#4 Bill O'Neill - Head of the Investment Committee of a London multi-family office

The Nalu Finance Podcast

In this episode of Nalu Finance, we sit down with Bill O’Neill, Head of the Investment Committee at Falco Private Wealth, to explore the foundations of building an effective investment portfolio.

Bill unpacks how to design a portfolio that truly reflects your goals, including:

• Why clear objectives and holding periods are essential

• How diversification really works—and where it can fail

• What risk means beyond volatility and how to assess drawdown tolerance

• How to think about liquidity, asset behavior, and the role of alternative investments
  

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🎙️ Transcript: Stefan Wagner: 00:00 Welcome to the first part of two podcasts with Bill O'Neill.

Intro: 00:04 Nalu FM finance podcast. Insights into the financial markets.

Sponsor: 00:10 This podcast is courtesy of the Zurich branch of Commerzbank AG, which offers over 20,000 publicly offered leveraged structured products in Switzerland. These structured products are accessible through a multitude of channels, including the BX, SIX Exchanges, and Swissquote Bank. More information can be found at certificate.commerzbank.ch.

Stefan Wagner: 00:34 Welcome to the latest edition of the Nalo FM finance podcast. In this edition, we are talking with Bill O'Neill. Bill, after a successful career in investment banking, asset and wealth management, where he worked as an investment strategist and chief investment officer, creating sound investment frameworks, above average investment performance, alongside a highly recognized media profile, Bill moved into consultancy in 2016. He now offers advice to management and clients on macro and asset market strategy and supports in developing investment processes for new businesses. Let's get started. Good afternoon, Bill.

Bill O’Neill: 01:15 Good afternoon, Stefan.

Stefan Wagner: 01:16 I'm here with Bill O'Neill, the head of the Investment Committee of Falco Private Office. Thank you very much for taking the time. And if I might jump in right away with a few questions and probably something to help me myself. I need the help here. I often struggle to set up my own investment portfolio. Often I'm overexposed in property, which is very emotional for myself and interest that I have myself because individual stocks or just purely because of the excitement of buying and selling that it gives you the pleasure. But how really should I go about in setting up my own investment portfolio?

Bill O’Neill: 01:51 Well, I think, first of all, Stefan, forgive me for being the analyst that I am and to my background, but for the logical, I think the first question is like, well, what do you want to do with your portfolio? What are the goals of your portfolio? And that was for most clients we cover. Those goals are multiple. There's no single goal. And from time to time, those goals can actually conflict with each other. You know, the short term fund versus the longer term succession on their portfolios. I think it's really important actually that side of it, because that really determines what sort of mix of risk appetite you're prepared to tolerate and enjoy, what goals you have in terms of the returns relative to inflation, real returns, what sort of drawdown you're prepared to tolerate when there'll be losses on the portfolio for a given period. And I think also what's important is the holding period, which is very important. You know, you're not going to be, I would imagine in the case of your portfolio, a fast trader on all of it. You're not going to be a day trader. But what are you sort of holding period? Are you looking at a time horizon of three years, ten years? And of course the other side of it is that we're operating from a context, an investment context. I think clearly the idea here is that you may harness the characteristics of various assets to actually produce the sort of portfolio you want that fulfills your needs and your goals. Complexity is the goals and the goals will move up and down in terms of priority,

Stefan Wagner: 03:25 I see. And the goal is, for example, let's say mine is, you know, I have a holding period probably three to five years. But how do I assess, in a sense, what the composition then needs to look like? In a sense, does diversification truly help me? I'm not sure about it. As a blackjack player, the more confident you are or certainty you have, the more you should bet. Yes, I mean that does apply here as well.

Bill O’Neill: 03:53 Well, I mean, I think at the end of the day, you know I think this is where the Thing gets complicated you caught the sort of taxonomy of markets in other words, you know What what sort of assets are out there that actually behave, you know like each other that can be combined but actually have distinct characteristics relative to others, you know and a set of equities and the US equities will have characteristics one or the other but might be quite distinct from say an emerging market bond. So you have to divide the world in some way, the existence you actually confront, the context in which you confront. and what you need then is to look at it so basically how do I rank those in terms of you know are these publicly traded assets do we have liquidity how does that affect my sense of what fits my long-term goals and talking particularly about holding period if I need to get the money out you know And so liquidity is an issue, the time to cash. Also, I suppose, the sense in which basically these portfolios are actually publicly traded versus privately traded. In other words, how often are they quoted, etc. And the other point is in terms of the holding period is that we know from theoretical science that the longer the holding period, the more stable the characteristics are going to be the distributions of the returns you're coming through. So if you're a day trader, you're going to find it very hard to actually come down to a distribution of outcomes that are actually in any way stable because essentially you'll have all sorts of weird and wonderful distributions depending on what market you're in and what you're trading. But the longer you hold a mixed set of acids, the more stable those characteristics are of the distribution. It may be normal distribution, but it will have a certain skew, a certain crystosis, et cetera. And that makes prediction a little bit more feasible. And you're essentially applying that context for those mixed of acids to what you want. Am I prepared to say I want a mix of assets that will only really give me a drawdown of 10% say in a year? Or do I want a mix of assets that on some occasion based on history has actually resulted in a 30% drawdown?

Stefan Wagner: 06:12 And do I look at this on an individual asset basis or as a combined on the portfolio?

Bill O’Neill: 06:17 No, it's all about diversification. As Mr. Markowitz said over half a century ago, it's the only free lunch in finance. Diversification is important, that correlation between assets, that negative correlation that allows you to enjoy some control at least of the risk for a given level of return. But it really is what's in the mix, you know, we know, straight up, you know, 60-30-10 portfolio, whatever, of equity, bonds, cash. That will give you a certain kind of risk, but we're constantly trying to map out new areas of the market, new areas of beta, as they say, that actually provide decent returns relative to inflation, but also are diversified. So diversified sources of beta. And that's the holy grail. And where do I find them?

Stefan Wagner: 07:04 Because they are more and more, I find it more and more difficult.

Bill O’Neill: 07:07 And how long will they remain in place? And will that market or that sector, that investment segment disappear? So you have things like interest in forestry, or interest in basically, you know, trade bills. You know, bills of exchange, or you have interest in, for that matter, basically, a market in precious stones and seashells. You know, it's a, is there a market, is there a liquid market in this asset, and what are the characteristics relative to other clusters of assets? And that's the art and the magic, really, of asset allocation.

Stefan Wagner: 07:40 And how do I measure the risk of that portfolio that I built then? Because they're probably not normally distributed when they are behaving that way. How do I look at it? How do I, when I start having it, what do I, you know, how do I measure that I did the right thing or not?

Bill O’Neill: 07:56 Well, the conventional thing is obviously volatility, you know, basically your standard deviation. But of course, when you're talking to clients, that's sort of a very ephemeral concept, you know, a very ethereal concept. And what you want to say is basically, what is the risk of a loss? What sort of loss aversion? Can you tolerate a £10 loss? Can you tolerate, you know, a £1 million loss? you know, what is your what is your appetite for loss for drawdown? And how would you enjoy a surprisingly positive performance relative to the risk of loss? And that's why you have client profiling if Mr. Wagner turns up at a wealth manager, they will profile you, they will ask you very deep, introspective questions about your character and your investment needs and objectives and tastes and that will draw from that basically with using certain algorithms, this is all very clever of course, what your sense of loss aversion is. Or return profit satisfaction because all these things have to be symmetric.

Stefan Wagner: 09:00 How would you describe, I mean I know my perceived or what I would be willing to take at the loss or maximum drawdown. How do I, my pleasure of taking a profit, how do you measure that one?

Bill O’Neill: 09:14 Well, I think it's just saying basically if you, look, observe this distribution of this performance of this asset and you do provide a certain sort of skew to the performance of asset, how would you prepare to include that in your portfolio? And I think there's certain sort of, you know, scenarios presented of profit and loss. and then which would be your preferred pattern of retirement. And all these are done in segments of say a year or maybe even three or five year holding periods in line with what you do. But a lot of this is simply sampling and sampling can be done on historic data or can be done on some sort of form of assumption of retirement going forward. But you're essentially saying, you know, if this were to happen based on the history, how would you react to this? And that's where you have the drawdown of 30 percent of the 95th percentile across the distribution. So you're looking at essentially tails of the distributions. And what are the characteristics? Because it's the extremes that will really affect the client. And most times, obviously, would cluster in the middle, you know, in terms of saying, well, I'm equally balanced or whatever, or I have a very significant aversion towards because this is supposed to be passed on in succession to the rest of the family, you know.

Stefan Wagner: 10:31 At this point, we're going to wrap up part one of this fascinating interview with Bill. In part two, we cover how and when to invest and what to do with alternatives investments like derivatives in your portfolio. Plus how to cut through all the information noise out there.