A Unique Lens On Risk Management

by: WisdomTree
Summary

Liqian Ren and I hosted an investment strategy discussion that covered factor investing, U.S. sector trades and the global outlook, where we were joined by Matt McAleer, Director of Equity Strategies at Cumberland Advisors, and Allison Schrager, economist and author of the new book, "An Economist Walks into a Brothel: And Other Unexpected Places to Understand Risk."

In Cumberland's portfolios, capital is primarily allocated through ETFs. McAleer prefers equal weight over weighting by market capitalization, saying it provides more breadth outside of just the top portion of companies.

Schrager explains risk through a unique storytelling lens, best exemplified by her new book.

By Jeremy Schwartz, CFA, Executive Vice President, Global Head of Research

On last week's episode of our "Behind the Markets" podcast, Liqian Ren and I hosted an investment strategy discussion that covered factor investing, U.S. sector trades and the global outlook with Matt McAleer, Director of Equity Strategies at Cumberland Advisors.

Later, we were joined by Allison Schrager, economist and author of the new book, "An Economist Walks into a Brothel: And Other Unexpected Places to Understand Risk." Schrager talked about managing risk when preparing for retirement, trading bonds and more.

An ETF Strategist Discusses His Global Outlook

In Cumberland's portfolios, capital is primarily allocated through ETFs. Fifty percent of their portfolios are typically invested in a broad manner and through indexes, such as small-, mid- and large-cap or equal-weight strategies. McAleer prefers equal weight over weighting by market capitalization, saying it provides more breadth outside of just the top portion of companies.

Currently, Cumberland has raised some cash in their equity portfolios, taking on a more defensive stance. However, when asked if that more defensive posture would support a factor such as low volatility investing, McAleer finds "low vol" or minimum variance indexes to be overcrowded in the short run, and thus, too expensive relative to the growth they offer.

Outside of broad index allocations, Cumberland also utilizes a sector rotation strategy. McAleer discussed adding to Health Care after recent weakness and underperformance.

Abroad, McAleer watches the relative strength of international markets compared to the U.S. and noted that Europe's equity markets have started to look better. He wonders if this is a false sign, or if the markets are truly catching up to the excess liquidity provided by the European Central Bank.

In emerging markets (EM), McAleer noted how rising U.S. interest rates have caused EM to underperform at times and that the freeze in Federal Funds Rate hikes has been a large reason why he has gone overweight in EM. For the first time in a while, Cumberland has raised exposure for EM to almost equal the weight of developed international markets in their portfolios.

Unique Stories of Risk Management

There are many books that discuss risk and the pricing of risk through complex, quantitative prisms.

Schrager explains risk through a unique storytelling lens, best exemplified by her new book, "An Economist Walks into a Brothel: And Other Unexpected Places to Understand Risk."

Schrager did her PhD in the economics of retirement, where the essential question is, "How do you make your assets last longer throughout your life?" She finds most people have trouble understanding risk and applying it to their lives, even when assisted by a financial planner.

Schrager says most view retirement as accumulating income, managing losses and maximizing the pile of money for retirement. However, the real goal is to smooth resources throughout your lifetime and have predictable income in retirement. This is achieved by managing a variety of factors, such as interest rate risk, and understanding how much income you want and need.

For advisors focused on retirement planning who need to explain risk to clients, Schrager's book is a captivating and quick read that will help communicate interesting stories.

For a quick teaser on the book, listen to our full conversation below.

Jeremy Schwartz, CFA, Executive Vice President, Global Head of Research

Jeremy Schwartz has served as our Executive Vice President, Global Head of Research since November 2018 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity indexes, quantitative active strategies and multi-asset model portfolios. Mr. Schwartz joined WisdomTree in May 2005 as a Senior Analyst, adding to his responsibilities in February 2007 as Deputy Director of Research and thereafter, from October 2008 to October 2018, as Director of Research. Prior to joining WisdomTree, he was head research assistant for Professor Jeremy Siegel and helped with the research and writing of Stocks for the Long Run and The Future for Investors. Mr. Schwartz also is co-author of the Financial Analysts Journal paper, What Happened to the Original Stocks in the S&P 500? He received his B.S. in Economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Mr. Schwartz is also a member of the CFA Society of Philadelphia.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.