The Exchanges

Q When you're building out that inventory or putting a manager in the warehouse, what does the research process look like for an individual manager?

A Yeah, so it's a balance. It's both the quantitative and the qualitative, and I'd probably say we're a blend. There are certainly, this is where it gets to nuances of differences in consultants. Some are very, very quantitative, and we're quantitative too, but we would tell you that That explains how they did in the past. It may or may not explain how they do in the future, right? It's all backwards looking. And teams change and people change. So we do that. We have a director of quantitative research that works with all of our individual, again, breaking it up a little bit. So let's take hedge funds. We'll stay on the hedge fund area. We might look at a manager and break out. Let's say it's a long, short equity manager. We'll get their returns, both long and short. We would get their exposures. And we'll try to break it out and say, what was their long alpha, their short alpha? What is just leverage? What is their returns by market timing? So changing their exposures around. You look at different periods of time. This is probably the most helpful. Say, like, how did you do in 2008? Or how did you do in March of 20? Take that, take an investment letter, start talking through it. We have an open door policy, so we'll take meetings with anybody, and so we have all this information out there, and we start to build peer universes, so we'll look at them versus peers. You know, at som…

AI assessment note: “It's both the quantitative and the qualitative, and I'd probably say we're a blend.”

Q It feels like the subtle things in culture, a lot of it come out of meeting with a group of people at the same time and face-to-face meetings. And I'm kind of curious over the last couple of years through COVID, not so much like obviously you had to adapt, but what do you think this looks like going forward on these types of assessments?

A Yeah, you're right. I mean, it was really hard at the beginning of COVID, and so first few months, I think we all thought, well, you know, they'll, we locked out for a couple months, and then we'll be back on the road, and then we had a variant, and another variant, and it kept going, and going, and going, so you have to adapt, and we tried to adapt the best we could, so we really embraced it That's still the hardest one to pick up on. You can augment that a little bit through the number of reference checks that you do. So maybe instead of doing five, you do 15, you do a little bit more. And then we've started to get a little bit smarter, and we're still doing this. Do calls individually. It's really difficult to do a group Zoom or Teams call in terms of due diligence because you might have people talking over each other. You can't pick up on individual Brady Bunch boxes that when the senior PM talks, the number two rolls his eyes. It's not even worthwhile trying to pick that up. So do it individually, and then when you get on site, try to do a couple more of these group meetings where you can Pick up some of the dynamics. We've also done a little bit of training on just trying to read body language. So what are little tips and cues that you do, which is frightening because you learn these things. And then when your wife's talking to you and you're like, wait a minute, I'm pick…

AI assessment note: “when you get on site, try to do a couple more of these group meetings”

Q Which two people have had the biggest impact on your professional life?

A So there's a lot of people. There's always been a person that showed up in my life that has taken me to the next level, and I don't want to miss any of them, so I'll just acknowledge all of them, but I'll give you two fun ones. So I'd say two people that have the biggest impact on my professional life Oliver Stone for his 1987 release of Wall Street, which I snuck into, and I saw it, I'm like, this is what I want to do, and then Peter Lynch for two reasons. One, I read his book, went up on Wall Street, loved it, probably the first investment book that I read, and my college fund was in the Magellan Funds, so Peter Lynch was obviously the PM, famous PM for Magellan Funds.

AI assessment note: “I'd say two people that have the biggest impact... Oliver Stone... Peter Lynch”

Q What is it about FEG that has allowed you to stay independent and compete?

A I think we were on that same path for a while. I call it maybe six, seven years ago, we started looking at our partnership and it's a layered cake. Right. Yeah. Different partners, but you have certain layers that are a little thicker and we were going to have a pretty good size vintage year that would be retiring at the same point in time. So we came to this crossroads and we're like, what are we going to do? And I remember every partner's meeting and every partner's offsite for like three or four years. We're like, well, what do you want to do? Cause we wanted to remain independent. We didn't want to be forced to sell. And so we came up with a ESOP structure. So we're an ESOP. There's a handful of other ESOPs in financial services. It's a little unusual, but what it allowed us to do is make sure everybody's an owner. So everybody at FEG is an owner of FEG, and that's helped. And so we're five years into that, and that's allowed us to be independent.

AI assessment note: “we came up with a ESOP structure... and that's allowed us to be independent.”

Q What are the types of questions you ask to take those generalities and calibrate them in numbers?

A One question would just be, how much of a loss are you willing to take? Because everybody says they're long-term until there's losses, and then you're like, whoa, we're down 10% in a quarter. Like, well, you told us your risk tolerance was higher. So a little bit of that, you try to get a sense for patience. We also try to get a sense for The continuity of the committee. Is the investment committee all on the same page? Because if it's not, that's tough too. So if half the committee says, hey, we really want to take advantage of time arbitrage, and we'll be concentrated in some contrarian areas, we're a long-term investor, we're going to ride out the storm. Then you have a few of the other investment committees who may be vocal and said, that's not what I'm looking for. I've got two years left in my term, and I don't want to go out like this. So the magnitude, the continuity are two big areas that we'll focus on.

AI assessment note: “One question would just be, how much of a loss are you willing to take?”

Q So a lot of times at firms where you have different teams of analysts from a manager's perspective, they never quite know, like, who the team is. Sometimes there's the consultant in the field, and then there's the research team, and how does that work at FEG?

A So I hear that all the time, and some of the firms seem a little Byzantine in how you approach that. We try to be pretty research-centric. And the nice thing about FEG, so I've been here for 18 years. Many of the sector heads that I manage have been here longer than I have. So it doesn't change that often. So you know who the fixed income guy is or the real assets person is. And so it's really easy to do, but we all try to funnel it through. I mean, yeah, sometimes a consultant may get involved, but we are different. We're not so big because a lot of these bigger firms have created Different offices with liaisons between consultants and research. And, you know, we just haven't had to do that yet. Hopefully we never have to do that. And so it's all pretty much driven here. So find out who the sector head is and call them or email them.

AI assessment note: “find out who the sector head is and call them or email them.”

Q I'd love to hear your perspective on the consulting business over that time, and particularly as kind of a mid-market consultant. What's evolved over those 18 years?

A Well, there's not a lot of us left. The history of consulting, there were a few firms that were started in the seventies, but a lot of them were started in the eighties. We were started in, in 88. And they were usually started by a few individuals, probably in their, at the time, late thirties, early forties, had some experience, and it all came out of this period where a lot of institutions were managed alongside of retail and high net worth, and usually by a regional broker or a bank trust department, and so there wasn't this embrace of Passive indexes. So Vanguard just came along in the seventies, and even though it existed, it wasn't really adapted. Alternatives. And institutions are very different than individuals, right? You don't have taxes. You have infinite timeline. You may have better resources. So to be treated in the same way where you're high dividend paying stocks versus a total return approach, it didn't take much for a handful of people all over the country within a 10, 15 year period to To leave startup consulting practices, whether they're focused on pensions, or they're focused on ENFs or region, and so all of the business really started at that point in time. Now, fast forward to the last decade or so, these people that started in their thirties and forties, you know, they're 60 and 70 years old, and they need a liquidity event, and even if they've passed d…

AI assessment note: “there's not a lot of us left... you've seen a lot of consolidation.”

Q What are the strengths and weaknesses of being smaller than some of the bigger players?

A There are strengths and weaknesses, and it's about fit. So most of our clients are not-for-profits, and we don't do any big public pensions, sovereign wealth. So if you're a two hundred million dollar community foundation, And you're dealing with one of our competitors who may also do pensions. I mean, they're 10, 15 trillion dollars. You've interviewed some of these people. They're great. They absolutely do wonderful work, but that's probably not a great fit for a lot of them, because what is their advantage? Their advantage is their size. They can invest in smaller managers, emerging managers. That's harder to do with a giant consulting firm, but what do those giant consulting firms have? Well, they have Probably services that we don't, especially on the pension side, they're going to have in-house actuaries. They're going to use their size to push down some of the fees. That's the one big lever they have. We'll use that lever too. We'll ask for most favored nation, but certainly they have an advantage when they have all that money versus us. We're going to try to find those smaller managers and paraphrase Warren Buffett. I always love some of his quotes. He was talking about the growth of Berkshire Hathaway, and when he was talking about Berkshire Hathaway in the beginning, he said, all we needed to do was find a few good investments. And then now it's about finding a few go…

AI assessment note: “They can invest in smaller managers, emerging managers. That's harder to do with a giant”

Q We both spent a lot of time in the hedge fund world. It's been a lot tougher place to be the last couple of years. How are you thinking about it and approaching it?

A Yeah, certainly has been. Luckily, I think we were in the hedge fund area in the golden days, the halcyon days, and there were great parties and great swag. It was a lot of fun. Like in this private equity bubble that we're living in, they're just not as fun. Not as fun. Yeah, so they had a great run. They've had a really poor, poor run. I think we're generally pretty optimistic on hedge funds, especially like a multi-strategy type of manager, because they tend to do better when rates rise. Because for a long time, When you shorted, you might've had to actually pay or you weren't earning anything. So now you're actually getting something on your rebate. You're also seeing volatility and dispersion, which is good. You need dispersion, not just lockstep volatility. Everything's moving up and down. That's hard. Maybe a macro manager gets it, but most people are trying to take advantage, whether it's between two stocks or two bonds of some divergence. And there's a lot more Divergence. So what does that all mean? I think a good multi-strat manager can earn six or seven percent, and that's nowhere near what it returned in the nineties, early 2000, but that might be pretty good this year. No one wanted that when the S and P was up 28%, but now when you have equity markets and fixed income markets down, Pretty good. So we've even said for some investors, maybe you think about having s…

AI assessment note: “I think we're generally pretty optimistic on hedge funds, especially like a multi-strategy”

Q How have you thought about fees with the lens of things like co-investments and other activities that a lot of allocators are thinking about? How do you get at more of that return underneath?

A We've been doing co-invest for a handful of years now. We have a checklist approach that we look at it. Are they recommended? Have they done it before? Is it in their wheelhouse? Does it make sense? If it's on the private energy side, and it's in the four corners, and it's unconventional, we have no geologists on staff. And even if we did, we probably couldn't fly them out, have them do the work, and make an investment decision. You're betting on the manager that you've known for a really long time, And you're making sure that you're aligned with them. And then you're like, if you do enough of these, they work out. So we do research and work on it, but I think you have to be very careful on the co-invest because you're hiring, you're paying them to bring you the ideas. You're doing a sanity check on it. But part of that checklist is the fee structure. So you want to look at that. I mean, ideally the best thing is no fees, no management fee, no carry. But that's changing, right? So everybody did that, and now you're seeing, well, how about at least a little carry? So carry can be okay if there's enough of a pref there. We pass most times when there's a management fee and a carry, because then it's just a fund of one idea, and that's not great.

AI assessment note: “part of that checklist is the fee structure. So you want to look at that.”

Q What's evolved and what do you continue to evolve as you look out the next couple of years in your investment process?

A We've got to train everybody on private capital. As you said, the crossover funds. We do try to have this devil's advocate process, and the amount of private capital funds re-ups is just off the charts. And we're seeing private strategies in every asset class. It's one of the things that we have to do is do a better job of cross training and so that people can kind of step in and help out. And it also makes the analysts better because we don't have a hedge fund group. We call it diversifying strategies. That's mostly hedge funds, but there are some strategies that are uncorrelated that are private and that fall into that category. Can the hedge fund guys figure out how to do an IRR? We have to Teach them these things. And that's an evolution is the world's going private. And so you need to make sure that your team can handle that.

AI assessment note: “We've got to train everybody on private capital. As you said, the crossover funds.”

Q So let's get into brass tacks a little bit on the ingredients. Broadly talk about manager selection. Like what are your biases? Maybe go across asset classes.

A This is where I spend a lot of my time. I'll start general and then we'll get a little specific because specifics more fun. What we do, or I do in my department, it's a little bit like a factory and a warehouse. So we're always looking to figure out what our clients' needs are. So we try to do some, some work at the beginning of the year, really kind of late the previous year to see what we'll How much private capital do they need? Are they looking to add small caps? So you try to get an idea of what we have, and then you look at your current inventory list, and you're like, ah, boy, a couple of these I know are closing really soon. We probably need to have more inventory here. I feel like sometimes you run a grocery store, and I need to have enough toothpaste, but I can't have an aisle of toothpaste. So you're going to have commingled vehicles that some people are going to want. Some people want a separately managed account. Some are going to want to have it in the ETF. Some are going to want, within a category, a little higher octane. Some are going to be a little more conservative in that same category. So you try to find, just like toothpaste, you might have like This is more whitening. This is for sensitive gums. And so you try to have enough, but you can't have too much because you have a whole store. So you can't just focus on small cap. What about large cap? What about …

AI assessment note: “So you can't just focus on small cap. What about large cap?”