Using Decision Science in Investing: Masters in Business with Omar Aguilar

Omar Aguilar · Schwab Asset Management

Alternatives belong in a diversified sleeve for mass-affluent and wealthy clients, with liquidity access improving via Forge.

Aguilar says Schwab is pretty constructive on alternatives and that mass-affluent and wealthy clients need an extra diversification sleeve. He notes that most private-market wealth creation has gone to about 1% of the population or less, while public equity holds far more money that could access these markets. Schwab's acquisition of Forge Global, a marketplace for pre-IPO shares, is meant to let employees and founders with illiquid stock tender shares to clients who want access. He calls the result semi-private and semi-liquid, and says it is not for everybody.

“Our belief is that for certain clients, mostly mass affluent, wealthy clients, there is a sleeve that requires that additional level of diversification and potentially opportunities.”at 32:42

Omar Aguilar · Schwab Asset Management

Alternatives in 401(k)s are usually too costly; only suits some clients who understand illiquidity.

Most 401(k) platforms will soon offer a broker window with semi-liquid alternatives. These suit only clients who understand the liquidity and duration trade-offs. Most 401(k) participants mainly want growth, and the main obstacle is cost. Fixed fees over 20 years put investors behind the public market, so for the average 401(k) investor the cost of entry remains too high, though the broker window fits some clients.

“The biggest challenge in here is for those clients that understand the liquidity that goes with it, the duration that goes into that, it is clearly a good fit. For the majority of clients with four zero one k, they only want to grow. If you actually think the biggest challenge with alternative investments still today is that the cost is much higher.”at 37:59

Omar Aguilar · Schwab Asset Management

Investors keep shifting from active funds to low-cost passive beta, a trend Schwab's ETF business reflects.

Aguilar says the industry has seen a clear trend from active into passive investing, with clients preferring lower-cost beta solutions. He cites Schwab's ETF franchise, which is now the fifth-largest ETF manufacturer in the world and gets roughly 35% of its net new ETF assets from outside Schwab. He ties the shift to better information availability and technology, which he says is pushing capital markets toward greater efficiency.

“We have seen the trend that goes from active into passive. We have seen the trend where people prefer lower cost beta solution.”at 31:13

Omar Aguilar · Schwab Asset Management

Private credit's recent problems are a liquidity misunderstanding, not a credit problem; its defaults are low.

Aguilar argues the headlines about private credit stem from investors misunderstanding liquidity, not credit quality. He says the market is not transparent like public high yield, but when he compares its size with potential credit losses, the exposure is very minimal, and in some cases lower than high yield, which is at its worst. He attributes redemption problems to investors requesting money back and not getting the full amount, because private assets carry a liquidity premium and cannot be redeemed the next day.

“I think the biggest misconception, even with the work that we have seen and all the headlines we have seen on private credit, is that it has not ever been a credit issue. It has been always a misconception of liquidity.”at 32:57

Omar Aguilar · Schwab Asset Management

Private equity and private credit marks are smoothed and lag public markets by two or three quarters.

Aguilar argues private equity and private credit returns look smoother and lag public markets because of illiquidity. When markets fall, private equity marks typically take two or three quarters to fall. This mistiming is why backtests and efficient-frontier comparisons between public and private assets are not comparable, and the liquidity component needs to be explained to investors.

“If you look at, say, private equity returns or private credit returns, they tend to be smoother over time, and they tend to have a lag. When the markets go down, usually the marks on private equity, they take two or three quarters before they go down.”at 35:03

Omar Aguilar · Schwab Asset Management

AI won't replace financial advisors; it will free time for client relationships.

He argues that personalized relationships are the key to success and cannot be replaced by AI. AI will instead cut the time advisors spend on reports, analytics and other tasks. His example is a drop from 50% of time on such tasks to 10%, which frees about 40% of their time for building client relationships. He says the mix of AI tools and human expertise is the formula for the future. He also notes that robo-advisors did not replace human advisors, and that the adoption pattern varies by generation and client segment.

“Our philosophy is, and still today, that the world of personalized relationships will be the key to the success in the future, and that cannot be replaced by AI.”at 46:20

Omar Aguilar · Schwab Asset Management

Mega-cap tech concentration persists; rotation is healthy but breadth may be narrowing again.

He says the Magnificent Seven concentration has been an issue for about two years and that large-cap tech is still heavily concentrated. Rotation into other sectors has started, which he calls healthy. Some sectors with better value than tech are carrying the market, and the S&P holds up on days when the Nasdaq falls. Breadth improved early this year, but he is more worried that it is narrowing again, with the momentum trade taking a second life after a mid-year stumble that his clients used to diversify away.

“we still believe they're still heavily concentrated. There's still significant concentration, particularly in technology. But we're starting to see that rotation going into other parts of the market, which is very healthy.”at 48:34

Omar Aguilar · Schwab Asset Management

AI capex cycle has extended beyond tech; next year's test is whether spending proves profitable.

He believes the AI capex cycle is not finished and has spread beyond technology. Healthcare, financials and industrials are now spending on AI, though the scale is smaller than in tech. He expects investors to start judging next year whether this capex has been profitable. He sees return on investment as the key metric, especially as companies borrow to fund AI spending. If returns do not show up, that would be a meaningful test.

“We believe that the CapEx cycle has extended. But what is good is it has extended beyond technology. ... what is going to be interesting going into next year is that investors are going to start trying to evaluate how much of that capital expenditures and that investment ended up being profitable.”at 50:30

Omar Aguilar · Schwab Asset Management

The US expansion is near its peak; higher rates will pressure risk assets within a year.

He says the expansion has lasted longer than expected. Nominal growth expectations for this year are still close to 6%, the labor market is stable, credit is healthy, and monetary and fiscal policy have supported the cycle. The US also looked attractive relative to the rest of the world. Now the cycle is near its peak, and higher rates are taking oxygen away from risky assets, so he expects the seven-year run to end and asset classes to balance out within about a year.

“Obviously, now we're in that path where we're basically getting close to the peak of the cycle. From here, it's difficult to sustain, especially because the risk premium associated with higher rates is starting to just take a little bit of the oxygen away of those risky assets.”at 53:49

Omar Aguilar · Schwab Asset Management

Tariffs have hit the economy less than expected, but they carry inflationary pressure.

Exceptions, negotiations, extensions and compliance difficulties have blunted the tariffs' implementation, and court proceedings add uncertainty. Still, he says any tariff is inflationary. Companies with clean, robust balance sheets absorbed higher input costs without passing them on. That changed this year, and cost of goods is rising slowly. Inflation is stable at about 3.5%, not getting worse, but prices are still ticking up.

“It has had probably less impact than we all thought.”at 54:39

Omar Aguilar · Schwab Asset Management

Credit spreads are too tight; it is still not time to take credit risk.

His fixed income team concluded that credit spreads were too tight, so there was no reason to go deep into credit. He repeats that the team still does not think it is time to take credit risk. Spreads are too tight relative to what investors are being paid for the risk, so the team prefers high-quality intermediate bonds for yield.

“credit spreads were too tight. There was no reason for us to try to go too deep into credit. ... Again, we still don't think it's time to get credit risk.”at 56:49

Omar Aguilar · Schwab Asset Management

Ten-year near 5% now looks attractive; favours intermediate, high-quality duration.

Duration was too volatile and risky earlier this year, but with the ten-year at 4.8%, close to 5%, the upside and downside now look balanced. Term premium and deficits keep pressure on the long end, and inflation expectations matter too. He prefers staying in average duration somewhat below typical benchmarks, in the intermediate 7-10 year part of the curve in high-quality bonds, to lock in attractive yields without taking credit risk.

“Now, when you started to get to the ten year being at 4.8, close to 5%, that to us has started to just become a little bit more attractive than what it was before.”at 57:02

Omar Aguilar · Schwab Asset Management

US investors hold too little international stock; there are great companies abroad to diversify into.

He says US investors have too little exposure to international markets, which contain great companies and opportunities. Home-country bias, along with recency bias after several years of US outperformance, keeps clients from diversifying away from the US. International markets have come on strong in recent years, which he cites as a reason investors should diversify.

“we don't have enough exposure to international markets. And there's great companies internationally. There's great opportunities to invest and diversify.”at 1:01:24

Omar Aguilar · Schwab Asset Management

Prediction markets are speculation, not investing; the house wins and investors own nothing.

He says Schwab's team avoids prediction markets because the gap between gambling and investing is large. Investing makes you an owner, while in prediction markets you hold no ownership and the odds are against you, so the house usually wins. He presents it as pure speculation that clients should avoid putting money into.

“there is a temptation to go into these predictive markets. I think we try to avoid markets that way because the difference between gambling and investing is huge.”at 1:07:06