Alan Dunne is joined by Mike Pyle, Deputy Head of BlackRock’s Portfolio Management Group, to explore how a supply-driven world is reshaping markets and portfolio construction. They discuss the transition from the demand-constrained 2010s to an era defined by scarcity, fiscal activism, geopolitical shocks and the immense capital demands of AI. Pyle explains why bonds may no longer provide the diversification they once did, why hedge funds and market-neutral strategies are becoming increasingly important, and how portable alpha can separate beta from return generation. They also examine AI productivity, equity valuations and what should replace the traditional 60/40 portfolio.

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Episode TimeStamps:

00:00 Mike Pyle’s journey from policymaking to investing

04:30 The shift from a demand-driven to a supply-driven world

07:29 Why the stock-bond relationship has changed

12:09 The return of fiscal activism

15:52 AI, scarcity and the growing demands on capital

19:57 When will AI productivity begin to transform the economy?

22:53 AI, inflation and the future of interest rates

25:23 AI valuations, earnings and whether markets are in a bubble

29:48 Building portfolios for the new macro regime

33:35 Private markets, income and hedge fund diversification

37:06 Why multi-strategy investing matters

42:19 Leverage, factor exposure and lessons from the quant crisis

46:08 Why the environment for hedge funds has improved

48:39 Portable alpha and separating alpha from beta

52:51 What comes after the traditional 60/40 portfolio

56:47 How AI could transform investment management

01:00:19 Mike Pyle’s advice for the next generation of investors

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I mean, to me, that's been the most important touchstone across all of my career and something I try to remind myself of every day sitting in my new role at BlackRock. This is an extraordinary organization filled with people who know their corner of what we do better than anybody else. And if I'm open to that, I can bring things together, connect dots in ways that are going to deliver value for clients and deliver value for the firm.

Welcome to Top Traders Unplugged. In markets success doesn’t come from predicting what happens next, it comes from being prepared for what you can’t predict.

In each episode we go deep with some of the world’s most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no short-cuts, just real conversations to help you think better and invest with confidence.

Welcome back to Top Traders Unplugged. My name is Alan Dunne, and today I'm delighted to be joined by Mike Pyle. Mike is deputy head of BlackRock's portfolio management group, which spans systematic and discretionary investment strategies across liquid asset classes. Mike has been at BlackRock on and off for quite a while.

Mike, that's a great CV. We're delighted to have you with us. How are you doing?

I'm good. It's so wonderful to be here. Thank you for having me and wanting to chat about markets, and economics, and all the things that so many of us care about.

Great. Well, I gave a quick overview. You have a fascinating background in government and in markets. We always like to hear what got you interested in economics and markets in the first place.

Yeah, so I majored in economics when I was in university, did some graduate work in economics. I came into college thinking I would be an economics major and I left college an economics major, but really it was a bit of a journey along the way. I came to school thinking I was going to become an economics major because it was the closest thing that my university offered to a business administration degree. And that's what I thought that I wanted to study and to go do.

And then I left it and thought I was going to be a philosophy major for a while, an English major for a while, and then came back to economics for a different reason, which is it provided a framework to really explain the world around me; why people behave the way they do, why firms and companies behaved the way they do, why governments can use policy to shape incentives and hopefully lead to more broadly shared prosperity.

And of course, also the role that capital markets can play in all of this, and the important role in helping all of us use capital markets to build for a better future, to connect savers and investors. All of those things became clear as I got deeper into my education. And as a result of that, it was like, this is what I want to go do. This is what I want to be a part of, whether it's in the private sector or as a policymaker.

And I think it gets at some really important dynamics for thinking about the economy, markets, and investing today by distinguishing where we are from where we were. So, I'd say the key point I would start with is, today, this current market environment is really a world shaped by supply, as we say. And this began during the pandemic, but we've really seen it only accelerate since then. Whether it's the Russia/Ukraine war, whether it's the energy shock coming out of the war in Iran, whether it (in some ways, most importantly) is the transformation underway with respect to artificial intelligence and the CapEx impulse powering that, all of these are phenomena happening on the supply side of the economy.

Yeah, interesting. I mean, this kind of shift from, as you say, a demand driven world to a supply driven world has been very stark. And I think people have been talking about it, and then it kind of goes away, and then it seems to keep coming back. As you say, we had COVID, then we had the war in Ukraine, now we've got the conflict in Iran.

I mean, there are a couple of upshots of that. I mean, obvious ones are on fixed income markets and then people point to the impact on say the bond equity correlation. I mean, from your perspective, what's the most dramatic, what's the most significant element of that from kind of an economic policy perspective and also, then maybe from a portfolio construction perspective?

So, basically pinning interest rates to the floor, engaging in quantitative easing and other tools to get investors and other economic actors to take on greater risk, recognizing that the risk-free options they have or the low risk options they have in front of them are going to be increasingly low return. And that has a side impact of really dramatically suppressing or lowering economic volatility as well as market volatility.

The other thing I'd say is that lower volatility environment, as a result of policy intervention, was one where market dispersion was really compressed. And as a result, in some ways, the investment opportunity set for active managers, for hedge fund strategies, was quite compressed as a result of that low market dispersion relative to worlds with more “normal” interest rate environments.

What did that mean for portfolio construction? It meant a few things. It meant that relatively balanced portfolios, call it a traditional 60/40, offered really attractive return features as well as really attractive diversification features. It meant that what was rewarded, frankly, both on the fixed income side as well as the equity side were sort of “long duration” trades being long duration in the bond space. Obviously, we saw the outperformance of long dated government bonds, of risk parity strategies, but frankly the same was also true on the equity side.

If you think about the outperformers, it was basically in a world where growth was scarce, the handful of companies that were producing a lot of growth and producing a lot of growth with very long dated cash flows in that event that the kind of tech, as they would come to be known as hyperscalers, where those future cash flows were all discounted back to the present basically at a zero interest rate. And that was functionally like the portfolio that worked for a decade.

Long equities in particular, long duration equities, long fixed income in particular long duration fixed income, and really benefiting from the negative stock/bond correlation to provide a lot of diversification between those exposures. It's a much different world that we step into today. And happy to talk about some of those distinctions as well.

And I know you were special assistant for economic policy in the Obama administration and even then, after the financial crisis, all the reports where you couldn't go too far in terms of the fiscal bailout. But I'm just curious, what do you think has changed from a social side or a fiscal or a policy side that has shifted the world to much more fiscal activism?

Yeah, I think in some ways, famously, it’s that generals are always fighting the last war. I think policymakers similarly run the risk of always fighting the last crisis. And so, I think you're exactly right. I mean, clearly, I think many policymakers took away from the experience, post the global financial crisis, that not enough was done in the immediate aftermath of the crisis on the fiscal side. The economy, as a result, remained, to use the term, kind of understimulated for a long stretch. And we saw a very sluggish recovery in the labor market in the broader growth trajectory in the United States. Obviously, follow-ons, like the Arizona financial crisis, complicated that picture globally even further.

I think if you look back to the very tail end of President Trump's first term, as the pandemic emerged, there was, I think, a pretty significant and activist fiscal intervention in the beginning stages of that pandemic under President Trump and his team, as well as the Democratic Congress. And then I think as you fast forward into President Biden's term, there's a real sense that the error of the last decade highlights that the risk is doing too little rather than doing too much.

You did touch on this idea of the perfect portfolio in the last decade was long technology, hyperscaler type exposure. They are long duration assets. And I guess a big feature of that period was the fantastic earnings they were generating and then with that huge cash flows and buying back stock, etc.

And obviously now, again, that's another contrast with the current era. They're still generating large earnings but obviously they're deploying those earnings in CapEx and we've shifted into I guess more of a world of constraints on capital versus ample capital. So, I mean is this, do you think, going to be a feature going forward or will this kind of naturally, I suppose, choke off some investment, or how do you see this kind of dynamic playing out?

Yeah, I think you get it. One of the themes that we've been talking about a lot in the current market environment, which is this distinction between scarcity and abundance. And in so many domains I think that we are living, as a corollary of this being a supply driven world, we're living in a world of scarcity.

So, you think about the supply chain shocks coming out of COVID and the world discovering that a lot of the supply chains that we had relied on were extremely vulnerable to a meaningful global shock like a once-in-a-century pandemic and scarcity in a range of important inputs as well as final goods emerge in that experience, the Russia/Ukraine war similarly, the first of two major energy shocks over the last five years and a recognition of how vulnerable to geopolitical risk global energy production and supply chains were.

And I think, importantly, the AI buildout is highlighting this as well across a couple of dimensions. And I think one, the demand for real resources to complete that build out, whether that's on the side of leading-edge chips, whether that's on the side of energy, whether that's across a range of other inputs, we're seeing a number of bottlenecks emerge just in terms of real resources.

Again, kind of highlighting that scarcity and bottlenecks, and that bottlenecks are incredibly important considerations today in a way that wasn't true a decade ago. But I think you also highlight that, on the capital market side, there are meaningful questions about the overall capacity of capital markets.

The scale of the build out here is historically immense on the AI side, exactly as we were talking about before. The fiscal posture of the United States, as well as other developed economy governments around the world, is much different today versus a decade ago by virtue of using those fiscal tools more actively wanting to invest in resilience and other policy goals.

And then there's the kind of basic financing that still has to happen in capital markets of investment grade corporates of the housing market of consumer finance. That's a lot of demands that we're placing on capital markets today. And I think that that's leading to the types of interest rate dynamics that we're seeing, I think that we expect to see going forward.

And I think the big question is when does some of this AI build-out flip us from more of a scarcity paradigm into one of abundance, of unlocked productive potential, of greater growth? And I think that's the thing that's most on the table as we roll the clock forward from here. Do we move out of the scarcity paradigm that's characterized so much of the last five or six years in the supply driven world, to one of abundance generated by the investment that we've seen most particularly in artificial intelligence and technology over the past 10, 12 years?

Interesting. I mean, that's a good way of framing it. And obviously that's the dilemma that the central bankers are grappling with as well. And Kevin Warsh has kind of alluded to that dilemma. I mean, it does create this kind of challenge. I mean, do you raise rates because something is inflationary at the moment, but maybe disinflationary down the line?

I mean, from your perspective, what's your timeline on that? I know it's a very difficult question to answer, but are you expecting that we would start to see more obviously benefits in terms of productivity from AI in the data, like in the next six months, or do you think it's something that's over kind of more a 2 to 5 year time horizon?

So, I think that I'm a pretty data driven guy and I think that particularly when it comes to an immense transformation like the one that's underway that has very few if any historical analogs, that it's important to recognize any forecasts that you're going to have about how this plays out really over any horizon, but particularly when you start getting from quarters to years, it's going to have huge uncertainties attached to it. And I think the good news is that we can observe how this is playing out in real time in the economy and policymakers will be making choices on the basis of the data that's coming in.

And so, I think my advice to the Fed chair, to other central bankers, to other policymakers is that it's hard to say when that transition point is going to happen, but we have extraordinary real time capabilities to gather data, to see what's playing out, and to understand with some texture and granularity, is this handoff beginning to take place? I would say the evidence thus far is fragmentary, but I do think that we are starting to see evidence of some of the productivity enhancements that have been forecast.

Obviously incremental investment is leading to incremental earnings in a range of corporates that are deploying AI. And I think that those types of data points are suggestive that a number of the promised benefits are coming and are to come. And the key question will be when do those benefits and the productivity improvements that they promise begin to have greater weight in the macroeconomy than the kind of resource demands of the AI buildout of the resilience build out of the fiscal needs of a range of economies around the world? And I think it's still a little early to say that we've gotten to that point.

Yeah, and I mean, as I mentioned, I mean the central banks are grappling with this and it was, I suppose beneath the surface kind of part of the question the market had for Kevin Warsh at the last press conference, which he kind of danced around a little bit. But I mean, do you think… Firstly, some people have made this parallel with the ‘90s and Greenspan, new paradigm, etc., it's a reason for not raising rates at the moment. What are your thoughts on that? Or are you more in the camp of no, actually a productivity boom means higher neutral rates? From a policy perspective, how do you think they'll disentangle all of that?

Yeah, I think that's a very good question. I think in the near term, as we were talking about the kind of real resource needs as well as the capital markets needs suggests that the pressure is upward on inflation and rates. And I think that that's the dynamic that we've heard policymakers speak to and we've seen priced in markets.

But I think you're right, I think there's an additional debate out there about whether the types of technology driven productivity enhancements that we, I think, are likely to see in the years ahead is going to be a force upward on that neutral rate; that there's kind of disinflationary trend, but there's also a kind of higher real equilibrium growth. And as a result, higher real equilibrium rate dynamic. Or whether (and I think this is the kind of minority position) that there's downward pressure on those real rates as well.

So, I think that there's going to be a lot of distinct threads to disentangle, a lot of hard questions, as you well know, estimating the real equilibrium rates. It’s a pretty hard business, and even which direction it's moving I think is a pretty hard business. But I do think that we can have some confidence that there's a disinflationary trend ahead. And then the question is, on top of that, which way is the real rate moving?

Interesting. I mean, obviously the upshot of the CapEx boom has been an earnings boom. So, I mean people have been talking about, is this a bubble? And then say, well, it's not a typical bubble, but maybe it's an earnings bubble given the magnitude of the CapEx build out. I mean, from your vantage point, how would you characterize valuations at this stage? Are they high or not? And any thoughts on the kind of the sustainability of the earnings growth that we're currently seeing?

And I think the question on the table is yes, those firms that really sit at these critical choke points of the AI buildout are generating extraordinary earnings, extraordinary profits. But how sustainable are those profits? I guess I'd have a couple of observations. I think one, these companies are at a strategic choke point of a critical economic build out. I think something that we know from economics is that in the short run, factors of production are fixed. In the long run, factors of production are flexible and move to where opportunity is.

And so, I would expect that over some horizon, measured on quarters to years, those bottlenecks are going to be relaxed because companies are going to innovate around them, new suppliers are going to come into the fold, supply is going to expand from the existing suppliers. So, I would expect that the bottleneck features of these extraordinary earnings are likely to dissipate over time.

I think two additional points, though, one is I think the market gets this. I mean, this is exactly why these companies with extraordinary earnings are trading on relatively subdued multiples. I think the market understands that these earnings aren't going to last forever. And when they get visibility into what that sustainable level of earnings is, I would expect that those multiples retrade higher and we get to a more equilibrium kind of destination in terms of that mix of sustainable earnings with a multiple that's marked to visibility into what that sustainable path is.

And secondly, I think we do think that the sustainable path of earnings, even once these bottlenecks dissipate, is pretty considerable. I mean, I think our observations are that's still the case, and still the case by some margin that the demand for AI capabilities is outstripping supply, however much we're building out. And I think that does suggest a path ahead of ongoing build out, ongoing delivery of additional capabilities. And that's going to mean, I think, a healthy earnings trajectory looking ahead, even if it looks different from the extraordinary earnings we've seen in recent quarters to a couple of years.

Do you think that makes sense or is there something there that hasn't adjusted to the new regime, or do you think that actually the equity market still has a right?

Yeah, I guess I might take a step back and talk a little bit about how we think investors can/should think about constructing portfolios today. I think to your point, we continue to think that growth, that exposure to growth in the form of equities, is at the core of a portfolio, and in particular exposure to technology, to artificial intelligence, these are really important exposures appropriately sized within a portfolio. It's why we continue to be really, across the platform, on balance, overweight US equities in particular in the total portfolio context.

But I think that we also see that the things you build around that need to look different today than they looked a decade ago. So, I think that we've talked a lot about the stock/bond correlation bonds as diversifiers. I think the role of bonds today looks meaningfully different than it did a decade ago. It isn't really about duration, it really isn't about the diversifying properties of bonds in the same way that it was a decade ago.

On the flip side, bonds can be a really significant source of income in a portfolio and income is a form of ballast and stability in a portfolio all the same. And so, I think we've shifted from a world of more duration oriented fixed income portfolios to more income portfolios focused on parts of the global fixed income landscape that are generating that stable steady income in public markets, in corporate credit, in emerging market credit, in private markets, and a range of the exposures they can provide. So, I think that those are two important themes for how we're building portfolios.

And the third is you still do need diversification. And diversification is an important dimension of how you need to build a portfolio. But diversification is in relatively short supply in terms of today's market landscape. And so, I think one of the things we recognize as well, or think as well, is that there's a really important role for more alpha oriented strategies, market neutral strategies, whether they be hedge funds, liquid alternatives. Those types of market neutral, low net strategies have a really important role to play in providing diversification and stability against those other exposures, whether on the equity side or, to a lesser extent on the fixed income side that are going to be more sensitive to macroeconomic and growth dynamics.

Very good. And I mean that's a good segue into, I guess, to get into that in a little bit more detail. Obviously, there's a whole plethora of hedge fund strategies that people can allocate to. Maybe before then, I mean, obviously private markets was the big theme going back, private equity, etc. I mean, sometimes people, because something is private markets, will put it into the diversifier. I mean, from your perspective, how do you categorize or what's your kind of way of thinking about private markets, private credit versus hedge fund exposure, and then kind of thinking about the roles of all of these opportunities in a portfolio?

Yeah, I mean, I think the way I see some of the private markets exposures that we think about, particularly here at BlackRock and spaces like infrastructure and credit, is that, take credit, for example. Income plays a really important role in portfolios as I just described. Getting exposure to a diversified basket of income generating assets means looking across the full span of capital markets.

If you're going to build a sound diversified income generating set of exposures in your portfolio, it can't just be in the public market space anymore. That wouldn't be a kind of full representation of attractive income generating assets in today's capital markets. And so bringing public and private exposures together, bringing different types of exposures from the credit universe, corporate securitized, emerging market and the like, is I think from our perspective, the way that you should be building thoughtful, balanced, diversified exposures in your portfolio in order to generate that type of stable income. That's an important building block for the total book.

I think on the flip side, I think hedge fund strategies in particular, like I said, kind of more market neutral low net strategies, I think those are best thought of as important diversifiers to the overall portfolio. That running at lower zero beta is a really important thing to add to the mix of a total portfolio to give a different kind of risk return profile than your equity exposures, than your income exposures which are by their nature going to be more sensitive to the kind of swings in growth that you see at the total economy level. I think those more market neutral exposures should be less sensitive to that and as a result more diversifying.

Is that as straightforward a diversifier as buying a 10-year treasury was a decade ago? No, that was about as good an environment as one could hope for, for having a very straightforward hedge in a portfolio. But I do think that in a world where that isn't as available as it was, where diversification is scarce, it's really a lot of those more market neutral type exposures that can provide the best diversification potential in the world that’s short kind of really, really good diversification like the kind that bonds used to provide.

Fair enough. And obviously, even within market neutral, which I guess kind of typically would be long/short equity or equity market neutral. I mean you've got discretionary approaches, you've got quant approaches, and then into the kind of the more macro world which can be market neutral or it's more directional I guess. I mean, when you're building those portfolios, are you trying to balance some exposure to everything or how do you think about that, do you include tail hedges or do you rely on kind of more convex strategies like macro and CTAs for that kind of potential convexity in times of stress?

Yeah, there are a range of ways of approaching and it really depends on the kind of objectives and needs of an individual client. But I would say, in general, a really strong multi strategy capability at the core of a hedge fund portfolio I think is really kind of piece of advice, kind of number one. I think that having a range of different strategies brought into one total portfolio, delivering one stream of alpha enables a couple of things. One, it enables greater breadth across each of the individual alpha streams to roll up to one portfolio experience. And as we know from the fundamental law of active management, higher breadth is an important ingredient in building a high, stable information ratio.

And then secondly, it enables the manager to really optimize across those different individual alpha streams depending on the market, and basically optimize the portfolio through time, at every moment in time. I think that's different than an allocator or an end investor trying to replicate a multi strategy by having a set of individual strategies - the ability to optimize that portfolio, to reallocate across those strategies dynamically, in the face of changing market conditions, not really available.

And so, I think finding a strong multi strategy manager, I think in many ways systematic managers have a particular leg-up in this regard that can do that real time optimization across individual strategies and alpha streams is the way that you can take best advantage of the breadth that a multi strategy offering can bring into the core of a hedge fund portfolio.

Okay, and I mean, it sounds like you're a fan of the large multi strat pod shop approaches for those reasons. I mean, the proposition from them seems to be very much about consistent returns with low vol. Obviously, you tend to see very high Sharpe ratios. What about in times of severe stress? Would you have conviction that those kind of strategies can deliver returns or outsized returns? Or do you think you need to couple that kind of core allocation with anything else in the portfolio?

Yeah, I think again this goes to the question of individual investors and their goals. I think in general, like I said, in terms of a total hedge fund program having that multi strategy effort at the core. Again, I think we think that systematic multi strategies have something kind of really unique and special to kind of offer at the core of a program. But complementing that with additional strategies can also make sense. More directional, macro or long/short equity strategies. These have very different distinct risk return profiles, correlation profiles versus a core multi strategy offering.

And as a result change the shape of the risk and return profile of an overall hedge fund strategy to help achieve an individual investor's goals. Whether that's greater return, whether that's greater stability, particularly in more stressed macro environments like the types of risk scenarios you describe. I do think that these strategies have different characteristics to the risk and return profiles that they generate in different market environments. And thinking hard alongside a team about how to build the right type of hedge fund program to achieve goals of diversification of the portfolio level, return seeking at the portfolio level, I think that those are the types of questions that investors weigh as they think about what type of satellite they want to build around a core multi strategy offering.

And learning the lessons of both that episode as well as other episodes that we've seen along the way in the hedge fund ecosystem as well as the quant ecosystem, I think has really motivated a lot of how both how they do research into alpha signals, but also how they construct portfolios.

And I think kind of rolling the clock forward, what we've tried to do is not just as I said, kind of dial the beta down to zero, but dial some of those well-known factor exposures, like momentum, like others, as close to zero as possible, and really isolate that pure alpha piece. So, I do think that experience has motivated the way research is conducted, the way portfolios are constructed, precisely to be responsive to some of those previous experiences.

Again, you always want to be humble, you always want to be very focused on risk and emergent risks in investing in financial markets. And so, we're extremely focused on exactly this dimension of research and portfolio construction every day around here. But I think that a lot of what we've done for a number of years now is motivated exactly by that set of concerns.

Yeah, I mean I think you get at the key point which is you roll the clock back a decade. It was a pretty hard decade for hedge funds writ large. And when you think about it sort of in a sense makes sense. As we talked about diversification and sort of relatively cheap forms of diversification were abundant, long duration government bonds. At the same time, market dispersion was very compressed. So, the alpha opportunity set was comparatively low even for long/short managers, especially compressed into a long only setting.

I think that combination of the widespread availability of diversification and the compressed opportunity set, at a macro level, really explains why that was such a challenged period of time for the hedge fund landscape. Fast forward, today we've talked about diversification in short supply. Investors need that at the portfolio level. And at the same time, the dispersion landscape and markets means that the investment opportunity set, the alpha opportunity set, is much different, significantly larger than it was a decade ago.

And I think that points to the way to why we've seen strong hedge fund performance over the past handful of years and why allocators are increasingly turning again to hedge funds for the first time in quite a while. Because of this mix of the world, short diversification and markets are offering greater dispersion as a result, greater opportunity to generate alpha, particularly in long/short strategies.

Very good. One of the features that we've seen coming back into the markets has been extension strategies and portable alpha. And for a long time, I suppose, they reflected the fact that equities were doing so well and continue to do so well. So, a lot of hedge fund strategies, when you compare them to equities, looked underwhelming.

So maybe, from an allocator perspective, allocators didn't want to give up their equity beta. And then I guess, from the manager perspective, track records look even better if you combine them with equity beta, particularly for lowly correlated strategies. Is that something that you deploy in your portfolios? Or how do you think about the opportunity set of combining active hedge fund strategies with kind of passive beta?

Yeah, I think that's a great question. I think we're seeing a lot of interest in portable alpha strategies from allocators today. And I think one of the things that we take some pride in at BlackRock is a really relentless focus on our clients' needs as well as what we can deliver in terms of customization around client needs.

And so, we spent a lot of time on portable alpha strategy with a range of sophisticated clients, both in terms of selection of underlying beta vehicle, selection of overlying alpha vehicle, and how you bring those two things together to give investors both that beta exposure that they want, coupled with a really strong, long/short alpha engine sitting atop it. And I think it's been really interesting to see the types of solutions that we've been able to work on with clients to really customize both of those things and generate really unique solutions, bringing the two together in a complete portable alpha solution.

From that perspective, do you think, I guess it's market neutral or those types of strategies, but is that the type of strategy that you think lends itself best to this kind of portable alpha approach?

Yeah, I mean, exactly. I mean, I think one of the things that's clearly the case is that… Well, one of the things that recent data suggests is the case in the market environment that we've been in is that long only strategies face a range of challenges delivering alpha as a general matter, not in all cases, because of how concentrated equity markets have become. And when you add the lever of being short as well as long, you pretty dramatically increase the ability of an alpha manager to take full advantage of the dispersion across the market, to deliver a steady stream of alpha and to take advantage of the market environment we've been talking about.

So, I think we've seen, from a range of allocators, a desire to say, move out of some of their long only active equity strategies, really embedding beta and alpha in kind of one allocation, or that the alpha piece of that is constrained by the long only constraint to a world where you're kind of separating the two. You're getting your beta exposure and then you're porting on top of that a long/short market neutral strategy to again kind of bring back together both the beta exposure you want as well as a really attractive alpha engine sitting atop it, and again kind of unlocking the ability to mix and match some of those betas and alphas.

That's a much different type of solution than embedding beta and alpha in one long only mandate. And I think it's again, kind of responsive to some of the market dynamics that we're seeing and some of the challenges that concentrated equity markets in particular present to long only managers.

We've talked quite a bit about the changed environment and also about portfolio construction. And I suppose one idea that encapsulates that change is the 60/40 really ruled in the last decade. Now, people are saying, okay, some people are saying 60/40 is dead. Others say, no, it's not dead, it just needs modification. What's your view on that?

Is it now 60/20/20, 60/30/10, or what are the components? And maybe related to that in the institutional space, we're hearing a lot more about TPA total portfolio approaches, is there a role for that outside the institutional space or how do you think about that kind of approach when you're building portfolios?

Yeah, I think this comes back to the conversation we were having earlier about how we see the building blocks of the modern portfolio in this kind of world shaped by supply, this world shaped by scarcity. And I think both the 60/40 conversation and the TPA conversation in some ways kind of come to the same concluding point.

I think what we've talked about here, what our founder and CEO Larry Fink has talked about, is moving away from a traditional 60/40, recognizing exactly the dynamics we've talked about, that it is important to have growth exposure at the core of a portfolio. But the role in particular that bonds are playing is different than historically and you need to build a different allocation within the 40. Bonds and a diversified set of fixed income exposures can provide stable steady income, which is an important ingredient in a well-balanced portfolio. And at the same time finding sources of diversification outside of the traditional asset classes and things like market neutral strategies, also an important role to play.

So, as distinct from that traditional public market 60/40 stock/bond portfolio, a portfolio of stock and growth exposures combined with fixed income exposures across public private markets, combined with diversifying exposures through things like hedge fund and liquid alternative strategies, these add up to what can provide an alternative to that traditional 60/40, recognizing the challenges that has providing diversification and providing exposure to the full set of opportunities available in capital markets.

And I think that in some ways the TPA conversation is a very similar one as well. We've spent a lot of time on that and I think the thing that we are very sympathetic to is in some ways it's important to move beyond asset classes and to think very distinctly across asset classes about what the distinct drivers of risk and return are and build portfolios around understanding what those underlying drivers actually are.

I began my career as a multi asset investor. This is how we thought about portfolios a decade ago when we were building shorter horizon alpha portfolios. But I think we're seeing now the same dynamics are really taking hold around the total portfolio approach conversation.

And so whether you've got a driver or a theme around growth in AI scarcity, whether you've got a driver and a theme around duration and where true diversification comes from, whether you've got a driver and theme around generating stable income, these are the types of underlying drivers of risk and return that you need to think about in an asset class or exposure agnostic way and then build a set of exposures that reflect that underlying driver theme and build a portfolio around it.

That's really what the TPA approach is about and it lands you in a very similar place to what we talk about today as an alternative to that traditional 60/40.

I'm just conscious of time. We've obviously spoken a lot about AI from kind of a macro and economic perspective. I'm just curious to get your thoughts on what you're seeing from an investment perspective. A lot of people think AI is going to be the thing that can transform portfolios. Obviously, we're seeing some managers using it effectively. From your perspective, how do you see AI changing the investing landscape?

So, obviously this is something we're thinking about every day here at BlackRock. It's highly likely to be the most important question we think about over the next decade in terms of how we do what we do.

I'd make two observations. I think one, we're benefited, I think here from having a systematic investing team and platform that's been at the forefront of technology and investing for its 40-year history. And if you kind of just look over the last decade, they were doing natural language processing more than a decade ago. They've been deploying machine learning and portfolio optimization and construction for almost as long.

And so, really that long tradition of being at the cutting edge of how to deploy technology and the work of investing in alpha signal generation, in portfolio construction around all of these new and emerging techniques, an important capability both in terms of delivering results to clients, but also in terms of shaping how we think more broadly across the firm around the business of what we do of investing client capital.

I'd say on the fundamental and discretionary side, I think in some ways a very different type of investment process, but I think important lessons to be learned from the systematic side. And so, I'd say there it's been a focus on building research engines that can draw across the full set of proprietary data that we have here at BlackRock to really super empower our analysts, both to enhance the quality of the mosaic that they're considering with respect to any specific company or name, enhance the decision making process around arriving at a judgment on that name. But I think in some ways just as, or more importantly increasing the ability of analysts to cover more names, to reach with high quality into a broader segment of the equity or fixed income market.

Why I think that's important, I think at the end of the day, if we're going to capture better results for clients (and again to go back to that fundamental law of active management), yeah, it's going to be partly about building better forecasts, but I think importantly it's going to be about building more breadth into fundamental portfolios. And key to that is increasing the velocity of ideas, increasing the velocity of high-quality ideas and being able to vet them at the hands of super empowered analysts.

I think that's what we're really working towards, again, capitalizing on this long tradition of excellence in innovation on the systematic side, and taking some of those lessons and recognizing what technology may enable us to do on the fundamental or discretionary side.

Good stuff. Just before we wrap up, we always like to get our guests just to reflect on their careers and maybe to give some guidance for people who are maybe coming into the investment world now. Any advice to give to people in terms of things to do or things to read or any perspective you think that anybody who wants to develop a career as an asset allocator or macro investor, what would your advice be, Mike?

My advice is to look humbly around you 360 degrees in any organization you're a part of and to really run towards where the best people are and to learn from them. I had this experience when I was in government. I was fortunate enough to come into the White House on day one of President Obama's term as a very young policy professional.

And the ability to turn to the career civil servants at the Office of Management and Budget at the Treasury Department to learn all that they had to offer about their corner of the federal budget, their corner of the global economy, and to be really open to that was an incredible accelerant for what I learned and what I was able to do as a policymaker.

Similarly, I showed up at BlackRock in my kind of the early mid-30s, having never been an investor before. And what I realized was, okay, there's some things that I know that are relevant to this process of investing that I can offer. But I'm a total newbie. And whether it's the most senior MD or the most junior analyst or associate, there are things that they're going to know and know much more deeply about what we do here that I'm at square one on. And so, to be open to being taught by people who know more about their thing than you do wherever in your organization they sit.

I mean, to me, that's been the most important touchstone across all of my career and something I try to remind myself of every day sitting in my new role at BlackRock. This is an extraordinary organization filled with people who know their corner of what we do better than anybody else. And if I'm open to that, I can bring things together, connect dots in ways that are going to deliver value for clients and deliver value for the firm.

Very good. Well, thank you very much for coming on, Mike. It's been fascinating to hear your perspectives, given your background and your seat at the moment. And I guess people can follow you and BlackRock's insights on the BlackRock website and on the various social media channels. But from all of us here at Top Traders Unplugged, thanks for tuning in and we'll be back soon with more content.

Incredible. Thank you for having me. I'm really appreciative.

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