Pete Mladina, “What You Thought Was Skill Was Just Risk Premia” by Meb Faber
Guest: Pete Mladina. Pete is the Director of Portfolio Research for Wealth Management at Northern Trust. He is responsible for the application of leading research to the Wealth Management investment process. In addition, Pete has written many academic papers, and is a guest lecturer on financial markets and investments at the University of California, Los Angeles.
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Topics: Episode #9
“Do I have enough to fund my retirement?” “What’s the optimal lifetime asset allocation?” Those two questions, stemming from a recent academic paper written by Pete, help launch Episode 9. The answers point toward Pete’s solution for retirement challenges, something called “goals-based” asset allocations (as opposed a singular, static “all-in,” asset allocation applied to your entire capital base). In other words, your specific goal – say, college tuition, a second home, maybe a trust – dictates the asset allocation of the associated, earmarked funds. From there, Meb and Pete transition to a discussion on factor-based investing, starting with “term” and “market” factors. According to Pete, “Ninety-five, ninety-six percent of the return variation of all managers and funds in the Morningstar database are explained by…basic factors.” Meb then asks, “What are the best diversifiers to a traditional portfolio?” Hint: Pete’s response includes Meb’s “desert island” strategy. They then discuss whether individual smart beta factors such as “value” should be evaluated relative to their own historical valuation. Your own answer will likely reflect whether or not you believe markets are mean-reverting, a topic often debated. They then touch upon risk factors as applied to REITs before diving into a discussion of the Yale Endowment allocation. Pete tells us that Yale’s outperformance over the decades really boils down to just one thing: exposure to venture capital. The rest could be replicated in a factor-tilted portfolio. They wrap up with a reader question: “How do you know when your strategy no longer works?” Find out Meb’s and Pete’s answers in Episode #9.
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Links from the Episode:
- “Characteristics of a Sound Goals-Based Investing Method” – Pete Mladina
- “Illuminating Returns of Elite Investors” – Pete Mladina
- “Optimal Lifetime Asset Allocation with Goals-Based, Lifecycle Glide Paths” – Pete Mladina
- “Yale Endowment Returns: Manager Skill or Risk Exposure” – Pete Mladina
- “Portfolio Implications of Triple Net Returns” – Pete Mladina
- Understanding Human Capital – Morningstar
- “Buffett’s Alpha” – AQR
Running Segment: “Things I find beautiful, useful or downright magical”:
- Philosophy: Return to the things we enjoyed as children – Pete
- Fiverr – Meb
Read the transcript here.