Transcript:
Karen Watkin: Welcome to Alpha Females, the investment podcast from AllianceBernstein. I'm Karen Watkin, and I'm a fund manager in the multi-asset solutions team here at AB. As a multi-asset investor, I love the challenge of looking across the capital markets to deliver the best outcomes for our clients, and I work closely with colleagues across all areas of the investment universe. The Alpha Females are those women who have developed these unique areas of expertise and made their mark in the investment industry. In this series, we'll hear their expert insights on key questions for multi-asset investors. I'm also going to be looking at their career journeys, the challenges they faced, and the lessons they've learned along the way. So stay with me as we uncover the stories of these impressive and inspiring women and gain a deeper understanding of the multi-asset investment landscape. How do you deliver attractive investment returns without taking excessive risk? That's a perennial question for investors, but one that gains particular focus at unpredictable and unstable times. For a long time, the 60/40 portfolio was held up as a useful guidepost for a moderate risk investor, with a 60% allocation to stocks, providing capital appreciation, and 40% allocation to bonds to offer some income and risk mitigation. Yet in 2022, following the COVID crisis, with inflation higher and stickier than expected, we saw both stocks and bonds sell off in tandem, the first time in 30 years for stocks and bonds to both have negative returns for a calendar year. This upheaval made many question the traditional shape of a multi-asset portfolio's balance between equities and bonds, which had previously provided both good returns without too much risk. With this in mind, how then should an investment portfolio be diversified and structured, and how does it need to evolve over time? These are just some of the questions that confront Defne Ozaltun as Vice President and Portfolio Manager for AllianceBernstein's Multi-Asset Solutions team. Defne's job is to figure out how to select and integrate different investment ideas and strategies that depart from the traditional way of doing things. As we'll hear, Defne doesn't come from a traditional investment background. In fact, she originally wanted to be a doctor, but got sidetracked by her curiosity in economics and took a diversion to asset management instead. Defne, welcome to the podcast.
Defne Ozaltun: Hi, Karen. Thank you for having me.
Karen Watkin: Defne, in Investment 101, we're typically taught that diversification is the only free lunch, that by including a variety of different investments, you can reduce risk and have a smoother path without sacrificing overall return. How do you go about finding diversifying sources of return in your portfolios?
Defne Ozaltun: Good question. You open by talking about a 60/40 portfolio. I think that's a pretty good starting point. We take it a few steps further, though. We have a simple but structured framework for thinking about how to build our multi-asset portfolios. Our portfolios, I tend to live in the custom world. When I build portfolios, the first thing I tend to think about is what is the client trying to achieve? What's the client goal? Top of mind. From there, we have three simple sounding layers that have a lot of depth to them. First, we try to determine the asset allocation with an eye to the longer term. What asset classes should this investor allocate to to achieve their goals over the medium-ish term, say five years. That requires us to think about different asset classes, equities and bonds are two of several others. We have to think through the characteristics of each of those asset classes and how they're related to one another as we put them together. That would be layer one. Layer two tends to be thinking through active managers. If it's appropriate to integrate active managers into the solution, then we go out and typically what we try to find are active managers who are selecting securities within a given asset class who we think have skill at doing that, at finding the security that are going to outperform. Then the third final layer is thinking about the now and here. What's different about today as opposed to the longer term considerations we've been talking about so far and thinking through whether any of our medium term expectations might need to be edited a little bit today if we want more or less of something given the environment we're in over the next few months or year. I'd say those are the three elements we consider. The 60/40 portfolio you started us off with is in the first bucket. We tend to almost all of our balanced portfolios, in addition to equities and bonds going back to 2022, have a little bit of allocation to inflationary assets, assets that do well in an inflationary environment.
Karen Watkin: Yeah, I think that's a great introduction to how we think about building multi-asset portfolios. As you've mentioned, there are many layers to it, and we have to think about both the long term and the short term horizons when we're building those investments for our clients. You mentioned the exposure to more inflation-sensitive investment strategies, and that's clearly been something we've had to have much more front of mind in recent years versus perhaps the previous decade where inflation remained much lower than average. Can you talk a little bit more about what some of those assets might look like? Perhaps thinking about those different time horizons, how do you think about evolving your portfolio to adapt to perhaps that changing macro backdrop?
Defne Ozaltun: Yeah, I think what's been interesting is also seeing the shift in mindset required in investors going from a low inflation environment where low inflation is actually a problem to an environment where high inflation is a problem. It's a completely different mindset, and you have different motivations and default modes of what do you do with cash in your portfolio. If you have flexibility to do something, your default options change a lot. Another thing I'll just say is that going into COVID before inflation spiked, we knew from historical analysis as well as intuitively that there were a few environments in which equities and bonds don't do well. High inflation is one of those few environments. That's why we tend to have a small allocation to inflationary assets because it's one of very few, like an Achilles heel of a 60/40 portfolio.
Karen Watkin: I think that's right. What else can you do in an environment like we had post-2022, where you're not seeing that natural diversification, perhaps between the stocks and bonds in your portfolio?
Defne Ozaltun: One very direct thing you can do is you can reduce your allocation to stocks or bonds. That goes into our tactical bucket, where we did and do tactically shift our asset allocation away or toward different asset classes. We reduced duration, meaning bonds, meaningfully going into and around and in 2022. We also like to think about how the underlying active managers may be exposed more or less to stocks that are negatively impacted by inflation. If you have an active manager in your portfolio who tends to like to buy growth stocks, those stocks do much better when interest rates are lower because their earnings are in the future. You might want to think about your exposure to different equity styles and different equity managers and the same thing within the bond universe.
Karen Watkin: I know you've done a lot of work looking at that in terms of the active strategies that we include in our multi-asset portfolios, and to your point, perhaps more importantly, how we think about integrating them. Can you talk a bit more about what are some of the things you look at when you're assessing the active strategies that we might want to include in our portfolio is both on an individual basis, but then importantly, as you look to combine them within a single portfolio?
Defne Ozaltun: The two most important things I think about are, what is the skill of this manager? Do they have a demonstrated history of selecting good securities within their universe. What's their philosophy? Does it align with their track record? The second most important thing I think about is because we're bringing them together in a multi-asset portfolio, we have to think about the factor exposures beyond their security selection that they systematically take, historically, as well as that they're taking at any given point in time, because that tends to correlate with different parts of our multi-asset portfolio. You can start taking unintended risks if you're not keeping an eye on that.
Karen Watkin: We talked in the introduction about this idea of integration, and I think fundamentally, that's probably the most important thing we do as multi-asset portfolio managers. Like you say, it's looking right through to your whole portfolio. It's understanding both the skill of the active managers you're selecting, but also what are the types of investments that they're ultimately bringing into your strategy. I think as well, part of, obviously, what we do is looking not just at our equity or our stock portfolio in isolation and then our bonds. It's really thinking about how all the different pieces might behave together. How do you think about integrating some of the different investment ideas?
Defne Ozaltun: I first try to zoom out and take a very high-level look at their longer-term characteristics index. Then I try to zoom in and cross-check what the longer term is saying with the here and now. There are all sorts of things that change in the shorter term versus the longer term. You have a portfolio manager with an underlying strategy changing, or you have an equity index, including a bunch of new stocks that behave very differently, or all sorts of things are happening in the here and now that is different from the history. I try to combine those two. I also try to construct portfolios with an eye to the tails. So the averages when you're constructing the portfolio are a good place to start, I think. If you leave it at that, though, you're going to get burned. As we saw during COVID, it really made me appreciate those graphs we look at where you look at a simulation history and it'll fall off a cliff during the financial crisis and then bounce back off. In reality, if you were really invested in that strategy, you probably never bounced back because you didn't survive through that trough for whatever reason. I think you have to keep an eye on the tails. I wonder in your portfolios, as you mentioned, because you're focused on income, the tail tends to be quite serious in the likes of high yield credit and illiquidity can be quite challenging. How do you think about that when you construct your portfolios?
Karen Watkin: Yeah, that's a great question. I mean, you're right. The higher income generating assets can often come with more negative tales. For us, it's about looking for ways to mitigate some of those risks. If we're thinking about our exposure to high yield corporate bonds, it's not overreaching for that yield or income. We would tend to try and avoid the very riskiest parts of the market, those companies that we think probably have highest probability of defaulting on their debt, ultimately. Really understanding where those tail risks might come, and to your earlier point, in what type of market environments they're likely to be exposed to that is an important part of how we think about constructing the portfolio. For your portfolios, how do you stay abreast of what's happening? Where do you collaborate? Where do you lean on others? I think sometimes multi-asset investors can be held up as masters of the universe, which, of course, is impossible. Where do you focus your time and attention? Where do you tend to collaborate or lean on others for your investment ideas?
Defne Ozaltun: Masters of the universe sounds very cool. I like that. We should call ourselves. That's what we should call this podcast. Yeah, I agree. I think financial markets are complicated. No matter whether you're an equity investor, a fixed income investor, things are changing all the time. Part of the challenge and part of what's beautiful about this job, I think. I do find that one of the biggest challenges for me personally is figuring out what the right lens adjustment on my camera is, zooming out, zooming in. I try to be very selective with the type of research I consume, and I try to document big trades I put on and learn from them, and I think that's really helpful. We also in multi-asset at AB have specialists for each of those three pieces of the framework I started us off with, the longer-term allocation, the selection of managers, and tactical allocations We have dedicated research teams that do quantitative and fundamental research in each of those buckets, and I do lean on them heavily. Then my role often is really thinking of taking those ideas and figuring out what is suitable for each of my clients. How do I allocate to those ideas? Which of them do I allocate to? How much at any given point in time? Again, the client's goal is top of mind there, making sure that I'm staying true to what they wanted to get out of this strategy.
Karen Watkin: As you think about some of those ideas, and you've talked about the framework that we have in place from our multi-asset portfolios, what do you think it takes to be a successful multi-asset investor?
Defne Ozaltun: Gosh, I don't know if I'm successful yet, so I don't know how to answer that. But I think that being as honest as you can with yourself and thinking through the facts is very, very important. What you see on your screen on Bloomberg, those are just the prices the market is offering you. Making sure that you can distinguish that from the facts is very important. I think it's very, very helpful to have centres of excellence on the team. Other people you can run ideas by, people who have different adjustments on their lens, on their cameras. Having a level head is very valuable. When markets get distressed, everyone wants to do things that are in the best interest of their client, but that can be very, very hard when everything is selling off. What do you think? What do you think are attributes of a strong multi-asset investor?
Karen Watkin: I think the idea of having the centres of excellence is really important. Like I said, we can't be expert in everything, but what we can be expert in is bringing those ideas together and integrating them to meet client objectives. I think the level head is important. One of the things I really like was from the book by Annie Dukes on Thinking in Bets, where she talks about how you think about good decision making and that the outcome of a decision does not reflect the quality of the decision itself. As you said, when you're navigating through tumultuous markets, you have to remember that a good decision can sometimes lead to a bad outcome. Then Actually, what you need to do is make sure you're assessing that decision-making process and refine that and learn from those experiences. I think that probably holds for all investors, not just multi-asset investors. But I think they're some of the key things.
Defne Ozaltun: Yeah, I agree.
Karen Watkin: I talked a little bit in the introduction about your diversion from medicine to asset management. What took you on that path and what brought you to your career in multi-asset?
Defne Ozaltun: I grew up in Turkey and had a heavy math and sciences education there. And so I thought, what better use of those skills then to become a doctor or an engineer? Then in college, I came to the US, and the college system here is very different than it is in Turkey, where you specialise very early on in life and continue that through college. And I was able here to take a class in economics, which just fascinated me. It was an area that I had no exposure to, literally. I didn't know what stocks and bonds were, let alone what the Federal Reserve was. And I felt it was an important element of how our world worked that I wanted to learn more about. And I ended up majoring in economics, taking all sorts of classes, studying a little bit in China. And I just I loved it all. I thought it was global. I thought it was relevant. And it was an area where the learning curve was very, very steep.
Karen Watkin: I think for me, it's one of the most appealing parts actually of a career in asset management is that learning never stops. There's continuous growth. The markets are always evolving. There's always something new to be learned. What do you think is the most challenging part of what you do when you look at your career history and the different market cycles you've navigated over that time? What has been perhaps most challenging during that period?
Defne Ozaltun: I think doing a good job of constructing portfolios on the long versus shorter term is quite challenging. It seems obvious when you say it, but things constantly change. Staying on top of that and making sure you're thinking that your framework is solid is very, very important because that's all you're left with when things go south. I think I'm still working on that. If I can get my framework to a good place, I think I'll be in a good place, but I'm still working on that.
Karen Watkin: What are some of career highlights? What are you most proud of?
Defne Ozaltun: I absolutely love it when we can deliver on a client's objective. It's the best feeling. I really like also bringing in new clients, talking through what their challenges are, how we can construct something that meets what they need, and actually winning a mandate. I get a thrill out of that. I love working with our team on a day-to-day basis, and when markets move, debating what the drivers are and what actions we should take in portfolio Those, I think, are my favourite elements of the job.
Karen Watkin: Fantastic. Well, Defne, thank you so much for joining me on the podcast today. It's been a real pleasure.
Defne Ozaltun: Same. Thank you for having me.
Karen Watkin: I think Defne did a fantastic job of really explaining what it takes to be a successful multi-asset investor. As she described, it can be complicated. There are lots of moving parts to navigate. But some of the key ideas she shared that I really liked was this idea of adjusting the lens on her camera, so knowing when to zoom in and when to zoom out. And then as we talked about having that framework of trying to bring together your different investment ideas of long term asset allocation, active investment strategy requires both a robust way of thinking about those ideas, but also having centres of excellence, having dedicated research teams that can really drill down into each of those areas of expertise for us as portfolio managers to then bring it all together to meet our clients' objectives. Then this idea of time horizon and being able to balance what we need to deliver for our clients over the long term, whilst also recognising that the shorter term, perhaps more volatile market periods, can be very challenging for investors to stomach. We have to find ways in our portfolios to navigate those and ultimately, try to give a smoother path for our clients and our investors. I think Defne always has a strong viewpoint, which is important when you're running portfolios. I think she also shows a very clear intellectual curiosity. She showed that with her diversion from studying medicine to being fascinated in economics and wanting to learn more about that and the way the world works. I think from both our conversation today and my other experience with her, she brings that every day. She is always questioning things. She is always willing to dig deeper to find the right answers for her portfolios and her clients.
Karen Watkin: That brings to a close this episode of Alpha Females, the Investment Podcast from AllianceBernstein with me, Karen Watkin. If you've enjoyed this episode, don't forget to tell your colleagues and friends about it. It only remains for me to thank Defne Ozaltun. This episode was produced by Richard Miron from Earshot Strategies.
