Antti Ilmanen - Understanding Return Expectations (S7E21)

Hey, everyone. Corey Hofstein here. If you've been tuning in to Flirting with Models, you know I'm all about rethinking portfolio construction, and I wanna personally invite you to an event that's doing just that. On October 8, we're hosting the return stacking symposium at Cboe Global Markets in Chicago. It's a one day in person deep dive into capital efficient strategies, and we're featuring speakers like Jonathan Glidden, CIO of Delta Airlines, Patrick Casley from One River, and Mark Horbul, managing director of the systematic strategies group at Canada Pension Plan. This is your chance to

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321. Let's jam. Hello, and welcome, everyone. I'm Corey Hofstein, and this is Flirting With Models, the podcast that pulls back the curtain to discover the human factor behind the quantitative strategy.

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In this episode, I speak with Antti Ilmanin, principal and global co head of the Portfolio Solutions Group at AQR Capital Management. Antti has long been one of the most thoughtful voices in the world of expected returns, having written not one, but two landmark books on the subject. But in his latest paper series, he returns to the topic with fresh urgency, probing the difference between objective and subjective expectations and asking why even rational models can go so wrong in real time. We explore everything from cape ratios and market timing accusations to why equity investors tend to ext

Sure. And you know me, there's not going to be one answer. I'll sort of give three. And the first one is related to this idea that I very much talked about objective expected returns. Let's define that in a moment. But now I want to talk about what are actual investor expectations, which we mainly read from surveys. And I like the idea of getting expectations straight from the horse's mouth rather than inferring from market prices. And there's actually a story about this is repentance partly for my PhD time shyness. So I got a footnote story of going to a farmer's office thirty plus years ago

So let's draw this distinction explicitly at the beginning here between what you mean by objective and subjective expected returns because these are phrases that you use throughout the whole series and it's really important to get these right. We'll use them in the conversation. So I'm hoping you can start by defining these terms. But one of the things I really loved in the series is you actually mapped these two ideas to different parts of the discounted cash flow model. I thought that was really, at least for me, clever way of understanding how you were thinking about this. And so I was hopi

Yeah. Yeah. So first objective, I think, like, I would call it objectively feasible and objectively feasible now sort of comes from long run empirical data. What kind of predictors have predicted returns to the right direction on average? And starting yields and market low valuations, let's say, when you talk of high expected returns, fit the bill. So most academic research and my books have focused on these o