The Exchanges

Q So you end up at Goldman Sachs, and what was that early experience? That's your first corporate experience, first Wall Street experience?

A It was terrific. I feel very, I mean, I keep acting like, you know, that was great. It's true. I feel like I've been relentlessly pursued by good fortune. I was at Goldman, and, and Goldman's a wonderful firm, but I personally think, and I know they're more profitable today and so forth, but that that was a golden era for Goldman Sachs. It was run by John Weinberg and John Whitehead, but other leaders like Bill Gruber and Roy Zuckerberg and Richard Menchel and so forth. And, and Whitehead and Weinberg were greatest generation World War II veterans. John Weinberg was a Marine. So it was just had a tone of professionalism and client centricity. And remember, Goldman was very much an investment bank. So it was relationship driven. As opposed to later on, and like I say, it's still a wonderful firm, but when the Jay Aaron people took over, it became more trading focused. And so when I was there, it was still very much relationship driven. So that was the fundamental culture. John Weinberg used to say a couple of things he said that stuck with you. One was that there are three things you have in business, people, capital, and reputation. And of the three, the hardest to replace or once damaged is reputation. He also used to say that some people grow and others just swell. So those are words to live by, you know. So he set the tone culturally. Tremendous professionalism and rigor on …

AI assessment note: “It was terrific. I feel very, I mean, I keep acting like”

Q As a firm, you serve as the outsource CIO for all of these clients, and there's a lot of clients. So how do you break up the responsibilities of who is that outsource CIO for each client?

A If you think about what an internal CIO does, they have to understand the school, understand their operating financial risk, and they have to understand the committee. There's a difference between ability to take risk and a willingness to take risk. And a lot of that is education. So that's one part. That's a big part of what they do. Managing meetings, managing expectations, meeting with new committee members to bring them on board. Then there's the investment part, right, which is meeting with managers, thinking about allocation, risk management, quantitative analysis, all that stuff. We, in a sense, separate those two. So the investment part is done by our strategy group. And the application is done by our portfolio management group. So every client has an investment officer and a portfolio manager, and the two of them are managing that client relationship. One is a little bit more human orientation, and the other is a little more technical. And so the portfolio manager's job, and they sit right next to the strategy group, is to take those best ideas from strategy and apply them to this particular client. So what happens is, if we're overweight emerging markets, which we happen to be today, Every client we have is overweight emerging markets. One, that might mean 15 above 10, five points over 10. Another might mean five over two. I mean, it just depends on the client. But we…

AI assessment note: “every client has an investment officer and a portfolio manager, and the two of them”

Q Just on that, where do you come out?

A Well, today, we're still Focused on factors. We think there are some sustainable factors that add value, like valuation and momentum and quality. Size is a little more questionable, in our opinion, but we're still looking at factors all the time. We're always saying, is it working? Isn't it working? And the jury's out a little bit. We've been doing this for about 20 years. And that's a long story, too, how we got to that. We were really trying to measure long-only managers more effectively. So we started to create a custom benchmark for every long-only manager. That really was made up of the first five screens they did before they picked a stock, which we thought defined a subset or a, you know, a micro beta. And once we started measuring them against that, we said, you know what, their alpha is much less. So it's much less downside, much less upside. So if I'm measuring a great high quality or a earnings momentum growth manager against the Russell 1000 growth, I get a lot of variability there. And if you say to that guy, tell me how you pick stocks. And he says, the first thing he says is, well, I picked the top half by ROE, return on equity. Well, he just excluded 50% of the benchmark. So is he really being, picking in that benchmark? So it's that kind of a notion. We did that because we wanted to be able to give the manager more money when he was at the bottom of his cycle. …

AI assessment note: “today, we're still Focused on factors. We think there are some sustainable factors”

Q So let's walk through some of those tilts. You mentioned emerging markets overweight. What is it that drives you to overweight emerging markets today?

A Yeah, it's a couple of things. One is that it's such a small portion of world market cap, and it's getting bigger. So our notion is it might be, who knows, it might be a third of world market cap in 10 years. If that's true, we don't want to be too cute. You know, we want to just be there in, in something that's meaningful. And if you look at emerging markets as about 10% of world market cap, and then this is a portion of that, a third to a half, you're really not getting a lot of China exposure when you just have an at-weight emerging markets portfolio. So that's one thing. And the second thing is simply the earnings yield. From a valuation standpoint, it's more attractive. So that's really it.

AI assessment note: “One is that it's such a small portion... second thing is simply the earnings yield.”

Q What were the most critical lessons you took out of that experience?

A First of all, it's this notion of reinforcing the notion of idealism and high personal standards, and that there's almost nothing you can't accomplish. This is a key to being a Marine, and I'm sure not just a Marine, but any high-performing organization. When you're in training, every day they would give you a task that you thought you couldn't achieve, but they knew you could if you pushed yourself, and then when you achieve that, That was the point, right? They were raising the bar to a level that you thought you could not achieve, but they knew you could. So you achieve it, and then you achieve the next one, and then you achieve the next one, and at some point you start thinking you can do anything, and then that's when you become a Marine. That there really isn't any obstacle you can't overcome. Most people under push themselves. So whether it's academically or physically, you can do a lot more than most people realize they can do, and the Marines are not interested in potential. But it's got to turn into kinetic pretty fast. Potential that stays potential, they're very blunt about it. It's not really any use to them. So I think that notion of action and results and high personal standards and idealism and teamwork. And I think teamwork is something you don't see as much in society today, more and more focus on the individual. But individuals don't put a man on the moon. So…

AI assessment note: “First of all, it's this notion of reinforcing the notion of idealism and high personal standards”

Q So fast forward to today then, that's obviously evolved over the last, whatever, 30 years. What are the key components of your philosophy, what you believe about investing today?

A We start with the notion that the law of active management, skill equals success times the breadth of your opportunity set. And I think this is underappreciated. In that simple algebraic equation, Success equals skill times breadth. So breadth is just as important as skill, as long as your skill isn't zero, right? So while everyone out there is trying to get more skillful, including us, if we can maximize breadth, which we should be able to because we sell no products and we have lots of purchasing power, that's an edge. Now, that doesn't mean we invest in everything, as you know, but we want to look at everything. So maximizing breadth. So we really start with the notion that most people need to have equities in the portfolio. Because it's the only way to provide enough return to offset their spending requirements and inflation and taxes for families. So you start out with sort of the all country world index, a max, the widest, broadest index you can. And then you say, well, how do I improve it? Well, the first thing you do is you put something in there that dampens volatility. So you get a higher point. And this is very basic, but I like to think of it in terms of a building block. Because this is one of the other key things is most clients don't really understand how real investing works. They understand maybe how buying a stock works or a company works, but putting together…

AI assessment note: “We start with the notion that the law of active management”

Q No, not that much. Not that much anymore. So how long did you stay at Goldman, and what was the impetus for starting Hurdle Callahan?

A I was there six years, 82 to 88. And while I was there, I just As I said, I had a great education. I was close to the head of research, who was the name of Bill Keeley. Lee Cooperman was the strategist, but Bill ran the department, and I was close to him. And I was curious about real money management, because in those days, it was a simpler world, stocks, bonds, and cash U.S., I was a broker. We had, people talked about a lot of the divisions later, like PCS and GSAM, and there were basically bankers, traders, and security salesmen, you know, brokers, and I was a securities sales guy. So the good news is I was a generalist. I mean, really, I, I was in option strategies. We sold fundamental stock research, municipal bonds. I mean, it was all over the place. So the training was really spectacular. But what happened was, while we were there, I was able to cover lots of different accounts, including one particular internal investment office at a family, and the family was the R.K. Mellon family, the R.K. Mellon branch of the Mellon Bank family, and I believe in those days it was the foundation and the family, and the chief investment officer was a guy named Arthur Miltonberger, and I covered him as a broker, and what was interesting was that they were consistently outperforming us, so Arthur Who was based in leafy Ligonier, Pennsylvania, which is really a bucolic setting, was outpe…

AI assessment note: “I was there six years, 82 to 88.”

Q Are there others that you still hold today from that experience?

A First of all, very lucky and fortunate and grateful about being an American, and the notion that citizenship is a responsibility that we all have, and what does it mean in the 21st century to be a citizen in a society that is as diverse as ours is? And so when you Become a Marine, you take an oath to support and defend the Constitution against all enemies foreign and domestic, and so forth. And when you leave active duty, you don't untake the oath. So that notion of compelling citizenship, and what can we do? I just read a great biography of Lincoln called Founder's Son. And he felt very compelled to move the experiment of democracy forward. And I think more of us need to think about that, that this is still an experiment. And we have an obligation to our country to move it forward.

AI assessment note: “when you leave active duty, you don't untake the oath.”

Q Other than independence matters, and if you can do better in leafy bucolic Pennsylvania than you can on Wall Street, maybe that's a good thing for the client. How did you think about kind of the core investment problem?

A Well, structurally, when I think about any performance-oriented Organization. I like to think about structure. Culture is part of that, but structure, culture, then philosophy, and then execution. So if I think about a sports team, I think about how are the New England Patriots structured? How does their draft work? How does their comp system work? How's everything? Then what is their philosophy? What is their philosophy of offense? What's their philosophy of defense? What's their philosophy on special teams? Then there's execution, right? So you've still got to catch the ball. You've still got to look off your receivers. You've still got to do that thing. And what I think a lot of people, they conflate those. And of course the fourth thing is luck, you know, random outcomes. And what we want to be able to do is look back and say, how do we optimize our decision making? How do we set up a system that allows us to make better and better decisions with high probabilities of success? So when I looked at Arthur Milton Berger's model, it was a structural thing first that I said, wait a second, this guy can cherry pick best in class managers from around the world, and he's got three and a half billion dollars of purchasing power, which is a lot of money today, but it was even more money in 1984 whenever we looked at this for the first time. And so we said, how can we emulate the stru…

AI assessment note: “How do we set up a system that allows us to make better and better decisions”

Q On the public equity side, so we start with the index, you get to factors, A little enhancement to 13 Fs, active manager cheaply. What's the vision going forward for public equities?

A Well, I do think that the combination of enhanced indexing, 13 F, and concentrated long only are all alpha strategies. Where we have differed over the years is we spend more time On manager skill and a little less time on dynamically shifting allocations. So the evidence is that in our opinion is that unless they're very strong signals, this tactical asset allocation stuff is very hard to add value on. So we do not want to abandon it because it's critical for risk management. And there are times when you have a strong signal. So we're watching it all the time, but our day to day experience is that that is more stable and we're spending much more time finding skill.

AI assessment note: “we spend more time On manager skill and a little less time on dynamically shifting allocations”

Q Alright, so if we're sitting down here two or three years from now, and now you've had two or three more years of innovation on your process, what are the things that you're focused on with your team now to continue to grow and improve what you're doing for your clients?

A Well, a lot of it is more of the same. And so better access, how do we have better waiting systems within the broad market exposure that are more effective? How do we educate our clients? This is the one I always want to emphasize. It's not just about investing. It's about getting the clients to understand what real investing looks like and getting these best practices into their portfolio. For example, a client will say, look, I've got a five percent required spending policy and so on and so forth, but I'm conservative. How do I get a higher expected return? We say, well, let's think about capturing some illiquidity premium. Well, that's frightening to people. But there's only so many moving parts that you can have, and so a lot of it is getting it into the client's system. And I believe that we are going to continue. Ranji Nagaswamy, who's our CEO, and I spent a lot of time on what we call governance alpha. You know, so governance alpha is, everybody's had lots of decades of concentrating on why the small cap manager ought to beat the benchmark by 50 basis points. And yet, a lot of times, the governance decisions that are coming out of the committees are destroying massive amounts of, of value, and no one's ever held accountable for that. So we really want to talk about best practice on governance. This is a hot topic for me because, in a way, the CIO function changes the fid…

AI assessment note: “better access, how do we have better waiting systems... How do we educate our clients?”

Q We'll dive back into that dynamic allocation. So shift over to philosophy. What are the core tenets of what you believed about investing?

A Well, it's evolved over the years. It's hard for me to reflect every point of it other than we believed in specialist managers. We believed in patients. We believe cost mattered. So we didn't want to overpay. That's an ongoing lesson. We see that all the time and talk about that more. But, and we wanted to have custom solutions. That was the other thing is that every client you had to solve for that client's needs. And I think it's true in any case. We use medicine as a metaphor a lot, because as long as someone's healthy, the money's very important. Once you get sick, the money becomes less important. But while you're healthy, it's really important. It's that significant. It's that serious. So when I look at wellness, wellness is different for every person. And so that was another key notion. Custom programs, open architecture, Wholesale access. Just put it all together as a program. It's sort of like, once again, using that sports metaphor. It takes a lot of parts to make the program successful.

AI assessment note: “we believed in specialist managers. We believed in patients. We believe cost mattered.”

Q And are there any particular favorite either tools or analytical metrics that you use with the team that kind of gives you that little sense on the quantitative side that, you know, this is a manager we want to dive into?

A The manager we dive into question is easier for me to answer than the actual tools. That's a podcast you need to have Matt Mead on because of the tools he's actually using. But it is that, first of all, you know this very well, that it's that there's a network of leading managers and thinkers, and if one of those managers who you've have a great regard for because they've earned it over the years says, this is a manager you should look at, and the returns Reinforce that, that the pattern of returns are unusual and seem to be very interesting. That's worth diving into. Now, the tools that we're actually going to use to cut it more finely are Matt's area of expertise.

AI assessment note: “The manager we dive into question is easier for me to answer than the actual tools.”

Q How do you think about venture capital when you have both a large pool and a pool that could be growing over time?

A Well, we look at various managers, all of whom we're always trying to get, as you know, private equity, including venture, is a lot of elbow grease on understanding what they're doing, but it's also a lot of access. You got to really work on your access, and we're doing due diligence While we're getting access, so that when this hard to get access to fund says, we've got an opening, we're ready to go. We don't want to say, well, we'd love to join you, but now we have to do our due diligence. So we're really doing a lot of due diligence prior to that while we're working to get in. So when we think of venture, we have small firms and we have larger firms that we invest in. So, and so far, capacity has not been an issue.

AI assessment note: “we have small firms and we have larger firms... capacity has not been an issue”