0:07

What's luck? What's skill? There

0:09

are times where, you know, you can ride

0:12

some waves and look like

0:14

a complete genius. It's a really

0:16

difficult thing to pull apart,

0:19

like all these risk factors and am

0:21

I just looking at something that was an

0:23

artifact

0:25

of the environment of that

0:27

five, ten year period? Like

0:30

how am I, and I've got various

0:32

quantitative tools to kind of try

0:34

to pull those apart, but it's never

0:37

black and white. It's almost

0:39

never black and white. It's

0:41

trying to assess

0:43

and understand and pull apart

0:45

luck versus skill and

0:48

it's not an easy thing to do. Imagine

0:52

spending an hour with the world's greatest

0:54

traders. Imagine learning from their

0:56

experiences, their successes and their

0:58

failures. Imagine no

1:00

more. Welcome to Top Traders

1:03

Unplugged,

1:04

the place where you can learn from the best hedge

1:06

fund managers in the world so you can take

1:08

your manager due diligence or investment

1:10

career to the next level. Before

1:12

we begin today's conversation, remember to keep

1:15

two things in mind. All the discussion

1:17

we'll have about investment performance is about

1:19

the past and past performance does not

1:21

guarantee or even infer anything about

1:23

future performance. Also understand that

1:26

there's a significant risk of financial loss

1:28

with all investment strategies and you need

1:30

to request and understand the specific

1:32

risks from the investment manager

1:34

about their product before you make investment

1:36

decisions. Here's your host, veteran

1:38

hedge fund manager Niels Kostrup-Larsen.

1:46

For me, the best part of my podcasting

1:48

journey has been the opportunity to speak to

1:50

a huge range of extraordinary investors

1:52

from all around the world. In this series,

1:55

I have invited one of them, namely Alan Dunn,

1:57

to host a series of in-depth conversations

2:00

on the topic of what it takes to be a world-class

2:03

allocator. In today's world,

2:05

portfolio construction is fast moving to the

2:07

top of the agenda of many investors

2:09

as they try to analyze and understand the

2:11

riskiness of their portfolios. And

2:14

with ever increasing uncertainty around

2:16

the globe, being well diversified

2:19

across many different strategies and themes

2:21

in your portfolio can mean the difference

2:24

between ruin and survival

2:25

when the next crisis emerge. The

2:28

aim of these conversations is to try

2:30

and understand the experiences that

2:32

have influenced these highly specialized allocators

2:35

and the processes they follow to harness

2:37

the best returns for their clients so

2:39

that we can all become better informed investors.

2:43

And with that, please welcome Alan

2:45

Dunn.

2:48

Thanks very much for the introduction, Nils. Today

2:51

I'm delighted to be joined by Clint Stone. Clint

2:53

is SVP of investments at the

2:55

family office of the Larry H. Miller company

2:58

in Salt Lake City. Clint

3:00

has worked in the investment industry over

3:02

a number of decades as an Alice asset

3:05

allocator, manager, selector

3:07

on both the sell side and the buy side. Clint,

3:10

great to have you talking to us today. How is everything

3:12

on your side?

3:13

Thanks, Alan. Great to be here. Beautiful

3:16

day in Salt Lake City. Good stuff. I'm sure

3:18

it is nice and sunny. Well, maybe

3:21

to set the stage for

3:23

today, I did mention that you've kind of

3:25

transitioned through a number of different roles in the investment

3:28

industry. So it might be useful just to

3:30

get a sense on your own journey in the investment

3:32

world and what's brought you to your current position.

3:35

You bet. I started my

3:38

career right here in Salt Lake City. I

3:40

got a degree in finance at Southern Utah University

3:44

and

3:46

started at Fidelity Investments in Goldman Sachs

3:50

in their private wealth management business here in Salt Lake City

3:52

before going back East

3:54

to get my MBA. That led

3:56

to roles in investment research.

3:59

I really want to wanted to make the transition to

4:02

stock picking

4:04

and investment research. And

4:07

so that's what I did. Worked for Bear Stearns Asset Management

4:09

as an equity analyst when they were still around.

4:12

They had a large cap value fund. And

4:15

studied during my two years at

4:18

getting my MBA at Cornell, was also part of a student

4:21

run hedge fund there where I

4:23

did industry research and valuations

4:26

and stock picking, and

4:28

surprised myself

4:30

coming out of my MBA program and

4:33

really wanted to look at the

4:35

world from

4:37

a broader perspective. And so

4:39

I joined the Cornell University Investment

4:41

Office. And instead of picking stocks, I was picking

4:45

countries and picking strategies

4:47

and doing asset allocation

4:50

work and manager selection work. And

4:52

just kind of fell in love with it, really enjoyed it.

4:57

Gave me a bigger view of the world. And it

4:59

just kind of fit with my

5:01

goals. Moved back

5:04

home to Salt Lake City to join a large

5:06

nonprofit institutional investment firm called

5:09

Ensign Peak Advisors. And

5:11

then two years ago joined

5:13

some friends here at the Larry

5:15

H. Miller Company. They were going through a very big

5:17

transition with two big liquidity events

5:19

of selling the Utah Jazz

5:22

and selling the car dealerships.

5:25

And it was just a really, really

5:27

cool opportunity to be

5:29

part of the team to help write the next chapters

5:32

here at the Larry H. Miller Company.

5:35

Good stuff. And obviously, be

5:38

useful as well to get a bit of background

5:40

on the Larry H. Miller Company

5:43

in the sense that you're involved on the

5:45

investment side and on two distinct sides

5:47

there. Isn't that correct? On the kind

5:49

of foundation or family office side, as well

5:51

as the investing of the

5:55

holding company, I guess.

5:56

That's right. Really fun

5:59

role for me. Really. meaningful role for me. I've been in

6:01

the nonprofit space, nonprofit

6:04

portfolio management space for the last, call

6:06

it 15 years. And

6:08

having a foot

6:09

on the foundation side with the

6:12

Larry and Gail Miller family foundation is

6:15

really meaningful to me. So the team

6:17

I built and put together get a manage and oversee

6:19

that that foundation, which is

6:22

about $700 million today and

6:24

getting bigger. And

6:25

then also having

6:27

a foot

6:28

on the company side, the taxable side of the

6:30

family office, which

6:34

is a very, very different goals

6:37

and investment approach. And so

6:40

just been a lot of fun to have a foot on both sides

6:43

of the house and be able to continue

6:46

my work on endowment style portfolio

6:48

management with the foundation and being able to

6:50

look at individual deals and companies on

6:54

the Larry H. Miller company side, which is really just

6:57

in their DNA, owning

6:58

and operating businesses and

7:02

is really all we do, our kind of our own

7:04

private equity platform on

7:07

the company side. Interesting. Well, maybe if

7:09

we start off with the foundation side, and I'm

7:11

sure we'll talk about the other

7:14

side as well. But I mean,

7:16

it's mentioned at the outset, it's a foundation,

7:18

I guess it's long term money, $700 million.

7:21

If you were to kind of compare and contrast

7:23

how you have to run this portfolio now,

7:26

as a kind of foundation family

7:28

office versus say, how the

7:30

likes of a Cornell University might run their

7:33

kind of endowment portfolio.

7:35

You bet.

7:37

We use a very classic

7:39

endowment style approach. But

7:42

there are some differences as things that

7:44

I've learned along the way that I want to implement here.

7:46

You've got to look yourself

7:48

in the mirror and say, you know, what is my

7:51

edge? How can

7:54

I compete? Global

7:56

markets are very competitive space and and

7:59

what can I do to to bring a competitive advantage

8:01

and do something unique with the resources

8:03

and the team that we have

8:06

here that we've built here at LHM.

8:10

So we use eight buckets

8:13

for asset classes, four publics, four

8:15

privates. My four publics are

8:17

fixed income, US equities,

8:20

international equities, and multi-asset, multi-assets,

8:23

just catch all, mostly

8:25

hedge funds, but could be anything in there from

8:27

crypto to just

8:30

anything that doesn't fit in

8:32

any of the other buckets. And then my four

8:34

private asset classes are private equity, venture

8:37

capital, we split those out, model those from

8:39

a risk perspective and

8:41

a return perspective differently,

8:43

and then real estate and

8:45

natural resources. We

8:48

use those eight building

8:50

blocks for the foundation and

8:54

really kind of the core of everything

8:56

that we do here.

8:58

And

8:59

it's interesting, I read

9:02

a paper recently around how a lot of

9:04

institutional asset

9:06

allocations may

9:08

look diversified in sense of having

9:10

allocations to different asset

9:13

classes, but ultimately may have a

9:15

lot of equity or economic

9:18

risk in the portfolio, which I guess is

9:20

probably fair to say about your portfolio.

9:23

I guess the flip side in terms of

9:25

managing that I guess is your long-term time

9:27

horizon, is that it? Or is

9:30

that why you're happy to be kind

9:32

of very concentrated in that equity

9:35

economic risk type of factor?

9:37

Yeah, absolutely. When

9:39

you think about

9:40

risk and how we

9:42

define risk here, how I define

9:45

risk, my single biggest risk for

9:47

the foundation is not

9:49

meeting its objectives and its

9:51

goals. And so I

9:54

could put the whole thing in T-bills and

9:57

have 100% liquidity. I

10:00

would never have a year

10:02

where I would have a negative return. I'd have a positive

10:04

nominal return every single

10:06

year, but yet I still

10:08

would not meet the goals that

10:11

we're trying to achieve in the foundation, which is

10:14

cover the 5% spending that spends 5% a

10:16

year and

10:19

maintain its purchasing power in

10:21

real terms, maintain that

10:23

investment pool

10:25

in real terms. So that's

10:28

been tough. As you know, inflation

10:30

has been very high and keeping

10:33

up from a purchasing power perspective

10:35

has been really tough, but that's our goal.

10:38

It's ambitious, 5% plus inflation,

10:41

and T-bills are not going to

10:43

get me there. And so that's how I view risk.

10:46

That's my risk. Number one is

10:49

if I'm spending 5% per year, I've got 95% of

10:52

my assets

10:54

that I'm not spending

10:55

per year. And then I can

10:57

really think down the road and really think

11:00

long-term about. And so you're right, economic

11:02

sensitive, it's very equity heavy,

11:05

very, very little fixed income. I do need

11:07

a little bit for rebalancing, for covering spending,

11:09

but

11:10

for the most part, it is

11:13

very equity heavy. Now I try to think

11:15

very, very carefully about

11:17

diversification to

11:20

macro scenarios within

11:24

those various equity constructs.

11:26

Owning equity in real estate, owning equity

11:29

in an oil and gas project,

11:32

owning equity in public markets, owning equity

11:36

in venture where you've got these

11:38

business formation and innovative

11:40

companies that are being formed. I'm

11:42

trying to think about geographic

11:45

diversification and industry

11:48

diversification. So it's not

11:50

all chips,

11:52

one big bet, all chips in one

11:55

place. It's really trying to think carefully

11:57

about what can happen from a liquidity.

11:59

interest rate, inflation, all

12:02

of these various macro scenarios,

12:05

but I do have the luxury of being able to look

12:07

down the road five to ten years

12:10

because I'm only spending 5% per year.

12:13

And I

12:14

guess, you know, obviously we've lived in

12:17

a very changed macro backdrop

12:19

in the last few years. You say inflation has been high.

12:22

And I guess the kind of growth-heavy,

12:25

equity-heavy approach certainly did very well

12:28

over the last decade. I mean,

12:30

when you look at last year and the year where

12:32

we had higher inflation, equity down, bonds down,

12:35

do you think that was, you

12:37

know, an anomaly or would

12:39

you be worried about the scenario

12:42

of, you know, maybe a challenging decade

12:44

for equities or say if we had a period like,

12:47

you know, people talk about 1966 to 82

12:49

where equity markets went up and down, but

12:51

you look back after 15 years, haven't

12:53

really gone anywhere. I guess that

12:56

type of scenario would be a big challenge

12:58

in terms of hitting those longer-term

13:00

goals.

13:02

Yeah. I definitely

13:04

view 2022 as an anomalous year.

13:06

It

13:10

makes sense what happened when you looked at what

13:12

the market was pricing in for interest

13:15

rate hikes and then what the Fed actually delivered

13:17

in 2022.

13:18

It

13:21

makes perfect sense what actually transpired

13:25

and how that translated from

13:27

Fed hikes to markets

13:30

and particularly the public markets, stocks

13:33

and bonds.

13:34

That is kind of a 2%. You know,

13:36

if you look back at the past 100 years in the United States

13:38

and say, how many years do we get

13:41

bonds down, stocks

13:43

down? You know, that's, you

13:45

could count on one hand the number of years

13:48

that that happens. That's

13:52

a pretty low probability event, but one that made complete

13:54

sense for what transpired

13:57

in 2022.

13:59

I look at fixed income today,

14:02

that's the one area where you can model

14:04

returns with a lot

14:06

of specificity, with a lot of

14:08

accuracy and say your yield

14:10

to maturity at entry is going to be very, very close

14:12

to your realized return. As

14:16

I look at those yields, they're certainly more attractive

14:18

today, but they're still not in a place where

14:20

I'm going to put 100% of the foundation assets.

14:23

Public

14:25

equities, private equities, I look at all my other asset

14:27

classes. I look at carbon markets. I look at oil and

14:29

gas. I look at pockets in real

14:31

estate that are still very attractive

14:34

today, very cash flowing. From

14:37

a supply to man perspective, still very attractive.

14:40

I still think there's a lot of opportunities outside

14:44

of fixed income in

14:46

all of these various equity

14:49

pieces of the capital structure, whether that's a public

14:51

company, a private company, a piece of real estate, a

14:55

natural resource project, and still

14:57

very much excited about the

14:59

next 10 years. Although I think it's very

15:02

likely that the next 10 are not going to look like

15:05

the last

15:06

Okay. When you say that, is

15:08

that driven by the valuation?

15:11

Obviously, that's, I suppose,

15:13

valuations in the equity space are clearly

15:15

different than the were maybe back in 2010. Obviously,

15:18

as you say, you can talk

15:20

about returns for valuations and

15:23

fixed income with a degree of certainty. What

15:25

would your perspective be on valuations in the

15:28

public and private equity space?

15:30

Yeah, I'm

15:33

actually pretty constructive on valuations

15:36

in both, certainly on a

15:38

backward looking basis in public equities you've had

15:41

in the US.

15:42

You've had an incredible decade. Just

15:45

looked at the numbers this morning, 12% annualized

15:49

compound return for 10 years. These

15:53

are extraordinary returns. International

15:56

public equities, 4%.

15:58

emerging

16:00

markets 2%, annualized

16:02

returns the last 10 years. Anybody

16:05

that was doing their asset allocation work and

16:08

doing their expected return models and saying,

16:10

okay, I need to be overweight EM or international

16:13

given valuations 10 years ago, we're just completely

16:16

wrong. The

16:18

world gave us something very, very different. There

16:21

were a lot of tell wins to the

16:23

US equity market that I

16:25

think are going to not be there or

16:28

not be as strong going forward.

16:30

Now, I

16:31

still want some. I've still got a 20%

16:34

strategic allocation to US equities. I've got a 10%

16:37

allocation to international

16:39

equities. And so I still

16:41

want exposure. There's

16:43

some incredible companies around the world

16:46

and public markets. And

16:49

despite the higher

16:51

starting valuations today, especially in the US,

16:54

I still want some exposure there.

16:57

On the private equity side, this is a tough

16:59

one. A lot of people have

17:01

talked about how valuations

17:04

today appear

17:06

or feel very high. I

17:09

don't feel it as much on the

17:11

private side.

17:12

Certainly, there's been a reset in

17:15

valuations, especially in public

17:18

markets, especially in late stage venture.

17:22

But when you look at early

17:24

stage venture, right at the point

17:27

where you're giving

17:29

capital to a business which

17:31

is just getting started, what

17:34

is valuations? I

17:37

mean, it's either a very, very low

17:39

multiple of future cash flows when you're looking

17:41

way out, 10 years out,

17:43

or you've massively overpaid for it. And

17:46

it's kind of binary

17:48

when you're at that early stage venture.

17:51

And we're still seeing lots of innovation, lots of really

17:53

interesting

17:54

opportunities to deploy

17:56

capital in

17:59

companies around the world. today. On the

18:02

buyout side, yeah, 12,

18:06

15 times, EBITDA multiples,

18:09

certainly kind of,

18:11

I wouldn't call it cheap, but

18:14

not out of the realm of where it's going to be difficult

18:17

to make money. There's

18:19

still a lot of room there

18:22

in private markets. Between

18:25

private and public markets, I still think

18:27

private markets are offering a little bit better

18:30

valuation setup than publics.

18:33

And is that, I guess, do those valuation

18:37

perspectives, estimates, et cetera,

18:39

feed into your model?

18:41

Or I guess, what is your approach to

18:43

figuring out the strategic

18:46

weights for those eight buckets that

18:48

you mentioned? Yeah,

18:50

great question, Alan.

18:52

It's

18:54

been a challenge, my career, to

18:56

build these expected return models and

19:01

see what transpires over the next five,

19:03

seven, ten years. It

19:05

takes a long time, but you get this report card of

19:07

how well did you do on your forecasting.

19:13

I'm

19:13

classically trained in that MVO,

19:15

mean variance optimization

19:17

space, where you input

19:20

your returns, your expected returns,

19:22

you input your correlations, you input your volatilities,

19:25

and you get this output of

19:28

various asset allocation, depending where

19:30

you want to be on that

19:32

risk curve. I have kind

19:35

of come from 180. After doing

19:38

that for a number of years, I've realized

19:40

that's almost a silly exercise. Instead of mean

19:42

variance optimizations, it's really

19:44

error maximization. I mean,

19:46

it's really taking the error

19:48

of your return inputs, because the model

19:50

is the MVO process is so

19:53

sensitive to your

19:55

expected return inputs, that

19:57

you're really just maximizing the error

19:59

around. your forecast of

20:01

those various returns

20:05

and asset classes. So we

20:07

use something different. We

20:10

input

20:11

volatilities, we input correlations,

20:14

and we input our starting weights. And

20:16

you could use your actual weights,

20:18

I think are the very best thing to use, but you could also use

20:21

your strategic weights, your model weights,

20:23

whatever you want to put in as your starting

20:25

point.

20:26

And then

20:28

we've got an implied return model. It's

20:31

quite simple. It could be running an Excel

20:33

spreadsheet that spits

20:36

out the return that

20:38

you have to believe for

20:41

your weights to be optimal. So

20:44

you give the portfolio a starting sharp

20:47

ratio, let's call it 0.5. And

20:50

you input your asset class volatility

20:54

estimates, correlation matrix,

20:57

weights, and your returns,

21:00

you now have a set of returns that you can say, OK,

21:02

I have to believe that these

21:05

long term returns

21:09

are going to justify this is what equates

21:11

to an optimal portfolio from the

21:13

weights that I've got here. And now you

21:15

can make decisions about, OK,

21:18

this is saying that I've got to believe international equities

21:20

outperform US equities by 2%

21:23

per year. Do I believe that yes or no? No,

21:25

I don't believe that. So

21:27

I need to change my weights. It's

21:29

an iterative process. You go back, change your weights. And

21:32

so my allocation,

21:34

my strategic allocation to these eight

21:36

asset classes for Publix and for Privates

21:40

are really this iterative

21:42

process of going through what

21:45

I believe in terms of risk

21:47

correlations. And

21:50

do I believe these implied returns?

21:53

We call it the implied return model because

21:57

you've got to believe that those returns

22:00

are what's going to transpire in the future for your weights

22:03

to be optimal. So

22:06

kind of a dumbed down black

22:08

litterman model that's

22:10

a little bit more easier to use in

22:13

a spreadsheet. It meets the

22:15

needs of our modeling. And then the last

22:17

piece you've got to layer on top of that is liquidity.

22:20

There's no liquidity construct and

22:22

just a sterile MVO

22:25

process, which we've

22:27

got to think very, very carefully about. Even if we're

22:29

only spending 5% a year, you've

22:31

got to cover the spend,

22:34

you've got to cover rebalancing. And

22:36

so I don't want 95% of my portfolio in

22:40

illiquid asset classes. So

22:43

I've got to split where it comes

22:45

out 55% publics to those

22:47

four public asset classes, 45% to those four privates. And

22:51

that feels about right to me in terms

22:53

of trying to maximize the

22:56

returns that I can get from private markets,

22:59

but still having some flexibility to rebalance

23:02

the portfolio.

23:05

Yeah, well, it's interesting, obviously, as

23:07

part of that process, I guess you have to have

23:10

inputs on, as you say, volatility,

23:13

correlation, et cetera, for all of

23:15

the distinct asset classes. And

23:17

that, I guess, brings us to that interesting

23:20

debate around how volatile

23:22

are in fact asset classes like

23:24

private equity and VC. Obviously, they

23:26

tend to be marked less frequently than

23:30

public markets. So may present

23:32

as being less volatile, but then

23:34

some people would say, but ultimately the underlying

23:37

risk is as volatile. So what's

23:39

your perspective on that?

23:41

I love this question, probably

23:43

because I've spent way too much of my life thinking

23:46

about it and doing work

23:48

around it. One of my last big research projects

23:50

before I joined LHM was this

23:53

exact question, how do

23:55

we model the

23:56

risk of a diversified

23:59

private equity? book that's got PE,

24:01

buyout, growth, venture

24:04

across vintages.

24:07

And you're right, like you've got to believe

24:09

in those risk inputs,

24:12

because the implied returns

24:14

in that model are going to be driven off of what

24:16

you're plugging in

24:19

from a volatility and a correlation perspective.

24:23

We can spend a whole hour on this, and I'm sure that's

24:25

not the topic of the show. But

24:27

but let me let me share just a few insights

24:29

that I felt like

24:31

were interesting to me as I went through

24:33

this deep research project. We're

24:36

very familiar with public markets, S&P 500,

24:39

500 biggest companies in the US.

24:41

You and I can pull out our

24:43

phone, trade

24:45

them anytime, anytime

24:48

the markets open, we can,

24:50

we can we could trade a basket

24:52

of those 500 companies. Let's

24:55

say you've got a basket

24:58

of 500 private companies, a

25:01

mix of mature,

25:03

you know, mid market,

25:06

large buyout, some

25:08

growth in there, and

25:10

some venture, both early stage

25:13

and later stage venture. So you've got this, you've

25:15

got this mix of 500 private

25:18

companies,

25:19

some super early stage, some

25:21

very mature. And

25:24

you can't pull out your phone and buy

25:26

this basket, you can't trade

25:29

it. You've got to get it through

25:31

either directly,

25:33

go cut these deals yourselves or

25:35

through external managers.

25:38

So that's, that's the comparison

25:40

I'm going to use the S&P 500. It's

25:42

liquid basket. Let's call

25:44

it the private 500. This this basket of 500

25:47

private companies. As you

25:49

go back to how you how you calculate

25:52

risk, you've got three main three

25:54

main pieces of risk. You've got your weights, how much

25:56

money do you have in each asset? You've got your volatilities

25:59

just the standalone. volatility of each of those 500

26:01

companies. And then you've got the

26:04

correlation matrix of that entire

26:07

basket, how they correlate, how every single one

26:09

of those correlate with each other.

26:12

That correlation piece was

26:14

really the insight for

26:16

me. So, you know, I've had different

26:19

people say, well, wait a minute, like you're investing

26:21

in venture capital, like the volatility on these companies

26:23

is huge. And I'll

26:26

give you that. I'll give you that the idiosyncratic

26:29

standalone volatility

26:31

on pick your, you know, early

26:33

stage venture company is

26:36

enormous. Now its weight, its

26:38

dollar weight is also tiny.

26:41

I mean, just

26:42

tiny. It's the smallest check size

26:45

in that basket of, call

26:47

it the private 500 companies

26:49

grow and through their

26:52

operating performance, they grow

26:54

cash flows. And

26:56

as those companies continue to grow

26:58

and perform, they

27:00

get follow-ons, they get more,

27:02

they do more raises. They

27:05

also grow from a capital base. So the

27:07

smallest check size are

27:11

those ones where you've got the most question around

27:13

at early stage. And so you've

27:15

got a very, very small capital amount,

27:18

which in the risk model makes

27:21

it very, very small. You've got a huge idiosyncratic

27:23

volatility for each of those early

27:25

stage companies. And then you've got the

27:28

correlation matrix. The correlations

27:30

are where I think a lot of

27:33

people are missing

27:35

when they try to model,

27:37

when they try to use public

27:39

market information and model these

27:41

private markets.

27:43

Big fan of Clef Aznas. He's used

27:45

this term volatility laundering,

27:48

which is just, it's a great term. I love

27:50

it. I get it. I'm on the other side

27:52

of that.

27:53

All of this work, when you do

27:56

this and you assign weights, volatilities

27:59

and a correlation matrix.

27:59

for this basket of 500 private companies.

28:02

You've got the bigger weights in there are not the early

28:05

stage companies. The bigger weights in there are

28:08

mature, cash flowing, very

28:11

stable businesses

28:13

and their volatility is lower.

28:16

But really it come to me, the biggest insight

28:19

through all of this work was the correlation.

28:22

The correlations should be lower

28:24

when you're dealing with private companies. Their correlations

28:27

with each other should be lower. They can't

28:29

be traded together. There's

28:31

no future. There's

28:33

no

28:34

index. There's no ETF that can

28:37

immediately move this basket.

28:39

Liquidity conditions are

28:41

gonna move

28:42

prices so much faster in public markets

28:45

than private markets. You don't have banks. I

28:47

don't really have a single bank in my private 500,

28:51

like from a sector perspective. There's no banks in

28:53

there. There's the correlations of

28:55

a software company in Palo

28:57

Alto versus a biotech company in Boston,

29:01

almost zero, call it almost

29:03

zero. So when

29:05

you have that richness of

29:08

really low correlations among

29:11

these 500 private companies, that

29:13

I think gets really overlooked

29:15

by people, well, let's just use the Russell 2000. Let's

29:17

just use public market information. Well, it's like, you could

29:19

do that, but it's not

29:21

reality of what you own

29:23

in this private 500. You end up

29:26

with a lot of correlation

29:28

offsets despite some

29:30

really large idiosyncratic volatilities

29:34

on the venture capital piece, which is still kind of a minority

29:37

piece of this private 500. Long

29:40

way of saying, like, what do I get to? I

29:42

get to roughly a 12 to 15% volatility estimate.

29:47

That's spot on the S&P 500.

29:51

My own personal belief, this is gonna be heresy

29:54

for a lot of people, but my own personal belief is

29:57

that the volatility of that basket of private 500.

29:59

if it's diversified across vintage, diversified

30:02

across geography, is

30:06

less than the volatility of the

30:08

S&P 500. I've

30:10

gone in circles

30:13

thinking about this and trying to model it, and that's

30:15

where I reserve

30:17

the right to change my mind at some point. But right now,

30:20

I really feel like my own personal

30:22

opinion is a little bit less vol

30:25

than the S&P 500. If

30:27

you're modeling just venture capital, which we

30:29

do, we break private equity

30:31

and venture capital in our asset

30:34

allocation construct and our risk allocation

30:36

construct, I would assign

30:38

a higher volatility. We've got like an 18% vol

30:40

for just the venture piece.

30:43

Again,

30:46

a lot of that coming from the

30:49

correlation offsets that are happening with these

30:51

private companies. Yeah,

30:54

I mean, because I've seen some research on this that

30:57

would say maybe if you

30:59

regressed

31:00

the performance of a VC index on

31:03

say the S&P 500, you

31:05

get a beta of maybe 1.4 or something

31:08

like that. But

31:10

not only that, you might have a negative

31:13

convexity that in the really extreme

31:16

scenarios, downside for equities,

31:18

it's gonna do even worse. And you

31:20

can imagine scenarios why that would be the case. But

31:22

what you say does make sense as well from

31:25

a correlation perspective. So

31:27

a couple of questions on that. One in terms of your 12

31:30

to 15 vol estimate under privates,

31:33

is that assuming that a chunk of it

31:35

is in stable cashflow

31:37

generative, kind of more mature businesses

31:40

as you say, is that what drives that or

31:42

is that right?

31:45

It's a little bit of both, absolutely. The

31:47

bigger weights, like if you look at the S&P 500

31:49

today, you've got these, it's

31:52

nowhere close to an equal weight

31:55

index, you look at Amazon, Apple,

31:57

Microsoft, these are mega cap massive

31:59

weights.

31:59

So, when I've done my work and looked at a mature

32:02

private equity portfolio, you actually get something

32:04

quite similar. You get these massive, massive

32:06

weights. Those weights tend

32:09

to be in the more mature

32:10

cash flow stable

32:13

companies, and the smaller weights tend

32:15

to be in the most volatile early stage companies.

32:19

And then you get this

32:21

richness, so that's a piece of it, but then

32:24

you get this richness of

32:26

correlation. So, why can't you just take

32:28

the volatilities of your 500 companies

32:31

and just weight them and say, okay, I've got these weights, I've got these

32:33

volatilities.

32:34

My volatility of the package,

32:37

why isn't it just the weighted volatility? Well,

32:40

it is if you assume a correlation

32:42

of one across all 500 companies.

32:46

Then it's just pure weighted volatilities, but this

32:49

is where the insight to me

32:51

is really powerful, which is you get such

32:53

low correlations, zeros, 0.1s, 0.2s, 0.3s, that when you

32:55

put that

33:01

whole correlation matrix together, it really brings

33:03

down the

33:05

volatility of that private package. Now,

33:07

I'm talking about the intracorrelations of the companies

33:10

within the private 500, which is

33:14

very important to do in my asset allocation

33:16

work. What correlation are you using

33:19

between private equity and public

33:21

equity?

33:23

I'm using a 0.6, 0.7, maybe 0.75 correlation, which is high.

33:29

It's moderately

33:31

high. It's not a one. I

33:34

still don't think it's a pure

33:38

one correlation between private and publics,

33:40

but it's high. When

33:43

I do the whole package

33:46

of my implied return model, input my

33:48

correlations, I've got that 0.6, 0.7 between public equity,

33:50

private equity.

33:53

I've

33:55

got my volatility estimates. You

33:58

know what? You don't have to believe me.

33:59

like those

34:01

volatility estimates or those correlations, put

34:03

in what you think. Put

34:06

in the model what you think is right

34:08

and it will spit out an applied

34:10

return that you can then debate with yourself to say,

34:12

do I believe that return or not?

34:15

I think it's a really

34:17

interesting question. A couple

34:19

of more questions on it just to get

34:21

your thoughts on. Obviously, we

34:24

all know that the scenario of correlations

34:26

going to one in public markets. How

34:29

could you get that type of scenario

34:32

in extreme economic downturns that

34:35

more startups will tend to fail? Those

34:38

low correlations between the

34:40

software and the biotech company

34:43

might increase a bit. That's

34:46

one question. Then the second thing is,

34:49

what about the realizable value in these stakes

34:51

could also be, I guess, a

34:59

hit in an economic downturn

35:01

if investors are generally overleverage

35:04

and in a liquidation

35:06

type of mode. Now, if

35:09

you might say that doesn't matter from your pure valuation

35:11

inherent value perspective, but in

35:14

terms of valuing those stakes, is

35:16

that a reason for saying the

35:18

tails might... Basically, is the left tail

35:21

potentially fatter than what you might think

35:24

based purely on the correlation?

35:26

The short answer is absolutely,

35:28

I'm going to recognize that there's going to be some

35:32

economic impact.

35:35

At the end of the day, if you have exposure

35:37

to companies and cash flows in

35:40

a certain country, whether

35:42

that's a public company or a private company, there's

35:45

absolutely this base of

35:48

correlation

35:49

and sensitivity

35:52

to economic outcomes, clearly. When

35:56

I do my risk modeling, I do three cuts

35:59

of risk.

35:59

do my what I call average risk. These are my

36:02

long-term

36:03

average volatilities

36:05

of taking the whole next 5,

36:08

10 years. What do I expect on average? Knowing

36:11

that

36:11

on a shorter term, there's going to

36:14

be

36:14

periods of higher volatility, periods of lower volatility.

36:17

It's the averages.

36:19

That's the first cut. The second

36:21

cut is the downside. That's

36:23

really where I can start to

36:26

think more clearly about exactly the point that you

36:28

bring up, which is, well, what

36:30

about in downturns, economic

36:32

downturns, when correlations rise?

36:35

This is where I put in like, okay, let's

36:38

consider this

36:39

three standard deviation event. What have I got

36:42

here? I've got a

36:43

recession. I've

36:45

got higher volatilities. I've got

36:47

correlations in certain asset classes

36:50

that are increasing. I

36:52

could input that. I could

36:54

input those numbers and

36:56

see, okay, exactly what's my difference

36:58

between my average volatility

37:02

and my downside volatility,

37:05

where I'm using a different

37:08

correlation matrix, higher volatilities.

37:11

Then the third cut I do is relative

37:15

to benchmark. Think tracking

37:18

error. Instead

37:21

of absolute volatilities and correlations, I'm

37:23

using all relative

37:25

to benchmark, which

37:27

is the third way I use this

37:30

risk model in helping me think through the

37:32

risk in my portfolio. ASH

37:34

BENNINGTON As you go through that process, do

37:36

you have a number in mind in terms of max

37:39

drawdown that you're comfortable enduring

37:41

or absolute worst case? What parameters

37:44

have you around that?

37:46

Absolutely. 15% to 20%. If

37:49

I'm building a portfolio for the foundation

37:53

that can

37:55

give me, in a worst case scenario,

37:58

whatever you want to call it, three, four, five,

37:59

standard deviation, your worst peak

38:02

to trough drawdown that

38:05

you would expect over 30, 40, 50 years.

38:09

I don't want that to be worse than 15 to 20%. That's

38:12

just too much drawdown

38:16

for the portfolio. At the end of the day,

38:18

we say we're all long-term investors and

38:21

you're long-term until you're not. You

38:23

get into these committee meetings and you've got human emotions

38:25

and when you're looking at a number that's 15%

38:28

below your peak portfolio value

38:31

and you're having these discussions,

38:37

there's human behavior that

38:39

creeps into that investment committee and those discussions

38:41

and those decisions.

38:46

It would be difficult for me to

38:49

build a portfolio and offer

38:52

that as the optimal portfolio if it

38:55

could possibly have a drawdown worse

38:57

than that 15 to 20% range.

39:05

You mentioned as well, obviously you have

39:08

a 15% of the allocation to

39:10

multi-asset or you have that multi-asset

39:13

category which is a bit of a catch-all but largely

39:16

hedge funds. I'm curious to hear,

39:18

how do you think about that? What types of strategies

39:20

are in there? Are they there

39:23

for absolute return or for downside protection

39:26

or for diversification or for all of the above

39:28

or what's the thought process?

39:30

All of the above. In

39:34

our annual asset allocations review,

39:37

we just increased multi-asset to 15%.

39:43

Part of the thinking there again is

39:45

the next 10 years probably

39:47

aren't going to be a repeat of the last 10 years. We

39:51

like strategies that

39:55

are going to benefit from dispersion, dispersion

39:57

between securities, dispersion between ...

39:59

sectors, dispersion between countries,

40:02

currencies. One

40:05

of the only places we can get that

40:07

is in long, short space,

40:11

arbitrage space where they can use both

40:13

sides of

40:16

the book and really put together

40:19

more alpha,

40:21

less beta,

40:22

and benefit from dispersion

40:26

among all the thousands of securities

40:29

and opportunities in

40:31

public markets around the world. So

40:34

we've got a few strategies that we like that are

40:36

in,

40:37

call it systematic

40:39

long, short, very tight

40:41

risk management,

40:43

very tight exposures to

40:46

risk factors, not taking big bets,

40:48

really trying to minimize those and just focus

40:51

on the alpha signals. That's

40:54

a very tough game, but

40:58

we think to the extent we could find some

41:01

managers who have an edge in

41:03

that area that cause

41:06

systematic long,

41:08

short

41:09

could be an attractive area for us over

41:11

the next 10 years.

41:12

Any reason for that preference

41:14

for long, short

41:17

in comparison to more directional or people

41:20

talk about convergent versus

41:22

divergent strategies within the hedge fund space.

41:25

And obviously, if the world is

41:27

going to look more different and more challenging

41:29

over the next 10 years, we could make

41:31

the case for more

41:34

volatility, greater dislocations,

41:36

as well as dispersion, which might

41:39

be beneficial for more

41:41

directional strategies. What's your perspective on that?

41:44

Yeah, I'm really

41:46

sensitive to what

41:48

I'm paying for. When I'm paying active fees,

41:52

how much beta am I getting? How much exposure

41:54

to risk premia

41:56

am I getting? And how much

41:58

risk? You know, true

42:02

alpha defined as, you know, after

42:04

all of the exposure to various

42:07

risk factors, risk premium,

42:09

trying to adjust for

42:12

skill versus luck. You know, what is that

42:14

skill-based return that I'm left with

42:16

that I'm really paying for in terms of active fees? I mean,

42:18

I'm paying a lot. I'm paying a lot in private equity

42:20

and venture capital. I'm paying a lot in hedge funds. I'm paying

42:22

a lot for active

42:25

management. I really

42:27

want to make sure that I'm getting a return

42:30

stream that is delivering something

42:35

worth paying for. And if it's got a lot of

42:37

beta, it's really hard for me. It's just

42:40

there are some strategies, you know, think

42:42

distress credit, where it's just going to come with

42:45

beta. To get the alpha, you have to take the beta. But

42:49

a lot of those strategies are really hard for me. I've got plenty

42:52

of market risk. I've got plenty

42:54

of equity risk. I've got plenty of private

42:57

equity in the

42:59

portfolio. I'm really looking

43:01

for something different. I also need that rebalancing

43:05

capability in my multi-asset bucket.

43:08

You know, if markets are

43:10

down like 2022, I really

43:12

need an absolute returnish, independent

43:15

return stream.

43:17

That's what I'm looking for. People

43:21

have different asset allocations. And I could see

43:23

how directional could fit into different

43:27

constructs. But I'm really looking to build that multi-asset

43:29

bucket from an independent return

43:31

stream, less correlated. You

43:34

know, I don't view it as a tail hedge.

43:37

I don't really view it like

43:39

all that side on the

43:41

pendulum of being a pure

43:44

tail hedge or, you

43:47

know, crisis alpha. There's

43:51

some strategies in there that might be down, might be up,

43:53

but just meant to be a little bit more. It

43:55

needs to be liquid. It needs to be independent.

43:58

It needs to be alpha worth paying.

43:59

for and that's what I'm looking

44:02

for. I really don't do a lot in

44:04

directional long-short equity. That is a tough,

44:06

tough game. Trying to predict next-quarters

44:10

earnings in a very diversified,

44:12

you know, across sectors. I've

44:14

got a couple long- short equity managers, one

44:17

in micro-cap banks,

44:20

one in one in biotech, that

44:22

are very, very narrow and specific

44:24

and have tighter risk management between,

44:28

you know, the long and the short books. We

44:31

can find some

44:33

nice alpha in

44:35

those strategies. That's really the only place that I

44:37

get into, you know, long-short equity.

44:41

What about things like global macro or managed

44:43

futures, trend following that type of

44:46

absolute return but potentially

44:48

crisis risk offset type profile?

44:52

Short answer is I like it.

44:54

We own some. We're looking at

44:56

some. We're looking at doing more in that

44:58

area. My caveat to

45:00

that answer is that I'm

45:04

looking for

45:07

diversity of signal.

45:09

Horizon, not just,

45:12

you know, a simple trend following strategy

45:14

over kind of a medium-term horizon. I'm

45:16

really looking for an ensemble

45:20

of models, a

45:22

suite of signals and models

45:25

where we don't

45:27

own anything that's just pure trend following. But

45:29

we have a couple things that inside

45:32

of there are absolutely, you know, a

45:34

couple of the sleeves inside of this broader

45:38

macro strategy

45:40

is very much

45:42

trend following. And so I tend

45:44

to skew to those again. I'm trying to find something

45:46

more independent return

45:48

but also consistent

45:51

return. I can't, if I have a strategy

45:54

that doesn't work for seven years

45:57

and only gives me alpha in, you

45:59

know, some big negative. To

46:01

me, that's not really what I'm looking for. That's

46:04

just not what I'm looking for. It's, it's, it's, it's

46:07

hard to stay in those strategies, quite honestly,

46:09

I mean, so I need something that's,

46:11

that's got a little bit more diversification, a little

46:13

bit more absolute return nature, where

46:16

it can be clipping, clipping along and not

46:18

just kind of some simple, naive,

46:22

trend following, you

46:25

know, model that, that

46:27

may work very, very well in a 2022 and then go,

46:29

and then go seven

46:32

years without without working. I'm looking for a little

46:34

bit more diversity there.

46:35

Interesting. So I mean, that brings us to the topic

46:37

of, you know, manager selection

46:40

and how you think about that. And you said something

46:42

interesting at the start with, you know, you were

46:44

very much a stock picker earlier in your career, and

46:46

then you had the Cornell University and you enjoyed

46:48

the strategic asset allocation,

46:51

manager selection, all of that sort of things. And

46:53

do you think it's a different skill

46:55

set, evaluating managers versus

46:58

doing fundamental security

47:00

analysis?

47:02

Absolutely. Now,

47:04

does having

47:07

experience with the underlying instruments

47:10

of whatever they're trading,

47:11

public equities, futures, commodities,

47:14

you know, when you're sitting across the table from a

47:16

portfolio manager, evaluating

47:18

their strategy and what they're doing is

47:20

just having

47:22

your own experience, trading

47:25

those

47:26

instruments and those asset classes help absolutely

47:29

as well. So I think the thing that I loved

47:31

about it was,

47:33

you know, coming from a more narrow kind of value,

47:35

I'm very much a value investor, my,

47:38

my, my finance textbook, textbook

47:41

in undergrad was was Gramm and Dodds security

47:43

analysis. And I think I'm always

47:45

going to have those,

47:47

you know, valuation routes to

47:49

my investing approach. But as

47:52

I looked at other strategies, I just across

47:55

asset classes across the world across different

47:58

things that people were doing for both fundamental and

47:59

systematic processes,

48:02

I just realized there are a lot

48:05

of ways to make money.

48:07

And there are markets and opportunities that

48:10

to isolate and capture the alpha

48:12

in that area, it's not

48:15

just a simple, fundamental

48:17

intrinsic value approach. They

48:20

may need different tools and different strategies.

48:22

So I loved being able to look and

48:24

evaluate at all these various

48:26

people and processes and portfolios

48:29

and different ways of doing things to say, is

48:31

that worth paying for? Am I getting anything there? My

48:34

default is always

48:36

going into

48:37

looking at a strategy, looking at evaluating

48:39

a manager is there's no alpha here.

48:42

That's my default. I've

48:45

got to be proved otherwise that there's something

48:47

worth paying for. There's something special here, either

48:50

the nature of the market, the nature of what they're doing and

48:52

have to tie together. I've found

48:54

something I can look at across

48:56

my career and say, there are times where I got

48:58

so excited that I found something special and

49:02

it just really gets me excited, but they're

49:04

hard to come by. It's not easy. Yeah. What

49:06

does that look like then? Something special

49:09

or something that you're genuinely convinced is

49:11

non-random

49:12

and worth

49:14

paying for?

49:15

Capacity constrained. Almost, it's

49:18

almost always something that sound

49:22

hard to believe after saying that having

49:24

a global macro, our

49:27

discussion on global macro, which is enormous,

49:30

enormous trillion dollar liquid

49:32

markets around the world that can be easily traded, but

49:35

honestly, those are the hardest for me to underwrite.

49:37

The very hardest strategies for me to underwrite

49:39

is as I go from macro

49:41

and

49:42

massive market down to

49:44

smaller and smaller and smaller and more

49:47

niche capacity constrained

49:51

opportunities where, let's

49:54

go back to the micro cap banks. This

49:57

hedge fund that only invests.

50:02

in one thing and they do one thing

50:04

really, really well, I get excited

50:06

about that, specialists, that

50:08

have dedicated their career to a specific

50:11

asset class, to a specific area, to a

50:13

specific niche. And they're

50:15

more interested in alpha

50:17

and

50:20

delivering a track record that is independent,

50:22

that is special than growing

50:25

their economic base. Clearly

50:29

there are times where if they just took

50:32

in more AUM and there's demand for that AUM,

50:34

they could get richer if they just did that

50:36

and it would dilute their returns. And

50:40

sometimes that happens and I see that as well, but when

50:42

I can find those people that are like, you know what, I

50:44

want

50:45

returns over economics. I

50:48

want to deliver something special over

50:51

just

50:52

getting rich, then that's

50:55

a unique formula for me. When they've got the skillset,

50:58

the people, the process, and

51:01

it's all aligned with this portfolio and you can

51:03

do the attribution and you can look at the biggest

51:05

contributors, the biggest detractors through time

51:07

and see like, how did you get into this position?

51:11

What was your research? What was your insight that

51:13

led you to

51:14

take this

51:16

position which led to this really nice

51:18

P&L, this really nice

51:21

return for this year or for this series

51:23

of years. And as you go and

51:25

tie that process and that group of people

51:28

to

51:29

their positions

51:31

in that P&L

51:33

and you can see like, oh wow, they

51:35

had some unique insight here. They were ahead of the market.

51:38

They had some research or competitive

51:41

advantage that I couldn't find anywhere else.

51:44

It's hard to find. It's really, really hard

51:46

to find, but that's

51:48

what I'm looking for. Niche, capacity constrained,

51:52

interesting people who are specialists in an

51:54

area who their

51:58

bigger focus is really to just...

51:59

that deliver exceptional

52:02

returns. What do you think is the most challenging

52:04

bit then picking managers, would you say?

52:07

Yeah, that attribution. Attribution

52:10

is tough, dirty work. I

52:13

live and breathe attribution and

52:17

for both my own portfolio and my own decision

52:19

making, it helps me become

52:21

better as a portfolio manager and as

52:24

overseeing this foundation portfolio. I want to know

52:27

what drives returns and

52:30

I'm always surprised. When I do

52:32

that, I'm always surprised. I'm like, oh, I thought this

52:34

was going to be my biggest contributor

52:37

to the tractor. Every once in a while,

52:39

that doesn't line up with my own thinking.

52:44

Doing that work with a manager

52:46

and going through, okay, I want

52:48

to understand your insights that led to

52:50

your positions and doing that attribution

52:52

work to me is difficult.

52:55

It's very difficult to say what was, what's

52:58

luck, what's skill. There

53:02

are times where you can ride

53:04

some waves and you look like

53:06

a complete genius. It's

53:09

a really difficult thing to

53:11

pull apart all these risk factors.

53:14

Am I just looking at something that was

53:16

an artifact of the environment

53:19

of that five, 10-year period? How

53:21

am I looking at just like how am

53:24

I, and I've got various quantitative

53:26

tools to try

53:27

to pull those apart, but it's

53:30

never black and white.

53:31

It's almost never black and

53:33

white. It's trying to assess

53:36

and understand and

53:38

pull apart luck versus skill and it's not

53:40

an easy thing to do. I'm

53:43

curious, obviously, you're in a unique seat

53:45

as we said at the outset in the sense that you're running

53:47

this foundation style portfolio,

53:50

but you're still dabbling in real businesses

53:54

and looking at businesses that are

53:57

involved commercially in the economy.

54:00

yield important insights

54:02

for you as you go about sourcing opportunities?

54:05

Very much so. Why can't

54:07

people just copy, let's call it the

54:10

Yell Endowment? They

54:12

can. They can pull up

54:14

the asset allocation, from an asset allocation perspective,

54:16

they could pull up the annual report

54:18

and just say, those are my weights. Those are my asset classes.

54:21

Those are my weights. But you're going to get very,

54:23

very different results than,

54:26

than yell, most likely.

54:28

To me, the magic is really

54:31

within bucket, within asset class.

54:33

How do you go? Let's take real estate, for example.

54:35

Let's take natural resources. For example, how

54:38

do you go about building a real estate

54:40

portfolio? Like if you, if

54:42

you had a book of office properties

54:45

in New York and Chicago and San Francisco

54:48

versus a book of real estate in

54:50

multifamily and industrial and call it the,

54:53

you know, Southwest growing economic areas,

54:56

like your returns in real estate could

54:58

be night and day difference, exact

55:01

same asset allocation, exact same, but

55:06

your exposures and your risks and your returns

55:08

in, in, you

55:11

know, the managers and the implementation and the,

55:13

you know, the properties

55:16

and the implementation of that book could be very, very

55:18

different natural resources, whether

55:21

you're in agriculture, timber, oil and gas,

55:24

carbon markets,

55:26

so much flexibility, creativity, in

55:30

terms of what is going to really drive the risk

55:32

and return of,

55:34

within each of those asset classes, sitting on,

55:37

I could have sit on a

55:39

board of a company called Nano Yield. It's

55:43

headquarters a mile from our office. We sourced it here.

55:45

We invested in it here at LHM, not

55:49

in the foundation, but in the company. It's, it's got

55:51

a really cool technology in terms of

55:53

nanoparticles,

55:55

increases plant absorption. The.

55:59

Applications for

56:02

fertilizer and crop inputs around

56:04

the world are just enormous.

56:07

Global

56:08

application,

56:09

headquartered right here. We

56:12

networked into it and the

56:15

insights that I learned from looking

56:17

at that

56:18

specific business sitting on the board, understanding

56:22

the types of products

56:25

and commercialization that's happening there,

56:27

understanding their go-to-market

56:30

strategy, understanding what they're doing in the

56:32

US versus South America versus India. Does

56:35

that color my view in the foundation

56:37

when I'm looking across these asset classes and how

56:39

to implement? Absolutely. I

56:41

mean, it gives me point of view. It gives me

56:43

insight. It helps me think about,

56:46

you know, right now, boy,

56:48

maybe within natural resources, I'm

56:50

going to tilt toward oil and gas because

56:52

I see this

56:54

kind of medium-term, long-term

56:56

supply demand dynamic

56:59

that

57:00

is really interesting. We're

57:03

under investment today. It's going to lead to better

57:05

pricing in the future.

57:07

Having those individual,

57:10

whether it's an individual property or an individual company

57:13

on the Larry H. Miller company

57:15

side where we can have those insights

57:17

to our own businesses. We're big into real

57:20

estate. We're big into senior living. We've

57:23

got a number of

57:24

home services

57:27

and FinTech and AgTech

57:29

and a number of other themes and investments across

57:32

the platform. Having those insights,

57:34

when I'm sitting with managers and talking about what they're

57:37

doing, talking about our

57:39

specific businesses, it just brings a lot of circular

57:43

learning for me

57:46

to be able to ask different

57:48

questions and

57:50

pick up on different things.

57:54

Obviously, in your role, you have to not

57:56

only do all of the investing, but you've

57:58

got to, I guess, leverage.

58:02

the skills of your whole team or

58:04

the people that you put in place. So

58:07

curious to get your thoughts on what does

58:09

a good investment

58:11

process look like from A,

58:14

from a decision making perspective? Is

58:16

it consensus? Is

58:19

it the CIO calling the shots?

58:21

What works best? Obviously, there's

58:24

pros and cons to different approaches. And

58:27

then second, I suppose in terms of building

58:29

an investment team, what does that involve?

58:32

How do you go about hiring talent and

58:35

putting a team together?

58:37

Yeah, Alan, you can ask

58:39

me in 10 years if we did this right.

58:41

It's going to take some time to see if

58:44

the processes and the people and the

58:46

frameworks that we've set up are

58:48

effective. But

58:50

we've built a small team

58:52

here. We've got three senior people and three junior

58:54

people, including

58:56

myself, and then a rock

58:59

star person on the legal side that does a lot

59:01

of work for us as well. The

59:04

three senior people,

59:06

my function is overlooking

59:09

the total foundation portfolio. And then I've got ahead

59:11

of the four private asset classes and ahead of

59:13

the four public asset classes.

59:18

And then basically, we each have an

59:20

analyst to support our work. When you look

59:22

at everything that we're doing

59:25

across the foundation, across

59:27

Larry H. Miller Company, that's

59:29

a pretty small team to try

59:31

to cover everything that

59:34

we're looking at, everything that we're trying to do across

59:36

the world, across all

59:38

public private markets. But

59:40

we've got a great network. There's a sister

59:43

investment team just dedicated to

59:45

Larry H. Miller Company that's looking at our

59:47

businesses and our direct deals

59:50

that we work closely with. I

59:52

want to empower my people.

59:55

I try really, really hard to get

59:57

input from my team.

1:00:00

At the end of the day, I felt like I have to sign

1:00:03

off on everything. So coming back to your question about process

1:00:06

and committees,

1:00:08

I've got to sit in front of the

1:00:12

foundation board, which is made up of the

1:00:14

family members, and look them in the

1:00:16

eye and say, I believe in this portfolio.

1:00:19

I believe in these investments. So I have to get to

1:00:21

a comfort level, even if I'm not

1:00:23

the analyst or the senior person doing

1:00:25

the deep, deep, deep dive on every single strategy,

1:00:28

every single manager. I've got to get deep

1:00:30

enough on every single one where I can

1:00:32

say, okay,

1:00:34

I understand your work. I get it.

1:00:37

Let's everybody I want, but

1:00:39

I want everybody's opinion. I want my public

1:00:41

markets opinion on a private market investment

1:00:44

and vice versa. I want the most

1:00:46

junior

1:00:47

person to be able to feel empowered to pipe

1:00:49

up, share their opinion and

1:00:51

not feel like, oh,

1:00:54

the bosses have spoken. I don't want to look dumb. And

1:00:57

so I try to balance that. I'm

1:00:59

a very opinionated person, but

1:01:01

I want to

1:01:02

have that balance of empowering

1:01:04

my team. So every

1:01:06

investment that we put forward to the investment committee

1:01:09

for the foundation, I

1:01:11

feel like has my blessing and has

1:01:13

the team's blessing. And

1:01:16

if somebody has said, well, I'm not sure about that.

1:01:18

Let's pause. Let's figure this out. I've

1:01:21

learned in writing diligence

1:01:24

memos for the last 15

1:01:26

years on various strategies and managers

1:01:29

and companies. Instead

1:01:32

of

1:01:32

trying to find all of the good information and present

1:01:35

the strongest case, it's

1:01:38

much better to treat it as a discovery

1:01:41

process. Here are the risks.

1:01:44

Here's what I like. Here's what I don't like.

1:01:46

Here are the risks that I see. Here's

1:01:49

what I think is really compelling and just treat it as

1:01:51

a balanced discovery process

1:01:53

and

1:01:54

I've got to convince everybody because I've done

1:01:57

the work and I want to get this through and I want my name

1:01:59

on it in the portfolio.

1:01:59

And so we're trying hard. I don't

1:02:02

think we've got it nailed down. I don't think we've got it perfected

1:02:04

but we're trying hard in our in our memos

1:02:06

and in our discussions to treat it more as a discovery

1:02:09

process

1:02:11

So that everybody can feel like okay. I'm

1:02:13

okay with asking a difficult question And hey

1:02:15

if that if that leads to something that

1:02:17

changes our mind

1:02:19

That's good process That's

1:02:21

good process. I don't I don't want to take it to the I

1:02:24

don't want to take it to the investment committee if we found something

1:02:27

That changes our mind about

1:02:29

an investment and I want that to happen

1:02:31

with my team Our foundation

1:02:33

investment committee has been very very supportive

1:02:36

And they'll ask some questions. I'll come

1:02:38

back to us once in a while and say well, what about this and

1:02:40

but for the most part as

1:02:42

As our team has done the work and and

1:02:45

uh done the diligence and presented

1:02:47

something Um, they understand

1:02:49

the framework the under they understand the asset

1:02:51

allocation structure our strategic targets What

1:02:54

we're trying to achieve over the next five to ten years

1:02:57

and they're very supportive on individual

1:02:59

strategies and managers within that

1:03:02

within that framework

1:03:03

and in terms of kind of obviously you

1:03:05

mentioned kind of analysts, um Are

1:03:09

they tending to be generous or specialists? And

1:03:12

uh, I mean I guess from your own perspective

1:03:14

you've done a bunch of different things over

1:03:16

the years. Is that kind of Valuable

1:03:20

you that you know, if you want if somebody wants to be a cio

1:03:22

is that something you would kind of recommend having done

1:03:25

different roles Um to

1:03:27

if that was kind of the ultimate kind of objective

1:03:30

I think so. I think there's this

1:03:32

balance between specialist

1:03:36

In one area and generalist

1:03:38

and and there are times where you need both. There

1:03:40

are times where you need you need deep

1:03:43

Industry specific knowledge or asset

1:03:46

or you know, insta even instrument specific

1:03:48

knowledge. I mean doing work on Various

1:03:50

structured credit mark pieces of the structured credit

1:03:52

markets and mortgage-backed securities and you know having

1:03:55

somebody

1:03:56

With deep knowledge is going to be really valuable

1:03:59

and at the same time when you're

1:04:01

discussing, well, who should, what

1:04:04

asset class should get the

1:04:06

next dollar, the marginal dollar?

1:04:09

And as we go through our annual strategic asset

1:04:11

allocation exercise,

1:04:13

you can't just be a cheerleader for

1:04:15

your asset

1:04:16

classes that you cover. You've got to

1:04:18

be able to think, well,

1:04:20

what are my returns and risks

1:04:22

here?

1:04:23

What are my returns and risks here? And

1:04:25

we're just trying to get to the very, very

1:04:27

best answer we can. And so

1:04:31

we're trying to strike the right balance. Again,

1:04:33

I don't think we perfected it. We're trying, right

1:04:35

now, each junior person is connected to a senior

1:04:38

person. So we've got a junior

1:04:41

person on privates, a junior person

1:04:43

on Publix, and we've got a junior

1:04:46

person in the middle that's

1:04:48

helping across both. But

1:04:50

trying to

1:04:53

still have that layer of being

1:04:55

able to

1:04:56

ask questions and poke and prod, whether it's public

1:05:00

or private. Because at the end of the day, I want everybody thinking

1:05:02

about

1:05:03

the total portfolio and our long-term

1:05:05

returns. Coming back to that, the biggest risk

1:05:07

that we have is not meeting our objectives. And we want to create

1:05:09

something very special. We want to create

1:05:12

a very special return stream, 5, 10, 20 years we look

1:05:14

back. And of course, we want to be in the top desk

1:05:16

aisle of foundation

1:05:20

performance. But that's not our first

1:05:23

goal. Our first goal is really to do something

1:05:25

special with 5%,

1:05:27

cover the 5% plus inflation,

1:05:30

and do our very best around delivering on

1:05:32

that within a nice controlled

1:05:35

risk when it comes to

1:05:37

drawdown, liquidity, all those things. And

1:05:40

as the team

1:05:41

grows, that's harder

1:05:43

and harder to do. It's easier and easier to do

1:05:45

the smaller you are. And I've

1:05:47

realized as the team grows, I'm

1:05:50

going to do my very best to keep that balance

1:05:52

of

1:05:54

having everybody still think of themselves as

1:05:56

a generalist and having ownership in

1:05:58

the total I don't want to get to

1:06:00

the point, no

1:06:02

matter how big my team grows, whether we're

1:06:05

the same six people in 20 years, or whether

1:06:08

we've doubled or tripled in size,

1:06:10

I don't want to get to the point where somebody's, oh, I'm just

1:06:12

the

1:06:13

real estate person.

1:06:16

I'm just the international equities person. Like,

1:06:19

I never ever want that

1:06:21

to happen. I want the entire team

1:06:23

to fill ownership and to be able

1:06:25

to think about, kind

1:06:28

of punk each other and

1:06:32

think about,

1:06:34

help us get

1:06:36

to the very, very best answer. You don't get

1:06:38

that by just saying, okay, I

1:06:41

don't do that. I'll just let them just like, it

1:06:44

takes stretching and thinking and getting

1:06:46

outside your comfort zone, but I'm

1:06:48

hoping we can continue to build

1:06:51

and create that culture here.

1:06:52

Good stuff. Well, maybe just to wrap up, and

1:06:55

we always ask guests if

1:06:57

you were to give some advice to people starting

1:06:59

off in their careers or people who want to get

1:07:02

into endowment investing or multi-asset

1:07:05

or that ultimately

1:07:07

be a CIO, what

1:07:10

things to read, things to do, what

1:07:13

would your advice be?

1:07:15

I did not reach out enough

1:07:18

when I was younger and

1:07:21

really seek mentors

1:07:24

and really seek to network

1:07:26

and create my own kind

1:07:29

of professional relationships and network

1:07:32

with other people. I should have done more of that.

1:07:34

Once I realized that it worked,

1:07:37

that most people were really

1:07:39

actually good human

1:07:41

beings and interested, if

1:07:44

you were genuine, if you

1:07:46

are real in saying,

1:07:49

hey, I have a passion for this, I'm interested

1:07:52

in this, I have found you for these

1:07:54

specific reasons because you're

1:07:56

in this role and you're doing this thing and that looks really

1:07:59

interesting to me.

1:07:59

I just want to learn. I just want

1:08:01

to, can we have a call? Can we go to lunch? Can we,

1:08:05

I've found that not always, but for the most

1:08:07

part, you're going to get a very, it's going

1:08:09

to resonate with that person if you are genuine, if

1:08:12

you are authentic. And I

1:08:14

would recommend the earlier

1:08:16

you can learn that and do that. Like

1:08:19

I tell students, I'm an adjunct

1:08:21

professor up at the University of Utah. And I tell

1:08:24

students, hey, you actually have superpowers

1:08:27

as a student that you don't realize you have. As

1:08:29

long as you've got that .edu

1:08:31

email

1:08:33

and use that and are reaching out to people,

1:08:35

like most people kind

1:08:37

of have a natural soft spot, like they're

1:08:39

willing to respond, especially

1:08:41

knowing that you're a student. And in that role, you

1:08:44

kind of lose that superpower a little bit once you get out in

1:08:46

the industry. And you're, you know, you're working, if you're working

1:08:48

for a fund or something, it's not as, it's

1:08:50

like, yeah,

1:08:51

you're fine. You can figure it out. You got, you

1:08:53

know, but reach out, network,

1:08:57

do your homework. Don't spam

1:08:59

people. I'm certainly not advocating the mass,

1:09:02

you know, spam campaign, but

1:09:06

be genuine, authentic, figure out what you're interested

1:09:09

in and learn from

1:09:11

others. Obviously, in terms of what

1:09:13

to read, clearly, Davis

1:09:15

Wenson's pioneer in portfolio management

1:09:17

book, that's like basic reading.

1:09:19

That's like required reading

1:09:21

from my team. Beyond

1:09:23

that, I wish

1:09:25

I had something, but I don't. I

1:09:28

don't have a book or one resource.

1:09:31

I read

1:09:33

as much as I can about different portfolio

1:09:35

construction techniques. I want to learn the

1:09:38

good and the bad. And I see things

1:09:40

that make a lot of sense, but don't like,

1:09:43

don't speak to my edge or speak

1:09:45

to my competitive advantage. So I've

1:09:47

got to do things my way, but that doesn't mean I'm not willing

1:09:49

to learn why other people are doing something

1:09:51

in

1:09:52

a portfolio. So

1:09:54

I'm constantly reading,

1:09:57

understanding, trying to build conviction, trying

1:09:59

to build.