The Exchanges

Q Do you have a favorite story about the ups and downs of getting there with a particular client?

A We have a family that's been a client for many years, approaching 30. I think we actually worked at Oppenheimer On the day they hired us, but that was maybe a month before we left Oppenheimer, so then they went all through Bear with us, and now they've been with us at ICG. And it's a healthy size family trust. They were talking about their long-term returns, and we're very focused on portfolio volatility. If you and I each have a million dollars, and we go invest it for the next 10 years or 15 years, and We both earn the same 10% per year average return, and you do it with 20% ball, and I do it with 10. But during that 10 or 15 years, neither one of us puts any more money in, and we never take any money out. We just leave it alone. When you get to the end of the measuring period, we'll have the same amount of money, because we both compounded at 10% a year. But, if we both earn 10% a year, and you do it with 20% vol, and I do it with 10, and there's cash flows, I'm pulling money out because I have to pay taxes, or I have to support the kids, or I'm adding money because I sold the business and I'm putting money in. If there's cash flows along the way, I'm going to have more dollars than you will if I compounded with half the vol. This client that I was referring to asked us about that recently, and the client basically wanted to understand the returns that they've gotten over ti…

AI assessment note: “We have a family that's been a client for many years, approaching 30.”

Q Have you thought about the whole alternative space? You hear more of the trajectory you've been on that more private equity, more of this is coming to This high net worth channel. I'd love to get your experience and what you've done and what you're seeing more broadly.

A Well, the interesting thing about it coming to that high net worth channel is how it gets there. If it gets there through aggregating vehicles, there are shops that are in the business of making private equity and other alternatives accessible to a universe of clients that are smaller than ours. A good chunk of the returns that our clients will get from that, they won't get. Because the shop that's putting it together is taking it in fees and expenses to do it, and then the fees they charge to do it. So, while it'll add some diversification to those clients' portfolios, I think they're probably going to be disappointed with the level of returns, but we'll see. But that aside, there's Plenty of opportunity in the alternative world to make money, and I think in an environment where the risk-free rate is no longer zero, It's not going to be as easy for the S&P 500 passive Vanguard fund. It probably won't do as well, relatively speaking, over the next five to 10 years as it did over the last five to 10 years relative to good active managers. We believe that. We'll see.

AI assessment note: “the interesting thing about it coming to that high net worth channel is how it gets there”

Q So if you look out six, nine months, whatever it is, with this manager, and they ended up being right, so you have this period of time with outsiders, then what?

A That's a very good question. I even said, guys, I think the long-term point is that my view is that we've been with this manager for a while. They're not delivering enough results over time to make sticking around worth it. On the other hand, their portfolio is particularly depressed now. Selling it now is foolish. They have a thesis behind it. If it plays out, I say we use that as an opportunity to move on. But obviously, if it doesn't play out, then it's an easier decision. And then if it does play out, it all works out. Exactly what they say is going to happen. We're going to look and say, oh, those guys are smart. They know what they're doing. That's great. Okay, but we already think that. That's why we're staying. But that doesn't mean we should stay for the next time. Full cycle of this. There's other places those dollars can go where I think we would say we believe we can get a better impact in the client portfolio. So I guess we'll see. This dilemma goes on with every investment committee at every firm that does what we do.

AI assessment note: “If it plays out, I say we use that as an opportunity to move on.”

Q Why don't you take me back to how you first got in the business?

A When I finished business school, which was 84, my economics professor kind of became my unofficial advisor, and I didn't know what I wanted to do. Which is actually why I went to business school. So now I'm finishing business school. I still don't know what I want to do. And I asked my econ professor, what do you think I should do? And he said, you should go to New York and work for one of the money center banks. They have these MBA training programs and do one of them. They're all comparable. They're all good. Because it'll give you some training, and you might get some ideas. So, I applied to, I don't remember how many, and had plenty of offers, and I purposely chose the program. It wasn't the highest paying one, although they were all within a few grand of each other. It was the shortest program. It was a four-month program. Okay, that's good enough. So I took it. Come to New York, August of 84. It's hot, it's humid, it's gross. The city was not great back then. It wasn't my cup of tea, but that's fine. Like, I had a buddy who did the same thing. He was at UCLA. I went to SC. He was a fraternity brother. He came to New York. He went to a different money center bank. But his job when he finished training was in LA. My job when I finished training was in New York. I just like, I cannot now start a job here. And I don't like New York. I don't like big money center banks and bei…

AI assessment note: “When I finished business school, which was 84, my economics professor kind of became my unofficial advisor”

Q How have you tackled the investment challenge for your clients?

A We want to protect our clients. So we spend a lot of time with our clients Understanding what it is they want and making sure that they understand that what they are saying they want, they really know what that means. Because the worst thing for clients is they get a portfolio that they're not comfortable with because it's too volatile, the strategies are too complex, and they don't understand them. Some of our clients don't understand the strategies they're in, but they don't care. But if they care, they need to understand it. And if they can't understand it, they're uncomfortable. And when you get uncomfortable, you start making decisions based on emotion, rather than based on finance and economics. We're trying to make sure that when we build a portfolio for our clients, that it's really inside a framework that makes sense for them, both in terms of their own comfort level, but also That will deliver for them the returns that either they want, Cause they just have a goal or that they need. It's an endowment and they're giving away five percent a year. If you're giving away five percent a year and you want to have a perpetual endowment, you can't just earn five percent a year. Cause first of all, you're not going to earn five percent every single year. You're going to have some years where you're up and some down and you're going to average five. And if you average just five …

AI assessment note: “We spend a lot of time with our clients Understanding what it is they want”

Q firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at Ridgeline.ai. And now, back to the show. I'd love to take that into how you've gone about investing on behalf of your clients. What are your thoughts on some of the other asset classes you've participated in?

A Well, we haven't had long only investment grade fixed income in client portfolios for probably more than the last 10 years, maybe the last 10 or 15 years, and if we had it, it was really short duration, almost extended duration cash type stuff, but no traditional investment grade bond portfolios, or when I say no, I don't mean zero. Very, very little. But I didn't understand, why do you buy bonds? You want liquidity. Bonds give you liquidity. You want return. They weren't giving you return. And you want safety. They're not actually safe when they yield two percent. They run the risk of price compression when rates rise. And of course, the investment highway is littered with people who think they know what interest rates are going to do, and you don't know. What you do know is if I own a bond portfolio with duration, And it's got a two percent average yield. I know when rates rise, that portfolio is going to go down. And people don't invest in bonds for that. Somebody who invests in the stock market, they don't like it when their portfolio is down 20%, but they know it can be. And that's the price of admission. Nobody invests in the bond market thinking they can be down 20%. They just don't do that. We're just now starting to really consider beginning to add some of that asset class back into portfolios and are pretty close to done with the work we're doing to identify the manag…

AI assessment note: “we haven't had long only investment grade fixed income in client portfolios”

Q How do you think about being a good partner to your managers?

A Being really straight with them. If we're expecting to add a big piece of capital or redeem something, we want to give them as much notice as we can. Now, sometimes you don't need to because what they do is so liquid and they're big and it doesn't matter, but it's still being a good partner. Managers appreciate information flow. So if we know that we are going to take a whole bunch of money away from some manager, the sooner we can tee that up for them, or add, by the way, We have a biotech manager who we just gave them a healthy chunk. We called them in advance and said, hey, we want to do this. We want to give you the heads up and make sure that that's all good. Not because they're closed or not closed, but they might have something to say about that. That's great. Or you know what? This is the wrong time. Hold off. And we want to work with them. We're pretty demanding about information flow, so while we want to be good partners and give them all that information, we want them to give us the information we're asking for, and we're not great with managers who have proprietary this, and secret sauce that, and we don't share this, and that's like enough already.

AI assessment note: “Being really straight with them. If we're expecting to add a big piece of capital”

Q Have you thought strategically about the business in a world where there feels like there's more consolidation coming?

A Oh, there definitely is. We get calls all the time from shops. We actually entertained one of them. This guy called us, wanted to talk about combining And we have this view that there probably are some consolidations, some combinations with other firms that really are synergistic, that actually us added on to some other firm that one-on-one is more than two, and that our clients would benefit from it, the research process would improve, efficiencies would be realized. And if we ever find that, and we are simpatico in the way we view the world, and the way we think about clients, and taking care of them, and allocating capital, and that whole thing, And it was symbiotic, we would entertain it. But, what we've generally found is, this is gonna sound arrogant, and it's not meant to be, but I don't know how else to say it. Most of the times we've taken a look at that, what we've concluded is, it's synergistic for them, but it's not adding anything for us. We have this research process, they don't, so now they'll get our research process. And, They have one portfolio reporting system, and we have another one. Ok, whatever. We could get that portfolio reporting system if we actually thought it was better. We haven't found synergy. But the calls we get, the emails we get, cold and warm, eventually that'll slow down. There's definitely a thing going on today where there's a lot of dema…

AI assessment note: “what we've concluded is, it's synergistic for them, but it's not adding anything for us”

Q So what are the types of answers that resonate for you and your team that give you the confidence to stay put?

A When managers are going through a rough spell, we literally just did this last week with a manager we've had for a while who's going through a tough spell. And they're great. And they run liquid funds and private illiquid funds. And we invest in both. And the private illiquid funds have been really good. The liquid funds, the head fund structure, they've been ok, but it's not worth it. And I called the main guy and said, we're really thinking of leaving this, not that. We can't leave that anyhow. But that's good, so we don't want to leave. And we don't want to sell it in the secondary market we're happy with. But the hedge fund is like, there's better places for us to put the dollars when you factor in everything. We're thinking we're going to leave. And I just want to hear your thoughts. And his response was, we should show you what's in the book and explain our investment thesis on what we own. You should understand why we own these names and what we think the timing is. It's very painful to be with a manager whose performance is not great. I'm not talking about bad, just not great. And then you leave, and three months later, boom. Capitulation's a bad word in the investment business. So he said, we should explain this. I said, absolutely. We want to hear from you. So we did the Zoom meeting last week, and they took us through everything, and we finished, and we said, he's ma…

AI assessment note: “They have real, logical, direct reasons for the companies in their portfolio”

Q What's the normal cadence of your communication with managers?

A Anywhere from monthly to quarterly, depending on a whole host of variables. How much money we have with them, how easily we can track what they're doing. If it's a large cap value equity manager managing separate accounts, and we can see exactly what's going on, we probably don't need to talk to them every month unless we just have questions, because we can see everything. And if it's a biotechnology hedge fund, and you can't see it, and the markets are crazy, we might be talking to them more often. The written communication is quarterly. We send out a quarterly questionnaire that managers need to complete, make sure they're on board. There was a manager that we interviewed last week, and they're very direct and said, you'll almost never get to talk to the portfolio manager. But if we get down the road, and we're serious, and we think we want to invest, are we gonna get to talk to them? Are we gonna get to come up and meet them ever? Or are you saying, we're never gonna see this guy, and it's just like, he's the Wizard of Oz, and he's behind the curtain. That's not happening. I don't care how good the track record is, and I don't care how many smart investors invest with them. That doesn't fly. But people do it. I think some managers think That doing that somehow almost makes you want to invest with them more like it's like you're special.

AI assessment note: “Anywhere from monthly to quarterly, depending on a whole host of variables.”

Q Where have you found those sources of advantage over time?

A They tend to be smaller than larger. They're not managing Hundreds of billions of dollars generally. So we spend way more of our time looking at smaller firms than we do at larger firms. Then, of course, small and large is all relative to the asset class in which they're investing. If you're a small cap equity manager, a large small cap equity manager might be a couple billion dollars, but that's a small large cap equity manager. It's adjusted for the marketplace in which they participate And what it is they're doing in the inefficiency of the market in which they're participating, but generally they tend to be smaller. They tend to be independent. They always have real identifiable risk control processes in place. At some point along the spectrum of doing the investment diligence, there's enough interest where we think there's really something there, and We start beginning the process of doing some of the operational diligence, and operational diligence can kill investment diligence. They can say there are these problems that they have to get fixed, or they won't fix these problems, and so that's the end of that.

AI assessment note: “They tend to be smaller than larger. They're not managing Hundreds of billions”

Q When you look at those two categories, if you think about the hedge funds that you like investing in, what are the ones that you gravitate towards?

A Well, there aren't a lot of them. There's managers that we think can deliver alpha. We're more on top of managers where the bar is higher, and the bar is higher when the fees are higher. They've really got to Prove that it's worth paying a management fee and carry, because I could just hire a long early equity manager and pay whatever it is, 30 to a hundred beeps, depending on who the manager is and what they do. There's a constant process, not like we're short-sighted, not like we make decisions based on one bad quarter, but when managers have a bad quarter, we want To understand why, but what we really want to understand is that they understand why, that they understand what went wrong, what they missed or didn't miss, or what they did or didn't do, because if they don't know, that's a problem.

AI assessment note: “There's managers that we think can deliver alpha. We're more on top of managers”