Myron Scholes on Time: Adapting asset allocation to tomorrow’s reality

Phil Maymin: Welcome to a special episode of Myron Scholes on Time, a podcast aimed at sophisticated investors, or those wishing to become sophisticated investors. I’m Phil Maymin and in this episode, we’re replaying a fascinating conversation Myron had at a recent event with Janus Henderson CEO Ali Dibadj. With Ali on the main stage at Janus Henderson’s Asia Investment Summit in Singapore and Myron dialing in, the pair explored the future of asset management drawing on Myron’s deep experience and academic work. We hope you enjoy the conversation…

Ali Dibadj: Myron Scholes is the Chief Investment Strategist here at Janus Henderson. He’s part of our newly formed Solutions Group, and he leads the evolving asset allocation product development efforts that we have that has the opportunity to apply to our investment teams, contributing to the macro insights quantitative specific views, hedging risks, disciplined portfolio construction, etc., for our firm.

Now, of course, among his myriad, myriad accomplishments, Myron is the Frank E. Buck Professor of Finance Emeritus at Stanford Graduate School of Business. He’s a member of the Econometrics Society. He served as President of the American Finance Association. And, of course, of course, of course, he’s well known for his seminal work in options pricing, capital market equilibrium, tax policies, financial service industry – and an all-round good guy.

He is, of course, a Nobel Laureate in economics, and core originator of the Black-Scholes options pricing model. Myron, it’s with great, great pleasure that I welcome you to this Singapore audience. You’re looking well.

Myron Scholes: Thank you. Thank you, Ali.

Dibadj: Thank you, Myron. So, we have many, many questions, and we’re going to get some questions from the audience. A few of them have already come in. So, if you’re okay, let’s just get started. We’ll try to keep on pace here. I will, with respect, sometimes interrupt you; please feel free to interrupt me, so we can get to as many questions as we want. So, the first couple of questions that we have is really going back to the Nobel Prize in 1997, 26 years ago. Actually, a bit after we opened up this office in Singapore, so it’s been a little bit of time. Just tell us about the feeling that you got. What happened? Did you know before time? What’s the process that happened way back when, really a turning point in your life?

Scholes: It was a turning point in my life, thank you, Ali. Basically, receiving the Nobel Prize was a fantastic experience for me. It was really a surprise when I received a call from Stockholm in the early morning in October in California. Many colleagues had indicated to me that I was on the list and I should win the prize, but when Fischer Black unfortunately passed away in 1995, two years before 1997, when I received the prize, I thought maybe the chances had gone down dramatically that I would be awarded the prize.

Basically, we went and received it in Stockholm on December 10, and the amazing ceremony and process, combining a formalism where the King of Sweden awards the prize to me and, additionally, there are talks that are given to the academies and schools, and there’s also frivolity, where students put on parties and the like, and it’s a wonderful ceremony.

Don’t forget, they’ve done it for over 100 years, since 1910, and so over that time, it’s really had a tremendous evolution and growth. But the most amazing thing to me was that when I had to sign the register, the Nobel Prize register, and look at other Nobel Prize winners that had recorded their name in the register as well, seeing such persons as Albert Einstein or Madame Curie is really awe inspiring. So, I tell people, if you get the opportunity to receive the Nobel Prize, do not turn it down.

Dibadj: Myron, where do you keep the medal? Do you sleep with it? What do you do with the medal?

Scholes: I can’t tell you that because I have to keep it secret. I do have one of the awards on my wall behind me here, in my office. So, they give you a scroll, which has your name engraved. It’s an original scroll, so it’s really impressive.

Dibadj: It’s very impressive. So, if you think about the reason you won it is Black-Scholes and the option pricing technology behind that. How did that impact the investment landscape, would you say?

Scholes: Well, you have to realize that the investment landscape today is tremendously different than it was in the 1960s and early 1970s. And with the development of the Black-Scholes technology, basically, many students were attracted to business schools. And as a result of being attracted to business schools, they had a model to price things.

And as a result of having the understanding of technology, then those students gravitated to investment banks and investment management companies. And they set the stage for having quantitative techniques for the first time in investment banks and in companies, such as Janus Henderson. But basically, the idea there was to think about how you create, at the same time that the Black-Scholes model came out, was the development of the options market and the futures market.

So, the number of instruments or technologies that could be used to enhance returns and have better risk management strategies for investors changed dramatically, since the advent of having more techniques, more ways in which you can hedge risk or transfer risk, and also, having technology or modelling. We all have models. It’s all intuition. And if you have something to put your anchor on or your hat on an exact model, that enables you to be able to do much more.

The Black-Scholes model enabled people in industry to have a framework in which they can augment the Black-Scholes or add value by using technology in managing money and in investment banking activities. So, I think it was a watershed, and so many other people in physics or in other quantitative techniques gravitated to finance and gravitated to our industry.

In a lot of ways, our industry is so far ahead of what is available in other parts of the world, because of the understanding and the development of technology over time. So, basically, the business changed from just being an agent. When I was at Salomon, or spent time at Salomon or other firms, maybe, Ali, you know this for yourself, that many people were just agents. They’re buyers and sellers. They sold securities and they purchased securities for clients.

The business changed from a focus of saying, “let me be an agent” to being a principal. Being a principal means I’ll design what my client wants. I’ll give what my client wants, and then I’ll take the risks onto my own account, and I’ll hedge those risks, the risks that are remaining. So, you’ll make it from a principal, where you take risks and you transfer them, and that makes things faster for the client. It makes it more what the client wants. And it makes it really more flexible. And that’s how the industry changed quite dramatically, since the advent of quantitative techniques.

Dibadj: The way the way I think about it, have always thought about it, Myron, is it’s almost the democratization of investing and bringing tools to more and more people to be able to do that. So, it really was a watershed moment. So, you’ve been with Janus Henderson for a number of years now. Why? And what have you enjoyed about being at Janus Henderson?

Scholes: Well, first of all, when I came to Janus Henderson, under the auspices of the Chief Investment Officer at the time, I talked to many of the investment professionals, and I enjoyed the discussions that I had with them, and the way they were thinking about adding value for investors. And they do well at it. And basically, what I liked about the firm what that it focused on investing.

It wasn’t a general firm, which is all over the map and various services with groups competing with each other. The team was working together, they were trying to think about, as you said earlier, adding value for clients. What are the opportunities available in the active management space? That was one part of it that was really attractive to me, the openness of the group to receive new ideas and new information.

The second part was that I developed a team of professionals, led by Ashwin Alankar, who started working with me as a graduate from Berkeley and PhD in finance. He started working with me in 2003, and he joined me slightly after I came to Janus Henderson. And we built a technology together to extract, really, the information embedded in option market prices to generate distributions of future risks.

To me, it was fascinating that I couldn’t figure out a way to marry together, by technology and option pricing, with the idea of investment management, the old style of Markowitz or the old style of others, Sharpe who talked about information ratios and returns relative to benchmarks. And we were able to develop a way to marry options together with a standard way in which portfolio theory is done to make things dynamic and not static.

The value of many investments that I see is a static framework, and we wanted to say if you have a static benchmark with your strategic portfolio, how do you take that strategic portfolio and adjust over time to risks that are in the marketplace? And that was very important. So, we developed a technology to extract information from the option market as to the risks of the road ahead. What is the market telling us? What is the crowd-sourced information telling us about those risks?

And we have helped other teams within Janus Henderson to use our technology outputs to augment their investment processes. For example, the hedge fund group uses our signals to inform their allocation processes. The equity investment groups allocate differentially to investments and risk taking, depending on our signals and how they differ as the downside risks.

We all believe that marrying together, that the investment acumen, the skills to pick alpha strategies with thinking about how to manage risk or the data part of the investment, is very important to making a better performance experience for our investors going forward. And I’m super excited about the opportunities that exist at Janus to implement and augment our technology for our investors that we have under our auspices at this moment.

Dibadj: The firm has certainly leveraged your acumen and your expertise and applying it to deliver for our clients and our clients’ clients. Particularly, Myron, in a very dynamic landscape and the dynamic world that we’re in today. Again, remember the stay invested theme that we’ll talk about later on today. Now, innovation has happened in investments since Black-Scholes, since you joined Janus Henderson. What are the types of things that you found most interesting in the innovation area for investments over the past several years?

Scholes: Well, obviously, to me, the quantity of shocks of growth has been really the movement away from, to ETFs, or exchange-traded funds, and also, the movement to more index investing and the growth of index of ETFs generally, in combination with investment managers taking an ETF, or basic passive strategy, with an active strategy, such as hedge funds and, or private equity investments.

So, what is happening is really, the strategy is more of a barbell strategy, trying to separate alphas or the ability to make abnormal returns from the beta component or the systematic risk of the portfolio. So, I’ve seen, really, movement of pension funds or wealth funds and allocators away from strict concentration on returns, the strategic portfolio, to really thinking about not only putting buckets or bucket investments, but really thinking about how we manage risk.

And many of the investors that I’ve talked to, particularly, Ali, after we talked about the changes in risk that we saw in 2022 when the market fell dramatically, that many investors are really worried about loss. They’re worried about, how do we manage risks? The CIO is worried about how we manage risk. That’s most of the allocation of time. And also, the boards, the CIOs, the Chief Risk officers, all want to know, how can I do a better job of managing risk?

And that’s, I think, a very important direction that I see going forward, and great interest among investors. And I think that, basically, we’re going to move away from product focus, the idea of thinking only on what products that are solutions focused, which we’ll talk about a little bit later in our discussion, and then to a partnership. And the focus will be really on data, computers, and how we use these data more efficiently. And basically, how we can move forward to be better investors. So, I’m really excited about a development in garnering data. How are we going to get more data? How we use data in investment management to augment returns. How we capture data, and how we’re going to transfer data going forward. People have said to me, and I agree, that data is the new oil. Data is going to be the new oil, and investments, and how do we capture and use that data? And we are thinking about that in our group now, thinking about how to do risk management by capturing that data, which really adds value for us.

Dibadj: One of the interesting things is, very much as you described, the risk lexicon increasing among CIOs, investors, and folks that we speak with. And really, it’s disaggregation of risk that a lot of folks are talking about, in terms of different factors. So, really thinking about what factors are exposed to risk factors, and that’s a lot of the way our firm thinks about exposure and creating alpha for your clients in thick or thin.

Thank you for some of the questions that have come in. If you have any more questions, please do feel free to send them in. We’ve got one about your investment thinking and whether that’s changed over the past several years. Are there ways that you’ve changed the way you tackle investing?

Scholes: Yes. I was one of the forefathers or progenitors of the idea of passive investment, or index funds. So, basically, I started to develop the initial ideas and that technology, and we have now seen a huge growth in the idea of passive investments, or passive investing. But the interesting part about passive investing, it’s really a misnomer, because passive investing is not passive investing.

Because passive investing is more buy and hold, it doesn’t take account of a change in opportunity set. It doesn’t take account of a change in risks. So, it’s static, it’s really static, it’s not dynamic. And the interesting part of investing is really thinking about dynamics. And my thinking has changed dramatically to think about what is the most important thing, other than strategic allocation to those sectors, that’s going to add value to those factors, as you said, Ali, that could add value to, or the specific investments that can add value to you, that is really important.

My second thing is really to try to worry about the growth of the portfolio, how the portfolio is going to grow over time. A passive investment doesn’t give you that. It’s just passive, it just sits there. But if you think about dynamics, the idea of compound return is so crucial. Making 100% one year and losing 50% the next year, on average, you make 25%. But you know that if you make 100%, one year and lose 50%, next year, you’re back to zero, you pay nothing.

And so, compound returns are really a phenomenal wonder to think about. And when you have compound returns, risk and expected return come in. So, the alpha strategies that were in Janus Henderson to produce better average returns have to be married together with the risk management to produce a better compound return. And compound return is a function of volatility. The more volatility you take, the more drag you have on your compound return.

So, that means taking excess volatility reduces the compound return even more. It increases the drag. And so, if you can risk-manage your portfolio, your accumulation of wealth will be much greater. Many institutional investors we talk to are very interested in compound return, even though they measure a lot of their performance of their managers by a benchmark or returns relative to a benchmark.

And so, that’s very important in thinking about things is the reason people constrain themselves, the cost of constraints are so large, people constrain themselves to benchmarks or looking at returns relative to the benchmarks, because they constrain themselves because they don’t trust their managers. And one thing that Ali is trying to do, and others are trying to do in the firm, in our institutional investing team and teams, is building trust.

Building trust with investors allows us to loosen the constraints of our investment strategy. Many of my colleagues that I talk to in Janus Henderson say if we weren’t constrained to stick as close to the benchmark, we can really add to returns. Maybe the alternative investment groups that Ali is talking about are going to do that by having more tracking error, taking tracking error to benchmark.

So, as we build more trust in the firm, and trust is so important, I really believe that my thinking is gravitated to constraints are costly. And trust, or lack of trust, is costly. Can we mitigate constraints by building a more trusting relation with our clients? And that is something that I really think is important. And one other point that I’d like to raise at this time is I realize that every period is important in returns.

You don’t have a long horizon return, where you can ignore the fluctuation day-to-day or month to month. If you can control those fluctuations, then you could add a lot to your returns. And another important point in investment that we take account of, or we should all take account of and keep learning to take account of, is that Markowitz and others have said diversification is a free lunch.

Basically, if you can diversify, you can get rid of the residual noise, your passive strategies, and basically, you’ll have a good investment experience. A, that’s wrong because at times of shock, basically, every asset becomes perfectly correlated or highly correlated. You have to take account of the tails. There is the bad tail, which is the last tail, but there is also the tail, which is the up tail, the good return tails. And that has to be taken account of in investment manager as well.

Reducing the tails and reducing the loss of tail loss, and increasing or maintaining the upside, gives you a tremendous compound return. There’s your convex relation, and that’s so important in creating greater terminal wealth. What I’m saying is we want to concentrate on risk management and asset selection. The combination of those two will give us a better performance than ignoring either of them.

Dibadj: Look, I think, Myron, the past 10 years, that was less relevant, right? Because there was limited volatility, risk wasn’t as important, money was free, as we talked about before. As we go forward over the next ten years, it’s going to be even more important. Our belief, at Janus Henderson, is going to be even more important to think about the alpha generation from the haves and have nots, and the risk associated to those.

And in doing that, we’re building, Myron, a solutions business. Can you tell us a little bit about what Janus Henderson’s solutions business really is? And what that means, going forward for our clients, both institutional and in the retail side?

Scholes: Yes. Basically, on the solution side of launching a solutions business, it’s a little bit diffuse as to what we mean by a solutions business. There are many ways to think of a solutions business. Everyone says they’re solving client problems. If they have a product, they sell a product, because that’s the solution to a client’s business. I think the way we’re thinking about it at Janus Henderson, and you can correct me, Ali, because I know you have your views as well, is that we have a set of products that we have is one way to think about a solution.

But this set of products and our investment team will talk to clients, listen to what they say, and be able to think about do we have a set of products that are already married together, which give us a solution for a client, because we’re going to understand their problems and relate with them. And second is we take our product set and construct a better solution for the client, working together to understand what the clients want.

My way of thinking about a solutions business is further, the next step, which we have a technology. And the technology can be implemented quickly. It can be idiosyncratic. It can be for that client directly. And it can be flexible. So, it’s not so much a product, it’s a way of thinking about how we combine the individual securities, how we combine the components efficiently to make a better alpha experience, a better return experience, and to make a better risk managed experience.

So, that’s an evolution, an evolution of the solutions business. But I think the reason we talk about solutions, in my view, is because we want to build that trust that I talk about. We want to work with the client to understand, in my view, what their problems are, and they could tell us what they’re thinking about. And as a result of that, you can build better things together. And that’s very important, I think, for the future and going forward, if one is building a solutions technology.

Dibadj: Myron, if you try to turn that into a practical way, can you give examples, questions that have come in, can you give examples of how Janus Henderson uses options to predict future risk? Is it just areas of high implied volatility from option pricing? Or is there something else that you’re using?

Scholes: That’s interesting, thank you for the question. Basically, there’s now an option trader at over 4,000 securities internationally, from bonds, to gold, to equities, individual equities. And basically, the option prices that exist on each instrument give information as to the distribution of risks. And so, we use the strip of option prices that exists on each instrument.

And we can take those prices, which we believe are efficient, and we can then use the technology that we have and that others have developed in the academic literature, and invert those prices, and obtain, from those prices, an implied distribution. It’s the same thing as having sensors about what the risk of the road ahead are. We use the information in the option market to tell us what the risks of the road ahead are or the whole distribution.

Now, the interesting thing is what risks can we ascertain from the option market? We can obtain risks maybe only for a short period of time, like the risk of the next two months or three months. The short end, the very short end of the option market, is very noisy, because you have a lot of leverage and volatility, but when you go to two months or three months, it really is informative as to the risk. And when we’re thinking about compound returns, as I said, every period matters.

So, if you can do better the next three months, you can do better the next six months, you can do better the next nine months. So, we extract and use from each strip of prices of the options, we then invert those prices using the Black-Scholes technology, and then stitching them together, each of the out of the money and in the money options, the out of the money calls and the out of the money puts, to figure out what the entire distribution of risk is.

And we think about volatility in a different way from other people. A lot of individuals think about volatility as a risk, but we differentiate between good volatility and bad volatility. Good volatility is upside risk. If you have a lot of volatility, and it’s all upside, who likes that? Especially if you like it because it has no downside. So, we extract the skewness, or the implied skewness, from the distribution, which is how much upside there is versus downside. We like upside risk.

We don’t like downside risk. If the market is telling us there’s much greater downside risk, then that affects our asset allocation. Volatility is a description of a world that doesn’t exist. Volatility exists only if the distribution of risk are constant and normal, and we know risks are changing all the time, and they’re not normal. They’re not normal.

Then we’re cobbling in information about how risks are changing, so we can use the option market to give us the signals of the road ahead. A lot of finance drives a car, only by looking in the rear view mirror. And they get all the information using past data, past factors, past correlations, past data. But that doesn’t tell you about what you’re really interested in, what are the sensors or the risk of the road ahead.

And basically, that’s when we have to focus on all our investments, not only using options, but other things to give us information about what the distribution of risks are. And we know they’re changing all the time.

Dibadj: And so, therein is the danger, I guess, of using past distribution of risk to pretend that those will persist going forward. That’s the crux of part of your thesis.

Scholes: You can use past information, but what we have found is the option market really subsumes that past information. In other words, if you use what the market is telling you, you don’t need to use the past data to forecast risk. That’s number one, if you want to forecast volatility. But number two is it’s better to decompose those forward risks into good risk and bad risk. Why just assume all risk is bad? And that’s what we have learned, that you can decompose it into good risk and bad risk.

And if your risk is good, more upside than downside, you want to take more risk. If the risk is bad, more upside to downside is not good, it’s more downside than upside, take less risk. And so, you can manage your risk dynamically. If the risk level goes up, what risk is important in investing? Risks of the tails are important. The option market gives you information about risk of the tails. The middle of the distribution is not very important. Think of our lives.

When bad events occur, bad, bad events occur, the tails, that really is something that impacts our life. When the good events occur, good happiness, wonderful things occur, that affects our life. So, risk management is not only thinking about risk of loss, it’s thinking about risk of loss in the tails. It’s not only thinking about risk of gain, it’s thinking about risk of gain in the tails.

If you can manage those two pieces, your compound return experience, your life experience, and investment experience will be far superior than ignoring those. And that’s where we need option market and other information to try to extract the forward distribution of risks that were most important to our investors, and most important to enhancing compound returns.

Dibadj: Myron, we’re getting a set of questions that circle around this theme. You said earlier on that we, at Janus Henderson, obviously have fantastic investment acumen and portfolio managers at the firm, the human element. Of course, there is, whether it be Black-Scholes or other technology, and you’re mentioning using options technology that’s even going to be much more advanced going forward from a distribution perspective. So, there’s this feeling, among some of these questions, of a tug of war between technology and the human element to it. Can you talk a little bit about how do you think that’s going to evolve over time?

Scholes: All we have is models in finance. The Black-Scholes model is a model. So, it’s a model. Our intuition is a model. We all have a model, which is based on intuition. Basically, what happens is that if we can quantify things, if we can systematize things, then we reduce the error of our model. All of our technology and our evolution is trying to reduce the errors of our model. And data helps us do that, whether we can data mine the past, or whether we can use information from the forward information, we can reduce the error of our model.

One of the interesting things that I’ve found in talking to investors, investors allocate to their strategic portfolio, they don’t do it continuously. They do it maybe monthly, they have a talk to the board, it’s a slow process. All innovation in business, all innovation in finance, occurs if we can do something faster, more individualized, and more flexible.

If we have technology at Janus Henderson to adjust our risks, based on extracting information every day in the option market, we can make decisions faster, we can use technology to make decisions faster, we can use technology to make individualized decisions for our clients, how to marry things together. And third, we can make them flexible. So, technology allows for us to do things in a systematic way, in an organized way, in a way that helps us respond to our first principles of acting.

If we have to keep revising our models all the time, and everything is slow, we lose a lot. We lose a lot in the translation. The constraints are too large. But you have to be careful of technology. We know now within the new movements to AI, or alternative AI and the idea of ChatGPT and all the other technologies that are being developed, they are information that’s really data mined. And so, basically, we have to worry about the data mining.

We have to worry about how we use technology and information going forward. And so, that’s why I think we need skill of people that have had huge experience, and can use the models to enhance returns, but not be trapped by the models, and not use the data from the past only to develop models, but to use theory economic theory of science and thinking about what is it that’s important?

Einstein said that compound returns were one of the most powerful things in the universe. I agree with Einstein. So, I took that as a framework to start with, and moving forward from that.

Dibadj: Myron, we’d be remiss – in the last few minutes here, I’ll try and squeeze a few questions in – to not ask your opinion about what the options pricing is telling you today. Where are you seeing mispricing? Where do you think the risk-reward is off, either in a positive or negative way, as you look at your models and your human intuition?

Scholes: I think what, often, is pricing telling us today about the risk of inflation and recession in the capital markets going forward? And over the next three to six months, option prices on bonds do not indicate either large inflation risk or an overly aggressive United States Federal Reserve Bank.

Over the longer term, rates will be higher, as more term premiums are priced into the market. This is suggestive of greater inflationary risk going forward, due to structural forces, such as deglobalization, or in sourcing, or decarbonisation, or other factors that will affect the supply. Because basically, you have two things: You have the demand, which is controlled by the Federal Reserve Banks and central banks. They’re trying to reduce the demand by increasing interest rates.

But you can reduce the demand, but also, inflation is a function of supply. If you have stickiness in supply, that’ll make inflation greater if you have insourcing, potentially, that will increase the costs, obviously, as we move away from the world that we had previously, international best suppliers of goods and services. So, the prime end of the curve is more attractive, as I said, in the back end.

And based on commodity options, or precious metals, they do not tend to indicate large risk of real rate pressures. Precious metals, being a real asset, sufferer when real rates rise, and therefore, expectations are favorable to gold, and are favorable to other real assets. And so, as I said, basically, the US dollar looks weak, relative to our forecast, based on the option markets, relative to the euro and the yen.

The yen is strengthening with the expectations of the end of yield curve control and risk of inflation, causing the unwinding of the yen carry trade. So, I think there are signs of inflation, attractiveness of oil, likely that we see in our option pricing, hence, to stem from demand. And there are very few signs of inflation, a recession, out there today. And the recession really results from a weak consumer.

And the regional banks and credit card sectors provide value information about consumer strength. And it seems to be that loans issued, and consumers and small businesses are still vibrant, and the loan reserves have not gone up dramatically from these consumer banks. We know inflation is sticky, however, and not easy to bring down. And the Federal Reserve Bank of Atlanta shows that prices of sticky components continue to accelerate higher.

So, the Fed Reserve Bank is paying attention to the sticky components of inflation, like wages, and maybe increased rates a few times further going forward. But the option market is really forecasting a softer landing. We see that, or maybe no recession at all. Option prices do not indicate a larger risk of a painful recession in the short run, in the short term. Three-month options on global equities indicate an attractive level of equity risk premium.

Upside risks, the downside risk is positive and expected gains are there. So, equity attractiveness has fallen, however, since the start of the year. I think the equity markets and the forecasters using option prices are worried that, basically, the Fed is going to overdo it and increase rates too dramatically. But still, the upside, the downside is very favorable going forward.

Dibadj: So, a bullish Myron.

Scholes: Yes. I’m more bullish, probably, than other analysts today are going to say.

Dibadj: Well, just to work on your bullishness, last question for today. If you look forward, over the next five or 10 years, Myron, and you put your crystal ball out, what are some of the things that you look forward to seeing from the asset management industry that you think could be exciting for our clients and clients’ clients?

Scholes: We have to be helpful in risk management. We have to move to another prong, and I think many will do that. I think the second thing is technology will be key. How can we marry our technology together? And I would like to also say that, really, how Janus Henderson can become flexible with clients and really work with clients and think about how partnership works. And the outsourced partner model will be a growth model going forward, in my view, to create the flexibility. Because basically, it’s not as though we are supplying product only, that’s not going to happen. What’s going to happen is that we are going to be trying to solve problems for clients that are going forward. And they’re going to be very important for their investment reasons and acumen. For example, one of the largest unsolved problems facing insurance companies and savers today is the post-retirement glide path for consuming well.

Many are just saying right now the path is deterministic. No risk. All you do is assume retirees consume at a constant rate, independent of healthcare or legacy desires. If consumption needs are met, retirees would want to take additional risk to provide legacy for errors. We are thinking of designing applications that actually handle more uncertainty, as opposed to certainty, as to how investors want to manage their wealth and risk going forward.

AI [artificial intelligence] is still in its infancy. Using large datasets are very important to think about what algorithms will be developed. So, I really think that we want to think about the idea of with the trust that we can build, and with building trust, which is so crucial, can we work in conjunction with our investors to add value? That is going to be a major change. But we’re not going to be divorced. We’re going to have … it’s the same way as a sophisticated partner, where they add value through technology. It’s much better for certain groups to build the technology that could be used by others, and in conjunction with it together, will make a better investment experience.

Dibadj: Great. Myron, thank you very much. Next time, we’ll have you here in person, signing autographs, taking pictures. You’ll bring your medal from under your bed and bring it over, if you would, as well.

Scholes: You’re not supposed to tell people it’s under my bed. You promised me you wouldn’t say that.

Dibadj: Thank you, Myron, for joining us.

Phil Maymin: Thanks for listening to this special episode of Myron Scholes on Time. We hope you found this conversation enlightening and thought provoking. If you have any feedback or questions regarding this episode or any other content on our podcast, feel free to write to us at AskMyron@janushenderson.com. Until next time, I’m Phil Maymin, have a great day!