Richard Tomlinson on Strategy, Risk & Performance | Allocator | Ep.31

Episode Overview

• Richard Tomlinson, CIO of Local Pensions Partnership Investments (LPPI), discusses the future of finance, from technological disruption to resilient portfolio construction for a new economic regime.
• The conversation explores the coming changes to the financial system's "plumbing," driven by technologies like tokenization and stablecoins that will eliminate inefficiencies.
• Tomlinson breaks down his approach to asset allocation, emphasizing the role of "real assets" as an inflation hedge and challenging the conventional wisdom around the illiquidity premium.
• The episode covers the strategic use of private markets for unique exposures and the importance of evaluating investments holistically with a "balanced scorecard" that goes beyond simple returns.

Key Concepts

• Financial System Disruption: The financial industry's core infrastructure is ripe for disruption from technologies like tokenization and stablecoins, which will remove inefficiencies and could make entire intermediary businesses obsolete.
• UK Pension Pooling: LPPI was formed as part of a UK government initiative to consolidate local government pension schemes, aiming to build scale, reduce costs, and increase investment in domestic infrastructure, inspired by models like those in Canada.
• Real Assets as an Inflation Hedge: The true inflation hedge in real estate is not the land value (which is sensitive to interest rates), but the rising cost of construction, which is directly linked to inflation.
• Deconstructing the Illiquidity Premium: The idea of a guaranteed "illiquidity premium" is a marketing concept; any outperformance in private markets comes from other factors like complexity, sourcing advantages, or gaining specific exposure unavailable in public markets.
• Holistic Portfolio Evaluation: Investment success should be measured using a "balanced scorecard" that assesses performance, risk, costs, and non-financial factors like stewardship and real-world outcomes to align with stakeholder goals.
• Public vs. Private Markets: The decision to invest in private markets is a strategic choice to access unique opportunities, such as local infrastructure projects, rather than a simple search for higher returns.

Quotes

• At 0:09 - "There's a lot of change coming there. There's a lot of inefficiency in the financial intermediation or in the way that the plumbing of the system." - Richard Tomlinson provides a preview of his views on the impending technological disruption in the financial sector.
• At 25:47 - "You've got to disaggregate land value from what's on the land, cost of construction." - Tomlinson explains that analyzing UK house prices requires separating the interest-rate-sensitive land value from the inflation-sensitive building costs.
• At 26:17 - "Is it going to be cheaper to build a house in a decade or so... than it is today? Find that hard to believe, really hard, with demographics." - Tomlinson making his case for the long-term structural inflation in construction costs, underpinning the value of real assets.
• At 27:20 - "I absolutely reject this idea of illiquidity premium and then you almost get paid for it... it's a really neat marketing thing." - Tomlinson dismissing the concept of a guaranteed premium for illiquidity, suggesting other factors are at play.
• At 37:37 - "It is incredibly powerful in the portfolio because you do get times when any risk asset gets hammered... and you've probably only got one or two things you own that might just be able to stand up." - Tomlinson explaining the true diversification value of strategies like macro or CTAs, which can perform when all other asset correlations go to one.

Takeaways

• To properly hedge inflation with real estate, focus on the replacement cost (bricks and mortar) rather than the land value, which is more sensitive to interest rates.
• Question the existence of a simple "illiquidity premium" and instead seek alpha in private markets through specific advantages like complexity, unique sourcing, or targeted exposures.
• Incorporate true diversifiers like macro or CTA strategies that can perform when traditional risk assets are falling in tandem.
• Adopt a "balanced scorecard" approach to evaluate investments, looking beyond headline returns to include risk, costs, and alignment with long-term goals.