I think our feeling is, particularly coming back to the equity side, is that there's tremendous advantages of being a stock picker and a fund picker. And the analogy I'd use here is being both a chef and a restaurant critic. I mean, if you're a restaurant critic, but you've never ever been into a kitchen, I don't think you'd really have an idea of how the dish was put together. And if you're a chef and you go to other great restaurants, you're going to get a lot of ideas.

So, we get ideas from our third-party managers and how to construct a portfolio, what kind of stocks to look at. But the fundamental work that we do on stocks ourselves gives us a much better idea when we're looking at somebody else's fund.

Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager, due diligence, or investment career to the next level.

Before we begin today's conversation, remember to keep two things in mind. All the discussion we'll have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions.

Here's your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary investors from all around the world. In this series, I have invited one of them, namely Alan Dunne, to host a series of in-depth conversations on the topic of what it takes to be a world-class allocator.

In today's world, portfolio construction is fast moving to the top of the agenda of many investors as they try to analyze and understand the riskiness of their portfolios. And with ever increasing uncertainty around the globe, being well diversified across many different strategies and themes in your portfolio can mean the difference between ruin and survival when the next crisis emerges.

The aim of these conversations is to try and understand the experiences that have influenced these highly specialized allocators and the processes they follow to harness the best returns for their clients so that we can all become better informed investors. And with that, please welcome Alan Dunne.

Thanks very much for the introduction, Niels. Today I'm joined by Hugo Capel-Cure from Rothschild and Co., in London, in the United Kingdom. Hugo is Managing Director and co-head of the investment team at Rothschild. Hugo, great to have you on today. How is everything on your side?

Well, the sun is shining, Alan, and it's all good.

Great stuff. It's a sunny day in Dublin here as well, so we've been blessed with some beautiful Spring sunshine in the last few days. Hugo, I know you're co-head of the investment team at Rothschild. So maybe just to frame the discussion today, could you give us a sense on the types of portfolios you run for your clients at Rothschild in terms of kind of size of assets and the investment objectives, any constraints, etc.?

Yes, so we look after essentially private clients, but also some smaller institutions and endowments and family offices and things like that. So, very much at the ultra-high net worth end of the spectrum. We manage as a team about £15 billion, so sort of high teens, billion pounds. And our mandate essentially, for our clients, is to do for them what the Rothschild family have achieved over generations, to stay wealthy in real terms. And it sounds very simple, but if inflation rises, which it is at the moment, it becomes a lot trickier.

Interesting. And obviously you've been in the markets going back over a number of decades now. How did you end up as a portfolio manager and a co-head of investments. What's been your investment journey?

Yes, well, I wasn't one of those strange creatures who, age 5, decided that they wanted to be an investment manager and read the financial papers. So, you'll be relieved to hear that, I think. And I really stumbled into it. I mean, I was looking for a job, and I was off a position at Coutts, and I know you had Alan Higgins on your podcast a few weeks ago. So, it was interesting hearing how they're getting on. And I found it really interesting and 30 years later I'm still at it.

Very good. So, you haven't quite figured it all out yet, but still learning, I guess.

No, I now know that I know a lot, lot less than I thought I knew 25 years ago.

Great. And I know along the way, so obviously you were a portfolio manager at Coutts and you were at Deutsche Bank for a number of years with more of an equity focus, is that right?

Great. So obviously, you know, you touched at the outset on that objective, a portfolio investment objective of maintaining wealth for clients, which, you know, sounds easy, but as you rightly say, we're living in interesting times from an investment perspective. We've got rising inflation this year for, I guess, for the first time… well, in the last couple of years, for the first time in a number of years that we've had significant inflation. How has that been a challenge for the portfolios? Or have you been making particular investments to insulate portfolios from rising inflation?

I feel this is a leading question, Alan, because I know where it's leading. And the answer is, firstly, we have to think about inflation because we're talking about preserving the real value of our clients' portfolios. We can't hide behind a benchmark. We have to think about inflation.

And the answer is, when equity markets are going up and inflation is non-existent, it's easy, easy keeping clients wealthy in real terms. When inflation's picking up and the other asset classes are coming under stress, it becomes much, much harder.

So, we've been doing a number of things. And one of the things (and I know it's very dear to your heart) is thinking about how we can find other ways of protecting us from inflation. And one of those things is the trend followers or the CTAs. The way we view it, the way I view it, is that inflation itself has a trend. It's a trend in prices rising day after day.

When we look at the genesis of the recent bout of inflation, a lot of it's coming from things like commodity prices rising. So, certainly a key strand in our inflation thinking is around alternative assets such as managed futures, or trend followers, or CTAs (there seems to be lots of different words for the same thing).

Another strand is the inflation linked bond markets and derivatives of that, which are very interesting. And another thing is thinking, really, about going back to stocks, about the kind of companies that are going to be able to pass prices through and be an inflation hedge. But we aren't deluding ourselves that rampant inflation is great for stock markets because history relates that it isn't.

Right. So, more of a case that up to a certain level, a certain amount of inflation can be good for stocks, but not too much. Is that it?

Yes. And you mentioned, you know, having all of the different strands, CTAs, inflationary bonds, and the particular types of equities you're looking at. I guess, are some of those decisions tactical or all of those kinds of asset things you would kind of allocate to it from a strategic asset allocation perspective as well?

The word tactical makes me laugh because I've sat on investment committees that attempted to do tactical and generally got it wrong over the years. So, we are very much in the camp of, and I think it was Howard Marks at Oaktree, said, there are two types of investors. There are know everything investors and know nothing investors. And we are know nothing investors. We can't predict the future. But we can certainly think about different kinds of scenarios and we can prepare a portfolio for it.

So, we've been talking about inflation for many, many years. We've been predicting the demise of conventional bonds for many years. And, I guess, better late than never, but it finally seems to be that there are some dynamics which are shifting in the markets. So yes, I suppose we made a tactical decision a decade ago to buy some trend followers and now they're doing well.

Very good. And I mean, in terms of you talk about wealth preservation for kind of high network clients. So, is it fair to say that your time horizon and a time horizon for the portfolios is kind of fairly long-term? And the word long-term is bandied about a lot in the markets. For some people, it's a year. For other people, it's 100 years. You know, if I say long-term to you, what would you understand by that?

Well, I think for a lot of our clients, it's also a generational concept. It's handing down assets, endowments, charitable funds, generation after generation. So, some of our clients have tremendously long horizons. Other ones tell us that they have a long horizon, but it's sort of doled out to us 1/4 at a time.

Yes, absolutely. So, you touched on, kind of give a sense of the types of strategies you're allocating to. Would you say, is there an investment philosophy that sums up your approach at all?

Some people, you know, very much, you know, would say, we're value investors, or we're growth investors, or we're a certain type. If you were kind of describing your philosophy to a client or a prospect, what would you say about the philosophy of how you run money in the portfolios?

You can have a highly rated stock, you know, which has tremendous prospects in terms of growth and is generating tremendous cash flows and that can be cheap. Likewise, you know, you can have a stock which looks cheap and just gets cheaper and cheaper over time. So, we wouldn't say that we're either value or growth, but we're certainly, when it comes to and things like equity investments and other forms of what we classify as return assets, we are fundamentally driven investors. We're looking for great businesses.

And really, I mean, essentially what we're trying to do for our clients (and many of our clients are entrepreneurs who've built up their own businesses and then sold them) is to take cash that's come out of what, by definition, is a fantastic business and put it into other great businesses. And then, that is the long-term vision. That is how we're going to compound over years and decades.

And then all the other things I've been talking about, such as the trend followers, I mean, that is a way of getting from A to B. It's a way of mitigating risk, protecting against major declines in equity markets. I know the crashes that sort of, on a statistical basis, should happen every 10,000 years, but actually happen every 10 years. And it's that long-term vision. So, it's not trying to guess where the market's going to be in 12 months' time, as much as anything else, because we don't have the smallest idea.

Interesting. So, it sounds very much an approach that was similar to, we had Elizabeth Burton, from Hawaii, on here a few weeks ago talking about, you know, maybe there's no need for all of these different buckets. You have kind of growth assets and then you have diversifying strategies. And it sounds like that approach is similar to your own.

Well, in extremis, Chris Cole, of Artemis, who I'm sure has been on the Top Traders Unplugged, very interesting thinker based in Austin, Texas, said that there are only two types of investments. There's long volatility and short volatility. And generally, most investors are 95% short and only 5% long.

So, we think about finding some great investments, finding some appropriate hedges. And I suppose a lot of this, in terms of thinking about asset classes, just comes back to my own experience. So, as you mentioned earlier, I was at Deutsche Bank for a number of years. I ended up, for the last few years, being on the investment committee for the Wealth Management Division globally of a Deutsche Bank.

There we had what looked like tremendously diversified portfolios. We had every asset class you could possibly imagine. We had equities, and fixed income, and structured products, and hedge funds, and real estate, commodities, you name it. We had not only an asset class, but we had a whole team of people behind that.

And then within the equities (and I was in charge of the equities), we had all these different levers we could pull. You could go into emerging markets, or developed markets, or growth, or tech, or other kinds of thematic investments.

Within the fixed income side, again, there was a whole team. And at that time, it was your conventional fixed income, but also there were lots of exciting new things, toys to play with, such as the CDOs, and ABS, and MBS, so on, and so forth, lots of alphabet soups.

And the lesson that we learned from that is that we had a pie chart that looked tremendously diversified. I mean, what could possibly go wrong with that level of diversification? But essentially, we were just replicating the same risk across the whole portfolio.

There was market risk in the equities, and there was market risk in the fixed income. I mean, everybody knows the CDOs blew up, but also things like high yield bonds blew up. The hedge funds had a lot of underlying equity risk in it. The commodities correlated with equities, and the structured products were essentially short vol. So, we didn't actually have a beautifully diversified pie chart. We had lots of cabins, but it turned out that they were all on the same ship. So, when the ship hit the iceberg, it went down.

So, we've learned, I mean, the lesson that me and my co-managers, they all came from other investment banks and had sort of similar experiences. The lesson that we've learned is that if something's going to be diversified, it can't behave the same way as an equity.

It has to be things that either generate the returns differently to equities, and so, I mentioned the trend followers. So, there are times when trend followers can be long equities and correlated, but generally, as you very well know, Alan, the correlation is pretty low. Or it's things which are explicitly long volatility hedges against a major equity decline. Or it's just cash, or proxy cash?

Yeah, interesting. We had Sebastien Page was a previous guest on this podcast and he talked about exactly what you're talking about. I think he'd written a paper called The Myth of Diversification, which is all about, you know, having lots of cabins, but they may all be, as you say, very, very much all in the same ship. So, when you're looking for your cabins, keep an eye on are they on the same ship or different ships?

You actually sort of have to be on the ship to experience it firsthand. And I think it's Mark Twain who said that experience is what you get when you don't get what you want. And yeah, I mean, it is remarkable. And I don't think many investors really realize just how correlated their portfolios are.

Yeah, no, I think that's it. I mean, as you say, the challenge is we can live in kind of stable times for long periods. And in those periods, I guess, these assets will behave slightly differently and give the illusion of diversification, as you say. But then it's in times of stress, you move into basically a different distribution, and things just behave very differently.

Yeah, well, I mean, the joke in our team is, you know, the easiest way of checking whether something is very fragile is by seeing if it has a high Sharpe. If it has a high Sharpe, it's probably going to blow up.

Interesting, yes. And I guess normally you have a lot of people coming into you highlighting what a great Sharpe ratio their strategy has, thinking that that's going to make it more attractive.

Yeah. So, it sounds like that experience at Deutsche Bank with that kind of seemingly diversified portfolio, but ultimately not very diversified portfolio was a very informative experience for you. And maybe, I'm guessing maybe the first step on the path to looking at diversifying strategies more closely, things like managed futures and trend following. Obviously, one of the things that I find, dealing with clients, often people who have that kind of equity and fixed income background and are used to looking at assets from a pure valuation, but it's a struggle with this idea of just allocating to a strategy that just follows the price. I mean, did you find that challenging, making that kind of transition from being valuation focused to looking at more trading oriented strategies?

Yes, so, valuation focused, more so correlation focused, I'd say. Yeah, I mean, it has been challenging. And some of these strategies, famously, you have long periods in the desert where they either don't perform or they perform poorly, and then everybody questions your judgment. But it's the performance that's delivered during difficult times in market is gold dust.

I mean, we have a strong conviction that your traditional 60/40 equity/bond portfolio is essentially a disaster zone. And particularly, if we have a regime of rising inflation, you could easily see both the equities and the bonds coming under pressure. So, for us, the holy grail is finding compelling diversification for equities, but without bleed. And if we can find negative correlations, but without bleed or even a positive return, then that's gold dust.

And you touched on that kind of negative, low correlation, it can be negative between trend following, and managed features, and equities. When you're looking at that as an allocation within the portfolio, are you thinking of it as just purely a diversifier or as a return contributor as well?

Yes, that's a really good question. So, we have a number of different diversifying strategies and we sort of really map them mentally on a sort of on a graph where one axis is sort of diversification or sort of anti-correlation and the other axis is sort of expected return or if it's negative the amount that it will cost to a carrier, so the amount of bleed. And generally everything sort of maps on that line.

So, something like a trend follower is something that we think, fundamentally, is a positive return strategy over time, albeit lumpy, but it's something where that correlation tends to be variable over time. Whereas something at the very other end of the spectrum, like a put option, is clearly anti-correlated, something like a put option on the S&P. But there's a very high cost of carry, particularly if your starting point is high vol. And then everything else sort of maps in between.

So, our ideas, because we can't predict the future, unfortunately, and because we don't know what the path is going to look like, and there are many different paths, we try to map everything along that axis.

Okay, so if you're thinking about, you know, obviously, as you say, you're looking at diversifying strategies, and you can look at, say, pure trend, or you could look at other strategies within managed futures, like short-term trading, or long volatility, or volatility trading, or maybe more conventional discretionary global macro, or systematic global macro. So, there are a number of different flavors of trading strategies there that could potentially be one up for consideration in your portfolios.

I mean, how do you think about differentiating, or obviously you map it onto the thing, the framework that you you've outlined, but is that a challenge to, say, measure or assess a macro manager who might give that characteristic versus a quant trend follower who might give a similar characteristic?

Well, Alan, you can see that I'm smiling. We've sort of tried everything over the years. And the one area where we've struggled is in the discretionary macro side. I mean, these are clever everyday strategies. And where we struggled is that we've never known whether the manager is going to be there. He's going to show up at the time that you have a major crisis. Perhaps he'll be, in his villa in the south of France, or perhaps he'll be on a golf course. But you never know if the discretionary macro manager is going to be there.

And if you're in a put option the day of a crash, it's great. You get a massive spike in vol, you get a big shift in the delta. and you win on both axes. and you get a very geometric response. You know, if you're in a put option over a long slump and volatility is drifting higher, maybe it expires after the money, maybe you don't want to buy another put because it's too expensive at a higher level of vol. And on the other side, if it's something like a trend follower, perhaps your trend followers, long equities the day of the crash, and that's not very helpful. But in a big slump, I mean, that slump is a trend, and they can go short equities over that period. So, we do think about the different paths that markets can take and try to cover the bases, really.

So, by having a number of different types of these strategies, is that it?

Absolutely, yeah.

Yeah, it's interesting. I mean, you mentioned those kind of short, sharp equity market declines as opposed to the more prolonged ones. And you also referenced, earlier tough times for trend following. And I think, if you go back to the last decade, we probably had both. We had a period of tough performance for trend, and also there were a number of kind of short, sharp declines in equities, but they tended to be short-lived.

Tell us about the experience of being allocated to trends during that period. was it a difficult strategy to hold or were you thinking, okay, we should be adding more of that kind of pure long vol, long push type strategy, or do you just take a very long-term perspective and continue to hold both types of strategies?

I know a lot of investors get frustrated owning the trend followers. I mean, anything which spends more time losing than it does gaining is a difficult strategy to own. And there are long periods where you get choppy sideways moves in markets and that's horrible for a trend follower and they don't add anything.

I think what gave us the reassurance and the faith to own the trend followers is, you know, our understanding that they're capturing some sort of facets of markets, which I think are just endogenous to markets and actually broaden that as sort of just a function of human behavior and psychology. I mean, we all want to own things that are going up and sell things that are going down.

For me, the best example of all of that is the cryptocurrencies, which sort of, have to be the purest manifestation of momentum that you can possibly have. And it's amazing how, as they grind higher, and higher, and higher, everybody, who may be thinking, no, I don't want to buy them. If they carry on going up, eventually everybody wants to buy them. So, you can see, in a sort of nutshell, how that works.

So, we always felt that the underlying premise for a trend follower, you know, there are various different academic studies, and there are various different ideas about why they might work. But we understood that there's a behavioral component and that's hardwired to human behavior.

There was a paper that we saw that was actually done, I think, by some academics at the University of Cork showing that trends across financial markets have been exhibited in pretty much every asset class over the last 200 years. So, where they've been able to piece together the data of commodities or the precursors of stock markets, anything like that, and the bond markets, you see exactly the same things.

So, they seem to be a part of human life. And so that's why we didn't really give up, because we knew that sooner or later that there'd be some more trends. We just didn't know when.

Yes. it's refreshing to hear you saying that. I mean, it's something I would have said myself over time, but you're sitting here now, in a period where these strategies have been in well, it sounds easy. But the reality is, you know, two or three years can be quite a long time if you have underperformance for that level. So, it's not without a challenge when a strategy underperforms.

In the same way, I guess, if you look at growth versus value, you may not like that differentiation, but it's a common differentiation in the markets, and values underperform for a long time. You know, with any of those challenges, the challenge of staying invested, is that a tricky conversation that you have with clients or do they obviously rely on you and your team for your expertise to guide them, but do you find you have to spend a lot of time defending a strategy if it's in a drawdown or a period of underperformance?

Yes, I mean, you do. And people want to know why something isn't working and it's entirely understandable that they ask the question. And it's really just, it's our job to explain why these different components have their place in the portfolio, explain that there will always be something underperforming in the portfolio at any one time.

I mean, I remember a conversation I had with a colleague many, many, many years ago when I was at Deutsche Bank, and he was about the put option. He said, I love the portfolio, but there's this thing in the portfolio. The markets are doing great, and this thing's horrible. You know, it's going down every day. It's so volatile as well. It's terrible.

I tried to explain to them; this is the insurance in the portfolio. I mean, much in the way that if you're driving very happily along a motorway, the value of your car insurance is also falling. But that's not the reason why you own it in the 1st place. So yes, we have to have those conversations. And I think it's only fair.

I think a key part of our job ,as investors, is to communicate and to explain what we're doing and to give our clients the reassurance that we aren't crazy, and we thought these things through. And for us, the portfolio is a jigsaw and every piece has an important part to play.

Absolutely. I'm curious, I think in your portfolios, you select individual stocks. as well as doing asset allocation, as well as doing manager selection, I guess. So, you've got kind of distinct skills that are required in a role; stock selection, asset allocation, and manager selection being the three, I guess, from a pure investment perspective. Do you think they're all kind of part of the same discipline or do you find one easier or one more challenging? Or what's your perspective on those three disciplines?

Yeah, well, we have various views on this. And the first thing is that we are low pride investors. We are magpie investors. We will go look for whatever we think is shiny and it's going to make good returns for our clients or be a sensible hedge. So, if it's a direct investment, we'll buy a direct investment. If it's a third party fund, because somebody's better at that particular, you know… If it's equities, if they're better at investing in Southeast Asia than we are, or, you know, if it's something like a trend follower, which is a very, very technical and quantitative discipline, we will go with that.

And I think our feeling, you know, particularly coming back to the equity side, is that there are tremendous advantages of being a stock picker and a fund picker. And the analogy I'd use here is being both a chef and a restaurant critic. I mean, if you were a restaurant critic, but you'd never ever been into a kitchen, I don't think you'd really have an idea of how the dish was put together. And if you're a chef and you go to other great restaurants, you're going to get a lot of ideas.

So, we get ideas from our third party managers and how to construct a portfolio, what kind of stocks to look at. But the fundamental work that we do on stocks, ourselves, gives us a much better idea when we're looking at somebody else's fund. It's just the way it's panned out. And a lot of, I know a lot of our peers either just buy stocks directly or just buy funds, and some consultants think it's odd that we do both things, but for us it makes perfect sense.

Interesting. And then that bit about them being the chef, I guess, reviewing the restaurants, obviously I guess you can be pretty harsh critic in that sense. Coming back to it, obviously, with security selection you're looking at the balance sheets, you're looking at the future cash flows. With funds selection, I guess you're looking at people and processes and personalities. Do you think that presents something that makes it more difficult or not?

Yes, I mean, it's fascinating. I mean, the two things are different. And when it comes to our third-party managers, we're looking for partners. And the way we visualize it is it's essentially people who are in our team, but are sitting in different buildings in different parts of the world. And we are looking for a lot of characteristics.

So, we're looking for a shared philosophy around how we think about investments, how we think about selecting the investments if it's stocks. We're looking for high caliber, fundamental, thoughtful, bottom-up research. We're looking for people who we think have the right kind of psychological attributes to be managing money for our clients.

In many cases, these are people we've got to know over many, many years. And sometimes it'll take years before we commit even a penny of capital to their funds. And we like to see how they operate in different environments. We often go out into the field with them. We see them when they're tired or we see them when they've had a couple of drinks as well. So, it really is a dating process where we're looking for people who we think we can be partners with for a very, very long period of time.

And, I guess, part of the whole challenge with that is the assessing. You can look at people's track records, and then you've got to disentangle the effects of luck and versus skill, which is always the challenge from my perspective, as an allocator as well… Has this manager or strategy just been favored by the environment? do you think that there is that overriding temptation to be swayed by performance more so than those kind of qualitative factors that you've outlined?

Funnily enough, performance isn't the first thing that we look at. We are more driven by process than by recent outcomes. It reminds me, there's a famous bit in one of Nassim Taleb's books, I think it was the first one Fooled by Randomness, where there's a guy, he's in the casino and he's at a blackjack table, and he sees somebody has a king and a seven. And you know, rather than sticking, he asks for another card and gets given a four. And the person standing behind them says, great call. And we all know it's not a great call. It's an extremely poor call with a lucky outcome.

We're very keen to differentiate between process and outcome. So, when it comes back to the managers, we're looking for all of those characteristics which we think will lead to good outcomes over time. But we understand that it won't be the case every year and there could be all kinds of exogenous factors which contribute to poor periods of performance.

What tends to happen in the investment industry, as you very well know, is that somebody will have a poor run of performance and then they'll be replaced (particularly if there's a consultant involved), they'll be replaced by somebody else who's probably had a good run of performance. And I think it was James Montier, when he was at SocGen, he did an analysis of UK pension funds and looked at all the managers that they'd fired and all the managers that they'd hired. The ones they'd fired did a lot better afterwards.

So no, performance, I mean, it's something that clearly we keep an eye on, but it's not the key driver of an investment decision, I would say.

So, taking that on a little bit more, obviously I can see the criteria you have for getting into a position with the manager. the trickier arguably one then is after a period of tough performance, and maybe the manager still has all of those attributes that you like in terms of characteristics and process, what would prompt you then to say, okay, no, we've made a mistake here or actually this manager isn't as good as we thought. Presumably, performance can play a part there. But anything else, what are the obvious reasons that would prompt you to redeem from a manager?

Well, again, perhaps it's easy to explain when we talks about the equity managers, and it'd be similar to our investment process. You know, when we buy a stock, we have a roadmap for that stock. I mean, is the company doing what we expect it to do? Is it investing in the way that we'd expect it to invest? Is it generating the kind of margins? Is it growing?

There are a number of metrics that we'll be looking at to see if it's staying on track and on the road. And if it is, and the share price comes off, and other things being equal, we will add to the position. In terms of a manager, again, it'll be, are they doing the things they should be doing? Are they doing the kind of research which we think is appropriate? Are they buying the kind of stocks which we think are attractive in the portfolio context?

Sometimes it almost feels like we can see more value in their portfolios than that they can see. They can get too close to them. They can't see the woods from the trees, particularly when they've been poor periods of performance, they can be shocked by it or whatever happens to be, and they'll be, the world is ending, and we'll be going, gosh, well, that looks like a very interesting collection of stocks.

So, for us, what would worry us the most is if they suddenly change their investment philosophy, and if they suddenly adopt a different approach and it feels very reactive, and it feels like they're just reacting to recent events. And it would be the same on the systematic funds. If we were looking at a managed futures player and they suddenly said, actually, we are no longer a managed futures, we decided we want to be more of a discretionary macro kind of person. That would be a red light.

Yeah, so things that are outside expectations, I guess.

In terms of how you make decisions within your kind of organization, the whole area of decision-making is kind of an interesting one in investment management. We're talking to some of the other CIOs we've had on, the CIO as the kind of coordinator and leveraging the skills of the whole team. When you're managing portfolios, doing asset allocations, is it by committee? Are there many people involved? What do you think is a good process for doing all of that?

What was the famous saying, a camel is a horse designed by committee? Yeah, I mean, if I go back to when I've been sitting on big committees, I mean, they're fabulous sort of optimizers for poor decisions. And generally, what committees do is they decide what… They agree collectively, what nobody believes individually.

So, they come to an outcome, which is generally the most suboptimal. And in investment context, that generally means selling when the market has already gone down. And the reason that happens is, it's all about looking prudent, and clients are expecting us to be conservative, and they've already lost some money so let's take some chips off the table. So, it all sounds sensible, but it's devastating for returns.

I mean, you put a very bad number into your compound series and it destroys the whole series, as we know. I think you should generally, you know, sparing the blushes of the other people on your podcast who sit on committees, you should generally avoid big committees or committees with too many people with the title doctor.

Okay. So maybe two, three people is kind of the right…?

Well, I would argue four because we are a beast with four heads. So, I have two colleagues in London and one who lives in Zurich and the four of us collectively come to what we hope on to big committee decisions.

Yeah. I mean, you touch on an interesting point there, and it's something I think about, you know, as you describe it, a lot of the behaviors that you see in markets can often be put into the category of prudence, and it seems logical, seems sensible, etc. But actually, if you do them, you'll end up with a pretty terrible outcome from an investment perspective.

Whereas, to actually generate good performance over the long term, there has to be some level of insight as to, well, actually, no, that's not a good idea because that's not how the markets work. So, if you sell after the markets had a big drawdown, that typically won't be a great idea, even though it might seem prudent.

From your own journey through the markets, do you think these insights have to be just learned from experience? Can you read them? How do you pick up kind of key insights that would help you actually become a better portfolio manager?

But even if you've pre-committed to buying more when the market goes down, it's still very difficult. It still feels horrible. I mean, you buy something, you might have owned something at 100, it then goes to 70, and you buy some at 70, and the next day it's at 60, and the day after that it's at 50. So, your portfolio is down. You just bought something which is falling, so your portfolio's done even more than it would be otherwise.

Your colleagues and clients are looking at you saying, well, you're not really helping preserve the value of my portfolio here by adding to risk assets. So, it's an extremely difficult thing to do. And again, I mentioned psychology and behavioral investing a number of times. I mean, one of the things that we've really, really learned is that investing, it's not just a pure science. There's a massive human element to it and there's a massive behavioral element to it. And positioning a portfolio so that you are able to buy things when the market's falling is incredibly important. And then actually doing that when the market's falling is even more so because it feels horrible.

So, I mean, practically what people can take from that might be one pre-commitment, I mean, devising pre-commitment strategies, I guess. Which I guess you can, I mean, for your pension, you can kind of invest every month or whatever, regardless of the level of the market, and then you're going to naturally be buying in a dip. But outside of that, I mean, do you need to kind of map out the plan ahead of time that in this type of scenario we will do XYZ?

I think it's vital, Alan, because if there's some horrible headline, such as a global pandemic, and economy shutting down, and the market's in free fall, trying to make sensible, rational decisions on that day when the headlines are so horrible is extremely difficult. Whereas if you can pull a piece of paper out of the drawer that said, when I was cold and calm and rational, I decided I was going to buy X, Y, Z shares and add 2% to this and 2% to that, you can pull that out, you can put the money into the market, and you can get on with it.

So, I'd have thought, I mean, clearly everybody has a different way of investing, but it's worked for us, having a plan. I mean, you never followed the plan perfectly, no battle survives a plan, but having a plan is a great idea.

Everybody has a plan until you're punched in the face.

Mike Tyson. Yeah, absolutely right.

Interesting. I mean, that ties very much in with what we've heard as well from other guests here. One of the themes has been about the different edges that you have as an investor. And one of them is trying to cultivate a behavioral edge, which, I guess, this falls into that category of knowing. And I guess, here in this instance, the insight is that to be successful it will be difficult to do what's uncomfortable. And if it's much as possible, plan for that and pre-commit to it. Isn't that it?

So, I can delude myself that I could see the pandemic coming across the world and I could see the effect it was going to have on global markets. But that's a delusion. Because if we'd all seen it, the market would have already reacted. I mean, the market is a discounting mechanism.

If the investment community knew that the market was going to fall in March, it wouldn't have fallen in March. It would have fallen at the very point that the investment community knew that the market was going to fall. So, we can delude ourselves with these things. And, you know, looking back, oh, we should have added more; looking at the journal on the day, it was an uncomfortable decision.

I think the reason for that, and it clearly comes under some category of hindsight, but the reason for that is that going forward, there's an infinite variety of paths. And you don't know which one it's going to be.

I mean, the markets could have carried on falling much, much further last year. Going, looking backwards, there's only one path. So, you've narrowed it down from the infinite number of paths to one path, and one path is clearly easier to identify.

But, you move forward two years and people who were fortunate to buy back then have kind of forgotten that. So, as you say, just one version of history. So again, I mean, what should investors take from that? Is it a sense of humility, a sense of knowing that anything is possible in markets? Or what would you take from that whole episode?

I suppose it's all, you know, I mentioned Howard Marks, of Oaktree, earlier, the know-nothing investor. You know, for a know-nothing investor, he's done pretty well, let's face it.

I think it's about understanding that different things can happen. Understanding that even if we can predict these different things, we can't predict the probabilities. Having proper, true diversification in a portfolio.

So, you know, not thinking that owning equities and high yield bonds gives you a diversified portfolio. Having not only the diversification, but having things which are going to perform well in some extreme scenarios. So, something, you know, obvious examples of put option and a big equity market collapse. Because having something that performs extremely well when other things are performing very badly is gold dust, because you can sell, go up a lot, you can sell it, you can then use that dry powder to buy your favorite stocks at bargain prices.

And I've had periods in my career when I've wanted to buy equities, but I've had nothing to buy them from. The only way I could buy an equity is by selling another equity, and that's very annoying. So having things which have their moment of glory when markets are doing extremely badly is incredibly valuable because it gives you that double whammy of having a currency that you can spend on cheap risk assets.

Yes, you've touched on a few different people with insights, Howard Marks, etc. Obviously, you've had that kind of experience in markets over the last three decades, whatever it is, that has helped shaped your kind of investment approach, your investment thinking. Any kind of inspirations or people who have very much shaped your thinking from the things you've read, people you've met, etc.?

I have to I have to own up to having made a couple of pilgrimages to Omaha in the last few years. There's some investor based out there who's done pretty well.

What was that experience like? Is that just a show, or do you actually learn much from the whole hullabaloo that goes with it?

So, of course, I'm talking about Warren Buffett and the Berkshire Hathaway AGM, which is, I mean, it's a unique thing. Most AGMs, you know, sort of a cup of tea and a biscuit and 20 or 30 bored-looking investors. The Berkshire one is done in a gigantic stadium with 40,000 people inside it with a convention center next to it with the 100 companies exhibiting, all of the Berkshire companies and the ones that they own big stakes in, with thousands of people in there as well, and lots and lots…

It's very hard to describe. I mean, it's a bit of a rock concert / investment conference / sort of Mooney's convention because there are some sort of Berkshire Hathaway types. And what's brilliant is just the range of other investors you meet there.

There are people, a lot of investors come over from China, for example. So, seeing all these Chinese in the geographic center of Americas is quite strange. But the Chinese generally admire two things, and that's age and wealth. And you don't get much older or richer than Warren Buffett or a Charlie Munger even.

And you just meet other great investors and really interesting people. And it's a very relaxed, informal environment. And you just run into people. You run into them in the queue, just waiting to get into the convention center. So, at 6:00 in the morning, there's already a massive queue. And you'll speak to people from every imaginable background.

So yeah, I mean, if any people listening to the podcast haven't been, then go along. I think you have to buy one book. But you don't have to buy an A share. I think you can buy a B share. So, you don't have to put tens of thousands of dollars down.

Interesting how, you know, one of the things that strikes me, obviously you're impressed by Warren Buffett and Charlie Munger as value investors. And often people who have that mindset are very much, you know, equity value and equity for the long-term. But you also have this respect and interest in investing in trend following, and which is, some would see that as being maybe the opposite approach of, buying high and selling low.

So, what is it about your approach that allows you to marry those two very distinct investment approaches and see a place for the two of them in an investment portfolio?

Yes, we talk about this a lot. I mean, there's more than one way to cook an egg. I mean, there are lots of different ways of investing and a lot of them are extremely different. It doesn't mean that they're right or wrong. And we are fascinated by any investor who, with a long track record, is doing something interesting and found a different insight or a view on the market. It can be fundamental, it can be quantitative.

We try to avoid things which you think are just speculative traps. There are some things, and clearly we can be wrong, but there are some things which just look like bubbles to us and we'll avoid those. But aside from that, I mean, if there are people who've been sticking to their knitting and generating good returns in the different ways, then we think putting them together can be extremely interesting.

Interesting. Very good. We're coming up towards the hour. We normally wrap up with kind of some final perspectives. Obviously, you've been in the markets a number of years and you're now managing significant size of assets. What would your advice be to people who are a bit earlier in their career than looking to transition into a head of investment, CIO type role? What are the key things you would suggest in terms of things to do, things to reach outside of the stuff you've already touched on?

Well, you’re just spoiled for a choice now. I mean, there are so many incredible podcasts now and people are just so happy to share what they've learned. And it can be in every space and what Niels has done with all the Top Traders is amazing. I mean, accessing these people and getting their wisdom.

So, listen to as many podcasts, but be selective about what you listen to because there are so many of them. Read as much as you can. Read as broadly as you can. So, not just stuff that's directly related to investments, but read broadly. Be intellectually open. Understand that, you know, however knowledgeable or clever we might think we are, we know very little really. So, be intellectually open and curious as well.

Very good. Sounds like very wise words, very good advice. So, Hugo, thank you very much for coming on today. I think that's been a fascinating insight into your approach and into how Rothschild think about asset allocation and managing client assets. And with that, I'll pass it back to Niels.

Thank you so much, Alan and Hugo, for a great conversation where you managed to touch on a lot of interesting topics. I have personally spent time with Hugo, over the years, and he really is one of the smartest allocators that I have come across. But what I really like about him and what I think was clear in the conversation today is the practical approach they have to investing and the understanding as to why you choose a certain investment strategy and a manager and that they allow them in enough time to perform across a full market cycle.

This long-term approach is perhaps inspired by investors like Howard Marks and Warren Buffett and is certainly refreshing to see among institutional investors. And I also found Hugo's view on investment committees pretty interesting. Make sure you go and follow Hugo and Alan's work because as you can tell from today's conversation, it is so important that you make a plan for how you want to react when the next crisis emerges. From Alan and me, thanks so much for listening and we look forward to being back with you on the next episode. And in the meantime, take care of yourself and take care of each other.

Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you, and to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute, and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.