The views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk.
Nick Samouilhan, co-head of Wellington’s multi-asset platform, joins host Thomas Mucha to discuss the importance of adapting portfolios to rising macro volatility, geopolitical changes, and structural shifts.
Key topics
2:00 – Drivers of macro volatility
4:05 – Inflation, diversification, and stress testing
8:15 – Company and currency dispersion
10:25 – Regime diversification
12:15 – Role of hedge funds
14:45 – Private market opportunities
17:00 – Navigating geopolitical risk
20:25 – New rules for investing
NICK SAMOUILHAN:
If you can line yourself up behind those big structural changes and you mentioned security there, we know that many countries there's a discussion about spending more on defense. So if you can line up your portfolio to be in in some ways the tailwinds of these, you are setting yourself up to drive portfolio returns irrespective of the economic cycle.
THOMAS MUCHA:
Macro volatility continues to ratchet up around the world putting consumers, policymakers, and markets on edge. Now while uncertainty can be nerve wracking for active investors, a changing macro backdrop can create opportunities to deliver alpha. From Trump 2.0 to growing geopolitical risks to the mania over AI and the changing nature of volatility itself, the winners and losers of the next ten years may be quite different from those of the last decade. This has important implications for portfolio construction and asset allocation. So joining me today to explore how investors can capitalize on all of this is Nick Samouilhan, co-head of Wellington's multi-asset platform and member of the firm's investment strategy team. He's joining us today from Singapore. Nick, great to have you back on WellSaid.
NICK SAMOUILHAN
Great to be back. Thanks for having me.
THOMAS MUCHA
All right. Well let's start with why macro volatility is rising, Nick. We could dedicate an entire episode to this. But give us an abbreviated version. What to your mind are the biggest drivers of volatility today?
NICK SAMOUILHAN
I think you hit the nail on the head there. There's lots of different reasons for this. We can spend lots of time on that. I kind of boil it down to two things. I describe the last ten, maybe 20, maybe 30 years of a case where from a macro perspective, aggregate supply was quite stable. You know, the labor force was growing, there was some productivity gains. It was quite stable and expanding, and the demand side was relatively well behaved. Governments tended to keep spending relatively in check. And there was a huge focus on keeping inflation down. And I think what's changed now above everything, is that governments now have more than just inflation as a priority. They are focused on other things as well. Whether that is strategic autonomy in certain sectors. You have written a lot about that, Thomas. Or it is about, in some way spending money on some important political cohort or it's about dealing with particular social aspects. Governments are willing to spend money. So the demand side of the economy is moving around quite a lot. And on the aggregate supply side, we're seeing a fragmentation on global supply chains. We're seeing some impacts on the labor market. So what you ultimately have here is the aggregate supply and demand in the economy's moving around a lot. What that means just for investing is we're going to spend much more time in periods where we're growing a bit too fast, and then the brakes get slammed and then we go into a recession and then we overcorrect and we go back out and arguably, we've had that ride for about 18 months now.
THOMAS MUCHA
So you think macro volatility is a new normal?
NICK SAMOUILHAN
In some ways the last 15 years was the abnormal one. Right. And we're going back to a previous place. But yes I think it's just something we need to get used to. It's just one of these rules that now will dominate, or at least, be important to understand of how we invest.
THOMAS MUCHA
Yeah. And I certainly concur with your point about national security playing a higher role, on the policy backdrop as well. And we'll get to geopolitics in a bit. But before we do that, Nick, to your mind, what are the key manifestations of this higher volatility, you know, with regard to financial markets? How do you think about that?
NICK SAMOUILHAN
When you step back and think long and hard about what this means for our portfolios, you kind of come down to three paths. The first one is in a world of higher and more volatile inflation, not terribly high, but just higher and more volatile than we’re used to, our research shows that equity valuations are lower, which makes sense, and interest rates are higher. And if that's your simple starting point, then the returns to beta would just be lower. So if you need to meet returns you need to get them some other way. Right. And that opens up a conversation about portfolios. So the first one is about what you own in the portfolios to generate returns. And we think that needs to change. The second one is that one of the great magic tricks of portfolios on the diversification side is the negative correlation between equities and bonds. When you lose money on the equity side, you tend to make money on the fixed income side. But that magic trick only exists because the times you lose money on the equities is usually when you're going into recession. And in that case, typically central banks are cutting interest rates, so bonds tend to do well. As we've seen that's not always the case. And sometimes the equity market declines because inflation is high, in which case bonds also lose money. Fixed income also loses money. So the second manifestation is you need something else in the portfolio that provides diversification. The third one is just in terms of muscle memory. When you come in each day, what you do on the portfolios, what do you look at. And like most investors, our processes are usually based on an assumption that the past continues. You know, you have some historical model to estimate parameters. You just say, well, if the past continues, what does this look like? And maybe that's not useful anymore. Not as useful as it was, because if the world’s a little bit different in the next ten years, you need to change from looking at historical risk models to perhaps stress testing a bit more.
THOMAS MUCHA
Yeah. That's interesting. One of the key messages that I've been trying to deliver to our portfolio managers, our analysts, is to do more scenario planning because the shifting backdrop, particularly in the geopolitical side, is creating a much wider set of potential outcomes. And yeah, the past is not prologue in a lot of these cases. And so, thanks for bringing that up. That's a key point. What are some of the more practical lessons here then for investors, Nick?
NICK SAMOUILHAN
I want to just go into a bit more detail, which is about muscle memory and stress tests and scenario planning, because I think markets are incredibly good at saying, well, these are the particular rules. Whenever something happens, we should follow those rules. And they become very efficient at doing that. And then investors boil that down into a process. Where things get very challenging is when the rules change, because everyone continues to apply the old way of doing things to what's now a new situation. And you then have these very funny things where things come out of left field. And that, to me is probably the most important practical thing, is to step back and separate out means from ends. What are you trying to achieve? And then trying to work out well, what are the important rules? How are things supposed to react? And many of the rules we've had for some time may not be true. I can give you one that I think many of us have learned in the last 18 months, which is for many markets, whenever the equity market declined, you should have bought them because you knew that policymakers would be stepping in and be supportive. So it always paid to buy on dips. And then it didn't, because the market kept declining, because central banks were worried about inflation. They weren't worried about the equity markets. So the rules subtly but importantly changed. And I think that to me is the most important thing, is to always separate what you're trying to achieve from the way you're trying to achieve it.
THOMAS MUCHA
Nick, what does this volatility mean from some other perspectives? You know return dispersion, regional synchronization, the currency markets. I mean is this a just a more differentiated backdrop which again gives more opportunities for active trading? Or do you think there's something fundamentally different going on here?
NICK SAMOUILHAN
I'll touch on two of those things. You just think about companies and managements and you now take the management that's been used to a reasonably predictable macro outlook where you can do some degree of planning and very low cost of capital, given where interest rates were, and then you transplant them and you put them into a place where visibility is much reduced, where regulatory actions can be strung tomorrow, where tariffs can come tomorrow, and where the cost of capital is real, it's much higher. In that environment, you should see a huge premium placed on good management because that will really help to navigate those waters. And that's a change. So that's the one thing is I think quality in firm management will start to come through, and you need some way of discerning between good and bad companies. On the currency one. This is a really interesting point because we've just finished a period where many countries were converging, they were integrating their economies on the supply chains and the cross flow of capital meant you had this growing convergence of policy and economic cycles. And on the margin and I think that's changing. I think countries are experiencing inflation differently. They're responding to that differently. They are trying to seek autonomy in many key parts of the economy. And what that should mean is that you’ll start to see greater divergence coming forward on policy and regulatory cycles and economic cycles. And arguably we're seeing that. We've had a period now where the US they've been cutting policy rates. And in Japan the opposite conversation has been happening. So we're seeing that already. And that divergence in policy cycles will manifest itself in an increase in volatility on currencies, which is not something you've had to worry about for some time. So currencies now become an important thing to think about.
THOMAS MUCHA
So let's get into the nuts and bolts here of portfolio construction, then, I mean what are your biggest pieces of advice for PMs and analysts and other investors in this environment. And how do you put together the right portfolio? The right asset allocation here?
NICK SAMOUILHAN
Yeah, I think it's stepping through and saying, firstly, do we have the right things in the portfolio? And many of us have spent lots of time thinking about regional diversification, allocating money around the world. But we probably need to spend as much time, if not more so, on this idea of regime diversification. And do we have a portfolio that can do that well if the economy is overheating? Does it do well if we're going into stagflation or at least behave in ways we can accept? So are we diversified to different outcomes of the macro economy? And that's a very different place to where we've been. That's the first thing is what do you own. And I think on the margin, what that path leads you down is to a greater allocation to inflation sensitive assets. And perhaps a greater allocation to hedge funds. I think on the margin is the conversation. The second one is this idea of, well, how do you build in some diversification in the portfolio? What do you own when equities decline because they're usually the biggest risk asset you own. Our research has shown up that, certain styles and hedge funds are very useful in that environment and tend to do well when equities don't, and particularly do well when equities and fixed income don't do well. So that's the other thing is looking at the downside part of the portfolio. And the other one is this idea of stress testing and scenario planning. In many ways most of our processes are built on things like value at risk or tracking error, which assumes the past continues. We should still do that, but we should also ask questions about, well, what if we moved into a very different environment tomorrow? What happens then? And those things about what you own, how you think about diversification, how you think about stress testing, those are very different from what we've been doing for some time.
THOMAS MUCHA
You just mentioned hedge funds and you know the role that those can play in portfolios. Remind us what your research said about that, particularly with regard to positive performance in this asset class right now.
NICK SAMOUILHAN
So we did two bits of work on hedge funds. The first came from this idea that if we looked at hedge fund returns over time, there was a period when they did very well. And then there was a period after the GFC many of them on aggregate struggled to generate the same returns that they did beforehand. And the question was why? And the more we probed into this, one of the main answers is just the opportunity set was much less. If you had much less volatility, things moving around much less, whether that's currencies or rates or individual securities, then there's less room for hedge funds to add value. And then that got us thinking about the corresponding what if we’re going into a place where we think rates volatility will go up, currencies would become more volatile, securities will move in different ways, then maybe the opportunity for hedge funds is bigger and therefore there's a high chance they could return. And that was the first part of research. That then set up the second bit of research was saying, well, what role can hedge funds play in our portfolio? Because usually what happens is you build your portfolio and you allocate to these hedge funds and you say, well, they sit there and their job is to generate returns when everything else doesn't. Right. It kind of just ticks along and irrespective of markets they should generate returns. And then we started to look at styles of hedge funds. And what we found is different hedge fund styles, whether that's macro or equity long/short or so on differ in four key characteristics. And those characteristics are the total returns they can provide, the consistency of those returns, the downside mitigation they can provide, and the diversification. And if you play with those, if you move things around, you can in some ways construct an allocation to hedge funds that plays a very particular role, allowing you to either replace some of the equity allocation or some of the fixed income allocation and play a very particular role in the portfolio.
THOMAS MUCHA
Yeah, it makes sense in a more volatile environment, in a way where you're trying to capture more alpha, these hedge funds give you more opportunities to do so. But what about the effects of macro volatility on some of the other areas of the market that have started to rebound recently? And I'm thinking here of small caps, private markets. Does your thinking change when you're looking at this through those lenses?
NICK SAMOUILHAN
So I think a little bit, with privates, the interesting thing to us is that part of the private equity space, and I'm thinking here about the leveraged buyout space. In that place, high interest rates are not helpful. And higher macro volatility tends to be associated with higher interest rates. And therefore leveraged buyouts which effectively are a big carry process will come under strain. But on the other side, what we find really interesting is that we have seen lots of companies stay private for much longer and therefore accessing the full market, investing across the spectrum, in some ways requires you to have some privates in your portfolio today. So we continue to do research on the sizing of privates in our portfolios and the role they can play. On small caps, this is a really interesting one. I'd say it's an asset class where the index is usually terrible. So the beta contains a number of companies that you probably don't want to own. But the alpha is fantastic because there are lots of companies there that are actually things you really want to own. And in a world where just on the margin, again, going back to your work, Thomas, where countries are trying to localize the production of certain parts of the economy, move things back onshore, small caps may be one of the beneficiaries of that.
THOMAS MUCHA
Well, thanks for the transition here, because I do want to talk about all the geopolitical aspects of this, Nick, which I think are likely to be significant. And, you know, not only is the second Trump administration upending decades of trade relationships and multilateral agreements, they're doing so with that blunt force transactional approach, that could threaten in a worst case outcome to potentially destabilize the global economy and raise a number of key national security risks. Now, of course, I'm looking at this through the lens of a geopolitical strategist, but how do you, as a multi-asset specialist, view the opportunities and risks here? And full disclosure, you know I've been banging the table for a long time about thematic approaches around defense, defense innovation, climate, climate adaptation, given the national security implications. But, you know, how are you approaching the geopolitical aspects through the investment lens?
NICK SAMOUILHAN
I'd say two things here. One is, in terms of a conceptual framework, thinking through the impact of geopolitics on our day to day running of the portfolio, it makes sense to think of it as a chronic versus an acute set up. And what I mean by that is there'll be times where there are flashpoints. There are actually events where it's an acute type outcome near there's an invasion somewhere and that will set off a cascading set of market reactions. Those are hard to predict. You can stress test them. And there are certain things that you could possibly hold in the portfolio. It’s the chronic one that I think is the one we should spend more time on, which is just a general world view that you've laid out there talks to a worse trade-off between growth and inflation, and perhaps on the margin, higher inflation and in some ways countries diverging from each other a little bit more. So it changes how we think about portfolios from that perspective. You're in a world that is moving a little bit more in different directions and there’s slightly higher inflation than it was before. Then, in terms of your second point, and again, we have very similar views here. Most individuals build portfolios either through here’s the global equity allocation or here is a regional equity allocation which we build up. Whereas if you actually look at what's driving certain securities, it's not the country they're in, but it's the particular structural change that they're beholden to. And if you can line yourself up behind those big structural changes and you mentioned security there, we know that many countries there's a discussion about spending more on defense. So if you can line up your portfolio to be in in some ways the tailwinds of these, you are setting yourself up to drive portfolio returns irrespective of the economic cycle.
THOMAS MUCHA
I do want to emphasize the importance of what you just said, which is these are structural changes in the geopolitical backdrop that are leading to very different priorities from a policymaker perspective. And, you know, one of the points that I try to drive home is that this focus on national security, sometimes over economic efficiency, is a fundamental shift in the policymaker priorities. And I do think this is likely to continue. We’re at the end of a very long geopolitical cycle, we're not sure what we're moving towards, but it seems to be one that's going to be more fractured, more transactional. And I also agree that that's likely to lead to higher inflation, lower growth. But more differentiated macro cycles than we had during the heyday of globalization. And so, you know, I do think this creates all sorts of opportunities. And I'd also like to underscore your point about acute risks and how difficult those are to predict. And, you know, one of the things that we're trying to do here at Wellington is really get exposure where we can to these long term structural themes that are likely to be with us, not for quarters, but for years and in some cases, decades. So thanks for that. And, and I'm wondering do you have anything additional to add to that viewpoint in terms of asset allocation?
NICK SAMOUILHAN
Yeah, and I don't want to put you on the spot here, Thomas, but you and I are probably at the age where it was unusual to hear politicians talking about it being okay to outsource jobs overseas because it meant that consumers could have lower prices. And that's not an argument that gets made these days. So I think it's we are in this different place where economic efficiency is just one of the outcomes and probably not the primary one. So we’ve spoken a bit about currencies, and I think it becomes very important to manage that. The other aspect I would say is, bonds used to be very boring in portfolios. You would buy them, and the yield would go down over time. And they generate the slow return. And they didn't really do very much. And now that's not true. And you're seeing a lot of volatility on inflation, on rates, and also between countries. And the world you just sketched out talks to making sure that part of your portfolio, the fixed income, has someone looking at it and saying, well, this is what's going on in China, this is what's going on in Japan, this is what's going to happen in Australia. This is the outlook for inflation. We should switch. And that kind of activity on the fixed income side is unusual and hasn't been needed, and I think is needed going forward.
THOMAS MUCHA
All right, Nick, any final words of wisdom on how we should be thinking about navigating the immediate disruptions as well as positioning portfolios for success over the long term?
NICK SAMOUILHAN
It comes down to this idea of means and ends. Often, we conflate doing something with the outcome, and that's fine if the rules don't change. But I do think now and then we should relook at and make sure that when we come in each day, we understand what the rules are and we're playing them. And there are plenty of times in my career where that’s not in the case. And I think that to just after the financial crisis where yields were critically low, and everyone thought they had to go up and they just kept going lower and lower. And at that point, value had beaten growth for a long time on the equity side. And growth started to outperform and everyone wanted to switch back into value and it was always the wrong trade. And I think looking back, if we'd realized the rules had changed, many investors would have had a different approach. And I think now we don't need to be too heroic about this, but just on the margin, spend more time thinking about an environment where countries start to move in different directions, where structural change, like defense spending, is more important than the economic cycle, where inflation is a little bit higher, a bit more volatile, and where equities and bonds start to move more and the correlation picks up than it has in the past. And then ask yourself, do I have everything in the portfolio that I want for that? Am I doing the right things? Am I watching the right things?
THOMAS MUCHA
Well, it's certainly a brave new world out there. Thanks for helping us make some sense of it. Once again, Nick Samouilhan, co-head of Wellington's multi-asset platform and member of our investment strategy team. Thanks again for being with us here on, WellSaid, Nick.
NICK SAMOUILHAN
Thank you, Thomas.
Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk. Podcast produced March 2025.
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