SI419: What Happens When AI Starts Building the Portfolio ft. Nick Baltas

Niels Kaastrup-Larsen (0:01)

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 shortcuts, just real conversations to help you think better and invest with confidence.

Alan Dunne (1:09)

Welcome back to Top Traders Unplugged where each week we take the pulse of the markets from the perspective of a rules-based investor. My name is Alan Dunne, and this week I'm sitting in for Niels, who's away on his travels, and I'm delighted to be joined by Nick Baltas. Nick, how are you doing?

Nick Baltas (1:25)

I'm doing well, Alan. I'm doing well. How are you?

Alan Dunne (1:27)

Good. I know you've been traveling as well, so there was a bit of tension earlier. Were you going to make it or not? But you're here in good shape.

Nick Baltas (1:33)

I'm here. I'm here. It's been quite a good September, obviously, back to school, back to work. It's been very, very busy.

And the kids are going back to school, and my son starts nursing and all that. So it's been a busy month, I must say, but all very good, all very good.

Alan Dunne (1:49)

Good, yeah. Well, it's busy and a positive month for trend following, so that always helps as well. So everybody in the industry, I'm sure, is in good spirits. But we do always like to kick off with asking our guests what has been on the radar? What's been on your radar in the last several weeks?

Nick Baltas (2:05)

So I don't know if that's something in my radar, but certainly something that just caught my attention, and I don't think it got just my attention. I think it got various people's attention, and it was part of a small article on DFT a couple of days ago. This comes from GS, from Christian Julek-Glissman. He's running our multi-asset strategy on the research side, and he put out a chart which is very, very simple but actually quite striking. So what it shows is that, sorry, it shows basically the percentage of S&P 500 constituents, so 500 stocks in the index, that have a negative beta to the index that they belong. So naturally, you would think if I belong to the index, then more likely I have a positive beta to it, partly because I'm part of the index. Obviously, at smaller sizes, you would expect that this will become less direct, but also because there's a significant beta factor that is driving assets and stocks in this particular case. So using a three-month calculation, point in time, it's 45 percent. So about half of the stocks in S&P 500 have a negative beta to the index, which I think is just mind-blowing. Last time that we had this situation was in .com, but at the time, the number was just a tad less than 20 percent. It's now almost 45 percent.

Obviously, the background here is the fact that S&P is a cap-weighted index. The AI dominance is effectively building its own mini index within the index, and all the rest are becoming less correlated to it.

So this clustering and concentration is basically causing this effect, but again, that in itself is quite a striking image once you see it. I know you've seen the picture, so we can relate, right? Yes, I think it is.

Alan Dunne (3:59)

I mean, it shows a dramatic, well, it looks like an acceleration on the chart. I mean, people can check it out. It was in DFT, so you'll see it online. Or check out Goldman's research.

I mean, is energy probably is driving it to an extent as well, I guess?

Nick Baltas (4:15)

It could be. I mean, there is not too much kind of discussion in the actual paper from Grishman on that part, aside from the fact that the market is getting concentrated. And there's a lot of discussion as to whether bonds are defensive in this current environment. And obviously, this decoupling in the equity space is creating opportunities for dispersion. Some people talk about going long correlation and so on and so forth. So that's kind of the background under which this was kind of projected. But that in itself, even out of context, is quite a chart. So not necessarily in my radar, but let's say some that caught my attention in the last couple of days.

Alan Dunne (4:46)

Certainly noteworthy for sure, yes.