WisdomTree Events:

Hi, everyone! Thank you for joining WisdomTree's Office Hours On, a peer-to-peer discussion on geopolitical events and international macro Outlook, where you'll hear from Kevin Flanagan, WisdomTree's Head of Investment and Fixed Income Strategy, along with Chris Murray, Director of RA Strategic Partnerships. Along with Brendan Ryan, Partner and Portfolio Manager at Algorithmic Investment Models.

Chris Murray:

All right. Welcome, everyone. I appreciate everyone taking the time to join us today. As Irene referenced, we have Kevin Flanagan and Brendan Ryan. Brendan Ryan is of Algorithmic Investment Models. He's a partner and portfolio manager. Our firms have have a long, tenured, history together, and, you know, we'd love just for Brendan to give a little bit of a snapshot of kind of how they do what they do. Some of the clients that utilize their models, and then we'll kick into some different topics that, you know, that will be topical.

Brendan Ryan:

Thank you, Chris, and thank you guys for having me on today. As Chris mentioned, it's been a pretty long history with WisdomTree. Our business is almost entirely ETF, so we're a ETF model manager. nearly entirely quantitative as well, and our trademark product is called Decathlon, and it's a global asset allocation strategy, so… Different from a lot of the… Kind of… strategic asset allocation models out there. We think of ourselves as a complement to those bigger models. We're used usually in UMAs on platforms, combining with, sort of, your favorite equity beta, and maybe your favorite fixed income beta to create that final portfolio, and we're dialing the risk up or down a little bit, as well as doing a lot of bottom-up sector rotation inside our strategy. We have 3 core risk levels. They're a 2080, a 50-50, and a 70-30 asset allocation risk level, kind of how we think about it. They're all ranking this giant pool of ETFs that we are trying to add to all the time as Companies like WisdomTree are pretty creative now in adding more and more ETFs, and really, we're looking for different ways To slice up the market that are unique, so we can feed that into our system, and hopefully it's good at choosing, when are opportune times to. get into a particular subsector, or large sector. We have things, you know, the Russell 1000 is an option for us, but so is home builders. So we get as granular as we can within those models, doing a lot of trading, and like I mentioned. even though we have those risk targets, we are pretty tactical. We're not making… we're rarely making big market calls, big binary market calls, where we're getting in or out of the market, but when volatility's low and the market environment is more tranquil, we do typically have quite a bit more equity, and when things are more volatile, we're usually getting into either Much less risky subsectors, like consumer staples, or just outright, adding significant fixed income.

Kevin Flanagan:

Hey, Brendan, I had a quick question for you. So, when you're going through the models, do you have a, like, a regularly scheduled rebalanced time frame, or is it more the signals you're getting? Or both?

Brendan Ryan:

Yeah, so this… it's a pretty important topic in our industry, because you're… we back-test everything, obviously, but the point in time you select is really important. So, historically, the strategy was run on a 25-day window, and that was just designed to mitigate wash sales. That means that the rankers we get are supposed to be a portfolio that's designed to work for 25 days, but what we found And we're getting new rankings every day, so tomorrow is a 25-day forward. projection as well, and we would just kind of run it calendarized, and that's how we back-tested it. When we back-test, we test all the possible days, so we're kind of getting rid of that rebalance timing risk. But when we were running originally, and for 95% of the time, it does work fine to just rebalance kind of without thinking about it in 25 days, but during COVID, we realized that we had gotten pretty lucky, and if we had a really unfortunate rebalance date, and we were locked into a portfolio for 25 days. that could have had a really bad outcome, because going into COVID, we were high. risk on, because it was a tranquil market environment. That obviously suddenly changed. Our rankings changed quickly, too, and thankfully, we weren't rebalancing in a really bad time, but it just gave us that perspective that we have to respond to the rankings, so now. long-witted way of answering your question, we are looking at it at least once a week. We're really looking at the rankings every day, comparing them to our portfolio, and kind of in the way that a normal portfolio manager is trying to track their benchmark, we kind of think of the rankings as our benchmark, and the portfolio is the product of the portfolio, and we want to track it as closely as possible. So some important sector comes in or out, we want to respond Quickly, often it ends up looking like 2 trades every 2 weeks or so, instead of maybe we would have made 4 on that 25-day. Schedule in the past.

Kevin Flanagan:

So, I mean, that's interesting, because it leads me to another question. So, if you were to have, say, the geopolitical kind of headlines, like we did, we all woke up February 28th. saw that the U.S. and Israel were bombing Iran. Is… now, do you just kind of just continue to go on that 25-day schedule, or do you… can you have the potential to override if you want?

Brendan Ryan:

we try not to override the rankings, but when something… when there's… I mean, now there's these giant one-day moves in certain sectors all the time, it seems like, but when there's a big change in something, we try to give it a couple days to be digested. But we think the rankings are pretty good, and they do respond pretty quickly, so we want to trust them. If… oil's kind of an interesting example. It's something that we owned Early on in the year, and oil was kind of beginning to price in that risk before February 28th, it was doing really well. I think it actually performed better before the war than it has since the war. But yeah, that's part of our thesis, that the market is fairly efficient, so things do get priced in when they're not completely exogenous. Like, I think COVID even was getting priced in a little bit in late February before the world shut down, and that's really what the market violently responded to, and I think Iran is no different. There were some odds that there was going to be a conflict that the oil markets were seemingly pricing in. But sometimes there are really major one-day shocks that we do try to overrule. The only one I can really think of is when the Swiss unpegged their currency to the dollar overnight or something, so our model just sees a giant one-day change in something that was… has no trailing volatility. That's something we want to ignore.

Chris Murray:

One of the things we talked about before we went live, Brendan and Kevin, if we could maybe go circle back to this, is some of the returns outside the U.S. that could be potentially getting ignored if you look at, you know, industry flows, both on the active and the passive side, you can see it's definitely a home buy a skew. we talk about it internally a lot, Kevin, on our monthly… I'm sorry, our Monday calls. Any comments on that?

Brendan Ryan:

Yeah, I mean, this is…

Chris Murray:

or to decide.

Brendan Ryan:

I think it's one big advantage of the breadth of things we look at, is that it's hard for something to not get on our radar, especially if it starts doing well. Our models started gravitating significantly more to international, about a year and a half ago. Not quite, I think. If we look back on this period as a turning point for international weakness becoming international outperformance, we'll probably remember, like. pretty much January 1st, 2025 being that turning point. Our models took maybe 3 or 4 months to… to kind of buy into that story, and they really hadn't had much international exposure for a while, because the momentum was bad, and that is a pretty big factor in all of our models, but we are… we are in the camp that… that, this period of U.S. dominance may have quietly come to an end, and perhaps will more loudly come to an end. Sometime in the future, but I don't… I think it is… like you said, it's on nobody's radar. It's on our radar because we're looking at everything in our system, and it's getting chosen, but it's not on anyone's radar because the dominant market theme is the AI trade, and it hasn't really changed. It looks maybe stronger than ever at the moment, and it's even spilling over into international now. what the… the Korean… equities driven by memory prices, and they're starting to actually participate a little bit in the AI trade. But yeah, definitely something we've seen. The dollar was a big driver of it in 2025, and now it's kind of broadening, and it's really been… I think comforting to us that we may be seeing this longer-term trend ending, but I think, to me, frankly, surprising that International has managed to stay strong when it seems like the AI trade is competing capital away from basically everywhere else. When it's… when it's doing well.

Chris Murray:

Yeah, just for… just for people's reference, I'm live here at the BNY Insight Conference out here in Aurora, Colorado, and… we presented this morning on AI, and there was 117 people scanned. It was standing room only, and the questions afterwards, people were just pouring on top of our analyst, Chris Ganati, who had presented today. So, to your point, Brendan, that is… seems to be a key component to everyone's thinking, at least from an allocation standpoint.

Brendan Ryan:

Yeah, it's, it's… something we're familiar with, we've… we call what our systems do machine learning, but we're… we're definitely now more comfortably calling it AI, as it's become a buzzword in marketing. But we were doing it for… for 15 years.

Chris Murray:

Right.

Kevin Flanagan:

So once again, Chris, basically what you're saying is I picked the wrong field being a bond strategist. You know, that was the case when rates were basically at 1%. Now it's all AI. I can't catch a break being the bond guy.

Brendan Ryan:

There's a lot of issuance, maybe, at least.

Kevin Flanagan:

Yeah, exactly, you know, I'm…

Brendan Ryan:

Somebody's gotta build those data centers, someone's gotta finance that.

Kevin Flanagan:

Yeah, you know, it's interesting, because there were some articles just about that today on Bloomberg. There was talk about Treasury yields, the recent run-up. Could it have been a factor in terms of corporate supply, maybe, you know, bleeding out a little bit of investors looking to buy treasuries, and the thought process, or the conventional wisdom was, not yet, but, kind of thing, you know? Just wait and see, because to your point. You know, even when you're looking at it from an inflation standpoint, we always talk about what will happen when AI is, I don't know, done, complete, all of this has been.

Brendan Ryan:

Right.

Kevin Flanagan:

out and the productivity gains, but we gotta get there first, and that's gonna be, I think, an interesting part, how we get from, you know, where we were to where we want to be.

Brendan Ryan:

maybe this is a little outside the scope, but it, like, it seems to me that AI is going to either be really inflationary or really deflationary, and maybe it will be inflationary and then deflationary. Does WisdomTree have a kind of a view on how this trade that none of us can ignore is going to actually impact inflation?

Kevin Flanagan:

Yeah, we actually were putting something out this week talking about could the I in AI stand for inflation instead? And one of the reasons being to exactly what you're saying, is that we would agree that, you know, this is a… once again, one of those rare historic moments of technological revolution. We've seen them before in the U.S. here and on a global stage, and given the productivity gains and what we're going to see, yes, that I think that will be good, in other words, favorable, that inflation. will not be an issue at some point in time, but back to what I was saying before, we gotta get there first. And as you were mentioning, the build-out to get there, the electricity costs, infrastructure, chips, water, I mean, there's just so many things. that are coming into play here, and are we beginning to see that, say, in some of our traditional inflation gauges, like CPI, maybe the producer price report? So, me being And what I'm doing is, you know, focusing on the econ numbers as they come in. This is definitely going to be some areas that I think will be paid more attention to, kind of going under the hood a little bit, right? For inflation, it had been about shelter, housing costs, but now… and then we moved on to, okay.

Brendan Ryan:

Solid, almost.

Kevin Flanagan:

Yeah, what could tariffs be impacting? But I think now maybe we're starting to look at, okay, what are some of the components, this build-out in AI, could be impacting as well. So, this is just gonna be, I think, an ongoing process that we're going to see, at least for this year, and more than likely into next year as well.

Brendan Ryan:

It's been unbelievable to me how the, kind of, like you were saying, the Treasury's moving up, inflation expectations moving up, hasn't been a drag on risk tolerance at all. Is there, like, a level that you think that starts to happen?

Kevin Flanagan:

Well, you know, maybe I'll let Chris answer an equity-related question, but I'll throw something out there. So, I mean, you know, traditionally, it's always been, right, a 5% tenure. And I know that if you look at some of the comments from, say, you know, Professor Siegel, Jeremy Siegel. He's like, no, you shouldn't look at the nominal tenure, you should look at tenure tips, you should look at real interest rates, and, you know, they're barely above 2% here, but you know, if you look at the two together, the combined, where is that? Is there a magical level? I would say if you start to see real yields, say 10-year tip yields moving towards 3%, that, I think, would certainly create an area where you would probably have some concerns, or the anxiety levels would begin to rise, but as I said, we're only around 210. That's a long way from here, where 5% on a 10-year Treasury is a little bit closer. But what's interesting is it's not too far of a difference between the two, right? I mean, you're looking at, you know, yields in the stock market, yields in the bond market, what do you want to compare them to? all I know is, traditionally speaking, when I'm having conversations with some of your colleagues, Brendan, the question I always get, and it's from an equity reference, right? It's like, I'm thinking about my stock port… or my equity portfolio. You think the 10-year's going to 5%? You know, so it's kind of couched that way.

Brendan Ryan:

Great. Yeah, how long can risk continue to be rewarded constantly?

Chris Murray:

Well, that was gonna… it's gonna be, kind of, like, shifting a little bit of gears, the headline, you know, we got Iran, there's good news, there's… I mean, it doesn't… it's… the market continues to seem to shrug this off. How much longer will the market shrug this off, or can we make that decision as long as, you know, the market keeps kind of printing new highs? It seems like, it's ignoring what historically would be You know, a big impact on the markets.

Brendan Ryan:

Yeah, it's interesting. I think everyone's trying to answer that question of, like, I think we're in… I think we've, like, begun, kind of, to be in bubble territory in the market, and I think now that people are aware of that, it's actually reinforcing it a little bit, because it kind of… creates, like, desperate bullish behavior, and I think maybe it's actually a prerequisite for having a bubble, is that you need everyone to think it's a bubble, because then it can just perpetuate itself. But what we're seeing from our models, which don't really have any biases, is that they aren't really interested They aren't… they kind of go hot and cold on the MAG7 stuff. They're not consistently interested in semiconductors anymore, and that used to be a huge a big pick, like, pre-COVID and a lot afterwards, but what they are buying is kind of what Kevin was talking about, some of the downstream, maybe inflationary aspects or bottlenecks, whatever the buzzword you want to use, some of the clean energy stuff that's going to be needed to power these data centers, a little bit of… natural resources, raw materials, things are getting kind of like an inflationary nudge from this massive capex build. That's what our models are buying, and it's thankfully allowed us to kind of participate in this crazy rally that's occurred since the end of March, as you said, kind of every day that there's ceasefire news, the market retrades at higher. It seems like every day there's, like, we really are in, like, a buy-the-rumor, buy-the-news type market now, but having that kind of secondary downstream AI beneficiaries has been pretty thematic, outside of the international stuff we talked about, which, again, even AI Seems to be spilling into that. It's allowed us to have a really different portfolio, not have that I own tons of NVIDIA and semiconductors, and I'm totally leveraged to this trade, which even the indices are getting more leverage to this trade, but being able to participate indirectly, I think it's made us feel pretty comfortable about our system, that it's not buying into the the really… Crazy-looking, Upward moves, but still getting the benefit, and it's not really wanting to go to fixed income or really kind of reduce risk outside of not being heavily concentrated directly in these most de facto AI industries.

Kevin Flanagan:

You know, Chris, another, I think, aspect to answering your question. I mean, we've been talking about this for a while, with the tariffs, and now with the war, is that it's difficult, Brendan, to your point, the headlines, you know, peace deal near, it's not near, it's near, it's not near, right? And so we've been trying to tell, you know, when we speak to clients, to try to filter out the noise, because eventually. Hopefully, right, we get to a situation where the hostilities do end, and then we come back into a more, say, traditional macroecon kind of setting, but I think that's also being looked at right now. I mean, Brennan, you mentioned the bond market, absolutely. You know, my argument has been. We got to 470 a couple of weeks ago on the 10-year, because there is… this inflation type of trade, but I think from a risk perspective, me, more on the bond side, say, looking at high yield, looking at investment-grade corporates, seeing how tight spreads are there, it's the underlying macro setting, I think, that's continuing to provide some of that support. We're seeing GDP 2.5%, maybe even higher in Q2. We get the jobs report on Friday. The numbers there have kind of come back a little bit, but we're still, maybe at worst, in a no-hire, no-fire situation. Manufacturing, we got some ISM gauges earlier this week that shows manufacturing expanding over the magical 50.0 mark there that, you know. contrast expansion with contraction. So there does seem to be this economic momentum here that we're seeing, I think that's playing a role also. Now, that's not to say… that's not to say there couldn't be risks going forward, right? I mean, there's always that, well, you know, higher inflation, higher energy, higher gases to pump, a tax on the consumer, you know, so it's not as if… you know, all things are flashing green here, but I think, trying to help explain where we're at now, I think, looking at the underlying macro setting here in the U.S, it's supportive.

Brendan Ryan:

Yeah, it's hard to… it's hard to find a headline number that doesn't… support, kind of, everything we're talking about, that we have a potentially even improving economy. I mean, it… hard for it not to be with all the capex that's going in. Just, like, seeing all these, I'm sure you have, everyone kind of attributing the recent rise in the S&P to the earnings getting revised up, but, you know, it's almost impossible for earnings not to increase when CapEx is increasing massively, like, they're only depreciating a fifth or a seventh or whatever of that spend, and the rest is going right into earnings, especially when they're just buying chips and leasing them out. And a lot of that is commodity memory prices, too, but our kind of view on the macro stuff that I think could derail that thesis, or we think might derail that thesis, is that we've gotten so… to such a wealth-centric economy and a kind of a stock market economy where people are marking their… thinking about, kind of, their consumption habits based on their wealth, and their wealth has continued to appreciate, and they own more stocks than ever in aggregate in the United States, so if we have some sort of weakness in this AI trade that could otherwise unaffect the normal economic measures we're seeing. People may lose confidence, and spending, may fall on it, maybe kind of like a… self… Reinforcing mechanism that has probably also been a tailwind for the last few years, as assets have increased. We think, yeah, that the market is kind of the biggest risk to the economy, in our view.

Kevin Flanagan:

Vernon, let me… I just wanted to ask you a question. I was thinking about it, you know, once again, putting my Bond hat on. You know, prior…

Chris Murray:

Does it ever come off?

Kevin Flanagan:

Yeah, right? It's nailed on, Chris.

Chris Murray:

ever coming on.

Kevin Flanagan:

You know, I mean, prior to, say, February 28th, and the Middle East War beginning. a lot of the concerns, and they're still out there, they didn't go away, was about private credit, right? I mean, you were seeing the risk off, you were seeing, actually, the 10-year Treasury flight to Quality buying taking you to 394. So, when you're looking, you know, within your models and what you're doing, are there any signals you do see, or not see for private credit, or is that just a little too niche-y?

Brendan Ryan:

No, I mean, yeah, we don't have… We don't have anything that's kind of… would give you some direct barometer on that. You know, in that case, it seemed like it was kind of… tied to the software weakness. Like, it seemed to me, I'm not an expert on this or anything, but a lot of the… a lot of the recent ingenuity in private credit was basically allowing credit to be extended against intangible assets. rather than your traditional kind of hard-asset-backed lending, and software was a big beneficiary of that, so these companies that never could get debt before now were able to get it, and suddenly all these AI models are coming out, and now maybe those credits look incredibly risky, or much riskier than they thought they were, because they're just backed by Cash flows, rather than some sort of hard asset that could be sold or recovered. So it seemed like those two trades were tied together, and we've kind of… maybe hoped that our system would be signaling for software, because it's kind of beaten up and would be maybe an interesting place to go in, but we kind of haven't seen that. that really has been a thematic trade that continued for most of that time period since, where SOX is going up and software is going down, and people are kind of thinking that that's the first industry that gets really disrupted, and I think private credit was just a spillover of that. And also, just that private credit got so aggressive moving downmarket, they're trying to make it so much more accessible. They're trying to broaden the asset class, which, of course, is why wouldn't they? So… It's hard to imagine that there… it wasn't done In a rather loose fashion, but yeah, from our system, there's something specific about… about it that we've seen, other than they haven't wanted to dabble in that software, which has kind of been a… something we thought would get interesting. But we're certainly skeptical of it… ourselves.

Chris Murray:

It's another big topic out here as well, right? Vaults, private credit, AI. So…

Kevin Flanagan:

Yeah, and I don't think, right, you know, even, hopefully, as I said, when the headlines from the Middle East, maybe they, you know. start slowing down, or the hostilities start, some of these things are still going to be with us, and I think that's what's going to be interesting to see, you know, some of the focus of the market going forward. Brent, I wanted to ask you something else, because you had mentioned momentum. Does it ever come a point where, when you look at momentum. You're worried about chasing yesterday's trade. You know, that was something I… my background, you know, from a trading floor environment, that was something that we were always very, very cognizant of, trying not to trace yesterday's trade. I just wanted to see your thoughts on that.

Brendan Ryan:

Yeah, I mean, like I said, momentum is a very powerful, kind of, underlying mechanism in our strategies, but it's not really a discrete mechanism. Like, I mentioned that SOX has not been ranked well. I think… We have a lot of… our system's very complicated, and one… good output that it generates is usually the momentum that is preferred by us is momentum that's really well-behaved. So that means usually it's occurring on low volatility, and hopefully relatively low correlation. A big part of our system is looking at correlations not just, to the market itself, but kind of across everything we look at. And there's a history of how you normally correlate to things and how you're doing today. So, the more something, I guess, looks like alpha. the more, interesting it becomes. My suspicion is something like semiconductors right now, is reasonably volatile, even though it seems like it's only in one direction, but is also becoming more and more correlated with the market itself, rather than maybe five years ago, when it was a smaller component, and it was kind of beating to its own drum. That's the sort of momentum our systems look for, momentum with low correlation. And that's what we saw with India a couple years ago, and that was a big pick for us as well. So there is… there is a lot of calibration on that in our system, and also when your returns kind of exceed some… normalized threshold in a short period of time, that's usually a warning sign for our system as well. So there are a lot of guardrails to protect against exactly what you're talking about, kind of just jumping into the hottest thing. Usually, the problem we have is what I alluded to, when there is, like, a sea change in leadership, it actually takes us a little while To get that. Usually, we're not buying something, trying to get into something at the low, usually has to establish some momentum, so that's kind of what happened to us with the international stuff. It took about 4 months before our system was comfortable. With it potentially being a leader in the market before we dove in.

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