combination of macro
factors.
Speaker 2 (03:32):
Well, it depends on how you define it.
So the way I think about it isthat the two big factors that
drive asset classes is growthand inflation.
You know the thing that Fedstry to manage and you really
have to look at it relative towhat's discounted.
So, in my analysis, about halfthe time growth surprises to my
analysis, about half the timegrowth surprises to the upside
and about half the timesurprises to the downside, you
have to look at it relative towhat's discounted in the price
(03:53):
and the same thing withinflation.
So you could argue, if you'rethinking of stagflation as
growth surprises to the downside, inflation surprises to the
upside.
It happens a lot more than Ithink people realize.
If we just study it history, youthink about the 1970s as a very
clear example, and that was adecade or so of stagflation.
But there's going to be shorterperiods in history where you
(04:14):
had a stagflationary type ofenvironment and it doesn't have
to be high inflation and veryweak growth, it just has to be
less growth than discounted andhigher inflation than discounted
at the same time.
So I don't think it's as rareas the history books would
suggest.
Speaker 1 (04:31):
I think it's fair to say that that's probably largely
what gold has been sensing sortof this concern around
stagflation.
There's the constant argumentof why is gold performing well?
Gold short term tends to havethese bursts when there's
geopolitical risks you know,threat of war, you see that time
and time again.
But the longer-term trend forgold is it fair to say that
(04:53):
stagflation is sort of the idealkind of environment for it?
Speaker 2 (04:55):
Yeah, in the 1970s gold was up 30% a year.
So I guess that's a resoundingyes in terms of stagflation.
But there's other factors youknow.
So, for example, if you justlook at countries outside of the
us, if you were to interviewthem and say, of all your
reserves, do you have more?
You know, us dollars in yourreserves that you ultimately
(05:19):
would like to have, I wouldguess most would say probably.
Then do you have less gold thanyou would ultimately want to
have given the geopoliticalbackdrop?
And my guess is most would sayyeah, we prefer to have more
gold.
Now you can't make that swapquickly, but I think that trend
has something to do with gold'sstrong performance near term.
(05:39):
But I think what is?
I think a lot of people miss itbecause we've seen how well
it's done the last few years.
But gold has outperformedstocks the last 25 years and its
return since we came off thegold standard in 1971, which is
when it basically became freefloating is almost the same as
global equities.
I think it's about half apercent a year behind global
(06:01):
equities since 1971.
Half a percent a year behindglobal equities since 1971.
And if you kind of zoom out alittle bit and you look at when
in the last 54 years did it dowell?
When did it do poorly?
In the 1970s it did really well.
In the 2000s it was up doubledigits.
So far this decade, in the2020s, it's up double digits.
(06:21):
The other decades it wasterrible.
In the 80s and 90s it wasnegative.
In the 2010s, I think, it wasabout 3% a year.
So it's like boom or bust.
And what's interesting is thoseboom and bust periods are the
opposite of equities.
So equities did poorly whengold did its best and gold did
its worst when equities did itsbest.
And over 54 years it's aboutzero correlation.
(06:44):
At its best and over 54 yearsit's about zero correlation.
So I think, regardless of whatyou view what the future is
going to look like and whetheryou think stagflation will
transpire or not, it's a verygood diversifier to equities.
Speaker 1 (06:57):
Well, it's funny to me that it's true that you
always have a cult in an assetclass, the cult of equities,
cult of gold, the gold bugs butthe audiences are a lot lower,
meaning there's a lot lessnumber of members of gold bugs
than there are equity bugs, youcan argue.
And yet gold has performed verysimilarly, although with a very
(07:20):
different sequence of returns.
Why is it that gold isn't sortof more mainstream?
Speaker 2 (07:28):
Yeah, it's a really good question.
I think part of it is we.
I think we're a byproduct ofour current environment.
So the last 15 years stockshave done great.
The prior 10 years stocks werenegative in the 2000s.
My guess is is if you asksomebody who was a significant
(07:52):
investor in the 1970s, therewere probably more gold bugs
then than there are now, becauseduring that decade stocks
underperformed cash for a decadeand gold was up 30% a year.
So you probably had more peoplethat were on the gold bandwagon
than on the stock bandwagon.
And I remember in the early 80sthere was a famous article that
came out I think it wasNewsweek or one of those big
(08:15):
magazines, and it called for thedeath of equities.
And of course it was at thevery bottom of the cycle.
That was right before thegreatest bull market in the
history of stocks, uh.
But but I think part of uh,what you just described is is a
byproduct of the currentenvironment that we live in, and
my guess is it changes overtime.
Speaker 1 (08:34):
Of course, stocks have always been more popular
than gold on net, but that gapis probably uh, it probably
changes over time it probablyalso has to do a little bit with
how much you can make anarrative around it With the
narrative so many times, youknow, with variations around
gold.
But there's a lot morediversity of things you can talk
about when it comes toindividual stocks, the stock
(08:55):
market, macro, all this stuff.
So I'm wondering if it's just abyproduct of just the
storytelling.
Speaker 2 (08:59):
Yeah, yeah, and storytelling has a lot to do
with it, because we live in aworld where we tell stories.
Stories are told every day onTV, in newspapers, on the
internet, and I think we allkind of want to be part of a
story, so I'm sure that hassomething to do with it.
Speaker 1 (09:21):
Speaking about stories, there is this story of
the only free lunch isdiversification.
It proved to be a bit fictionalin this current cycle, or maybe
last cycle, but the point isit's still a cycle-driven type
of dynamic.
Let's get into what the realstory around diversification
should be.
Speaker 2 (09:39):
Well, I think you're right.
The one free lunch in investingis diversification, and what
that means is you can get ahigher return for the same level
of risk, or you can get thesame return with less risk than
if you had a less diversifiedportfolio.
So that in theory, shouldn'texist, but diversification
allows it to exist, and there'sa very simple math behind that.
(10:00):
And you're right.
We had what I call the bearmarket and diversification for a
while.
The less diversified you were,particularly in US stocks, the
better you did for 10, 15 years,and the more diversified you
were, the worse you did.
This year is almost the opposite.
So it's interesting, and whenyou look at across asset classes
(10:20):
, almost everything is not onlyup but doing relatively well,
except for US stocks, which arestill negative year to date.
And so this year is a goodexample of diversification quote
unquote working whereeverything is doing well, and so
when you ask somebody how's themarket doing, they
automatically think about the USstock market.
And when somebody asks me howthe market's doing, I respond in
(10:46):
terms of a balanced mix ofmarkets, because I always think
in terms of diversification,because you're right that one
free lunch you should alwaystake advantage of, even when you
go through periods where youwould be better off being more
concentrated, over the long runthe math shows that you're
better off being diversified,because you just get a higher
return to risk ratio.
Speaker 1 (11:05):
The thing I think most people fall prey to is the
idea that the more positions youhave in your portfolio, the
more diversified you are, asopposed to looking at it from
correlation perspectives.
I think that what you'redescribing there is basically
kind of the genesis of a of arisk, parity or permanent
portfolio type of construct, butthe challenge there is everyone
(11:28):
always hears that, but theydon't think it's the next level,
which is how do you think aboutweighting what the diverse fire
?
So let's explore that, becauseI always go back to this idea
that oftentimes what you ownmatters a lot less than how much
you own of it.
Speaker 2 (11:40):
Yeah, because you could say two extremes.
You could have a hundredsecurities in your portfolio, a
hundred line items, and if theyall go up and down together,
that's like having one line item.
So the number of securities hasnothing to do with being
diversified.
And then, on the other end, youcould have two securities and
be way more diversified thansomething that has a hundred
(12:00):
securities.
So, for example, if you justown a stock index and you owned
a tips index, that's a prettydiversified portfolio, way more
diversified than something with100 securities that are
equity-like.
So, yes, the exposure matters.
So you want things that do wellin different environments.
And then the question that youasked is the weighting.
(12:26):
It doesn't do much good to sayI've got five securities that do
well in different environments,but I've got 99% of my assets
in one and hardly anything inthe other four.
And the way I think aboutwaiting is what you're trying to
wait is the exposure to thosedifferent environments.
So you want assets that do wellin different environments and
you want equal risk exposure toall those assets, so that one
(12:48):
asset doesn't drive your totalreturns.
And the simple way to thinkabout that is assets that are
more volatile you should ownless of and the assets that are
less volatile you should ownmore of.
And the way to think about thatis you have an environment
that's good for asset A.
If asset A is very volatile, itgoes up a lot.
If it's a bad environment forasset A, it goes down a lot.
(13:11):
Asset B, which is less volatilea good environment it goes up a
little.
A bad environment it goes downa little.
So if you overweight the morevolatile asset, like most people
do they overweight stocksversus bonds then your total
return is dominated by that oneasset.
It's not a diversified portfolio60-40 is 90% correlated to 100%
stock portfolio.
(13:32):
It's basically violating thefirst rule of investing Don't
put all your eggs in one basket.
Many investors violate thatsimple rule.
So the way to think about it isown assets that do well in
different environments and thenweight them where the less
volatile assets you own more of,the more volatile assets you
own less of.
And that is what the riskparity concept is is pairing the
(13:54):
risk so that you get equal riskcontribution, equal
contribution from all theseassets, and then if you pick the
assets that do well indifferent environments, that's
how you diversify.
You know, from my perspective.
Speaker 1 (14:05):
The challenge there is, you know, is that obviously
risk regimes for different assetclasses also change, right.
So you know, as we saw, therisk in treasuries, for example,
it was a lot higher the lastseveral years than it had been
in years prior.
So how do you think about ifyou're going to normalize to
volatility or to risk across thedifferent asset classes?
What happens when you're in asmall sample where the risk for
(14:26):
that particular class may be inan anomalous period?
Speaker 2 (14:30):
Yeah, it's a good question.
So I think there's twoapproaches there.
One is you can take a passiveapproach and say you know the
average volatility for assetclass A is, you know, 15%.
Asset class B is 10%.
So I should own more of B thanA to get the equal risk
contribution.
So you can just look at averagevolatility over time.
So that's one approach which Ithink makes sense because and
(14:53):
I'll get into why so the secondoption is you can try to be
dynamic, and when volatility ishigher, maybe you own less, when
volatility is lower, maybe youown more.
The challenge with that is youonly know what the volatility of
the past is.
You don't know what thevolatility of the future is, and
you go through periods wherehigh volatility precedes low
(15:15):
volatility and vice versa.
So the challenge with trying tochange your weighting based on
your expectation of futurevolatility is you're going to be
wrong a lot, and we saw this in2008.
We saw it in Q1 2020, where youhad a period of low volatility,
and so maybe you'reoverweighting something, and
then volatility spikes and nowyou have too much exposure, so
(15:36):
you cut your exposure and thenmarkets recover.
So now you're overweighted onthe downside and then you're
underweight on the upside so youcan get whipsawed.
So in my experience 26 yearstracking investments and
managing client portfolios isthat predicting volatility is
really hard.
And you'll be right sometimes.
You'll be wrong sometimes andsometimes you'll be really wrong
(15:58):
.
And so trying to balance theweight based on your expectation
of where volatility is going tobe and that's usually informed
by past volatility it's just toohard to do, and that's usually
informed by past volatility.
It's just too hard to do.
So I prefer to just takeaverage volatility, weight it
(16:19):
and just that exercise.
It's so valuable over timebecause you're so far ahead of
most people who are not welldiversified.
So to me, the big step isbecome diversified.
You can even take averageweightings.
It doesn't really matter aslong as you're moving in that
direction.
You're so far ahead of mostpeople that if you get the
timing off by a little bit, itdoesn't really matter that much.
It's more about thinkinglong-term and having the
philosophy of how to build thatdiversified portfolio.
Speaker 1 (16:41):
How did that philosophy come about?
I mean, where did the wholeconcept of risk parity kind of
originate from?
What's the history of it?
Speaker 2 (16:46):
Where do the whole concept of risk parity kind of
originate from?
What's the history of it?
So the term risk parity isprobably a couple of decades old
.
I think of it as a balancedportfolio and I don't call it a
balanced portfolio because thatterm balanced is.
It's kind of ubiquitous in ourindustry and I feel like it's
misused.
Most quote unquote balancedportfolios are not balanced.
(17:06):
People think of it as 60, 40 isbalanced.
It's 98% correlated stocks thatby definition, can't be
balanced.
So so if you kind of go back toeven before the concept of the
term risk parity came out, thisidea of pick asset classes that
are diverse to differenteconomic environments and then
weight them where you own lessof the more volatile assets,
(17:30):
more of the less volatile assets.
I believe Bridgewater came upwith that idea probably three
and a half, four decades ago andthey've been managing money
that way ever since.
Let's talk about your riskparity ETF RPAR.
Speaker 1 (17:47):
Talk about the history of that launch, how it's
performed and maybe make thecase for why now might be a good
time for thinking about that.
Speaker 2 (18:00):
As the first part, with my clients, we're also an
RA, manage about 26 billion forwealthy families and
institutions, and thisphilosophy of risk parity and
balanced portfolios I've beenusing with my clients for 20
plus years.
I've written a couple of bookson it and it's just something
that, to me, makes a lot ofsense, and so about six years
(18:23):
ago, we figured out it'd be alot more efficient if we created
a vehicle and take the strategy, put it inside of it and get
all the efficiencies that comealong with an ETF structure,
taxes being one implementationefficiency, passive vehicle to
(18:44):
get exposure to this balancedportfolio, which includes global
equities, commodities, goldtips and treasuries, and it's
risk balance across those assetclasses and rebalances once a
quarter and it's effectivelypassive.
We have target weights verysimple to follow.
It's a very simple strategythat I think can be very
(19:06):
effective over time.
It's a very simple strategythat I think can be very
effective over time, and Iintentionally kept it very
simple because I feel theconcepts are really powerful and
so you don't want to get lostin the details.
You want it to be easy tofollow, easy to understand, easy
for people to appreciate whatthey own, why they own it and
what that exposure is.
So we launched it in December2019.
(19:31):
And its first year it did reallywell.
It was down 4% when COVID hitin Q1 of 2020.
Stocks are down 21.
It was down four and itfinished the year up 19 and
change, and so that was like avery good stress test, because
you had an economic collapse andit doesn't matter what caused
that collapse In this case itwas COVID but economy collapsed,
(19:53):
assets performed exactly as youwould expect.
Commodities and equities gotcrushed.
You know those are risinggrowth assets.
Gold tips and treasuries werein a bull market.
Those are falling growth assetsand so they reacted exactly as
you would expect.
Those are falling growth assetsand so they reacted exactly as
you would expect and theyroughly netted out equal down
net 4% in a very volatile periodand then you had the recovery.
(20:14):
So good start.
2022 was a terrible year.
That was an environment wherecash went from zero to five very
quickly.
That's an environment you can'treally diversify against
because it has nothing to dowith growth and inflation.
The cash rate went up a lot andall these assets compete with
cash and if you told me today,cash would go from five to 10 in
(20:37):
six months.
I tell you you don't want to bein a diversified portfolio
because it's probably going todo poorly, and so 22 was a
terrible year.
So far this year, it's been apretty good year.
Uh, as I mentioned,diversification is working Um
and in, and I think, if you lookforward, uh, I I view this as a
world of great uncertainty,wide range of potential outcomes
(21:03):
, probably a heightened risk ofextreme outcomes.
Um, because of all the, notjust the uncertainty with
geopolitics and US politics andpolicy, but also uncertainty as
it relates to how is growthgoing to transpire, how's
inflation going to transpire, itseems like it's a really
important environment to bediversified, and so I feel like
you should know what it means tobe diversified, which is what
we've talked about today, andthen how to implement that
(21:24):
diversification, and I hope thatRPAR can serve as a tool to do
that.
Speaker 1 (21:29):
Yeah, I think the point of the uncertainty is key,
right?
It's like if there's convictionaround a particular future path
, then you want moreconcentration, obviously.
Well, if the crowd is convincedof that, then yeah, it's all
versus discounting.
Right, but when you think aboutARPOR and when you talk to
advisors that are looking at it,are they looking at it from the
(21:51):
standpoint of it being a coreposition, a satellite position,
because it's ultra-diversifiedfrom that standpoint, it can be
any of those.
Speaker 2 (21:59):
I think if you look at it from a pure standpoint, it
could theoretically be thetotal portfolio because it's got
13,000 securities.
It it could theoretically bethe total portfolio because it's
got 13,000 securities.
It has equities, commodities,gold tips and treasuries.
So it's pretty diversified,probably more diversified than
most total portfolios, eventhough it's one security.
So in theory it could serve asa total portfolio.
Now, in practice that's notpractical, and so so I view it
(22:24):
more as a tool to get morediversified.
So I think you know I alwaysthink of it as there's a
spectrum.
On one end of the spectrum isthe conventional portfolio, what
most people do.
On the other end of thespectrum there's a more
diversified portfolio.
So think of conventional.
Is not that diversified?
I mentioned 60, 40 is 90%correlated stocks.
On the other end of the spectrumyou can think of RPAR on that
(22:45):
end, where it's superdiversified.
Now, most people can't get allthe way there because it's just
so different from what'sconvention, and so the way I
think about it is RPAR is a toolto get closer to being more
diversified and for those thatare more comfortable moving away
from convention towardsdiversification, they understand
what it means to be diversified.
(23:06):
They appreciate the benefits ofit.
This year it's easier becauseit's done better, but for a long
time it did worse than beingmore conventional and over the
long run I think it should dobetter than being more
conventional because it's moreefficient.
But for those that feel thatthey can handle being more
diversified, less conventional,they can own more of it and move
(23:27):
in that direction.
And for those who feel they wantto be more conventional, they
can own less of it or not own itat all and move towards that
conventional side.
So I don't really think of itas a core or satellite.
I think of it as just a tool tobecome more diversified.
And if you're all in and you100% get it and you're not going
to sell it when itunderperforms the conventional
(23:47):
portfolio, then you can be morein that camp.
And if that's a more difficultthing or it might take time to
get there, then you can be moreconventional and just maybe own
a little piece of it.
Speaker 1 (23:58):
We should talk about time frame on this you mentioned
.
You're much more longer term inyour thinking.
I look at the RPAR volume aswe're speaking.
Yeah, it's around 10,000 sharesbeing traded, which some people
would get nervous about becausethey think it's not liquid from
that standpoint.
So let's do a little bit ofmyth, busting around volume,
liquidity and how to think aboutthe timeframe with which you
(24:18):
should look at RPAR and hold onto something like that yeah.
Speaker 2 (24:21):
So liquidity is?
It's an interesting topicbecause you're talking about an
ETF, and so the liquidity of theETF is really represented by
the liquidity of the assets theETF buys.
And it's because if you, let'ssay, there's 10,000 shares
traded and you put in an orderto buy 10 million shares, you
would think, oh, now the priceis going to move.
(24:42):
But what happens is shares arecreated.
When you put in a 10 millionshare order, either a buy or
sell, they're either redeemed orthey're created, and so what
matters is the liquidity of allthe underlying assets that
you're buying.
So RPAR includes ETFs that arevery liquid.
Inside of it includes tips,bonds, treasury, futures,
(25:03):
commodity equities and gold ETF,so it's very liquid.
So you could put it in an orderfor 10 million and it shouldn't
move the price very much, andso that's a little
counterintuitive and thatapplies across all the ETF
landscape.
It's not unique to RPAR.
So you have to look at theassets that the ETF is buying
and the liquidity of thoseassets, and that will determine
(25:25):
how liquid the ETF is, notnecessarily the volume.
So that's the response on thevolume.
So to me it's not a concern atall.
I'm sorry, what was the otherquestion I got?
Speaker 1 (25:39):
On the timeframes, because a lot of people,
obviously with ETFs, have to bemuch shorter term.
Um, uh, I'm sorry.
What was the other question Igot on the yeah, no on the
timeframe.
So it's because a lot of peoplehave a much short term, shorter
term.
Speaker 2 (25:44):
Yeah, the way I think about that is I think it's a
little counterintuitive.
So I think of that as you'retrying to go from point A to
point B, so you know lower leftof the chart on on a upper right
on on B, and I think there's.
You can simplify it to twopaths.
From A to B.
You could be on the volatilepath and let's call that equity.
So you invest 100% equities.
(26:06):
It goes up over time but it's avery volatile path.
It goes through good periods,bad periods and this is
long-term.
You can be on a smoother path.
So I think of RPAR as having anequity-like expect a return
with less risk.
So similar point A and point Bover time, but a smoother path
to get there because it's morediversified and again, that's
(26:29):
that free lunch and investing.
So if you're investing for ahundred years, do you want to be
on the smoother path or themore volatile path?
If they end up in the sameplace, I'd prefer to be on the
smoother path or the morevolatile path.
If they end up in the sameplace, I'd prefer to be on the
smoother path.
If you're investing for fiveyears, do you want to be on the
smoother path or the morevolatile path, I'd still choose
the smoother path.
Assuming they get to the sameplace on average, I take the
(26:51):
smoother path.
Now the challenge is if you'rejudging success or failure not
on whether you're on thesmoother path or the more
volatile path, but if you'rejudging it based on.
How did I do relative to thevolatile path.
If I choose a smooth path andmy other option was the volatile
path, about half the time you'dbe better off in the volatile
path because it's more volatile.
(27:11):
So over five years it could beup a lot more.
It could also be down a lotmore, but on average you end up
in about the same place and thesmoother path will get there
more consistently.
So if you did five years, fiveyears, five years, five years
you'd win more with the smootherpath.
But in any one five-year periodyou'd probably be disappointed
(27:32):
about half the time.
So that goes back to.
It's not necessarily a timeframequestion.
It's more about what is yourreference point.
Is your reference point steadyreturns or is your reference
point?
Is your reference point steadyreturns or is your reference
point?
I could have been in the morevolatile stock market and done
better, and so the more orientedyou are to judging success or
(27:53):
failure based on what could havebeen meaning the more volatile
path, then.
And that matters, by the way,because if you feel like you
made the wrong decision fiveyears ago by being on a smooth
path, then and that matters, bythe way, because if you feel
like you made the wrong decisionfive years ago by being on a
smooth path, then you're morelikely to change your mind for
the next five years.
And if you keep changing yourmind, you'll probably be up in a
worse place than if you justheld one or the other the whole
(28:14):
time.
So I think that's where thepsychology comes in.
So it's not necessarily atimeframe, it's more about what
is what is your patience andwhat is your reference point.
So that's the way I wouldrespond to that question.
Speaker 1 (28:27):
I always like using the analogy of I'd rather get to
my destination If I'm flyingslower and smoother than faster,
with more turbulence, all right.
Like yeah, you're going to getthere faster, but it's not going
to be comfortable, right yeah,like yeah, you're going to get
there faster, but it's not goingto be comfortable, right, yeah.
Speaker 2 (28:41):
And long term, you don't win that way, you know.
But long term is a long time.
Speaker 1 (28:46):
Well, and, as you know, the unfortunate thing is
that long term for most peoplenow is three months.
Yeah, I know, Long term isgetting shorter.
That's the money line for thepodcast on this.
Long term is getting shorter.
We haven't talked about thecommodity side of risk parity
and how our power wars.
Talk about gold, right, butlet's talk about how that
(29:07):
diversifies as well.
And how do you.
Speaker 2 (29:09):
Yeah, I think of commodities as a basket there's,
there's gold and then there'sall the other commodities.
And the reason I draw the linebetween those two is because
gold acts more like astoreholder wealth and it tends
to do better when growth is weak, and all the other commodities
have industrial use and aredemand-based, and they tend to
(29:31):
do better when growth is strong.
So, for example, in firstquarter 2020, covid hit, economy
collapsed, gold was up and allthe other commodities got
crushed.
Same thing happened in 2008.
Gold was up.
The other commodities went downsignificantly.
So I think it's good toseparate those two.
So the way I think aboutconstructing a commodity
portfolio is, rather than justowning the commodity prices,
(29:54):
which tends to have a low returnover time and is pretty
volatile.
So, like through futures, weown commodity producer equities
the companies pulling thecommodities out of the ground.
So their price of those stocksis heavily influenced by the
commodity price.
So, for example, in 2022, wesaw commodity prices go up.
That index of commodityproducer stocks was up double
(30:16):
digits when global equities weredown almost 20%.
And in the 1970s, those stocksdid really well as commodity
prices rose through that decadewhen global equities
underperformed cash.
So it's a good diversifier,particularly over those
environments where inflationreally surprises the upside, and
global or commodity producerequities have actually had a
(30:39):
pretty good return over a longperiod of time.
Our analysis shows that it'sactually outperformed global
equities by a couple percent ayear over 50 plus years.
So you can get diversifiedwithout giving up returns as you
go into a segment of the globalstock market that is pretty
different from the othersegments, is pretty different
(30:59):
from the other segments.
So the way I think aboutbuilding a pretty efficient
commodity exposure is commodityproducer equities plus gold and
just the gold price and thatbasket, I believe, has an
equity-like expected return overtime but is a much better
inflation hedge than globalequities.
So it's a good way to bediversified without giving up
(31:19):
much in terms of returnlong-term.
Speaker 1 (31:21):
As you know, one of the things with ETFs, of course,
is transparency, and anybodycan look at an ETF and see the
holdings and weightings.
If somebody is on board withall this thinking, why would
they invest in our car asopposed to just, you know, look
at the holdings daily and do itthemselves?
Speaker 2 (31:47):
Well, I think I can answer that pretty easily
because that's what I did for 15years For my clients.
I bought the underlyingexposures through ETFs or
managed funds or however way youwant to get that exposure, and
six years ago we figured outit's more efficient to do it
inside of an ETF wrapper, so one.
You get the tax efficienciesthat come along with wrapping
all those assets inside of asingle ETF vehicle and I feel
like that technology of taxefficiency within that ETF
wrapper is heavily underutilizedin the industry.
(32:08):
The big advantage is, inassuming you manage it well, you
can effectively defer capitalgains until the ETF is sold.
And so if you have assetclasses within that ETF
structure and you do regularrebalancing, which is a repeated
process of buying low andselling high, you sell a little
bit of the winner, you buy alittle bit of the loser.
(32:29):
That can potentially addreturns through time because
you're buying low, selling highrepeatedly.
In practice it's hard to do thatoutside of the ETF wrapper
because you have to pay capgains on the winners that you
sell.
Inside of the ETF wrapper.
You have the opportunity todefer all those gains until the
total ETF is sold.
So I think doing it inside ofRPAR or ETF wrapper is
(32:52):
potentially more tax efficient.
It also takes away you don'thave to actually manage it, it's
managed for you, it's automaticaway you don't have to actually
manage it, it's managed for you, it's automatic.
The rebalancing just frompersonal experience, it's hard
to do because you not only haveto sell the winners and pay the
taxes, you have to buy thelosers.
And buying the losers is noteasy to do in practice because
(33:13):
there's a lot of emotionalpushbacks against buying the
losers.
There's always a narrative asto why it has been a loser and
why it'll continue to be a loser, and the same thing with the
winners.
So inside of the ETF wrapperit's automatic, you don't have
to look at it, you don't have tothink about it.
And then there's also otherefficiencies.
Like you know, rather thanowning treasury bonds that are
(33:33):
pretty tax inefficient becausethe income is ordinary income,
we own treasury futures that aremore tax efficient than
treasury bonds because there isno income and all the return is
cap gains and you canpotentially generate cap losses
to offset the cap gains.
Also, RPR has 20% of leverageinside of it and that leverage
is achieved very cheaply becausewe use futures to get that and
(33:57):
the implied financing cost offutures is cash.
So think of it as you can get20% of leverage, your cost of
financing is cash.
It's harder to get cheaperfinancing than that.
So you get a little bit ofleverage inside the ETF and that
can potentially add returnsthrough time.
So I think there's a lot ofefficiencies that come along
with using the ETF, which isexactly why we created it and
(34:18):
why we use it, alex, for thosewho want to learn more about
RPAR and, in general, just kindof educate themselves on the
entire concept.
Speaker 1 (34:25):
where would you point them to and what resources
would you have them look at?
Speaker 2 (34:29):
Sure, a lot of resources, because I've spent a
lot of time you know 20 yearsthinking about this, writing
about it.
So the RPAR website isrparetfcom A lot of resources
there about the ETF.
We do quarterly webcasts.
The replays are on the siteswhere we kind of walk through
the strategy.
I've written a couple of bookson this.
Risk Parity is the most recentone.
(34:51):
Evokeadvisorscom is ouradvisory site, so there's a lot
of information there.
I also do a weekly podcastInsightful Investor is the name
where I interview guests.
It's not about risk parity,it's more about markets and
investing and I try to focus onthings that are counterintuitive
or widely misunderstood.
(35:13):
That, I think, are the bestinsight.
So there's a lot of resourcesthere for people to tap into.
Speaker 1 (35:18):
And one thing we haven't touched on, which we
should, briefly before we wrapup here, is you have more than
just RPAR.
Speaker 2 (35:23):
Yes, there's RPAR, and then there's RPAR on
steroids, which is UPAR, and sothat's ultra risk parity and
it's the same exposure as RPAR,except it's levered 40% more.
So it's 40% more risk, 40% moreexcess return, none of that
financing cost, and I think ofRPAR as equity-like expected
return with less risk, and UPARas equity-like risk with an
(35:46):
expected return that I wouldexpect to be above equities
long-term.
So there's two versions of thatrisk-paired ETF.
Speaker 1 (35:54):
Learn more about RPAR .
Again, this is a sponsoredconversation and I'll see you
all on the next episode.
Thank you, alex, appreciate it.
Thank you.
Let's talk about stagflation if there's a risk
that we're entering that, andwhat that means on various
investments Sure.
Speaker 2 (00:06):
I think there is certainly a risk.
Obviously, we don't know what'sgoing to happen, but the risk
of growth being weak issignificant.
Tariffs, depending on how itgoes, is a tax.
Speaker 1 (00:20):
The economy seems to be slowing and we've had an
expansion for a long period oftime, so the longer term trend
for gold, is it fair to say thatstagflation is sort of the
ideal kind of environment for it?
Speaker 2 (00:30):
Gold has outperformed stocks the last 25 years and
its return since we came off thegold standard in 1971, which is
when it basically became freefloating is almost the same as
global equities.
I think it's about half apercent a year behind global
equities since 1971.
I view this as a world of greatuncertainty, wide range of
potential outcomes, probably aheightened risk of extreme
(00:54):
outcomes because of all the notjust the uncertainty with
geopolitics and US politics andpolicy, but also-.
Speaker 1 (01:02):
My name is Michael Guyatt, publisher of the Lead
Lag Report.
Joining me here is Alex Chihulyof Evoke Advisors, the man
behind the ARPAR risk parity ETF.
This is a sponsoredconversation by Evoke and I know
we've done this a few times.
Alex, I'll put your background,but I want to get right into
the more pressing thing which Ithink is increasing on people's
minds, which is the risk ofstagflation.
(01:24):
There was a juncture sometimelast year where Powell said I
see no stag and I see no flation.
I don't even know what thatmeans, but Powell said it, so it
sounded smart.
Let's talk about stagflation.
If there's a risk that we'reentering that, and what that
means on various investments,sure.
Speaker 2 (01:42):
I think there is certainly a risk.
Obviously, we don't know what'sgoing to happen, but the risk
of growth being weak issignificant.
Right, Tariffs depending on howit goes, is a tax.
The economy seems to be slowingand we've had an expansion for
a long period of time.
So, as we all know, thebusiness cycle, it's a cycle.
(02:05):
So on the growth side, there'scertainly risk that growth could
slow.
On the inflation side, inflationis sticky.
It's higher than the target.
It's been higher than thetarget for some time.
Tariffs could.
It's interesting.
Tariffs are stagflationary,right.
They hurt growth and theyincrease inflation.
(02:27):
So, depending on how that playsout, that could have an impact.
But there's also a lot ofsecular shifts that could
potentially be more inflationaryand on the other side you have
AI and the potentialproductivity gains from that.
So maybe that pushes inflationdown.
I'd say, on net, there is riskthat inflation is higher than
(02:48):
expected and if we look atwhat's discounted, it's not very
high in terms of looking at thedifference between nominal
yields and real yields, so whatthe market is discounting.
So it's not that high.
So I think there's certainly arisk of stagflation and I don't
know if it's like the 1970sstagflation, but I'd say there's
(03:08):
definitely a risk of that andwhat's interesting is, most
investors don't have a lot ofassets in their portfolio that
is designed to do well in thattype of environment.
Speaker 1 (03:18):
Well, you could argue , maybe to some extent.
Nor should they, because it's avery rare combination of macro
factors.
Speaker 2 (03:32):
Well, it depends on how you define it.
So the way I think about it isthat the two big factors that
drive asset classes is growthand inflation.
You know the thing that Fedstry to manage and you really
have to look at it relative towhat's discounted.
So, in my analysis, about halfthe time growth surprises to my
analysis, about half the timegrowth surprises to the upside
and about half the timesurprises to the downside, you
have to look at it relative towhat's discounted in the price
(03:53):
and the same thing withinflation.
So you could argue, if you'rethinking of stagflation as
growth surprises to the downside, inflation surprises to the
upside.
It happens a lot more than Ithink people realize.
If we just study it history, youthink about the 1970s as a very
clear example, and that was adecade or so of stagflation.
But there's going to be shorterperiods in history where you
(04:14):
had a stagflationary type ofenvironment and it doesn't have
to be high inflation and veryweak growth, it just has to be
less growth than discounted andhigher inflation than discounted
at the same time.
So I don't think it's as rareas the history books would
suggest.
Speaker 1 (04:31):
I think it's fair to say that that's probably largely
what gold has been sensing sortof this concern around
stagflation.
There's the constant argumentof why is gold performing well?
Gold short term tends to havethese bursts when there's
geopolitical risks you know,threat of war, you see that time
and time again.
But the longer-term trend forgold is it fair to say that
(04:53):
stagflation is sort of the idealkind of environment for it?
Speaker 2 (04:55):
Yeah, in the 1970s gold was up 30% a year.
So I guess that's a resoundingyes in terms of stagflation.
But there's other factors youknow.
So, for example, if you justlook at countries outside of the
us, if you were to interviewthem and say, of all your
reserves, do you have more?
You know, us dollars in yourreserves that you ultimately
(05:19):
would like to have, I wouldguess most would say probably.
Then do you have less gold thanyou would ultimately want to
have given the geopoliticalbackdrop?
And my guess is most would sayyeah, we prefer to have more
gold.
Now you can't make that swapquickly, but I think that trend
has something to do with gold'sstrong performance near term.
(05:39):
But I think what is?
I think a lot of people miss itbecause we've seen how well
it's done the last few years.
But gold has outperformedstocks the last 25 years and its
return since we came off thegold standard in 1971, which is
when it basically became freefloating is almost the same as
global equities.
I think it's about half apercent a year behind global
(06:01):
equities since 1971.
Half a percent a year behindglobal equities since 1971.
And if you kind of zoom out alittle bit and you look at when
in the last 54 years did it dowell?
When did it do poorly?
In the 1970s it did really well.
In the 2000s it was up doubledigits.
So far this decade, in the2020s, it's up double digits.
(06:21):
The other decades it wasterrible.
In the 80s and 90s it wasnegative.
In the 2010s, I think, it wasabout 3% a year.
So it's like boom or bust.
And what's interesting is thoseboom and bust periods are the
opposite of equities.
So equities did poorly whengold did its best and gold did
its worst when equities did itsbest.
And over 54 years it's aboutzero correlation.
(06:44):
At its best and over 54 yearsit's about zero correlation.
So I think, regardless of whatyou view what the future is
going to look like and whetheryou think stagflation will
transpire or not, it's a verygood diversifier to equities.
Speaker 1 (06:57):
Well, it's funny to me that it's true that you
always have a cult in an assetclass, the cult of equities,
cult of gold, the gold bugs butthe audiences are a lot lower,
meaning there's a lot lessnumber of members of gold bugs
than there are equity bugs, youcan argue.
And yet gold has performed verysimilarly, although with a very
(07:20):
different sequence of returns.
Why is it that gold isn't sortof more mainstream?
Speaker 2 (07:28):
Yeah, it's a really good question.
I think part of it is we.
I think we're a byproduct ofour current environment.
So the last 15 years stockshave done great.
The prior 10 years stocks werenegative in the 2000s.
My guess is is if you asksomebody who was a significant
(07:52):
investor in the 1970s, therewere probably more gold bugs
then than there are now, becauseduring that decade stocks
underperformed cash for a decadeand gold was up 30% a year.
So you probably had more peoplethat were on the gold bandwagon
than on the stock bandwagon.
And I remember in the early 80sthere was a famous article that
came out I think it wasNewsweek or one of those big
(08:15):
magazines, and it called for thedeath of equities.
And of course it was at thevery bottom of the cycle.
That was right before thegreatest bull market in the
history of stocks, uh.
But but I think part of uh,what you just described is is a
byproduct of the currentenvironment that we live in, and
my guess is it changes overtime.
Speaker 1 (08:34):
Of course, stocks have always been more popular
than gold on net, but that gapis probably uh, it probably
changes over time it probablyalso has to do a little bit with
how much you can make anarrative around it With the
narrative so many times, youknow, with variations around
gold.
But there's a lot morediversity of things you can talk
about when it comes toindividual stocks, the stock
(08:55):
market, macro, all this stuff.
So I'm wondering if it's just abyproduct of just the
storytelling.
Speaker 2 (08:59):
Yeah, yeah, and storytelling has a lot to do
with it, because we live in aworld where we tell stories.
Stories are told every day onTV, in newspapers, on the
internet, and I think we allkind of want to be part of a
story, so I'm sure that hassomething to do with it.
Speaker 1 (09:21):
Speaking about stories, there is this story of
the only free lunch isdiversification.
It proved to be a bit fictionalin this current cycle, or maybe
last cycle, but the point isit's still a cycle-driven type
of dynamic.
Let's get into what the realstory around diversification
should be.
Speaker 2 (09:39):
Well, I think you're right.
The one free lunch in investingis diversification, and what
that means is you can get ahigher return for the same level
of risk, or you can get thesame return with less risk than
if you had a less diversifiedportfolio.
So that in theory, shouldn'texist, but diversification
allows it to exist, and there'sa very simple math behind that.
(10:00):
And you're right.
We had what I call the bearmarket and diversification for a
while.
The less diversified you were,particularly in US stocks, the
better you did for 10, 15 years,and the more diversified you
were, the worse you did.
This year is almost the opposite.
So it's interesting, and whenyou look at across asset classes
(10:20):
, almost everything is not onlyup but doing relatively well,
except for US stocks, which arestill negative year to date.
And so this year is a goodexample of diversification quote
unquote working whereeverything is doing well, and so
when you ask somebody how's themarket doing, they
automatically think about the USstock market.
And when somebody asks me howthe market's doing, I respond in
(10:46):
terms of a balanced mix ofmarkets, because I always think
in terms of diversification,because you're right that one
free lunch you should alwaystake advantage of, even when you
go through periods where youwould be better off being more
concentrated, over the long runthe math shows that you're
better off being diversified,because you just get a higher
return to risk ratio.
Speaker 1 (11:05):
The thing I think most people fall prey to is the
idea that the more positions youhave in your portfolio, the
more diversified you are, asopposed to looking at it from
correlation perspectives.
I think that what you'redescribing there is basically
kind of the genesis of a of arisk, parity or permanent
portfolio type of construct, butthe challenge there is everyone
(11:28):
always hears that, but theydon't think it's the next level,
which is how do you think aboutweighting what the diverse fire
?
So let's explore that, becauseI always go back to this idea
that oftentimes what you ownmatters a lot less than how much
you own of it.
Speaker 2 (11:40):
Yeah, because you could say two extremes.
You could have a hundredsecurities in your portfolio, a
hundred line items, and if theyall go up and down together,
that's like having one line item.
So the number of securities hasnothing to do with being
diversified.
And then, on the other end, youcould have two securities and
be way more diversified thansomething that has a hundred
(12:00):
securities.
So, for example, if you justown a stock index and you owned
a tips index, that's a prettydiversified portfolio, way more
diversified than something with100 securities that are
equity-like.
So, yes, the exposure matters.
So you want things that do wellin different environments.
And then the question that youasked is the weighting.
(12:26):
It doesn't do much good to sayI've got five securities that do
well in different environments,but I've got 99% of my assets
in one and hardly anything inthe other four.
And the way I think aboutwaiting is what you're trying to
wait is the exposure to thosedifferent environments.
So you want assets that do wellin different environments and
you want equal risk exposure toall those assets, so that one
(12:48):
asset doesn't drive your totalreturns.
And the simple way to thinkabout that is assets that are
more volatile you should ownless of and the assets that are
less volatile you should ownmore of.
And the way to think about thatis you have an environment
that's good for asset A.
If asset A is very volatile, itgoes up a lot.
If it's a bad environment forasset A, it goes down a lot.
(13:11):
Asset B, which is less volatilea good environment it goes up a
little.
A bad environment it goes downa little.
So if you overweight the morevolatile asset, like most people
do they overweight stocksversus bonds then your total
return is dominated by that oneasset.
It's not a diversified portfolio60-40 is 90% correlated to 100%
stock portfolio.
(13:32):
It's basically violating thefirst rule of investing Don't
put all your eggs in one basket.
Many investors violate thatsimple rule.
So the way to think about it isown assets that do well in
different environments and thenweight them where the less
volatile assets you own more of,the more volatile assets you
own less of.
And that is what the riskparity concept is is pairing the
(13:54):
risk so that you get equal riskcontribution, equal
contribution from all theseassets, and then if you pick the
assets that do well indifferent environments, that's
how you diversify.
You know, from my perspective.
Speaker 1 (14:05):
The challenge there is, you know, is that obviously
risk regimes for different assetclasses also change, right.
So you know, as we saw, therisk in treasuries, for example,
it was a lot higher the lastseveral years than it had been
in years prior.
So how do you think about ifyou're going to normalize to
volatility or to risk across thedifferent asset classes?
What happens when you're in asmall sample where the risk for
(14:26):
that particular class may be inan anomalous period?
Speaker 2 (14:30):
Yeah, it's a good question.
So I think there's twoapproaches there.
One is you can take a passiveapproach and say you know the
average volatility for assetclass A is, you know, 15%.
Asset class B is 10%.
So I should own more of B thanA to get the equal risk
contribution.
So you can just look at averagevolatility over time.
So that's one approach which Ithink makes sense because and
(14:53):
I'll get into why so the secondoption is you can try to be
dynamic, and when volatility ishigher, maybe you own less, when
volatility is lower, maybe youown more.
The challenge with that is youonly know what the volatility of
the past is.
You don't know what thevolatility of the future is, and
you go through periods wherehigh volatility precedes low
(15:15):
volatility and vice versa.
So the challenge with trying tochange your weighting based on
your expectation of futurevolatility is you're going to be
wrong a lot, and we saw this in2008.
We saw it in Q1 2020, where youhad a period of low volatility,
and so maybe you'reoverweighting something, and
then volatility spikes and nowyou have too much exposure, so
(15:36):
you cut your exposure and thenmarkets recover.
So now you're overweighted onthe downside and then you're
underweight on the upside so youcan get whipsawed.
So in my experience 26 yearstracking investments and
managing client portfolios isthat predicting volatility is
really hard.
And you'll be right sometimes.
You'll be wrong sometimes andsometimes you'll be really wrong
(15:58):
.
And so trying to balance theweight based on your expectation
of where volatility is going tobe and that's usually informed
by past volatility it's just toohard to do, and that's usually
informed by past volatility.
It's just too hard to do.
So I prefer to just takeaverage volatility, weight it
(16:19):
and just that exercise.
It's so valuable over timebecause you're so far ahead of
most people who are not welldiversified.
So to me, the big step isbecome diversified.
You can even take averageweightings.
It doesn't really matter aslong as you're moving in that
direction.
You're so far ahead of mostpeople that if you get the
timing off by a little bit, itdoesn't really matter that much.
It's more about thinkinglong-term and having the
philosophy of how to build thatdiversified portfolio.
Speaker 1 (16:41):
How did that philosophy come about?
I mean, where did the wholeconcept of risk parity kind of
originate from?
What's the history of it?
Speaker 2 (16:46):
Where do the whole concept of risk parity kind of
originate from?
What's the history of it?
So the term risk parity isprobably a couple of decades old
.
I think of it as a balancedportfolio and I don't call it a
balanced portfolio because thatterm balanced is.
It's kind of ubiquitous in ourindustry and I feel like it's
misused.
Most quote unquote balancedportfolios are not balanced.
(17:06):
People think of it as 60, 40 isbalanced.
It's 98% correlated stocks thatby definition, can't be
balanced.
So so if you kind of go back toeven before the concept of the
term risk parity came out, thisidea of pick asset classes that
are diverse to differenteconomic environments and then
weight them where you own lessof the more volatile assets,
(17:30):
more of the less volatile assets.
I believe Bridgewater came upwith that idea probably three
and a half, four decades ago andthey've been managing money
that way ever since.
Let's talk about your riskparity ETF RPAR.
Speaker 1 (17:47):
Talk about the history of that launch, how it's
performed and maybe make thecase for why now might be a good
time for thinking about that.
Speaker 2 (18:00):
As the first part, with my clients, we're also an
RA, manage about 26 billion forwealthy families and
institutions, and thisphilosophy of risk parity and
balanced portfolios I've beenusing with my clients for 20
plus years.
I've written a couple of bookson it and it's just something
that, to me, makes a lot ofsense, and so about six years
(18:23):
ago, we figured out it'd be alot more efficient if we created
a vehicle and take the strategy, put it inside of it and get
all the efficiencies that comealong with an ETF structure,
taxes being one implementationefficiency, passive vehicle to
(18:44):
get exposure to this balancedportfolio, which includes global
equities, commodities, goldtips and treasuries, and it's
risk balance across those assetclasses and rebalances once a
quarter and it's effectivelypassive.
We have target weights verysimple to follow.
It's a very simple strategythat I think can be very
(19:06):
effective over time.
It's a very simple strategythat I think can be very
effective over time, and Iintentionally kept it very
simple because I feel theconcepts are really powerful and
so you don't want to get lostin the details.
You want it to be easy tofollow, easy to understand, easy
for people to appreciate whatthey own, why they own it and
what that exposure is.
So we launched it in December2019.
(19:31):
And its first year it did reallywell.
It was down 4% when COVID hitin Q1 of 2020.
Stocks are down 21.
It was down four and itfinished the year up 19 and
change, and so that was like avery good stress test, because
you had an economic collapse andit doesn't matter what caused
that collapse In this case itwas COVID but economy collapsed,
(19:53):
assets performed exactly as youwould expect.
Commodities and equities gotcrushed.
You know those are risinggrowth assets.
Gold tips and treasuries werein a bull market.
Those are falling growth assetsand so they reacted exactly as
you would expect.
Those are falling growth assetsand so they reacted exactly as
you would expect and theyroughly netted out equal down
net 4% in a very volatile periodand then you had the recovery.
(20:14):
So good start.
2022 was a terrible year.
That was an environment wherecash went from zero to five very
quickly.
That's an environment you can'treally diversify against
because it has nothing to dowith growth and inflation.
The cash rate went up a lot andall these assets compete with
cash and if you told me today,cash would go from five to 10 in
(20:37):
six months.
I tell you you don't want to bein a diversified portfolio
because it's probably going todo poorly, and so 22 was a
terrible year.
So far this year, it's been apretty good year.
Uh, as I mentioned,diversification is working Um
and in, and I think, if you lookforward, uh, I I view this as a
world of great uncertainty,wide range of potential outcomes
(21:03):
, probably a heightened risk ofextreme outcomes.
Um, because of all the, notjust the uncertainty with
geopolitics and US politics andpolicy, but also uncertainty as
it relates to how is growthgoing to transpire, how's
inflation going to transpire, itseems like it's a really
important environment to bediversified, and so I feel like
you should know what it means tobe diversified, which is what
we've talked about today, andthen how to implement that
(21:24):
diversification, and I hope thatRPAR can serve as a tool to do
that.
Speaker 1 (21:29):
Yeah, I think the point of the uncertainty is key,
right?
It's like if there's convictionaround a particular future path
, then you want moreconcentration, obviously.
Well, if the crowd is convincedof that, then yeah, it's all
versus discounting.
Right, but when you think aboutARPOR and when you talk to
advisors that are looking at it,are they looking at it from the
(21:51):
standpoint of it being a coreposition, a satellite position,
because it's ultra-diversifiedfrom that standpoint, it can be
any of those.
Speaker 2 (21:59):
I think if you look at it from a pure standpoint, it
could theoretically be thetotal portfolio because it's got
13,000 securities.
It it could theoretically bethe total portfolio because it's
got 13,000 securities.
It has equities, commodities,gold tips and treasuries.
So it's pretty diversified,probably more diversified than
most total portfolios, eventhough it's one security.
So in theory it could serve asa total portfolio.
Now, in practice that's notpractical, and so so I view it
(22:24):
more as a tool to get morediversified.
So I think you know I alwaysthink of it as there's a
spectrum.
On one end of the spectrum isthe conventional portfolio, what
most people do.
On the other end of thespectrum there's a more
diversified portfolio.
So think of conventional.
Is not that diversified?
I mentioned 60, 40 is 90%correlated stocks.
On the other end of the spectrumyou can think of RPAR on that
(22:45):
end, where it's superdiversified.
Now, most people can't get allthe way there because it's just
so different from what'sconvention, and so the way I
think about it is RPAR is a toolto get closer to being more
diversified and for those thatare more comfortable moving away
from convention towardsdiversification, they understand
what it means to be diversified.
(23:06):
They appreciate the benefits ofit.
This year it's easier becauseit's done better, but for a long
time it did worse than beingmore conventional and over the
long run I think it should dobetter than being more
conventional because it's moreefficient.
But for those that feel thatthey can handle being more
diversified, less conventional,they can own more of it and move
(23:27):
in that direction.
And for those who feel they wantto be more conventional, they
can own less of it or not own itat all and move towards that
conventional side.
So I don't really think of itas a core or satellite.
I think of it as just a tool tobecome more diversified.
And if you're all in and you100% get it and you're not going
to sell it when itunderperforms the conventional
(23:47):
portfolio, then you can be morein that camp.
And if that's a more difficultthing or it might take time to
get there, then you can be moreconventional and just maybe own
a little piece of it.
Speaker 1 (23:58):
We should talk about time frame on this you mentioned
.
You're much more longer term inyour thinking.
I look at the RPAR volume aswe're speaking.
Yeah, it's around 10,000 sharesbeing traded, which some people
would get nervous about becausethey think it's not liquid from
that standpoint.
So let's do a little bit ofmyth, busting around volume,
liquidity and how to think aboutthe timeframe with which you
(24:18):
should look at RPAR and hold onto something like that yeah.
Speaker 2 (24:21):
So liquidity is?
It's an interesting topicbecause you're talking about an
ETF, and so the liquidity of theETF is really represented by
the liquidity of the assets theETF buys.
And it's because if you, let'ssay, there's 10,000 shares
traded and you put in an orderto buy 10 million shares, you
would think, oh, now the priceis going to move.
(24:42):
But what happens is shares arecreated.
When you put in a 10 millionshare order, either a buy or
sell, they're either redeemed orthey're created, and so what
matters is the liquidity of allthe underlying assets that
you're buying.
So RPAR includes ETFs that arevery liquid.
Inside of it includes tips,bonds, treasury, futures,
(25:03):
commodity equities and gold ETF,so it's very liquid.
So you could put it in an orderfor 10 million and it shouldn't
move the price very much, andso that's a little
counterintuitive and thatapplies across all the ETF
landscape.
It's not unique to RPAR.
So you have to look at theassets that the ETF is buying
and the liquidity of thoseassets, and that will determine
(25:25):
how liquid the ETF is, notnecessarily the volume.
So that's the response on thevolume.
So to me it's not a concern atall.
I'm sorry, what was the otherquestion I got?
Speaker 1 (25:39):
On the timeframes, because a lot of people,
obviously with ETFs, have to bemuch shorter term.
Um, uh, I'm sorry.
What was the other question Igot on the yeah, no on the
timeframe.
So it's because a lot of peoplehave a much short term, shorter
term.
Speaker 2 (25:44):
Yeah, the way I think about that is I think it's a
little counterintuitive.
So I think of that as you'retrying to go from point A to
point B, so you know lower leftof the chart on on a upper right
on on B, and I think there's.
You can simplify it to twopaths.
From A to B.
You could be on the volatilepath and let's call that equity.
So you invest 100% equities.
(26:06):
It goes up over time but it's avery volatile path.
It goes through good periods,bad periods and this is
long-term.
You can be on a smoother path.
So I think of RPAR as having anequity-like expect a return
with less risk.
So similar point A and point Bover time, but a smoother path
to get there because it's morediversified and again, that's
(26:29):
that free lunch and investing.
So if you're investing for ahundred years, do you want to be
on the smoother path or themore volatile path?
If they end up in the sameplace, I'd prefer to be on the
smoother path or the morevolatile path.
If they end up in the sameplace, I'd prefer to be on the
smoother path.
If you're investing for fiveyears, do you want to be on the
smoother path or the morevolatile path, I'd still choose
the smoother path.
Assuming they get to the sameplace on average, I take the
(26:51):
smoother path.
Now the challenge is if you'rejudging success or failure not
on whether you're on thesmoother path or the more
volatile path, but if you'rejudging it based on.
How did I do relative to thevolatile path.
If I choose a smooth path andmy other option was the volatile
path, about half the time you'dbe better off in the volatile
path because it's more volatile.
(27:11):
So over five years it could beup a lot more.
It could also be down a lotmore, but on average you end up
in about the same place and thesmoother path will get there
more consistently.
So if you did five years, fiveyears, five years, five years
you'd win more with the smootherpath.
But in any one five-year periodyou'd probably be disappointed
(27:32):
about half the time.
So that goes back to.
It's not necessarily a timeframequestion.
It's more about what is yourreference point.
Is your reference point steadyreturns or is your reference
point?
Is your reference point steadyreturns or is your reference
point?
I could have been in the morevolatile stock market and done
better, and so the more orientedyou are to judging success or
(27:53):
failure based on what could havebeen meaning the more volatile
path, then.
And that matters, by the way,because if you feel like you
made the wrong decision fiveyears ago by being on a smooth
path, then and that matters, bythe way, because if you feel
like you made the wrong decisionfive years ago by being on a
smooth path, then you're morelikely to change your mind for
the next five years.
And if you keep changing yourmind, you'll probably be up in a
worse place than if you justheld one or the other the whole
(28:14):
time.
So I think that's where thepsychology comes in.
So it's not necessarily atimeframe, it's more about what
is what is your patience andwhat is your reference point.
So that's the way I wouldrespond to that question.
Speaker 1 (28:27):
I always like using the analogy of I'd rather get to
my destination If I'm flyingslower and smoother than faster,
with more turbulence, all right.
Like yeah, you're going to getthere faster, but it's not going
to be comfortable, right yeah,like yeah, you're going to get
there faster, but it's not goingto be comfortable, right, yeah.
Speaker 2 (28:41):
And long term, you don't win that way, you know.
But long term is a long time.
Speaker 1 (28:46):
Well, and, as you know, the unfortunate thing is
that long term for most peoplenow is three months.
Yeah, I know, Long term isgetting shorter.
That's the money line for thepodcast on this.
Long term is getting shorter.
We haven't talked about thecommodity side of risk parity
and how our power wars.
Talk about gold, right, butlet's talk about how that
(29:07):
diversifies as well.
And how do you.
Speaker 2 (29:09):
Yeah, I think of commodities as a basket there's,
there's gold and then there'sall the other commodities.
And the reason I draw the linebetween those two is because
gold acts more like astoreholder wealth and it tends
to do better when growth is weak, and all the other commodities
have industrial use and aredemand-based, and they tend to
(29:31):
do better when growth is strong.
So, for example, in firstquarter 2020, covid hit, economy
collapsed, gold was up and allthe other commodities got
crushed.
Same thing happened in 2008.
Gold was up.
The other commodities went downsignificantly.
So I think it's good toseparate those two.
So the way I think aboutconstructing a commodity
portfolio is, rather than justowning the commodity prices,
(29:54):
which tends to have a low returnover time and is pretty
volatile.
So, like through futures, weown commodity producer equities
the companies pulling thecommodities out of the ground.
So their price of those stocksis heavily influenced by the
commodity price.
So, for example, in 2022, wesaw commodity prices go up.
That index of commodityproducer stocks was up double
(30:16):
digits when global equities weredown almost 20%.
And in the 1970s, those stocksdid really well as commodity
prices rose through that decadewhen global equities
underperformed cash.
So it's a good diversifier,particularly over those
environments where inflationreally surprises the upside, and
global or commodity producerequities have actually had a
(30:39):
pretty good return over a longperiod of time.
Our analysis shows that it'sactually outperformed global
equities by a couple percent ayear over 50 plus years.
So you can get diversifiedwithout giving up returns as you
go into a segment of the globalstock market that is pretty
different from the othersegments, is pretty different
(30:59):
from the other segments.
So the way I think aboutbuilding a pretty efficient
commodity exposure is commodityproducer equities plus gold and
just the gold price and thatbasket, I believe, has an
equity-like expected return overtime but is a much better
inflation hedge than globalequities.
So it's a good way to bediversified without giving up
(31:19):
much in terms of returnlong-term.
Speaker 1 (31:21):
As you know, one of the things with ETFs, of course,
is transparency, and anybodycan look at an ETF and see the
holdings and weightings.
If somebody is on board withall this thinking, why would
they invest in our car asopposed to just, you know, look
at the holdings daily and do itthemselves?
Speaker 2 (31:47):
Well, I think I can answer that pretty easily
because that's what I did for 15years For my clients.
I bought the underlyingexposures through ETFs or
managed funds or however way youwant to get that exposure, and
six years ago we figured outit's more efficient to do it
inside of an ETF wrapper, so one.
You get the tax efficienciesthat come along with wrapping
all those assets inside of asingle ETF vehicle and I feel
like that technology of taxefficiency within that ETF
wrapper is heavily underutilizedin the industry.
(32:08):
The big advantage is, inassuming you manage it well, you
can effectively defer capitalgains until the ETF is sold.
And so if you have assetclasses within that ETF
structure and you do regularrebalancing, which is a repeated
process of buying low andselling high, you sell a little
bit of the winner, you buy alittle bit of the loser.
(32:29):
That can potentially addreturns through time because
you're buying low, selling highrepeatedly.
In practice it's hard to do thatoutside of the ETF wrapper
because you have to pay capgains on the winners that you
sell.
Inside of the ETF wrapper.
You have the opportunity todefer all those gains until the
total ETF is sold.
So I think doing it inside ofRPAR or ETF wrapper is
(32:52):
potentially more tax efficient.
It also takes away you don'thave to actually manage it, it's
managed for you, it's automaticaway you don't have to actually
manage it, it's managed for you, it's automatic.
The rebalancing just frompersonal experience, it's hard
to do because you not only haveto sell the winners and pay the
taxes, you have to buy thelosers.
And buying the losers is noteasy to do in practice because
(33:13):
there's a lot of emotionalpushbacks against buying the
losers.
There's always a narrative asto why it has been a loser and
why it'll continue to be a loser, and the same thing with the
winners.
So inside of the ETF wrapperit's automatic, you don't have
to look at it, you don't have tothink about it.
And then there's also otherefficiencies.
Like you know, rather thanowning treasury bonds that are
(33:33):
pretty tax inefficient becausethe income is ordinary income,
we own treasury futures that aremore tax efficient than
treasury bonds because there isno income and all the return is
cap gains and you canpotentially generate cap losses
to offset the cap gains.
Also, RPR has 20% of leverageinside of it and that leverage
is achieved very cheaply becausewe use futures to get that and
(33:57):
the implied financing cost offutures is cash.
So think of it as you can get20% of leverage, your cost of
financing is cash.
It's harder to get cheaperfinancing than that.
So you get a little bit ofleverage inside the ETF and that
can potentially add returnsthrough time.
So I think there's a lot ofefficiencies that come along
with using the ETF, which isexactly why we created it and
(34:18):
why we use it, alex, for thosewho want to learn more about
RPAR and, in general, just kindof educate themselves on the
entire concept.
Speaker 1 (34:25):
where would you point them to and what resources
would you have them look at?
Speaker 2 (34:29):
Sure, a lot of resources, because I've spent a
lot of time you know 20 yearsthinking about this, writing
about it.
So the RPAR website isrparetfcom A lot of resources
there about the ETF.
We do quarterly webcasts.
The replays are on the siteswhere we kind of walk through
the strategy.
I've written a couple of bookson this.
Risk Parity is the most recentone.
(34:51):
Evokeadvisorscom is ouradvisory site, so there's a lot
of information there.
I also do a weekly podcastInsightful Investor is the name
where I interview guests.
It's not about risk parity,it's more about markets and
investing and I try to focus onthings that are counterintuitive
or widely misunderstood.
(35:13):
That, I think, are the bestinsight.
So there's a lot of resourcesthere for people to tap into.
Speaker 1 (35:18):
And one thing we haven't touched on, which we
should, briefly before we wrapup here, is you have more than
just RPAR.
Speaker 2 (35:23):
Yes, there's RPAR, and then there's RPAR on
steroids, which is UPAR, and sothat's ultra risk parity and
it's the same exposure as RPAR,except it's levered 40% more.
So it's 40% more risk, 40% moreexcess return, none of that
financing cost, and I think ofRPAR as equity-like expected
return with less risk, and UPARas equity-like risk with an
(35:46):
expected return that I wouldexpect to be above equities
long-term.
So there's two versions of thatrisk-paired ETF.
Speaker 1 (35:54):
Learn more about RPAR .
Again, this is a sponsoredconversation and I'll see you
all on the next episode.
Thank you, alex, appreciate it.
Thank you.
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