Investing Billions - E217: How to Manage $15B: Insights from Sacramento County's Pension Fund

Episode Date: September 24, 2025

How should a public pension build an active equity and absolute-return program—without diluting alpha or chasing the “hot” manager? In this episode, I go deep with Brian Miller, Senior Investment Officer at the Sacramento County Employees’ Retirement System (SCERS), on constructing a $6B public-equity book inside a ~$15B plan, sizing managers, and using absolute-return strategies as true diversifiers. Brian reflects on 16 years at Tukman Grossman Capital Management (value, long-term compounding, and staying consistent), the realities of “LP capture” across cycles, and why tracking error isn’t the right risk lens. We unpack manager due diligence (including on-site visits), active vs. passive trade-offs, the global/US mix, and how SCERS uses MSCI Caissa for whole-portfolio visibility.

Today, I'm speaking with Brian Miller, a senior investment officer at the Sacramento County employee retirement system, a pension system that today manages $15 billion. We discuss Brian's formative years at Tuckman Grossman, a public equity manager who counted the Stanford and Yale endowment as LPs, as well as his past eight years running the public equity and absolute return book at Sacramento County, which stands at roughly $6 billion today. Without further ado, here's my conversation with Brian. Brian, I'm very excited to chat. Welcome to the How Invest podcast. Yeah, thanks, David. Appreciate it. Thanks for having me on. So I want to go back to the beginning of a career two years out of your undergrad. You started,

Tuckman, Grossman, Capital Management. You spent 16 years there. Tell me about your time at Tuckman. Yeah, a couple really interesting stories about the timing of when I joined. Tell me about what you did and tell me about your main lessons that you learned while working there. The firm was founded by Mel Tuckman in 1980, joined by Dan Grossman just over a year later. And Dan worked for Warren Buffett kind of in the early days. So, you know, I remember him telling stories about their annual meetings when it was just, you know, a handful of people in a conference room before it got to be what it is today. in the auditoriums in Omaha. At the time, it was, say, the two owners who were the portfolio managers, I switched over

and became an analyst, and then we had another analyst as well. So really, four people on the investment team. And as a single product, single strategy firm, they did really well in the niche they had, right? They got up to, I think, north of 12 billion in assets under management at the time, managing assets for predominantly institutional clients, you know, Yale, Stanford, a lot of state public pension plans, so a really great client list. And it was really, I say, a great time to be in active management in those early years. And then we faced a lot of headwinds for active management

in the year subsequent, which I'm sure we'll talk about here. As you mentioned, Tuckman and Grossman had LPs like Yale, Stanford, Rockefeller, and even, I believe, Vanguard at some point, subadvised to Tuckman. So really the cream of the crop. And Tuckman was a value investor. What did you learn about value investing that helped shape the rest of your career even to today? The reason they were able to be so successful is kind of the role they played in for those clients, for those public pension plans. You say the, say a value slash core component of an active equity portfolio. So obviously those are, you know, large institutions.

They've got, you know, well-diversified equity programs. And we fit a really nice niche, I think, for them in their public equity portfolios. And one of the things that I think made Tuckman so successful was their consistency. I think they followed a really consistent approach. over a long number of years that led them to kind of fill that niche in the face of, you know, a lot of headwinds in the market, whether that was, you know, a shift towards international, a shift towards global, right, a focus on technology and growth stocks. And they faced a number of headwinds, but really stay true to who they were as investors.

And so that really taught me a lot of lessons about, you know, finding what you do that you can be successful at and then staying consistent with it. The other thing I would say is just the focus on long-term investing, right? Allowing your, the ability for those investments to compound over time and not getting swayed by, you know, shifts in the market, but, you know, finding a great company, finding attractive opportunities and entry points from evaluation perspective to enter those positions and then really hold those things long term and let the value of those things compound in the face of market pressures. You know, you had a recent guest on, I think, talking about how active investing can be

successful, but it has to have kind of a long-term time frame. Obviously, active investing comes with variations in markets, variations in performance. And, you know, you're not going to perform, you know, outperform the markets every year. And so you've got to have that kind of long-term perspective and being able to weather those storms and kind of ride the up and downs. and that allows active investors, especially fundamental kind of concentrated investment strategies like Tuckman to be successful over time. Rahul Mugdahl, who's at Parvus, explains this as buying public positions that if the stock

market closed for five years, you'd want to hold. So almost like an illiquid type of investing into the public markets. From that perspective, it's if you have great quality. companies, right, that you think can weather storms and markets, I think that helps you sleep better at night. As an investor, you can weather some of those storms, right? And you're not as concerned in the day-to-day price movements because you are looking long term. You're looking at what the future potential for these companies can be several years out. I've had to come up with this term that I believe described something that happens to

managers, public or private, LP capture. So GPs could be highly affected by their capital base, by their LP base, both negatively in that they could pressure them to sell just because there's noise in the market, but also positively, if you have somebody like a Yale endowment or Stanford, as you had a Tuckman, maybe they could even double down when things are going bad. How much of the quality of the LP base allowed Tuckman to build this amazing franchise over so many decades and over so many different market cycles. In a lot of ways, all comes back to performance, right? So the fact that the firm was able to deliver really strong performance helped it grow.

That, you know, obviously is the first foundation of that pillar. That then leads to great clients. And that can then obviously build on itself, right? I think in those early years of the firm as they were able to, you know, attract great clients, then that feeds on itself and allowed them to, you know, help grow that client base and be successful. The interesting thing about kind of that LP capture part of it and how the LP base can impact a firm is I think we saw it go both ways over market cycles. If you think back to the financial crisis, 0809, firms like Tuckman were almost a source of liquidity when other parts of those investors' portfolios were struggling.

When you had kind of a liquidity crunch, say, in private equity and those distributions coming back to LPs kind of dried up, then those liquid parts of the market that maybe held up a little bit better, even in the face of, you know, strong market declines or a source of liquidity. And we certainly saw that in, you know, 0809. And then on the flip side, like you said, when they do recognize there's drawdowns, they do then put capital in. And I know we saw that a little bit with Vanguard. Vanguard was able to do that at times when, you know, because they have a stable of portfolio managers within the portfolios, you know, that they were having subadvised. Tuckman was maybe one of several underlying PMs.

And so they were actually able to shift capital between their underlying PMs. And so you were seeing that. You definitely saw both sides of that part and the side of the business. It's almost like the same dynamic with. With liquidity providers in the private markets, which are secondary funds, you're almost able to get that illiquidity discount in the public markets because so many people are going towards the doors. And if you're just around, you could buy the same asset at a discount.

If you think back to what happened in the financial crisis, that's what a lot of great investors were able to do that had liquidity. They were able to step in when the markets were really struggling and be a liquidity provider, get great assets at discounts to long-term intrinsic values. And so if you're able to be opportunistic and have kind of that cash flow opportunity to invest when the markets are struggling, I think it's a great value opportunity. But having that liquidity is not always there. It kind of comes there's a lot of different dynamics on whether you have the liquidity and the ability as an investor, you know, on the on the management side to take advantage of those things.

And so a lot of our ability to do that at the firm level was kind of somewhat dictated by your client base. And then the movements they made from a cash flow perspective as they're managing their portfolios. So, yeah, a lot of interesting dynamics there that you face as a manager for that type of a portfolio. I graduated undergrad in 2008. So I was not an actor in the market. So I only know from secondhand. But my understanding is that the difficult behavioral thing during a crisis is you have to sell some things for a loss in order to buy other things at higher discounts. So in other words, nobody's portfolio is up.

So you have to make that relative trade, which makes you have to realize the loss in parts of your portfolio, which is behaviorally difficult. Is that the right way to think about it? Or are there people really hoarding cash on the sidelines that wait for the next crisis that really move the market? I would kind of answer that in two ways, both on the investment side, you know, as an asset manager versus on the allocator side, right? As an investment manager managing a single portfolio, right, dedicated to large cap stocks, yeah, you definitely have to in a way what the future opportunity set is for all the stocks in your portfolio. And yes, some of everything is going to be down at that point. But are you able to get into a higher opportunity stock

that's, you know, maybe sold off more and creates greater value in the future? And so, yeah, you definitely are kind of making those tradeoffs and evaluating all the stocks in your portfolio and then the future opportunity set. And you definitely, I think you saw that a lot in the financial crisis. You saw a lot in 2020 as well when stocks sold off. And then a lot of people took the chance an opportunity to upgrade their portfolios, get into stocks that maybe were higher price that they really liked, but couldn't get into due to valuations or other considerations. And so that's on the asset management side. On the allocator side, I think it's a little different because then you have pockets of

liquidity in your portfolio because you are diversified across asset classes that allow you then to take advantage of those. So same example when, you know, if you have negatively or uncorrelated assets, within your portfolio and equities are selling off strongly, that's the opportunity to maybe rebalance and put money to work in those areas that have sold off. And that's where the diversification comes into play as an allocator that allows you to take advantage of those opportunities. Starting with this global financial crisis, 2009 to 2020, obviously growth, outperform value values a little bit back in the beginnings of the 2020s. Fundamentally,

let's put aside active versus passive, but fundamentally, do you believe the Fama French three-factor model that held for 70, 80 years until 2008, do you believe that's back in play, meaning that small-cap value will outperform other asset classes in the public markets, or has something fundamentally changed, whether the alpha is being traded out in the market or something fundamentally about the underlying businesses has changed, that will make it kind of the century for growth over the next 75 years. It's a really good question, and it's really hard to answer in, say, in a vacuum, in a short-term time period of what we're seeing.

You know, think back to different segments of that and, you know, to kind of repeat your question, it's like, is there a small cap premium, right? Does that still exist? Is there a value versus growth dynamic? What's interesting in the last several years is I think the dispersion you're seeing in the market and that obviously the mega cap stocks, which have really outperformed, but then you see the dispersion underneath that. But those mega cap stocks are growing earnings, right? It's not just as pure speculative, speculative growth in multiples. Those are fantastic companies that have been growing earnings, have tremendous cash flows. They would be considered, I think, high quality companies. I think about factors. And so I don't

think in the short term that those long-term dynamics are dead, but I think you're definitely seeing a dispersion that's playing out in the markets. The one caveat I'd say to that is markets, I think have changed to a certain extent. You don't have the same number of public companies that you used to, right? So the small cap universe is not the same universe it used to be. You're seeing companies almost bypass that small cap segment and go straight from an IPO to a mid cap to a large cap company. And so I think there are other market dynamics at play. But those short term value versus growth dynamics, I think, are going to play out over time. And, I kind of follow the belief that over the long-term stocks follow earnings.

And so those small-cap companies have to deliver the level of earnings growth to justify the return profile. And that's what I think you're saying in a large-cap segment. Those companies are really delivering strong earnings growth. And I think it's shown up in performance. And so I think that's where it's going to take time for some of those dynamics to play out to decide, well, is growth going to continue to dominate over the large, you know, over the long term and, you know, the next 15, 20 years like they have in last 10.

I think it's to be determined. We'll see. The CIO of Hurtle Callahan, Bad Conger, went on the podcast, and he talked about that small cap value is fundamentally different today. And although there are some great small cap value companies, many of them fit one of two new categories. One is basically large cap companies that have fallen angels. and two, those are no longer able to raise in the private markets,

adversely selected companies that now are going public as a last resort, whereas to your point, you now have these private companies, both in venture capital and private equity, that are able to raise a bunch of private capital and now go public when they already are a large cap. So these quality, small-cap value companies are certainly, there's fewer of them in the market, so it's fundamentally different asset class.

I think that's right. And I think it shows it in the numbers when you look at some of those small cap companies that have negative earnings, right, that are under forming low quality companies. It does present an opportunity set for small cap managers, particularly small cap value managers, to generate alpha when you're thinking about can they identify high quality small cap value companies that can deliver good results and returns. So I do think it presents an attractive opportunity set for small cap active managers to deliver alpha. But from an asset class perspective, I think it does make it challenging for that segment of the portfolio to perform as a

whole relative to what large caps have been able to deliver. Let me ask you an odd question. If I believed in the fundamental thesis behind small cap value, which is hype gets overbought and value kind of accrete some compounds over time, but I did not believe in the public version of that, and I wanted to buy that in the private markets. What would that asset class be? You're actually seeing some, I think, crossover between public and private opportunity sets. You know, I'll name a firm that we're not invested with, but it's been interesting as Kut, I think, launched a new series where it's almost a... a public-private type opportunity set to take advantage of those, those kind of burgeoning

opportunities where, you know, small companies that you would like to invest in and would have historically, historically, via public markets, stay private, and therefore they can invest along that side, but they also can invest in public companies. And so, yeah, I think that kind of answers the question, which is you're going to see market participants creating an opportunity set to have these crossover vehicles that crossover between public and private markets to take advantage of investing in great companies irrespective of those really dedicated silos of private markets, public markets. And I think that is just a development of what you're seeing in those markets and how long companies are saying private. And that's on the venture side. Is there an equivalent

on the private equity side? On the private equity side, I think it's a little different. I don't tend to see that as much on the private equity side. Private equity tends to stay more private. They tend to do what they want to do because they have the levers to make change at those companies that are just more suited for private markets. Their ability to come in and take over a company, change it, turn it around, improve operations, improve, you know, growth opportunities. I think in some cases are just suited for private markets.

And I think that's why the private equity opportunity set has been so good. So, yeah, maybe a little bit less of a crossover there with private equity because, like I say, I think it's just suited for how those firms operate and the transition and change they like to implement in companies is just more suited for private markets versus the public eye. So after spending 16 years at Tuckman Grossman, Capital Management, you then moved to Sacramento County Employees Retirement System or S-SERS. Tell me about that move from going from manager to allocator. What was that like? Yeah, it was really interesting. I recall one of my very first meetings with one of our existing managers was a firm very similar to Tuckman, Grossman,

which was large-cap concentrated U.S. equity core portfolio. And I had to resist the temptation or, you know, I was just naturally inclined to want to dig into each stock within the portfolio. Being so focused on individual stocks and company analysis, that's what you're naturally drawn to. But you quickly learn that you just don't have the bandwidth as an allocator to dig into the individual stocks at that level. And so you really have to shift your focus from individual company analysis to portfolios and how you're evaluating managers. And so that was, the biggest shift for me. I think, you know, I still like to dig into the individual stocks within our manager's portfolios, but now it's under the lens of understanding their decision

making, understanding their process and philosophy to evaluate how they're making their decisions versus, you know, the individual stocks. And so you really have to like say step back, look at managers from a more holistic higher level, and then you're doing it across asset classes. So when I joined Sacramento County, I was a third member of the investment team. You know, we had our deputy CIO join just after a year after I was there. So we have, essentially, we've had a four-person investment team for many years. And so we're really working across asset classes. When I joined, I led public equity and also absolute return, which I still do. And so, you know, like I say, it's that focus on manager decisions.

and allocations, and that's where you shift your focus, and it was really an interesting transition. Yeah, I was going to say probably the best way to diligence to public managers is actually to go through the individual stocks and to see their thinking on a micro level instead of, I guess the default is just listening to their narrative, listening to them talk about meta decisions versus kind of going into a company, seeing how they analyze it, and then doing it multiple times, and then maybe after you invest, you don't have to do that, but isn't that kind of a great place to start, which is like, what are your actual

decision making? Why did you do that? Why did you not do that rather than kind of listening to this theoretical portfolio construction approach? There's definitely a top-down view where you're looking at, you know, the firm, the people, you know, their investment philosophy, their process. But then ultimately you are digging down and especially for fundamental active managers is what is their investment making, decision-making process. How did they actually choose stocks that build up into the portfolio that they're constructing, which is ultimately what you're investing in as a fundamental active equity manager? And so it does give a great insight into their decision making, how they view individual companies.

And it's, you know, it's hard to do initially, you know, with a manager, but it is definitely something you can build into over time, understanding their security selection. process and see how that may change over time through conversations you have with them as you've invested with them over a number of years. And so there's definitely a learning curve to getting to know a manager. And you kind of do your best to do that as fast as you can when you start at a new at a new firm. But now that I've been in this role for many years now, you kind of learn how to narrow that process down and be really more efficient in how you're evaluating and selecting managers. How do you go about making that process more efficient? Obviously, you still have to spend a lot

of time, but where can you expedite and or simplify your manager selection process? As I've been in this role now for, gosh, eight years, you know, time goes by quick, right? You really learn to target your conversations with managers on where you're focusing. You know, when I first joined Sacramento County, we would, if we were doing a search for a manager, it would be starting with a really large laundry list of managers and working from there, which would make the process very long, very tedious. It would take a long time to implement. We've gotten a lot better at, you know, part of its mind knowing the manager universe, knowing the areas I want to focus in, and really being targeted on the types of firms and strategies that we would, you know,

look to invest in. So instead of starting with that large laundry list, it's, yeah, it's a much more tailored, narrowed list of, okay, I'm doing a, you know, a U.S. small cap growth search, who's the manager that I'm looking at? Okay, there's a, there's five names really that I want to consider. The one part I would say that is, I think, really invaluable. And this was kind of a learning out of COVID, which was the importance of meeting managers at their location and visiting them at their shop versus them traveling just us or even doing anything virtually. I think virtual meetings are great for existing managers where you know them and you can kind of just do the check-ins. But on the due diligence process, I think it's been invaluable of,

you know, you need to go visit the managers and really spend time with them digging into the details. And I think that's something you get from visiting their shops and visiting their location. I think it's just that's how you get to spend the time. time with those managers and get into knowing them better than you might otherwise. I've never met an asset allocator that did not say they were understaffed. I do tend to think that that's directionally accurate. And I think one of the patterns I've seen among the most effective ones is that they really focus on preventing false positives and they let false negatives go through the crack.

So you gave that example. they will focus on these five managers that their staff or an OCIO has sent to them. And they focus on the final decision. They don't worry about the manager that might have not made it to the process, even though directly they could have been good. Their job is to make sure there's no mistakes. And if they make no mistakes, then they're going to do just fine. Yeah, it's really hard because you could spend a lot of times spinning your wheels

trying to evaluate all the managers. And there are great managers out there that I'm sure, obviously, it's a huge universe. And if you start from scratch, well, maybe you would select other managers, but there's a time component and there's a trade cost perspective of switching managers. It's not an easy thing to do. And obviously, you don't want to be just chasing and trailing performance or chasing, you know, the hot manager. And so, yeah, there's definitely a component of that.

I think, you know, when you're selecting manager, I look back at, you know, in hindsight, now the managers that we've hired since I've been at Sacramento County, I think, you know, knock on wood, right? We've had a pretty good success rate. It's been interesting because often, but right after you hire a manager, they tend to underperform, like, immediately, like the year after you hire them, it's like, okay, then you're really second guessing, oh, gosh, did I hire the right manager? Did I make a mistake?

you know, you're always kind of second guessing your process. But obviously, you invest hopefully with a long-term perspective of, you know, these are managers that we're going to keep in our portfolio for five, ten plus years. And like I say, knock on wood, things have turned out quite well. We've had a fairly good success rate of the managers that we've hired, delivering, you know, what we would have expected of them. And that is a combination for us. It is staff driven, but it also is consultant driven. We do utilize consultants since we have, you know, very lean staff. And it is always a joint recommendation.

So that's kind of, I think, the safety rails perspective of, you know, the consultants help and make sure you're not making any big mistakes of, you know, of hiring managers that really isn't the right, you know, institutional quality. You know, they're the safety check on checking your decisions. But we also pride ourselves on being staff driven as well and identifying managers and identifying opportunities to allocate. If you've been considering future tradings, now might be the time to take a closer look.

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Download the Plus 500 app today. Trading and futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. The underrated aspect investing is the rootedness of theses. You mentioned this, like, you invest in a manager the next year they underperform. If you're not rooted in your original reason for investing in that manager, then you're going to have weak hands. And this is kind of a concept that mostly applies to crypto, which a lot of, you know,

a lot of people say, I wish I would have bought Bitcoin at $100. But if you look at it behaviorally, they probably would have sold it at $150 after, it went down from $200 because they wouldn't have known why they were buying Bitcoin. You could take that with any theory. It's very important to root yourself in why you're doing something, even when you would have made the same initial decision because of that pain of holding it. And paradoxically, that happens the most with liquid investments. The chance to redeem is another chance to make the quote unquote wrong mistake if it's

actually the right manager. So this rootedness and why you're doing things takes a lot of work on the front end, but I think it's one of the most underappreciated aspects of asset allocation. And that does come back to what your process is from an allocation perspective and evaluating managers. And yeah, you definitely don't want to just stay rooted in what you're doing. You always want to kind of fine tune and improve your processes where you can. but that does give you some comfort in the selection process, even if a manager does underperform

is, well, why did I hire the manager the first place? What were the roles, you know, this manager is expected to play in the portfolio? Even if they're underperforming, do you understand why they're underperforming? Is it a short-term nature versus, you know, are you investing for the long-term and can stick with that underperformance so that allowing the manager to turn that around and deliver the long-term results you're hoping for. It is something that you do kind of lean back on that process-driven approach of evaluating the managers. And if you made the right decision at the time with the information you had, you can

always go back and have hindsight and second guess. But, yeah, that's just part of the process. Writing down your investment thesis, have things changed? If they have, then you might want to sell, even if it's doing really well. And then if they haven't, you might want to hold, even if there's no. and it's going poorly. And it's such a difficult thing to do, especially in your mind. You really have to write it down.

It's where knowing your managers really well helps. And that comes from time in a lot of cases, is has their investment approach shifted, right? Is there a strategy or style shift in their portfolio? We had, you know, a few managers in our portfolio where, you know, there was a value growth dynamic. And over time, the portfolios almost converged. And so they, as they were, there was a value manager and a growth manager. And then their portfolios literally had a lot of overlapping securities and holdings. And then you're like, well, why is that? Which one may have shifted? And, and then you start evaluating, okay, that is more of a case for making a change,

knowing that there was a shift in what the manager is doing. And that led to the performance deviation, then them sticking to their guns, delivering what you expect them to deliver, and the market force is just moving against them in a short period of time. As of this recording, you're roughly $15 billion, a little bit under $6 billion of that is in your public equity book. Tell me about how you go about building a portfolio, a $6 billion portfolio in public markets. We were 50% domestic equity and 50% international when I joined in 2017. we've incrementally shifted that to increase U.S. exposure.

And the way we've done that is by adding global. So rather than just directly increase U.S., we essentially reduced international to add global equities. And we also shifted that to be versus an acquit benchmark. Obviously, U.S. equities have done quite well. And the way we've kind of shifted that portfolio to match the equity, like I said, is by adding global equity strategies. I think overall managing that portfolio, there's kind of a debate around the number of managers that you want.

And we are, at least I am, and I think our consultants generally are believers in active management. And so our 50% of our U.S. equity portfolio is passive. Everything else is active management. And even our U.S. equity portfolio has delivered. on the active side has delivered good active returns. And so I'm a big believer in adding incremental returns wherever you can. And so I think active management still has the ability to do that. But we do have that debate as as we've added global, we've increased the manager count

and what is the right number to have. And because ultimately you don't want to diversify your managers into the point where you're just holding the market. But we are still small enough as a firm, as an organization, that I think we can allocate two kind of unique niche strategies in some cases, find incremental ways to add alpha, and if that leads to some incremental manager count, I think it's okay. But we're kind of towing that line, I think, right now. And where we've offset that as, you know, through the years is we've reduced managers in areas

where we've had duplicate exposure. So when I joined, we had, say, multiple small cap growth managers, multiple small cap value managers. We've consolidated in areas where we had overlap and that has opened up homes to allocate to new managers on the other side of the portfolio. Explain the tradeoffs in having multiple managers in the same strategy or having roughly or having more managers overall versus stream mining or manager. What are the pros and cons? It really comes down to sizing of allocations and finding that balance between what is a meaningful enough size for an active manager to contribute to the portfolio without taking excess risk if they get too large.

Knowing, you know, on a public equity portfolio, these are active strategies, they are going to deviate performance-wise year-to-year. You, you know, they are going to have downside risk relative to benchmarks. And so how much of that are you willing to take? How much are you willing to have a single manager allocation not only contribute to the downside, but also contribute to the upside? And that is the biggest, I think, consideration for that manager count. For example, we had emerging markets small cap allocations when I joined, but they were very small, really weren't big enough to move the needle, and they weren't delivering enough

unique exposure and performance relative to broader emerging markets. And so that was an area we were able to consolidate. If you think about, you know, international large cap, we've had this dynamic in play where some of the allocations have probably gotten a little too large and we need to kind of resize those just from our risk perspective. And so, like I say, I think that a lot of that comes down to individual manager sizing, the risk considerations, how those portfolios are constructed and the risk they're taking, because there is a difference also between, you know, a fundamental concentrated portfolio

versus a highly diversified quantitative portfolio and the level of, you know, tracking error and risk that you're willing to take. I say tracking error, but I really don't like that as a risk consideration because I think you have to have tracking error to deliver excess returns in alpha. And so I don't, you know, necessarily like that as a risk component. I think more downside risk and downside volatility is a big consideration, but all those things do come into play. And for the audience, tracking error is the index versus what the manager does. So it's essentially the active deviation from the index.

So tracking error, I would say, is like a very biased terms. It's almost like a term that was created by a passive manager to show it's an error from its own return. Whereas you could say you could just rename it presumed alpha or presumed manager discretion, whatever, however you rename it. I think it certainly is a very biased term for it. You see strategies almost focus on that as a component of how they manage their portfolios, which if you're trying to deliver, you say, information ratio, another term that, you know, it maybe needs definition, but involves tracking error. if you're just seeking for high information ratio and you're looking at how much you know return a portfolio delivers relative to a benchmark well a strategy can have great information ratio because it has very low tracking error versus the benchmark so it doesn't

deviate it but only delivers just a marginal amount of excess return or alpha and that you know may suit a lot of people's needs but if you want to seek a higher active return, higher excess return, well, then you have to be willing in a lot of cases to allow a higher tracking error. And that's where kind of that risk versus return tradeoff comes into play a lot of times. Isn't that one of the difficult behavioral aspects of investing in that you end up selling your winners and almost having to double down or allocate more to your losers? Isn't that kind of an odd part of portfolio construction? Yeah, it's been an interesting study because we just went through a strategic asset allocation, which we do every

three or four years. And that kind of sets the high level targets. And you go through those debates of like, well, how much U.S. versus international should you have? And you say, well, the U.S. has done great, but will it continue to outperform going forward? Right. Versus international has struggled as been a, you know, perennial underperformer performer for many years. years, but valuations are great. You know, you're starting to see US dollar weakness, which you haven't had. So, I mean, it's played out in 2025 that international has finally done much better. But it's that kind of that continual balance of how much do you want? What have you had that's performed well? And do you need to sell that to reallocate to areas that have greater

upside optionality in the future? And so there's always that tough balancing act where I I like to think of things as more of on a long-term perspective of do you think these segments of the portfolio are going to perform better over time, irrespective of kind of short-term considerations. So irrespective of short-term, say, valuations or fluctuations in the U.S. dollar, do you think U.S. earnings are going to grow better than international or other segments? And I think that helps, having that long-term perspective, hopefully helps minimize some of the short-term, deviations in the market and short-term valuation or other considerations. And presumably it's two decisions. Do we want to allocate less to this part of the market, called it international large gap? And two is what managers do we want to decrease? And presumably you could be divesting away from entire asset class, but increasing in a manager in that

asset class if he or she had demonstrated at alpha. Yeah, yeah, definitely. We've seen that over time as allocations have shifted, you know, you may reduce, you just laid out a great example, you may reduce international overall, but you may increase emerging markets as a component of international. And so, you know, you reduce one segment, but you increase the underlying subasset class targets. And so that shifts. You may adjust the number of managers you've had within a portfolio. So even though the underlying assets over, you know, they decline in individual manager's assets may increase. It's kind of an interesting perspective now that I've been on both sides of that is having those conversations with the managers and saying, yeah, you're

performing great, but we're taking assets down for this reason. Or, you know, we just had an allocation shift. You, you know, we're moving money from here to there. And they all understand it. It's part of the business. But it kind of reflects on the earlier part of our conversation of the managers saying having to adjust their portfolios based on what their underlying LPs and investors are doing from a cash flow perspective. The LP capture. Yeah. 7% of your portfolio goes into absolute return.

Tell me about some of the strategies that you're using in absolute return and maybe some of your favorites. Like we just did a strategic asset allocation. We're sticking with that 7%. For us, I think it's served a really good. role in our portfolio. And what we did seven or, you know, several years ago was focus exclusively on diversifying strategies. And so these are what you might expect is, you know, low correlation, lower beta, more unique drivers of returns. And for us, the way our portfolio was segmented is

really growth, diversifying and real return from like a broader asset category perspective. and within diversifying, it's really absolute return and fixed income. And so, like I say, it's served a really good role for us. 2022 was a great example of that where both equities and fixed income were down double digits and absolute return held up really well. And so it kind of goes to show it's their unique strategies that can hopefully protect capital, but deliver still positive returns. For us, we don't view it as, say, a risk mitigating or tail risk.

component portfolio, it is really meant to deliver positive returns. And so from a strategy perspective, we invest in really strategies across the board that can just fit those underlying characteristics that can be, you know, event driven. It can be macro, whether that's discretionary or systematic. It can be more market neutral or multi-strategy type of strategies. And then also even equity long short, as long as it's more of a market neutral low net type of portfolio that can deliver returns without a lot of directionality. So diversifiers are there to diversify the absolute return assets are there to diversify your assets, but also that you don't subscribe to lazy thinking that, okay, great, they diversify. It doesn't matter about their return. You also want to

maximize your return. What would be an example of that? You said long short, equity event driven. And are these just public strategies? Could you do things like farmer royalty or music production rights or are these kind of more esoteric or does it have to be public? No, they're not they're not just public equity. They are, yeah, they are kind of a broad mix of strategy. A lot of them are derivative driven, whether that's volatility arbitrage or, you know, fixed income arbitrage type strategies.

Some of those other things you mentioned, really not there's royalties or other things, those still tend to be more in private markets, say like, you know, private credit, private equity, those sleeves of the portfolio. But for us, it is really portfolios that hopefully can deliver returns irrespective of market direction. And that's really a key driver and hopefully protect capital. So a big focus is on kind of that risk-adjusted return, what, you know, what the volatility profile is for those. strategies, you know, we're not seeking double-digit like returns. That's, I think, a little bit unrealistic. You know, I've seen commentary from other allocators where they give hedge funds

a really hard time for not delivering a certain level of returns for the amount of fees that you're paying. I think that comes back to how you're evaluating them and what role they play in the portfolio. So for us, you know, over the traveling five years, delivering a, you know, a five to six percent return with low volatility, with low downside, good risk-adjusted returns certainly fits the bill for us, especially in the prior years where the base interest rate, you know, were low. And so if you think of a spread versus treasuries or spread versus fixed income, they were certainly delivering that return profile. And, you know, as interest rates have moved up, I think the return expectation moves up a little bit, right? You start with a higher cash base

rate, you know, then the expected return above that is higher. And so hopefully the strategy will deliver that. But that just goes to kind of some of the thinking and how we view absolute return and the role it plays for us. Last time we chatted, I asked you if you were diversified and you said you used a tool for that, the MSCI tool. Double click on that. How does this tool tell you whether you're diversified? And by what metrics or factors are you diversified. You know, with a small team, you know, lean internal resources. We've leaned on a lot of technology resources to help us, you know, know, know our portfolio,

understand what we own and just be more efficient in what our processes are. And Kaisa is an MSCI now owned product, which is built to be a total portfolio solution, meaning crosses, you know, goes across public and private market assets. And if you think about, you know, a top-down perspective, we have been able to build it in how we categorize our portfolio and then drill down, you know, from the top level all the way down to the individual company holding levels at private equity firms, for example. And so we're very, it's a great tool for easily segmenting and knowing what you own,

whether that's by geography, by, you know, by asset class, by securities, by style components. And the way that's helped us implement is knowing if we, what our overall healthcare exposure is, what our overall, you know, IT exposure is, and being able to then make those incremental decisions of should we add more exposure. And all of that is in private markets, right? So how we invest on the private market side is all often through sector specialist managers, like say, whether that's healthcare, whether that's, you know, tech buyout, etc. And that this tool helps us really find, you know, have a great understanding of what we own in our portfolio and that can evaluate along those lines. Going back to when you started two years out of undergrad and

you started at Tuckman Grossman, what is one piece of advice that you could have given Brian that year that would have either helped accelerate your career or helped you avoid mistakes. It's a really good question. One thing I would say, I would recommend this not only for myself, but everyone, which is just to be a continual learner, you know, continue to educate yourself and, you know, be active in that process, you know, for you individually. And I think that really helps drive your career forward. I think the piece of advice would be really be forward looking, really look into what the large

trends are that are developing in the marketplace and try to be early in those trends. It's really easy to, in hindsight, to say, oh, gosh, Bitcoin 15 years ago would have been a great investment or, you know, AI, you know, eight years ago. So figure out ways to be on the front end of those type of large trends. The way to do that is having conversations with people. And then that helps build your network, build your understanding of markets. So really reach out, really network, really build conversations, and then be forward looking in how you're looking at markets, how you're thinking about the opportunity set.

And I think that probably makes you a better investor. then also helps drive your career forward in the best possible way. I think that's excellent advice. I think you want to find the most interesting people on the cutting edge and start to build this mosaic of information on new strategies or new assets or new approaches. And then secondly, I would say you want to learn to be internally validated because the first 10 years of an asset class, everybody's constantly asking you why you're doing it. But as long as first principles hold, so you always have to ask yourself, what part of my theory is, thesis is wrong, despite everybody criticizing me, do the physics or the math of the thesis hold. And if so, that's when you know you're onto something because it's something fundamentally sound

that's in the marketplace not socially acceptable or not seen as high status. And I think holding through that is also not an easy task and learning to build kind of that prepared mind to be truly contrarian versus, you know, contrarian in a way that everybody else is saying the same thing yeah and as you as you do that and you ingrain that into how you work how you operate then you build conviction in those ideas right so have you done the work do you have you had those conversations do you understand and then that helps you then have that conviction that you can stay invested with that theme or that you know opportunity set that's such a good point it's it's the same root of thing so if you see a social

criticism as a storm, is your tree trunk strong enough to withhold? Is your thesis strongly rude enough to withhold the criticism of other people's criticism, which you could call essentially a storm? Yeah. And like I say, a lot of it comes back to process and having those convictions. And are you doing the right? You have the underlying underpinnings, right, for those decisions and the things you're thinking. And it comes all back around to those earlier conversation. So, yeah. This has been an absolute masterclass on public equity investing, absolute returns, on value investing in the public markets. Thanks so much for jumping on and look forward to sitting down and continuing a conversation soon. Yeah, thanks, David. I really

appreciate it. And I've really enjoyed the other podcast hosts or guests you've had on. I've really learned a lot. It's a great podcast. And I really had a fun time talking with you. Thank you, Brian. Much appreciate it. Thanks for listening to my conversation. If you enjoyed this episode, please share with a friend. This helps us grow. Also provides the very best feedback when we review the episode's analytics. Thank you for your support.