Choice Words: Ryan Boothroyd, senior asset allocation specialist, Legal & General

The flipside to that, Boothroyd continues, is the possibility of “a more difficult period for international relations”. “Big countries, rather than constantly integrating and looking for more and more globalisation, are starting to have frictions in the way they behave with each other,” he explains.

“And that can have pretty big implications – it might mean we need to think about higher risk premiums for geopolitical risk and it might be we need to think of wider ranges of scenarios. Really, though, what it comes back to is trying to ‘prepare rather than predict’ with these types of portfolios – making sure you are looking at building something that is robust to a wide variety of environments.”

Mind the gap

Asked about what he most looks for in an investment, Boothroyd highlights the importance of “a gap between what we think and what the market thinks”. “It is very difficult to make money if you are just trying to align yourselves with what everyone else is doing by, you know, buying everyone’s favourite stock or allocating to everyone’s favourite fund,” he elaborates.

“So the core decision-making process for us – particularly on our more dynamic trades – is looking for that gap. A great example would be as we came towards the end of March and our chief economist was pretty concerned about the prospect of ‘Liberation Day’ and US tariffs – probably more so than the market. We felt there was a bit of complacency there and so we went into April with a pretty defensively-positioned portfolio for our more dynamic funds.

“Obviously, that played out pretty well as you then saw people putting up their chances of a US recession, for example. You saw equity markets selling off and then the gap between us – being more cautiously positioned in the market – started to narrow. Then you can close the position. That gap is critical.”

Transcript of ‘Choice Words’ Episode 14:

Ryan Boothroyd, with Julian Marr

JM: Well, hello and a very warm welcome to another in our series of ‘Choice Words’ videos where we get to talk to the great and the good of UK fund selection and UK fund research. I am Julian Marr, editorial director of Wealthwise Media, and today I am delighted to be talking to Ryan Boothroyd, senior asset allocation specialist at Legal & General. Hello Ryan.

RB: Hi Julian.

JM: Let’s kick off with a nice, easy one for you, given what has happened in recent weeks and months. What excites you about the current investment outlook? What gives you pause for thought or concern?

RB: There is plenty of stuff to be excited about at the moment. We are asset allocators and macro investors so, when we get to what we see is potentially a ‘macro regime change’ – so moving from one macro environment to another – that tends to get us pretty excited. I think you could make a pretty credible case that is the direction we are moving in at the moment – we have had this US dominance of finance, of politics and, particularly, of equity markets for the past five years or so and there is a reasonable argument that might be starting to slow or reverse.

And I think that provides pretty interesting opportunities – particularly for more balanced returns from portfolios, rather than relying on a single stock, for example. You know, we tend to have this diversification philosophy – so we are trying to get much more of a spread, avoiding concentration – and so portfolios like ours think that type of environment is probably a lot more helpful.

The difficulty – the flipside of all of this – is that we think we are getting into a more difficult period for international relations. So we have this, you know, concept of ‘power conflict’ – so big countries, rather than constantly integrating and looking for more and more globalisation, are starting to have frictions in the way they behave with each other.

And that can have pretty big implications – it might mean we need to think about higher risk premiums for geopolitical risk and it might be that we need to think of wider ranges of scenarios. Really, though, what it comes back to is kind of trying to prepare rather than predict, I suppose, with these types of portfolios – and making sure you’re looking at building something that is robust to a wide variety of environments.

Democratisation of alts

JM: When you are looking at asset classes, are you developing a view for whether investors and those who advise them should be moving away from more traditional investments – and, if so, towards what sorts of alternatives?

RB: I mean, equities and bonds are always going to form the foundational building blocks of a portfolio – that is just the time-tested way, really. But what you have got to acknowledge is there are environments where equities and bonds don’t perform well – and the particularly dangerous ones are where they don’t perform well at the same time, such as 2022, for example. That is where alts or different types of asset classes can be helpful.

Alts span a very broad remit – but really we are thinking about things that don’t necessarily correlate to those traditional asset classes. So in 2022, that would have been things that give you inflation protection, like commodities or maybe some forms of real estate, for example. But really the breadth and depth of alts is always expanding, and you’re kind of seeing it increasingly democratised, so that people are getting abilities to invest in more and more types of alternative investments, in more client-friendly type vehicles. That is a big theme we have been seeing.

And, generally, when you think about our portfolios, there is pretty basic stuff like commodities, infrastructure and listed alternatives – but, in some of our less liquid portfolios, you can move all the way through into things like private credit, alternative risk premia, catastrophe bonds and all these kind of weird and wonderful things. But equities and bonds are always going to form the vast majority of the portfolio – the alts, really, are about making portfolios more robust to a wider variety of scenarios, really.

Where AI offers an edge

JM: That’s very interesting. Let’s talk a little bit about AI now: as a professional investor, do you think that is a threat or an opportunity – or both?

RB: We are taking the optimistic view, generally, on AI. So one of our core beliefs, really, is that it’s difficult to have an informational advantage in relatively efficient markets but processing of information is potentially an area where you can get a little bit of an edge – and that is where machine-learning and AI can be really helpful.

We have used variations of it for a while on the desk and a good example relates to the Fed producing this huge document every quarter, I think, called the ‘Beige Book’, which is all these different indicators for the underlying health of the US economy, based on interviews and various other bits of data.

It’s very difficult to analyse – it’s very long, it’s very thick – so what we have done is basically develop a sentiment analysis of that publication using AI, so we can track, systematically, what we think is the sentiment of people who are heavily involved in the US economy over time. So that would be a good ‘use’ case.

Another one would be, as more of these commercially available AI models get integrated and gain the right security clearances to be used within an organisation where, you know, data privacy is important, we can see real benefits in taking time from people’s admin to focus more on value-add activities.

So things like Copilot – we have it sitting in the background of meetings, transcribing things, saving someone – you know, a grad or an intern – having to spend an hour writing up meeting notes. And that ultimately means, you know, more effort directed towards more productive things. So, generally, we are trying to take the positive view and, hopefully, it will help both efficiency and data-processing and analysis for us.

Matter of interest

JM: Well, we are raging against the dying of the light, believe me! Or at least I am on my side of things! What is the biggest investment mistake you are prepared to admit to and what did you learn from it?

RB: I have chosen a good one because I think it wasn’t just a mistake for me – it was a mistake for lots of people. So I started working in this industry in 2012 and I think the hardest period was 2022.

I was managing a portfolio of very interest rate-sensitive assets at the time – kind of listed infrastructure and real estate – and I think getting the magnitude of the increase in interest rates and the speed of the increase right was really, really difficult. And particularly when people were conditioned on an environment of zero interest rates, essentially, forever – basically my entire investment career before that.

And this was something I think that didn’t just catch me out – it caught out lots of people in the industry, because the difference between a 3% interest rate and a 5% interest rate on asset prices can be pretty profound. What it basically means you do is you buy things early because you think things look cheap at 3% interest rates, whereas actually you have got another 2% to go and they can get a lot cheaper.

So I think that was probably the trickiest bit – and, you know, I speak to a lot of other investors who had similar experiences. Multi-asset portfolios, for example, really struggled in that environment because your equities were down and your bonds were down and so, yes, that adjustment was pretty difficult, I think, for a lot of people.

‘Blind to our blindness’

JM: OK, then – a really impact. Great stuff. Let’s look for a ‘top tip’ to help professional investors watching this do a better job?

RB: You have to be careful advising other investors on their top tips – because they might have some top tips for me as well! – but I think the big one is being conscious of your own behavioural biases. I think we all acknowledge behavioural biases exist but we are particularly bad at thinking they apply to ourselves. But, you know, they apply to everyone – even the most experienced ‘lord of investors’.

Daniel Kahneman has this quote that we are ‘blind to our blindness’ and I think this stuff is particularly dangerous in an investment context – and particularly if you’re managing a portfolio. So I think it is having a greater awareness of that and trying to put measures in place to get around it.

There are different things that we do on the team – you know, we will have things like, The most senior person speaks last. And we will conduct post-mortems of past decisions to check what we were thinking at the time and whether it was reasonable. That kind of stuff can really help – but I think that is a key vulnerability for a lot of investors that people probably do not take seriously enough.

JM: Yes – I presume that would have probably been too complicated to tell yourself on your first day at work. So what piece of advice do you wish you had been given – or would you have given to yourself – on your first day in the business?

RB: I think, Have more conviction in your own ideas and probably worry less about what other people think. You know, I came into the investment industry – I was relatively insecure when I started; I didn’t really know anyone else who was working in the City; I had a northern accent, had been to a state school and everything else – so it wasn’t necessarily my most obvious surroundings, if you like.

But actually, if you are willing to work hard, if you have curiosity, if you have humility, that is all that really matters in the industry. Generally, my experience has been that it has been very meritocratic. And so, if I was going back to myself then, I would say, Look, have confidence and conviction in your own ideas because you are more interested in this stuff and work harder than most other people, and that will ultimately serve you well over your career.