#5 The 2nd instalment of my interview with 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 Investment Committee at Falco Private Wealth, to explore how to build robust investment portfolios in today’s complex market environment.

Bill dives deep into practical asset allocation and macro strategy, including:

• Why 80% of portfolio performance is driven by strategic asset allocation

• How to rebalance portfolios in response to macro regime shifts

• Where derivatives and structured products can enhance or complicate diversification

• The value of staying humble and distinguishing signal from noise in market forecasting

• How alternative investments are reshaping portfolio construction

He also shares insights from his work at Falco Private Office and reflects on the enduring lessons from his favourite financial movie, The Bonfire of the Vanities.

🎧 Listen Now On: Apple Podcasts | Spotify | Youtube | Podomatic

🎙️ Transcript:

Intro: 00:06 Welcome to the second part of the interview with Bill O'Neill.

Stefan Wagner: 00:34 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 to 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 begin at taking a look on how to start investing.

Bill O’Neill: 01:08 I'm a true believer in pound averaging and euro averaging. I think you build clearly the core of the portfolio which is largely liquid and publicly traded. And if you can obviously using ETFs or active funds. Most now, you look at the industry, 34% of portfolios are actually driven by passive structures. The theory suggests up to 80% of the experience we have will be based on asset allocation. The actual, well, the return experience, return risk experience would be driven, determined by the asset allocation that you actually set. Wow, okay. Rather than actually stock picking or TA or personalized tactical asset allocation. That's always been the sense, really, with wealth management in the years that I've been there.

And I think that's been important. That's really important in terms of getting the asset allocation right. Look, at the end of the day, you can build an asset allocation really quickly in the modern world using passive strategies. So you've got market exposure. So you're exposed to that 75, 80%. Then you have the enhancement around tactical asset allocation, which adds another 10 or so. And then finally, that's 10. It's really just stock selection. So all this thing that people get upset about and get really, really hurried about and get excited about. At the end of the day, for a core portfolio that lets you eat well and sleep well, that really is, at the end of the day, driven by the correct and appropriate allocation. And that should be a dynamic. That shouldn't just be determined at point A, you know, at T equals one, and then left there. It has to reflect your needs as well. That's where client advisors come in, in terms of the review, et cetera. It's very important.

Stefan Wagner: 02:53 That was a little of my next question. When is the next best time to rebalance? Something has become cheap or become expensive?

Bill O’Neill: 03:02 Not in the middle of a crisis. I mean, clearly things like, for instance, the new normal, which has evolved for the best part of a decade now, really, of low nominal interest rates, low real interest rates, a lower bond premium if you come between cash and long-term interest rates, a tendency for equity risk premium to rise, the required equity. All of that feeds into the models and all of that will essentially chuck out a different allocation. So for instance, At a very, very large, as a wealth manager that I was, you know, up to some years ago employed with, there was a big rethink in recent years about the equity exposure because they felt essentially that, first of all, you know, a lot of the characteristics, returns and volatility characteristics were better achieved by using a high-yield portfolio, a mix of U.S. investment grade and U.S. high yield.

The argument for actually holding longer-term duration was probably, so short term security, duration was actually a better risk, you know, basically taking on duration risk at that, but given the war, obviously, in other words, that the real interest rates would continue to move down, which was obviously very, you know, very, very accurate. And so, so that I think was sort of basic, but it shifted the portfolio to an other, a non-sovereign debt exposure away from equities because essentially you're saying the return, the equity risk premium essentially exposed after the event would decline over time and the valuations would have to be cheaper to actually meet the required risk premium as a result.

Stefan Wagner: 04:44 And then, I mean, that's because that's where the world I come from. Yeah. And derivatives, do they have some use in there? Can there be? And if yes, then how would you apply them?

Bill O’Neill: 04:56 I would say largely in form of execution. I think basically, a form of you want to basically quickly execute into a market. I think the use of derivatives there to gain exposure basically, what's the underlying sort of, you know, the delta one basically, but it takes a little time to build. We would see them doing that. And I think we, certainly my experience with use of derivatives has been, it's been a way of actually taking exposure relatively quickly. Leveraging these situations is, account, it has to be explicitly referenced in a portfolio.

And we would send obviously clear references to things like the alternative investment side, you know, 30-20, 30-30 rules, et cetera. But the idea would be explicitly dealt with more in the AI side, which obviously clearly investment trusts, you know, But I think in terms of actually operating a multi-asset portfolio, derivatives have seen a way of enhancing what's known as the transfer coefficient, which is the information coefficient, which is essentially around the management skill, et cetera. But the transfer coefficient is actually about the execution, basically. how efficiently you actually capture the asset relative to cost of dealing.

Stefan Wagner: 06:23 And you see, in this case, derivatives, you think… And they have been used.

Bill O’Neill: 06:27 I mean, you could use derivatives. And I, myself, I basically come from a background where it's been very much so long only Delta, Delta 1, you know. because essentially it's saying let the volatility play out through say your equity exposure or your more risky credit exposure and the natural diversification that a multi-asset portfolio then presents. And then what has happened of course is that structured products begin to interfere with that because the risk return payoff is actually There's a kink, a skew. It has a very different distribution. It's very difficult to integrate. Because we go back into the world we actually presented with, the taxonomy, the world of capital market assumptions. You know, the long term return from basically U.S. equities is going to be something in the order of 6 to 7 percent with volatility of 15, you know, based on deviation 15 or whatever. Now, if you are sticking a derivative into that, that is that's quite a different payoff stream. Do you follow me? Yeah. So essentially, you're at risk of undermining some of the foundation pillars of the optimization, let's put it that way.

Stefan Wagner: 07:41 Yeah, I think the optimization has a hard time dealing with the derivative in it.

Bill O’Neill: 07:44 It can, it's not impossible, but it's a different form of anabolic and that's housed in a different place.

Stefan Wagner: 07:49 Yeah, yeah. And that's why it's often you find in the alternative bucket and it can be left there. Now, often when I do this, you know, you're trying to, you know, find ways of listening or finding out what's happening to the market. I think Warren Buffett once said, you know, I've never seen a rich economist. They all seem to be know everything, but show me a rich, actually one who got it right and made money out of it. So which camp are you? What would be your approach? Because there's so much information out there. What do I listen actually to? Who should I listen to?

Bill O’Neill: 08:22 Well, I think I think I think the end of the day, I think you have to be humble. I mean, I think, you know, the markets at the end of the day make fools of us all, really. And I think the important thing is, I think the really important thing is to distinguish noise from signal. How do I do that? I think it's, I think it's, I think, I think it partly is that don't try to be too early and too clever, you know. And, you know, what we're finding in the world the way that basically trends persist for much longer than we anticipate. for instance, the new normal, as I mentioned, of disinflation. It's way, way, way more like negative interest rates, you know, gazillions of basically quantitative easing.

And just, you know, go with it. But don't, don't try to be too smart too early with these things, you know. I often think back to the various sort of, you know, total return, you know, portfolios that were actually built in sort of the late noughties, you know, 10 years ago. So many of them blew up, you know, and then, of course, the whole story of hedge funds themselves and the LTCM, essentially an illiquidity premium, you know, see for what it is. But the big trends, you know, you still have to think about it. I think clearly technology was the one that worked for years and still continues to work. The decline of long-term interest rates is something that's working for years and continues to work in different manifestations.

But I think it is getting more difficult because some of the secular forces are now sort of becoming quite extreme in the market, you know, and but you're saying to yourself like you go with well, how can a USP market of sort of no 20-22 times sits with a bond yield, you know, that can't be sustained much above, much above two and a half, three percent, you know? How does that, you know, how does that present itself? And, you know, how are those reconciled? And that's, I think, the really difficult thing at the moment, you know, when we seem to be at the moment of basically an environment where labor share of GDP is still constrained to basically a lot of what the growth coming is coming through profits, but we've seen already with populism and social, you know, social, you know, disintegration, social fatigue, that may not last forever. We're already seeing serious backlashes.

Stefan Wagner: 10:40 No. You've been with Falco Private Office now for a while. You're obviously implementing things that we talked about. Is there something specific on Falco that got you excited?

Bill O’Neill: 10:52 Because you were a bigger organization before and now you are, I would say, more agile. having some greater leverage to actually have an impact, greater ability, greater scope to make an impact. What I found interesting is actually being able to work with people around the asset allocation side, the top end of the pyramid, let's put it that way. I've been able to work with some of the processes around that and with people I've worked with before. But also it's been maybe in terms of actually looking at how alternative investments can be brought into this as well and actually how they run alongside things from a transactional basis, obviously, in terms of actual, you know, structures, et cetera, original and sale, which is somebody else's expertise, but actually trying to build those into actually portfolios as well, to run alongside what you'd see as being sort of somewhat more conventional multi-asset Delta one.

Yeah, you know liquid structures and I think that's been an interesting one in terms of actually being able to try and look at how those two can marry together, you know, and how did that how does it work being in these? I think what I think I think I think what really is that basically you have essentially the risky part Ex ante you have the 15 or 20 percent risky part which is defined as being essentially for the alternative investment side and then beyond that then you actually have the more can say the more conventional world and But it's interesting how the two can converse with each other in the sense of basically, you know, in this environment, if you were to look at sort of AI as an asset class, be it sort of commodities, you know, derivatives, you know, property, and all the other bits of sort of, you know, the less liquid markets, private markets and such. what are their characteristics and sort of you know how they are becoming more and more an interest to investors and where basically it's not just a question of simply taking the public markets you do have to look and model that some of these asset characteristics as well because essentially clients say okay it's no longer 10% it's now 20-30% of my portfolio you know.

Stefan Wagner: 12:51 And they often have significant leverage and it makes them behave like a derivative.

Bill O’Neill: 12:55 And it's a real challenge for us as allocators because if you want to integrate that against something like, say, a US Treasury or like an S&P, you know, stock or an S&P index, how do you actually do that? Because that's a very different one. Now, of course, with technology and the power of technology, but it's a very different one. That's what I think is the interesting bit in terms of being true to an empirically based process, a system where returns and risk assumptions and the diversification process is built around historical experience. It's not just pulled out of the air.

Stefan Wagner: 13:31 I agree. My last question for you. What are your up to three favorite financial movies and why? I mean, you don't have to come up with three.

Bill O’Neill: 13:43 I think probably the Bonfire of Vanities would be the major one. That's a good one. I would have to say in terms of the others, clearly, I'm trying to think I would think probably that would be my major one. And why? I think it's just because it sort of, it marked, it was the zenith of an era and it actually, it marked the end of an era. You know, basically it was the most, it was the extreme of the era and New York at that time was sort of the crazy system that was going on. But it sort of, it clearly, you know, it manifested itself in other ways as well later. it was just that extreme, you know, that sense of entitlement, that sort of master of the universe, you know, set against, you know, a reality that in some ways was crumbling and essentially brought the anti-hero down, really, you know.

Stefan Wagner: 14:46 No, thank you very much. Much appreciated.

Bill O’Neill: 14:48 Thank you, Stefan.

Stefan Wagner: 14:49 Thank you.