Allocation and Aspiration… ‘Peace of Mind’ and Performance

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• What’s a “peace of mind” portfolio for high-net-worth investors in 2024? In spite of the ups and downs in recent years, tried-and-true strategies can still work.
• Joe Prendergast, Strategic Advisor and Head of Investment Strategy at Goodbody in Dublin, Ireland, says that a 50-50 allocation between growth assets and defensive assets is still at the core of his approach.
• What else is important in a portfolio? What’s the outlook for the next year? We break it down in today’s post.

Many forces shape the markets — including politics, world events and even the climate — but none are as fickle (and often, as pernicious) as financial media. Between 24/7 business news coverage, the endless scroll of social media and mercurial punditry, it can be difficult to figure out what’s really going on.  

“Learn to distinguish what’s a fact and what’s speculation,” says Joe Prendergast, Global Strategic Advisor and Head of Investment Strategy at Dublin, Ireland-based Goodbody. “There’s a lot of lazy supposition out there. Most importantly, remember, nobody knows anything for sure, so do be skeptical.”

Joe joined host Alan Dunne on an Allocator edition of Top Traders Unplugged to talk about risk management, the impact of higher interest rates on allocation decisions, the standout opportunities for investors in 2024 and much more. Read on for his take on the classic 50/50 asset allocation split, his thoughts on Euro-centric investing in a dollar-driven world and his must-reads for aspiring investors. 

Keeping it 50/50 

Joe’s overall investment philosophy is “absolutely rooted in [the] strategic asset allocation” at the heart of most wealth management frameworks — and which he thinks of as a “risk control mechanism.”

The core portfolio Goodbody might build for a big client will likely be quite similar to an everyday investor’s portfolio: 50% equities and 50% lower-risk assets, for example. 

That’s because a 50/50 split is a proven tactic. Over the past 20 to 30 years, based on a five-year time horizon (with a Euro-based benchmark — almost all of Goodbody’s clients are Euro-based), the 50/50 portfolio “has an extremely good track record of preserving nominal capital,” says Joe. The “low probability of loss … is really important for the ‘peace of mind’ function for the investor.” 

That peace of mind, contained in a liquidity-related portion of the portfolio, with almost no market risk at all, allows for risk-taking while safeguarding whatever the investor needs for the next year, five years or whatever they’re comfortable with. 

Calculated risks 

After simple strategic asset allocation, “we can build out as much as we like,” Joe says. 

A high net worth portfolio will also involve a longer-term, “illiquid piece … where the real risk is being taken.” 

He calls this the “aspirational part of the portfolio,” which classically is in private equity or another higher-risk premia. The underlying idea is a “high probability strategy,” one in which an investor isn’t “just putting everything on the table,” he adds. “You actually have a strong sense that [it’s] a sensible thing to do. You’re not up at night worried about whether the S&P is up or down 5%.”

He notes that this approach is “not for everybody.” 

Some clients want 100% equity, for example — “but we would almost always counsel against that,” he adds. “You can have 100% equity as your portfolio, but if you look at the number of times that portfolio may have had a drawdown in the region of 50% over the last 20 or 25 years and has not recovered fully over five … or 10 years … it just seems not a very sensible thing to do.” 

He notes a “more compartmentalized, safer” path: Instead of a high probability strategy, one could choose more illiquid equity with a larger risk premium. 

Into the Euro-zone 

Conversations about finance tend to be dollar-based, no matter where in the world we are. But Alan wonders: As a Euro-based investor, what’s Joe’s take on global exposure versus Euro-denominated strategies? Does he simply accept the currency risk, or does he try to manage it? 

“I spent a huge amount of my career looking almost exclusively at FX,” Joe replies. “Certainly for my first 10 or more years [in the field], I was almost 100% an FX analyst. … The one thing FX taught me is to never believe anything anybody says about financial markets.” 

For example, at a point early in his career, the buzz on the Street was that the Fed was about to tighten.

“I remember back in 1994 … it was the consensus view,” he explains. “They [the Fed] ended up tightening a lot more than was expected, but there was this big view that the dollar would go up. I’m not sure why — maybe it was just my own ignorance or something — but I just looked back at all the past Fed tightening to try and figure out what had happened.”

He discovered that the dollar always went down when the Fed tightened for the first time in a cycle, without fail. 

“I learned a huge amount about empirical work and not believing anything people say, because a lot of the time it’s just supposition. It’s what I used to call the ‘missing paragraph.’ You hear somebody say something like: U.K. retail sales are very strong; therefore, I like the pound. I used to think, Well, why do you like the pound? Can you link those things together for me?”

Dollar diplomacy

Joe takes the same approach to FX in Goodbody clients’ portfolios. 

“When you look at the value of global exposure … we hedge everything in fixed income,” he says. ”We take almost no — or very low — amounts of non-Euro fixed income risk.”

He notes that the firm has hedged FX in the past, but he doesn’t see a need at the moment.

However, Goodbody doesn’t hedge anything on the equity side. Most of that (in line with benchmarks) is U.S. dollar exposure, which varies over time. Cost of carry and valuations might have an influence, but “typically, if the dollar is in the middle of ranges and interest rate differentials are at least creating some cost of carry to hedge, it just has not been worth doing.”

Joe and his colleagues do believe that the U.S. is “still very well-positioned from a corporate point of view … [the country] is, almost certainly, still going to have the highest productivity [and be] the most profitable. It’s going to be the center of earnings growth over time for quite some time. As long as we believe that, and then the currency volatility is relatively less than the equity return (over time), and there’s a cost of carry.” 

That’s why, for Goodbody, it “just doesn’t make sense to consider hedging under most circumstances.”

‘Capital’ ideas

Joe has a longstanding interest in economic history, particularly the history of economic thought. As a student, he found Charles Kindleberger and JK Galbraith’s writing “absolutely fascinating” and embraced the idea of marrying finance and creativity. He recommends their work “even for the entertainment value alone.” 

He says Thomas Piketty’s “Capital in the Twenty-First Century” is incredibly important for anybody who invests with the expectation of making money — “because the idea that the return on capital is greater than the rate of economic growth is the kernel of what we’re trying to do.”

Joe thinks Piketty’s book tells us that if we apply capital to the market, we should expect to see a decent return. 

“I know that’s not the point of the book, but it’s a really important corollary,” he adds. “The other thing I like about that book is there are a lot of great stories about financial events and crises of the past in real detail. It’s just a fascinating read. It looks big, [but] it’s not as long as it looks.”

He also recommends the original “Fooled by Randomness” by Nassim Nicholas Taleb. 

“When I was a young lad at Credit Suisse First Boston, I went to visit a hedge fund manager you probably know, Jim Leitner, in the U.S.,” Joe recalls. “When I was leaving, he went to his cupboard and he pulled out a copy. … He had a whole load of them in there. I think he was giving them to everybody. In financial markets, I think that’s the best thing I ever read.”

When it comes to investing, Joe advises thinking outside the box, “using data as much as you can, embracing the contradictions.” 

“Keep it simple, but also think laterally and be creative,” he adds. “But don’t let that stop you [from] making decisions and having a strategy. Once you have a strategy, which is totally different from a trade, stick to the plan. That’s always my line. Stick to the plan.”

Well said, Joe.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.