The Exchanges

Q So if you take equities as an example, you mentioned valuation, you could think of the basic factor assessment, quality, size. What are the levers that you'd like to pull and just say your equities portfolio?

A This is where we have spent a lot of time over the last few years, taking asset allocation frameworks and applying them within an asset class. So you mentioned equities. We, like everyone else, noticed that it was increasingly difficult to add value, to drive alpha within parts of the equity portfolio. So think large cap US equities. Very difficult to add excess returns. And we had a problem. We had A very large part of the portfolio allocated there. It's actually the largest for most clients, but it was harder to generate returns beyond the broad based indices. And we developed something that I think is quite innovative. We started out thinking about asset allocation decisions. We use a regime based framework. So we understand economic growth and changes in economic growth and the sensitivity of asset classes to those changes. So what are cyclical assets or what are counter cyclical assets? And then we said, okay, what if we just took that same framework and applied it within equities? Are there factors or sectors that also behave that way? And what we found is the answer is yes. So things like size and value tend to be more pro cyclical. Things like quality and low volatility tend to be counter cyclical. They're more defensive. And are we able to actually systematically harvest those style preferences and Using a business cycle framework. And in 2017, we partnered with FTSE R…

AI assessment note: “we started allocating based on historically rewarded factors during stages of a business cycle.”

Q So what was that schooling path like from there?

A We'd settled in Colorado, and I went to elementary school, middle school, high school, and actually college. I went to the University of Colorado Boulder, and I got a degree in finance. What's really interesting is my parents basically had to start all over. They couldn't carry forward those jobs that they had in Iran to the U.S. So my upbringing was very much unique in that we didn't have all of those structures in place for me and my brother and sister to really Be successful. We had to learn a new process, learn a new system. So I put myself through school and learned along the way, I would say, because my parents weren't really there to give me that guidance because they were also learning what it was like to be an immigrant in the US. But yeah, so I graduated from the University of Colorado Boulder. I spent a few years in Colorado, and then I quickly moved to the West Coast and started my career in finance in San Francisco.

AI assessment note: “I went to elementary school, middle school, high school, and actually college.”

Q What were those different roles that you played in each of those asset classes?

A So on the derivative side, I was supporting our hedge fund business. So BGI had a very large systematic hedge fund group, and I was supporting a lot of their exotic transactions. Credit default swaps, total return swaps, inflation swaps, interest rate swaps. At the time, all of that was bespokely negotiated. Pre-financial crisis, there wasn't any standard mechanism to trade those things. So you'd get a document that was like a hundred pages long that you'd have to review in order to Get confirmation with the counterparty that you actually had a trade. So that was the experience originally. Fixed income, very focused on credit and multi-sector. So the long-only systematic group at BGI was really, really successful thinking about index-based concepts. So everything was methodologically driven, fully transparent, which was actually really interesting because I ended up moving into the ETF business, into the iShares group, And I spent many years working with index-based fixed income solutions. More recently on the equity side, applying some of those systematic approaches that I've learned in the past, but to a set of new asset classes. So within equities and more recently thinking about public, private, and multi-asset investing.

AI assessment note: “So on the derivative side, I was supporting our hedge fund business.”

Q As you look at return composition, what have you found are the biggest drivers?

A So I think as an industry, we spend a lot of time thinking about the bottoms up piece, idiosyncratic piece, but the majority of your return comes from your top down asset allocation decisions. So think about really simply If you're underweight equities over a prolonged period of time, irrespective of how you sourced that equity exposure, you're probably going to be underperforming your benchmark. If your benchmark is sixty-forty and you have a structural underweight of 10% over a twenty-year horizon, you have to do a really amazing job picking managers and thinking about style exposures. Very difficult to overcome the fact that you're underweight equity risk. So the majority of the returns are going to come from your asset allocation decision. I would argue an equal, maybe not exactly equal, but pretty close is going to come from your style decisions, and the rest is going to come from idiosyncratic, but we've spent all of our time talking about that piece, which I find really fascinating.

AI assessment note: “the majority of your return comes from your top down asset allocation decisions.”

Q What was it that drew you to finance?

A So actually, I didn't really know what I wanted to do. I found a role at an RIA In San Francisco, that honestly was something that was more luck than really intentional at that point, and I basically packed up all my stuff and moved to San Francisco, and that, I think, really was a time where my understanding of finance was quite different. I couldn't have told you what an investment banking job was like or what an asset management job was like. So that was my first experience. Quickly from there, I got a job at Barclays Bank, which was probably what really shaped my career from there. I decided that I wanted to be more on the institutional side. The RIA channel was very heavy on client-facing activity, which I enjoyed, but I was more analytical, and I tended to be more interested on the investment side. So the Barclays job really helped me get some of that experience that Helps me today with my current job.

AI assessment note: “I found a role at an RIA In San Francisco, that honestly was something that was more luck”

Q So you have this widely dispersed range of needs. And you're trying to create that benchmark and execute. What sort of an overriding investment philosophy do you bring to serve these clients?

A So the team is very much a top-down asset allocation team, and we think about asset allocation in a regime-based framework, so business cycle-aware framework. Everything we do is geared towards understanding long-term Return drivers, so strategic asset allocation decisions, and shorter term return drivers, so think six months to three years, tactical asset allocation decisions. From there, it's really about how we implement, and we generally implement through managers. So we're selecting a manager within public equities to get the exposure that we're looking for in equities. We are selecting a manager in private credit to get exposure to direct lending or distressed credit. We're not directly investing in those markets. So that's the last piece of it, is the portfolio construction and manager selection piece, which becomes really, really important because it's bringing the puzzle pieces together. It's a little bit art and science. You can't perfectly do that through your regular analytics reports and reports that you get from the systems. You have to really think about both the quantitative and qualitative aspects of what makes a manager successful and how that manager behaves with other managers in the portfolio.

AI assessment note: “the team is very much a top-down asset allocation team, and we think about asset allocation”

Q Now, in equities and fixed income, the levers are reasonably known in terms of the drivers of return. You get into some of the alternative categories. Some of it is a little harder to put your finger on what's going to move the needle. So how do you think about that structure, applying it to alternatives?

A I think the challenge in alternatives is that you actually can't really be that dynamic. You can talk about the marginal dollar, but the invested capital tends to be long term. When we think about assets on the alt side, it tends to be more about where we want exposure for the strategic time horizon rather than the tactical time horizon. Unless we have new capital to put to work, in which case then we try to understand where we are in the business cycle. So there may be certain asset classes that tend to perform better in early stages of an upswing and certain asset classes that tend to perform better in the early stages of a downswing or in a prolonged contractionary environment. There, I think the liquidity is going to be the key factor. Are you able to raise cash or move between asset classes or not? The answer is generally not. So we tend to keep that portion of the portfolio fairly static.

AI assessment note: “the challenge in alternatives is that you actually can't really be that dynamic.”

Q What have you found about the predictability of the asset allocation and the tactical decisions compared to the manager selection decisions?

A So the evidence around factor returns and their cyclical behavior is pretty strong. We've seen over seven business cycles that factors tend to behave a certain way, and it's not just because we've looked at the time series and looked at the performance. There's a really good reason if you think about the fundamentals of those factors themselves. Smaller companies tend to be levered. They tend to have Less cash flow, and they source a lot of their cash flows with external funding. Larger companies, higher quality companies, they tend to be really profitable. They have high return on assets. They source a lot of their cash flow from internally generated activities. They don't rely on debt. So it's really intuitive almost, where you say, well, if we go through a recessionary period, the company that has a strong balance sheet, internally sourced cash flows, very little reliance on debt, Is probably going to weather that storm better than a company that is going to look to the capital markets for help, or it doesn't have as much profitability to weather that storm or cushion that storm. So that's been very, very strong. On the manager selection side, it's harder. It's really hard. I think you can use quantitative and qualitative ways to understand manager performance, but in a lot of asset classes, things will surprise you. The best managers will End up being the worst managers, an…

AI assessment note: “So I would say the hardest part is the manager selection part.”

Q When you have that comfort in the process on the strategic asset allocation, tactical allocation, manager selection, how do you think about active versus passive and just not filling those portfolios with either an index or a simple factor that gets you where you want to be?

A So we have an incredible team. Many of the things that we're talking about are not possible without some of the people that we've hired. So Jeff Bennett on the team who leads manager selection research and the analysts that support him, Are tasked with really understanding where it makes sense to source that exposure using lower cost passive exposures, and where it actually makes sense by an active manager. The answer is not always passive, always for here, and active always here. It depends, and I also think it's not just passive versus active, but vehicle choice. When does it make sense to use exchange-traded funds versus Mutual funds versus private vehicles. These are all decisions that the team is making based on what we understand the client's needs are. A lot of it is driven by what we hear from the client and their preferences. Sometimes they actually have preferences around managers that we then have to incorporate into the portfolio.

AI assessment note: “tasked with really understanding where it makes sense to source that exposure using lower cost”

Q What if you learned both your experience in Vesco and previously about what works in this approach, and importantly, what doesn't?

A Well, so if we're lucky, we're right, 55% of the time. We're probably wrong a lot, and we have to get comfortable with being wrong a lot. What I mentioned earlier around repeatable process and making sure that it's articulated, that allows you to then stick with something, even though maybe it's not working in the short term. Because again, there's going to be times where it doesn't work. Think about, for example, our dynamic factor strategies. We have a period of underperformance. Now do we go and change the process? No, we don't. Because we're highly convicted in the process. That's the first step to a death spiral, is if you keep tweaking and moving back and forth based on current market conditions. So I think one of the things I learned early in my career, and I still believe it, is systematic or investment processes that are well articulated and repeatable tend to have a better effect on short-term behavioral biases.

AI assessment note: “That's the first step to a death spiral, is if you keep tweaking”

Q What's one fact that most people don't know about you?

A Well, I have a son that's neurodivergent, and it's actually been probably one of the things that has taught me the most about life and about challenging situations and working collaboratively with people that might not necessarily think the same way or act the same way. He's been actually one of my best teachers. A lot of long nights of understanding how to interact with him, and it's been very rewarding, and I've actually spent a lot of time thinking about how to bring some of that neurodivergent thinking into the workforce, because I actually think it's missing. I think there's an opportunity for us to really expand the way we think about those skill sets, and especially in something like investing, it could be super helpful to have different viewpoints.

AI assessment note: “Well, I have a son that's neurodivergent”

Q If you look at equities today, how are you thinking about the next few years?

A So our models generally tend to change two to three times a year. So they are pretty dynamic. I would call them low frequency quantitative strategies. If I look at our current positioning, tends to be a bit more pro-cyclical. We tend to favor smaller and middle capitalization companies, value-oriented companies, because what we're seeing from the economy is actually Quite impressive. It's been very resilient. Most people expected a recession by now. We haven't had a recession. Employment is very stable. The consumer is pretty healthy. Generally speaking, in periods of economic expansion and recovery, factors and sectors that have higher operating leverage and more beta to the market tend to outperform. So that's how we're positioned. But we can review that on a monthly basis. So if something changes, we reserve the right To also change. So it's a little bit more of a dynamic approach to thinking about it. And what I find quite interesting, we used to do asset allocation studies for clients every two to three years. Now imagine if you haven't done an asset allocation study for two to three years. Interest rates have moved from zero to five and a half percent. The world is completely different. And if you haven't changed your asset allocation, you're probably missing something. I believe that given the importance of equities within the portfolio, and alternatives and other strate…

AI assessment note: “We tend to favor smaller and middle capitalization companies, value-oriented companies”

Q What have you found special about doing this work inside Invesco compared to the various places you've been before?

A I've been really fortunate to be given an opportunity within Invesco to lead the solutions group. I find Invesco to be a little bit in the middle between what I've experienced in the past. So if you think about BGI, BGI was a really academic institution, really smart, really, really focused people, flat organization. I think culturally we tend to be thoughtful and We tend to think about the ramifications of what we're doing, both for clients, for shareholders, and our team members, but we also tend to be a bit more action-oriented. We're not going to sit around and debate that for the next five years. So I actually find it to be really, really exciting to work here, and the people have been fantastic.

AI assessment note: “I find Invesco to be a little bit in the middle between what I've experienced”

Q There's this marriage that you're describing between strategic asset allocation and tactical allocation. So on the strategic side, let's just say value works. If you have a 25 year horizon, nobody has a 25 year horizon. You better figure out what to do in the middle. How do you bring those together to figure out where you are in a regime?

A If you think about factor investing, the starting point is be overweight all factors equally because their excess returns are negatively correlated, and over time, you will get the benefit of diversification. We agree with that. There's nothing wrong with that approach. But we also understand that over shorter horizons, taking views on factors, taking views on certain styles can be beneficial. So if your benchmark is the broad market cap, your long-term position is a overweight to certain rewarded factors. Your tactical position is how do you adjust that overweight given what's happening in the market today? How should I tilt my portfolio away from both my benchmark and a neutral overweight factor portfolio To harvest potentially excess returns over a shorter horizon.

AI assessment note: “Your tactical position is how do you adjust that overweight given what's happening”