“Over the course of my career, I have had the pleasure of working with various asset allocators and CIOs at major Wall Street investment firms. I also have the distinct pleasure of teaching the complexities of asset management to graduate students in my capacity as an Adjunct Professor of Finance.
“In each of these roles, I have come to learn that those who are most successful in this business are those who understand that investing and allocating is both a science and an art that must be approached with knowledge and humility. Perhaps no one I have yet to encounter embodies these qualities better than Jason. His understanding of market dynamics is superb; his familiarity with managers across asset classes is vast. He approaches asset allocation and manager selection using a combination of an encyclopedic knowledge of market history along with his own differentiated analysis that frequently incorporates the latest academic scholarship in portfolio management. He understands that risk is every bit as important as return and that error will inevitably occur in a process in which forecasts must be made with imperfect knowledge; but with proper portfolio construction, risk, and error can be mollified.
“Lastly, and perhaps most admirably, Jason approaches his position with unmatched integrity and dedication, understanding the extreme responsibility of managing people’s hard-earned money. For all these reasons, and many more, Jason is, in my assessment, the consummate financial professional and highly deserving of this honor.”
—John M. Nolan, managing director, WBB Securities
Jason Bastedo is the director of investments & risk management at Novartis Corp., with responsibilities for management of Novartis’ $11 billion in US corporate defined benefit and defined contribution plans, encompassing asset allocation, manager selection, portfolio construction, and risk management. He has over 19 years of overall investment experience, and 14-plus years in a manager research/capital allocator capacity, having worked in a multitude of settings, including an outsourced CIO, manager-of-managers, and both Asian and US private banks. Jason holds a BA from the University of Pittsburgh, speaks Japanese, and has studied overseas at Kansai Gaidai University in Osaka, Japan.
Jason is proud of the mentors he has had throughout his career. He is mindful of the degree to which behavioral biases creep into an investment recommendation, predicated on the strength of historical past performance. This past performance, he says, is the byproduct of the other four “P’s” (people, philosophy, process, portfolio).
“Normal portfolios are a great tool to decompose the proportion of excess returns attributable to the robustness of the pond relative to how skillful the fisherman in that pond is,” he says, and knowing that helps in monitoring/sell discipline related to the investment.
Lastly, he indicates, attributing excess returns of an investment strategy in a framework leveraging the fundamental law of active management” (information coefficient, transfer coefficient, breadth) is a useful way to think about the sources and sustainability of an alpha source.
CIO: What did you think you understood before the COVID-19 crisis … and if, during the crisis you were proven wrong, what did you learn from it?
Bastedo: Coming into 2020, I imagine most investors were worried about elections, trade, Brexit, and earnings as among the largest risks in markets, but at some point COVID-19 hijacked the narrative. At first, I believed it to present largely a potential solvency/liquidity problem, and that as long as companies could stay in business and keep people employed, the “V-shaped” scenario was plausible. As the number of cases continued to increase and the duration of the pandemic extended, it became clearer how economically devastating this would be, ultimately creating the greatest growth shock since the Great Depression.
In response, the fiscal/monetary measures taken to address the crisis have equally been unprecedented. Many market practitioners have previously commented on the fragility of market structure given post-GFC banking reforms catalyzing the impact on investment bank balance sheets and overall market-making activity, but the consequential impact from the absence of these historical “shock absorbers,” combined with market volumes dominated by passive plus non-fundamentally driven systematic investment strategies (i.e., trend following, risk, parity, volatility targeted, etc.) perhaps exacerbated the speed and degree of the selloff, which took many by surprise.
CIO: What took you by surprise? What worked?
Bastedo: The extreme selloffs and spike in volatility driven by the virus and measures to contain it were nothing short of remarkable. We observed a VIX move from around 14 to a peak of about 85 from Feb. 19 to March 23, four of the top 10 VIX closings on record and seven of the worst 11 trading days in the past decade – all in a two-week span within a month that averaged daily moves of around 8% (not seen since 1929).
Additionally, the disconnect between credit spreads, which didn’t widen to GFC levels, and implied equity volatility were an interesting dichotomy. Within equity markets, observing that those companies which performed well in January prior to the drawdown also performed best during the selloff was also interesting.
I think patience, composure, and a focus on risk management helped, with a recognition that in the heighted volatility regime assets were perhaps being driven by second derivative change in COVID-19 cases and that fundamentals didn’t matter.
CIO: How would you build the portfolio differently now that you have gone through this massive accelerated shift in the market?
Bastedo: Overall, I think our portfolio fared well given the environment. We had been talking about the late cycle investing playbook for quite some time and entered the period with an overweight in long bonds, with the intention of reducing equities and adding to hedge funds. Re-risking and sequencing have been our most recent focus, but we have been more deliberate and cautious in those activities. On the margin, I’ve been orienting myself to the dislocated credit markets (RV, structured, and distressed) where our hedge fund book has intentionally been underweight given that spreads were at tights prior to all this.
CIO: ESG has been a tidal wave force behind recent innovative investment framework in our industry. How do you see the ESG framework and effort be influenced by the recent event?
Bastedo: I’ve always thought of ESG in the context of harvesting a quality premia from the market, which invariably also comes along with other associated factor tilts (size, value, beta, etc.). That said, I recognize a precise definition of what constitutes ESG is hard to come by and still evolving. COVID-19 has the possibility to complicate things further. It will be interesting to see how factors like share buybacks (which now seem politically challenged), how well companies treat their employees, or perhaps even the nature of a company’s business relationship with China weighs into and/or is prioritized within an evolving ESG framework. Regardless, the sheer size of the asset pools that implement these programs is tremendous, so one always needs to be mindful of the manner in which they inform risk asset pricing, and the impact of lower sponsorship for names that rank poorly through ESG lenses.
CIO: What’s your view on the fate of the Euro and the EU?
Bastedo: I will not make a call on the fate of the euro and the EU here as it has been characterized as fragile seemingly since its inception. I would observe however, there seems to be a lot less cooperation and collaboration from members as it relates to the COVID crisis in contrast to say, the GFC. This could be a function of a multitude of differences such as the number of virus cases, population density, health care systems’ capacity, political views of borders, approach to mitigation, etc. Additionally, the EU also does not have any ability to ascribe blame to the UK (deserved or otherwise) this time around.
CIO: What do you think will be the impact of COVID-19 on developing economies?
Bastedo: I think it’s too early to know the impact on EM countries but certainly those who are dependent on exporting oil, or have high exposure to global supply chains and/or tourism, are clearly challenged. Layering in the potential for weak governance, health care infrastructure, or need for external funding can only magnify those problems. I’d add in that EM is not homogenous and that the financial, social, and structural challenges facing the asset class are immense.
CIO: With the shakeout of industries currently going on—where do you see the most exciting opportunities over the coming years?
Bastedo: The post COVID-19 world can have tremendous implications on corporate and consumer behavior going forward. Many business models will have to evaluate the consequential impact of this new reality (i.e., operating costs, foot traffic, demand, etc.), which will invariably create a whole host of winners and losers. Perhaps like many, I expect the emerging distress in hospitality, retail, energy and real estate to provide a rich opportunity set in the years to come.
CIO: And professionally, where do you see the most exciting areas to specialize further over the coming years?
Bastedo: I think it depends on the level at which one is at in their career, but my understanding is that as one becomes more senior, there is actually greater interest in T-shaped professionals, that is, individuals who have built deep expertise and a wide knowledge base. These are subject matter experts who demonstrate organizational agility and can work across disciplines, including being comfortable with technology. The latter could become increasingly important in a future where “man + machine” becomes the norm.
CIO: How is the quarantine affecting the way you view teams and working environments, such as work from home, meetings, etc.?
Bastedo: I have felt very fortunate to be employed in an industry that is capable of working from home. Many of the funds I have spoken with have said the transition so far has been seamless. We have leveraged technology which has helped foster connectivity, and preserve those face-to-face interactions as necessary and appropriate. Due diligence is the one area where much of the industry (both allocators and funds alike) seems unclear as to how the discipline evolves, but I take comfort in knowing we are all effectively in the same boat for the time being. There are some distinct challenges and tradeoffs that I’m sure many are considering when balancing flexibility/nimbleness against limitations of the current COVID-19 reality.
CIO: What exercises have you found useful?
Bastedo: I took up boxing a year ago and I have found it to be the absolute best workout and stress reliever. Incidentally, in a time where there perhaps is the greatest need for people to blow off steam, gyms are not accessible. I have since traded in my boxing gloves for home fitness routines supplemented with the additional time I get to spend with my wife and two daughters, who are aged 3.5 and 1.5 years old, respectively. If there is an upshot to this entire situation, it is undoubtedly the potential for quality time with the family and those you care for most.
CIO: Who is the manager you don’t currently work with whose brain you’d most like to pick for an hour?
Bastedo: I’ve always enjoyed Michael Mauboussin’s body of work focusing on behavior, decision-making, and complex systems dating back to his days at Legg Mason and working with Bill Miller. The way in which he would leverage the firm’s affiliation with the Santa Fe Institute to capture the insights of brilliant interdisciplinary experts/thinkers and contextualize/translate those into an investment management application was fascinating.
CIO: And in a fantasy scenario, if money was no obstacle, where in the world would that meeting take place?
Bastedo: After weeks of sheltering in place, preferably somewhere outside (properly social distanced, of course).
CIO: What asset class or investment troubles you most right now—and why?
Bastedo: Real estate. Before COVID-19, the entire retail sector was already under extreme pressure which has now been exacerbated by the shutdowns. To the extent remote work trends accelerate and corporate behavior enables such a reality, people theoretically no longer need to live near the major job centers. The knock-on effects of rationalization for commercial real estate overall in that environment could be very significant. If peak urbanization trends also manifest, the effects could spill over into the residential sector as well.
CIO: Describe the weirdest interaction you’ve had with an asset manager.
Bastedo: Allocators are well aware of the occupational hazards of being marked as such with those notorious color-coded badges at conferences. While I applaud the notion of a marketer seizing the moment at such an event, one individual followed me into the men’s room and proceeded to pitch his firm’s strategy. I’m pleased to cite that lone occurrence for such an encounter.
CIO: What should be an investment trend, but isn’t (yet)?
Bastedo: I’m still waiting for a reversal in the proliferation of passive investing. The environment for much of the last decade has certainly been challenging (varied by asset classes, for sure) but at some point, differentiation and fundamentals will matter again. Perhaps COVID-19 is the catalyst for such a change in preference towards active management, though demonstrating success in its ability to protect capital to the downside will be paramount.
