E257: What I Learned Advising the World’s Top CIOs at Goldman Sachs
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this episode, Julia Rees Toader, CFA and Founding Partner at PrinCap, shares insights from her decade advising the world's top CIOs at Goldman Sachs Asset Management. Starting as an intern and rising to Global Head of Portfolio Strategy, Julia worked with sovereign wealth funds, pension plans, and ultra-high-net-worth families on portfolio construction and asset allocation. (01:41)
• Main Theme: Julia reveals that the world's best CIOs make investment decisions based on gut instincts and emotional considerations alongside quantitative analysis, challenging the traditional belief that numbers alone drive sophisticated investment decisions.
Speakers
Julia Rees Toader
Julia Rees Toader, CFA, is the Founding Partner at PrinCap and former Global Head of Portfolio Strategy at Goldman Sachs Asset Management. She spent a decade advising sovereign wealth funds, pensions, private banks, and ultra-wealthy families on portfolio construction, risk management, and asset allocation. Julia started as the founding intern on the Portfolio Strategy team at Goldman and grew the business over time, eventually becoming its global head.
Key Takeaways
Gut Instincts Drive Elite Investment Decisions
The most successful CIOs combine emotional and qualitative considerations alongside quantitative analysis when making investment decisions. (02:01) While technical analysis and numbers matter, Julia discovered that as investors become more senior, they increasingly rely on their gut instincts. This was a surprising revelation for someone classically trained in modern portfolio theory. The best decision-makers develop a holistic "both sides of the brain" approach that balances rigorous analysis with intuitive understanding of market dynamics and human behavior.
Diversification Doesn't Drive Behavior
Despite textbook theory suggesting diversification improves portfolios, Julia found that diversification alone doesn't motivate people to actually change their investment allocations. (03:12) Moreover, people won't invest based solely on strategic merit - investments must make tactical sense in the current moment. This insight reveals a crucial gap between academic portfolio theory and real-world investment behavior. Successful portfolio construction must account for human psychology and timing, not just mathematical optimization.
Home Country Bias Creates Hidden Alpha Drags
One of the most consistent patterns Julia observed globally was significant home country bias, often representing 10 times the appropriate weighting in portfolios. (13:33) For example, UK investors would hold 50% UK equity in supposedly "global" portfolios, funded by underweighting US markets. This concentration without additional expected returns created a persistent drag on performance over many years. The bias was so embedded that even professional investors would "glaze over" its impact, making it an invisible but significant detractor from returns.
Options-Based Hedging Frees Up Capital for Higher Returns
Instead of traditional 60/40 portfolios using 40% fixed income for risk management, Julia advocates for options-based hedging to achieve similar downside protection while freeing up more capital for equity investments. (09:04) This approach allows investors to maintain higher equity allocations while still protecting against significant drawdowns. The key insight is that most investors care more about avoiding losses than limiting standard deviation, and options-based strategies directly address this concern while potentially improving long-term returns.
Value at Risk Resonates More Than Standard Deviation
When explaining portfolio risk, Julia found that value at risk creates more meaningful conversations than traditional standard deviation metrics. (25:58) Instead of saying "your portfolio has 8.1% standard deviation," she tells clients "in 99% of one-year periods, we'd expect to be doing better than a 19% loss." This approach helps clients viscerally understand and prepare for potential drawdowns, leading to better behavioral outcomes during market stress. Risk communication must bridge both intellectual and emotional understanding to be effective.
Statistics & Facts
- Julia observed UK portfolios with 10 times overweight in UK equities compared to global market cap benchmarks, with supposedly "global" portfolios still holding 50% UK equity. (14:03)
- Private banks allocated up to 50% of their core equity exposure into thematic equities during the growth factor boom around COVID. (43:51)
- A hedge fund Julia mentioned has been up 100% for three consecutive years, demonstrating the kind of outsized returns possible in concentrated strategies. (23:46)
