Investing legend Byron Wien's 'radical' portfolio is dumping US stocks and holding the most cash in 8 years. Here's what has him worried, and what he's buying instead.
- Byron Wien, the longtime investor and vice chairman of private wealth solutions at Blackstone, recently made important changes to his "radical asset allocation" portfolio mix.
- During a recent webcast, he explained why he raised cash by trimming his holdings of US stocks, and recommended other parts of the market where investors should hunt for yield.
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What might an ideal diversified portfolio look like?
Byron Wien, the vice chairman of private wealth solutions at Blackstone, attempted to answer this question in 2011 by launching a portfolio mix that embodied what he called "radical asset allocation."
In a blog post back then, he described it as a portfolio that maximized returns from the most promising assets and geographies in the world while holding enough dry powder to jump on new opportunities.
These days, Wien is leaning more into the dry powder portion of his so-called radical portfolio. During a recent webcast, he revealed that the portfolio reduced its allocation to US stocks to 10% from 15% and lifted its cash holding to 15% from 10%. He said that's the largest share of cash he has allotted since 2011.
Wien remains confident as ever that the bull market is not on the brink of ending. However, the fact that the stock market has performed so well this year in the face of "problematic circumstances" is cause for concern.
"I have more optimism than you do, but I recognize the dangers that are lurking," Wien said to Joe Zidle, Blackstone's chief investment strategist and co-host of the webcast. The firm oversees $545 billion in assets.
Wien and Zidle then proceeded to walk their audience through some of these dangers on their radar.
The risk of a recession
Top of their minds - and on the minds of many investors this year - is the risk of a US recession.
Of the three primary indicators that Wien and Zidle track, two are flashing a recession signal. Leading Economic Indicators are deteriorating, while the yield curve between two- and 10-year Treasurys has inverted for the first time since the most recent recession. However, average hourly earnings growth is still above water.
"The yield curve is one that I consider to be most important," Zidle said. "But I would note here it doesn't really take more than one of these indicators to trip a recession warning. Certainly, more than one becomes of a greater concern. But the yield curve is the one that I consider to be the most predictive."
Wien concurred that it was a concerning signal, although he had a slightly more optimistic take on the dreaded recession indicator.
He noted that the curve usually inverts because the Federal Reserve nudges short-term rates above longer-term ones. This time, however, it was long-term rates that fell below short-term rates due to an abundance of liquidity that investors parked in the bond market.
This dynamic suggests a recession may not happen as soon as the inversion implies, Wien said.
But that does not mean the coast is not clear enough to be taking on more portfolio risk.
"We're now in optimistic territory, so the market can make some further progress," Wien said. "But we're definitely not in the ideal position to be a heavy buyer - and that's one of the reasons we raised a little more cash for the radical asset allocation."
The shift from US stocks to cash was the only big change in the radical asset allocation portfolio. Beyond that, Wien continues to advice investors to seek yield in the fixed income and mortgage markets. And for individual investors, he says municipal bonds are still attractive.