[REPLAY] - Brett Barth – Asset Allocation for Families (Capital Allocators, EP.03)

Brett Barth is a founder and the CIO of BBR Partners. BBR manages north of $12.5B on behalf of 125 families in its multi-family office. In this episode, we start talking about raising twins, a family issue close to both of our hearts. From there we learn about how Brett came to form BBR. We spend a lot of time going into depth on his firm's asset allocation process and on the decision-making process of manager selection. Along the way we touch on inefficiencies in Asia in the early days and in music royalties today. Brett offers nuggets of practical substance for allocators of all types – from financial advisors to large institutional managers. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com https://thepodcastconsultant.com/)

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Ted Seides?

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• 0:46Ted Seides?

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• 1:24Ted Seides?

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• 2:09Ted Seides?

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• 2:43Ted Seides?

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• 3:32Ted Seides?

  Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can keep up to date by visiting www.capitalallocatorspodcast.com.

• 3:59Speaker 02

  Ted Seides is the Managing Director of Hidden Book Investments LLC. All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Hidden Book Investments. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Hidden Book Investments may maintain positions in securities or managers discussed on this podcast.

• 4:23Ted Seides?

  My guest today is Brett Barth, a founder, managing partner, and Director of Investment Research of BBR Partners. BBR manages north of $12.5 billion on behalf of 125 families in its multifamily office. In this episode, we start talking about raising twins, a family issue near and dear to both of our hearts. From there, we learn about how Brett came to form BBR. We spend a lot of time going into depth on his firm's asset allocation process and on the decision-making process of manager selection. Along the way, we touch on inefficiencies in Asia in the early days and in music royalties today.

• 5:08Ted Seides?

  Brett offers nuggets of practical substance for allocators of all types, from financial advisors to large institutional managers. I hope you enjoy the show. If you do, please subscribe to the podcast and maybe even write a review on iTunes. You'll help others discover it, and I thank you for that. Please welcome my friend Brett Barth.

• 5:33Ted Seides?

  Brett, welcome to the show.

• 5:34Speaker 03

  Thanks. Thanks for having me, Ted.

• 5:36Ted Seides?

  I'm always curious. None of us in our crib sat around saying, "I can't wait until I can be a capital allocator of other people's money." How'd you first get interested in all this work?

• 5:47Speaker 03

  Good question. I actually have to give credit to my fellow managing partner, Evan Roth, for having the lightbulb. It was completely his idea. I just thought it was a great idea and wanted to be part of it from the very beginning.

• 5:59Ted Seides?

  So let's circle back. Evan and you were at Goldman together.

• 6:02Speaker 03

  We were. We actually were even fraternity brothers in college before that.

• 6:04Ted Seides?

  Okay, we're going back. Remind me where you grew up?

• 6:08Speaker 03

  I grew up in Northern Virginia.

• 6:09Ted Seides?

  And siblings?

• 6:11Speaker 03

  I have a twin sister.

• 6:13Ted Seides?

  And where does she live now, as far away from you as possible?

• 6:15Speaker 03

  No, she and I are very close, but she lives in Chicago with her husband and family.

• 6:19Ted Seides?

  Okay, and you have twin boys who are just about 12. I have a boy and girl twins who are 11. What do you remember growing up as a twin that you carried with you as a father of twins?

• 6:34Speaker 03

  That you need to treat them separately. My name's obviously Brett. My twin sister's name's Betsy. Like, we got the nickname Brettzy very early, and it always bothered me.

• 6:45Ted Seides?

  Hold on one second. And your boys' names are what?

• 6:47Speaker 03

  Uh, Brian and Benjamin.

• 6:48Ted Seides?

  Yeah, okay.

• 6:49Speaker 03

  I think, I think the Bs, similar names, the Bs are not a problem. I think it's even harder with two boys. You really want to be treated as your own person, and they're each individuals, and they each, you know, deserve their due.

• 7:02Ted Seides?

  Yeah. You know, I saw that with my twins, a boy and girl, so there's some obvious differences. But as they're growing up, you have this tendency to not have to compare them as much to other kids and where they are at their stage of development, especially firstborns, who's sort of a natural parent tendency, because you have two that are so wildly different. How have you figured out what their passions are and how to steer them, particularly with two boys, where it's not so clear that it should be or isn't the same thing, and yet for you guys as parents, it's awfully difficult?

• 7:34Speaker 03

  Great question. They have similar passions and to a little bit different. You know, they both are passionate about sports, more as spectators and fans than as athletes, because they take after their old man. And so it's really easy. I mean, they love going to Yankees games and football games and Rangers games, and they're happy to do that together. I would say that there's a little bit of us of, well, if one's taking tennis lessons, they're both taking tennis lessons, because there's a lot of synergy to them having tennis lessons at the same time, of us maybe not letting it completely flourish that way. But, you know, one, one's given up piano and one still enjoys it. And so you, you gotta do it.

• 8:12Ted Seides?

  What advice would you give a, a new parent of twins?

• 8:16Speaker 03

  There are a lot of synergies, and you should take advantage of them. Not only are there the synergies, at least for us, same schools, you know, play nights the same night at school, all that good stuff. But you also have a built-in playmate, which is really awesome as well. You know, my kids, they would argue they're not friends, they're brothers. I'm like, isn't it great that your brother's your best friend? Guys very rarely fight. They're like, he's not my friend. He's my brother. I'm like, you know, they'll play catch together in the yard.

• 8:43Ted Seides?

  Yeah, I'll throw one in there for you that a friend of mine who had two sets of twins told me, which is my twins have no idea which one is older than the other.

• 8:50Speaker 03

  Uh, mine don't either. I actually, I think I got that idea from you.

• 8:53Ted Seides?

  You may have.

• 8:54Speaker 03

  Yeah, actually, you're the one who told me that. So I'm four minutes older than my sister, and I harass her to this day. And even my niece and nephew were highlighting that to her again, when I saw her over the weekend.

• 9:04Ted Seides?

  Yeah, there's this sort of pump your chest thing, right?

• 9:06Speaker 03

  My kids don't know. And they are dying to know. And I won't, I, I, we had that working for a while. My kids are over it. And they're like, we know you know, and we know you're just not telling us. And I'm, I'm honesty is best policy. Yes, I know, and I'm not telling you.

• 9:21Ted Seides?

  So how'd you end up at Penn?

• 9:22Speaker 03

  I ended up at Penn because all I ever wanted to do was go work on Wall Street. I don't think I had capital allocator on the mind. And I wanted to be in a city. And Wharton was one of, if not the best undergraduate business school. And that's where I wanted to be and applied early. So I.

• 9:37Ted Seides?

  Were you a, were you one of these bar mitzvah kids?

• 9:40Speaker 03

  Absolutely. I was a stock market junkie in my early teens. I actually got as a bar mitzvah gift, a few shares of Genentech back in the early eighties. You know, one of the first biotech companies, uh, from my dad, who's a doctor, a friend of his. Uh, I had no idea what it was, but that stock was a skyrocket from my bar mitzvah to college and paid for a lot of spring break. So I got my early, uh, bug from Genentech. I also read Peter Lynch's One Up on Wall Street.

• 10:07Ted Seides?

  Of course.

• 10:08Speaker 03

  And he recommended that you invest in what you know.

• 10:11Ted Seides?

  So Genentech for you?

• 10:12Speaker 03

  Well, Genentech was a gift. I decided to then buy one other stock. I learned that it, winners can outpace your losers. So Genentech at a ten bagger was great. The other stock I bought, which was actually my decision, was Freddie Fuddruckers Enterprises, which was a hamburger place I love. It only took about two years after I bought the stock for it to go bankrupt. So I learned that, uh, they're both winners and losers, but you can only lose a hundred percent, but you can make a lot more than that.

• 10:37Ted Seides?

  Yeah, I remember that franchise. So was there one out by you in Virginia?

• 10:40Speaker 03

  There was one right near me.

• 10:42Ted Seides?

  It was, it was like Mother Fuddruckers Burger or something like that.

• 10:46Speaker 03

  They were of all different sizes. Great fixings bar. If you saw my physique, you'd understand my appreciation for hamburgers.

• 10:54Ted Seides?

  Sadly, that was the only thing I remember about that franchise.

• 10:56Speaker 03

  And it went bankrupt.

• 10:58Ted Seides?

  It did go bankrupt. Okay, so. So those were the stocks. You got the bug. Wharton, obviously, is a hub for that. So and then from there Goldman.

• 11:07Speaker 03

  You got it. So I wanted to go work on Wall Street back in the early 90s. Goldman Sachs was the place to be and had a really interesting opportunity to go there, you know, on the sell side.

• 11:20Ted Seides?

  And was that straight up recruiting at Wharton?

• 11:22Speaker 03

  Hundred percent.

• 11:22Ted Seides?

  And where'd you start in the bank?

• 11:24Speaker 03

  I started in a group called Equity Capital Markets, which is a joint venture between investment banking and equity sales and trading that worked on equity new issues, convertible bond issues, anything equity linked.

• 11:37Ted Seides?

  And you guys remind me, I know it was early 90s.

• 11:38Speaker 03

  Ninety-three.

• 11:39Ted Seides?

  Okay, so coming out of the recession, then, pretty interesting time to be in that seat. And you stayed at Goldman for how long?

• 11:45Speaker 03

  Almost seven years.

• 11:46Ted Seides?

  Mostly in ECM?

• 11:47Speaker 03

  I was in ECM in New York for a few years, doing a combination of things, working on both convertible new issues as well as a number of different IPOs, particularly for a lot of the early private equity deals that were going public, you know, the Nabiscos of the world. In 96, I moved to Hong Kong and worked on Asian new issues and did that for several years and then came back to New York, moved to, fully to the sell side and worked covering convert arb and merger arb hedge funds in the equities division in the late 90s.

• 12:18Ted Seides?

  So mid 90s in Hong Kong must, I know it was the Wild West. What was that experience like? What did you take from that?

• 12:24Speaker 03

  Well, there are a couple of things, both personal and professionally. I would say professionally, it was a great opportunity. At a big firm like Goldman Sachs, the, the office in Hong Kong was much smaller. You know, there were a handful of us covering, we didn't cover Japan, but from Hong Kong, you know, from Korea to India to New Zealand and Australia. So lots of cultures, met lots of people. I think I went to weddings in nine different countries from friends I met. So really neat negotiating with companies in, in different parts of the world. But mostly, we were proselytizing, which is the US capital markets are big and deep. You should list your company in the US. You should hire a US investment bank and that investment bank should be us. And then when we were lucky enough to convince a company of that, you know, to work on that transaction.

• 13:07Ted Seides?

  We think about, a lot about where, where a market's efficient. And inefficient. How different back then was what you saw in either the way the companies were run? How sophisticated they were about thinking about financing in Hong Kong versus what you'd seen in the US?

• 13:22Speaker 03

  I think there was a very, very big difference when back then, when you went country to country. There were places like Thailand and India where the companies were mostly family run. The families were very wealthy. The individuals were very well educated, often in the US or in Europe and at places like Wharton. And so you go into the meetings, you'd speak English, you'd use lingo right out of business school and they totally got it. Now, they may or may not have been friendly to minority shareholders. They may or may not have been good investments, but it wasn't a meeting that was materially different than a meeting you'd have in the United States. In the same vein, you'd be in mainland China, talking to a state-owned enterprise and there'd be no English.

• 14:05Speaker 03

  You'd have to explain what an equity offering was to the management team. I mean, it was the total end of the spectrum, so it really depended country by country.

• 14:13Ted Seides?

  You now travel a fair amount to Asia. It's 20 years later. And what is that perspective of you were there much earlier on? How does the level of sophistication today look compared to?

• 14:24Speaker 03

  I think it is light years ahead. They have, if not fully caught up, come very, very close. The, the management teams are sophisticated, the investors are sophisticated, the pools of capital are deep. I mean, there were lots of things you just couldn't do because there were no buyers of them. Every time you did a transaction, it was the first time. You know, you'd list a company in Hong Kong and New York at the same time and no one had done that before. Or you'd offer a convertible bond that was convertible into, you know, locals or ADRs and no one had ever done that before. I mean, that just, that's not an issue anymore. Everything has become fully around and the regulations have caught up.

• 15:03Speaker 03

  There were a lot of regulatory issues where, you know, things, ADRs couldn't be fungible. You had issues with foreign owners of domestic stocks. Many of those restrictions are either much lighter or have been removed at this point as well.

• 15:19Ted Seides?

  And so Goldman then? Then shifts you back to New York. You're back to doing presumably somewhat similar things to what you had. And Evan shows up one day and Evan, if I recall, was on the private client.

• 15:31Speaker 03

  Yeah. So he, he was in the asset management business, actually at Goldman initially, working to convince Goldman's private clients that they should be buying Goldman's asset management products. He'd actually left a couple of years earlier to go to a firm called Global Asset Management. And Global Asset Management was originally the Rothschild single family office that in the, I believe, early eighties, although you might correct me, they started taking other families. And GAM was very sophisticated for the time. They called themselves global because they didn't invest in just their home European markets, which in the seventies was really sophisticated. They started using third-party managers and hedge funds, not just their own in-house products. So he started working with wealthy US families, saying,

• 16:14Speaker 03

  there's a better way you can use third-party managers or sophisticated things you can do with your money. And by the way, there's this high-touch European private banking model that you can be part of as well. And so he led that business here in the US in the late nineties.

• 16:29Ted Seides?

  So he calls one day and says, and why you?

• 16:33Speaker 03

  You know, we were very good friends. We, I had been in his wedding. I wasn't married yet, but he ultimately was at my wedding. And we talked about a lot of different things. And I had had this background at Goldman where I'd gotten to know some private equity firms. I had gotten to know the hedge funds. I'd gotten to know emerging markets investors. And so it was really interesting from a sell-side perspective. I had seen a lot of different types of buy-side activity. And he wanted to start this business. I'd spent seven years at Goldman. Goldman had just gone public. I would say of all the things I was good at at Goldman, politics was not one of them. And as you got more senior, who was responsible for what, arguing about your compensation,

• 17:14Speaker 03

  became a bigger part of the job. As I said, the firm had gone public and the culture had changed. And it was also late 1999 when people were starting internet companies and doing all kinds of entrepreneurial things. That's not me. I was always a finance and investment guy. But you know, from his perspective, he knew about my frustration, given our personal relationship. He knew, he thought this was an interesting business opportunity. The way he explained it, I thought it was a really interesting opportunity. He thought I could be useful from an, as an asset allocator, manager selection perspective, given my background.

• 17:49Speaker 03

  And I just thought, hey, it'd be really neat to have a job where you worked with sophisticated, wealthy families where you could invest in anything. You didn't have to have a commercial relationship and we could source the smartest managers in the US and Asia doing all kinds of different strategies. That seemed like a really interesting opportunity as a career, not only a business opportunity.

• 18:10Ted Seides?

  Yeah. And so when you thought about it at the time, in the subsequent years, there was clearly a pushback on Wall Street and said the competitive, say, private client business has all kinds of conflicts of interest. They need, as Evan did, need to sell the Goldman products. Was that a conscious part of your initial pitch? Or was it more, hey, there's a need and you guys have the skill set, let's go at it and see what happens?

• 18:34Speaker 03

  Like all business plans, we got more lucky than good. That was always part of our plan. We want to be independent. We had a third partner when we started who has since retired, the other B in BBR, Art Black, who was in the private client group at Goldman. And he covered a lot of the large, single-family offices in New York. And he was really convinced that in addition to the GAM model, the single-family office was the way to go if you could set one up because you could be really sophisticated, you could be independent, you weren't trying to buy whatever product he had to sell. And so we took kind of his best ideas of what

• 19:15Speaker 03

  does a single-family office look like and Evan's best ideas of GAM's model when we put BBR together. And so being as close to a single-family office as you could get for a family that wasn't wealthy enough or interested enough in creating their own single-family office was always the model. Both of them had built their businesses over the course of the 90s because people were getting rich selling their businesses, right? Whether it was roll-ups, private equity, IPOs, people didn't tend to fire their wealth manager. They just had, you had new wealth in the business, the universe was growing. So our thought was we just have a better mousetrap, the universe would keep growing. We started the business in early 2000 and that clearly was not the case.

• 19:58Ted Seides?

  No.

• 19:58Speaker 03

  Wealth creation quickly stopped.

• 20:00Ted Seides?

  You said luck and luck sometimes is tied with timing, right?

• 20:03Speaker 03

  But then all of a sudden, we had a model that was much better than Wall Street's. You know, it was Elliott Spitzer suing the banks over conflicts and who was getting IPOs. And at the same time, we had an asset allocation approach that used alternatives that was more absolute return oriented. Those two things actually meshed really well and neither was part of our quote competitive business plan when we launched.

• 20:24Ted Seides?

  So you guys are hanging a shingle. There were probably some relationships in those early days. What happened from going, uh, I'm not sure this is going to work to, hey, we got something here.

• 20:36Speaker 03

  Right. Well, we, the catalyst to get us really started was that UBS bought GAM early in the fall of 99. And that was Evan's push to say, I don't want to go to, nothing against UBS, but he'd already left one big investment bank. He didn't want to go to another and he wanted to do something entrepreneurial. Art and I were convinced that doing something entrepreneurial was interesting. And so we spent those next couple of months, although I assure you Goldman Sachs, I was working full time at my job at Goldman Sachs of, you know, could this work? What does the business model look like? And quite honestly, thinking through, did they have any clients that would be with us day one? Given it was really more Evan than Art day one, as it relates to Art was on a team.

• 21:21Speaker 03

  His team stayed at Goldman Sachs. This was not one of these lift outs from that perspective. But I was highly confident we'd have a handful of clients, enough clients to pay the bills day one. And we did, and just like any other asset management startup, those first few dollars are the hardest. And quite honestly, we hit the ground running where we had a number of clients right away. We were break even right away. You know, we, each of the three of us wrote a check to fund working capital expenses. And we thought we could survive two years on the checks we wrote. And we agreed that we'd never write another check, that if two years later, this was not a commercial success. We were not going to continue to pour our own money into it. And we were break even almost immediately and never wrote another check again.

• 22:05Ted Seides?

  Great. So before we turn to really the investing side of BBR and lots to talk about there. I'm always curious to ask. If you had to throw all this away today, start a completely new profession based on everything you know now and the coulda, woulda, shouldas, what would you be doing?

• 22:25Speaker 03

  I would have spent more time investing early. I think there's pros and cons to that. I think I learned a lot commercially from a lot of people I worked with at Goldman Sachs who are phenomenal mentors about how do you do business? How do you convince people to do business with you? Where should you spend your time? What's opportunistically interesting? But I didn't do anything that was really investment oriented. Whatever deal I had to sell, I wanted to convince people to own it, not should they or should they not actually own it. I think that would have been going quote to the buy side earlier. And it's different when you're actually making investment decisions. And so those first couple of years, when you're

• 23:10Speaker 03

  actually an investor and you're actually managing other people's money and you've got that duty and that weight of responsibility. And by the way, that was 00102. It was not an easy time to be making those decisions. I think it would have been helpful to have a little experience earlier than that. With all that said, the fact that we didn't start managing money till March 1 of 2000, like almost right on top of the NASDAQ high, really framed our investment approach for years to come. And I think it's served us well. But I think I would have liked to have more buy side experience earlier.

• 23:44Ted Seides?

  So let's turn to that investment approach. What do you believe about investing that permeates how you think about this challenge of people are giving you a big pot of their money?

• 23:54Speaker 03

  So one, we have a bunch of philosophical tenets about what we believe about investing. Those are ones that we spent a lot of time hashing out before we started. It was based on a lot of reading, who we thought was best in class. And those have not changed.

• 24:14Ted Seides?

  And so what are those tenets?

• 24:15Speaker 03

  Those are asset allocation is critically important. You know, it's the old Brinson study of it doesn't matter nearly as much what stock you own as do you own stocks versus bonds? We are still huge believers in that. We are huge believers in mean reversion. You've got to buy the dips and sell the rallies and be very long-term focused. We are huge believers that it is incredibly difficult to market time and so don't try and do it. Have those strategic targets and buy the dips and sell the rallies. Although this sounds a little contradictory, we're all, we also believers that at times there are really fat pitches. I don't think that's as, as much, although we're spending a lot of time researching

• 24:55Speaker 03

  it in equity valuations as it is distressed debt opportunities in 2009 and, and things along those lines.

• 25:04Ted Seides?

  Let me push on one of those. There was this great, probably not that well-known, but debate between David Swensen and Peter Bernstein, the late Peter Bernstein, where David, similar to you, believed asset allocation drives returns, strategic asset allocation is an important part of a policy portfolio. And Peter would say to David, but that strategic asset allocation by definition includes some form of market timing, right? You have to decide, is it 25% in stocks or 40% in stocks? And if you change that, there's an element of timing. So curious, how do you think about that contrast?

• 25:40Speaker 03

  I think they're both right. So we have a forecast on what we think. And to be fair, our asset allocation approach, we allocate to strategies, not to asset classes, right? Hedge funds aren't an asset class. You know, long, short equity is a strategy you either do or don't want to be allocated to. You'd have expected returns, risks, correlations. You know, for our perspective, we build returns, expected returns for each of those strategies. And we don't think there's some sort of magical, mystical, uncorrelated beast. If, if you think equities are going to return seven and a half, if you're a long, short equity manager, you know, what's your bait? What's your alpha? What are your fees?

• 26:26Speaker 03

  And you should have a relatively high correlation to equities and you should have a return that has certain risk and return characteristics related to that. And so we, we build those. I guess you'd say that there is some market timing to those factors because, or to those forecasts. Because as your equity forecast comes down, you're going to want to own a little bit less equities as it goes up. But that's not a daily quarterly thing and it's at most annual. And quite honestly, it's a very long-term forecast and they, they evolve pretty slowly.

• 26:58Ted Seides?

  What are the buckets of the strategies that you use in your, in your approach?

• 27:02Speaker 03

  At the, at the top level, we believe that strategies fall into two main categories. They are higher risk, higher returning strategies and stable returning, lower risk strategies. And that in the simplest of case, people build stock, bond portfolios and stocks are those higher risk, higher returning strategies. And bonds are stable returning, lower risk strategies. You know, from our perspective, there's lots of strategies that can fall into both. Within equities in higher risk, higher returning, you can be passive and/or active. Your active can be long or long, short or private versus public. And so it's those types of differentiations we make in terms of sub allocations.

• 27:42Ted Seides?

  So let's, let's hop right in on that. Active versus passive. If people aren't talking about it or haven't had a conversation about it, they've been on Mars the last couple of years. So it sounds like you use both in your approach. And how do you think about when to allocate to active and passive? When you read about it, it almost seems like, oh, no, no, no. Passive has to be the way to go because it's low cost. You're using both, you always have. Talk a little bit about how you think through the active versus passive decision.

• 28:11Speaker 03

  Sure. I think. Active and passive is actually not a binary decision, that there's a spectrum, right? There is, on one end, purely passive, then you can have factor decisions, you know, value bias or dividend bias. I think you want to be on the ends of the spectrum. If you're going to be passive, you want to be as passive, and for us, since we're managing money for families, as tax efficient as possible. In the middle, you've got, I'll call them index funds and drag, your average mutual fund that most of whom underperform the market. And if you think about the universe of them that are fully invested most of the time, after fees and transaction costs, on average, they have to underperform the market

• 28:54Speaker 03

  and they're highly diversified. As you get more and more active, you can have managers who own small numbers of stocks, are very concentrated, are agnostic in terms of their weightings versus the index. And then I would actually argue the most active are long, short equity managers, where they're making active decisions, not just on the long side of the portfolio, but the short side of the portfolio and how net exposed they are as well. So I, we take a core satellite approach where you want to be passive and you particularly want to be passive in the most efficient markets. And you want to be active in niche managers where there's a lot of inefficiencies and they've got a structure to be concentrated where there's a large amounts of active share to take advantage of those inefficiencies.

• 29:37Ted Seides?

  So today, what are the markets where you are passive?

• 29:40Speaker 03

  US large cap.

• 29:41Ted Seides?

  Okay.

• 29:41Speaker 03

  You could argue that we're passive in fixed income, where we own intermediate duration, high quality, investment grade bonds, primarily munis again, because we're families. But I would say there's a lot of defense that gets played there on the credit side. So although they're diversified portfolios, they're meant to kind of perform in line with the indexes. They're also, we are paying a little bit for credit research, just to make sure, not to add value, but to make sure you don't step in any Illinois potholes.

• 30:12Ted Seides?

  Right, okay. So we've got our, we've got our kind of high return, higher risk, mostly various forms of equities, active, passive, long, long, short, global.

• 30:23Ted Seides?

  The lower risk, which is bonds, bond-like things.

• 30:26Speaker 03

  Another one of our philosophies is that unlike a lot of high net worth investors, we're exclusively total return investors. What I care about is having more money down the road than I have today. Clipping coupons is nice. I'd always rather get a dividend or get a coupon, but we're total return investors. And so for a lot of our history, where yields have been low, we've generally shied away from things like REITs, which you conceivably could put into that stable return low risk bucket and have decided that things that are less liquid in the real assets and real estate category are more interesting. Given the illiquidity, we have a higher return target. We're taking a little bit more risk. We keep those on the higher return, higher risk side.

• 31:11Ted Seides?

  We're going to take a quick break in the action to tell you about Brookfield. Brookfield invests in the thing behind the thing behind the next big thing. Their focus across infrastructure, energy, real estate, private equity, and credit is helping to build the backbone of the global economy. Brookfield combines deep operational expertise with disciplined, long-term investing, uncovering value, and partnering alongside clients to shape tomorrow's economy today. Invest in the businesses that shape tomorrow. Learn how you can own what's next at Brookfield.com/own. This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital. And now, back to the show.

• 31:57Ted Seides?

  You also have the challenge of having 125 different families. How have you structured your investing? So you said you want it to look like a single-family office, but at the same time, there may be some customization that some of the families would like.

• 32:11Speaker 03

  Each individual family has a director responsible for that family on our client advisory team here. They'll build the asset allocation and they'll say, okay, for this particular client, if we're going to have an allocation to merger arbitrage, here's the manager we're going to use. And that's sort of a matrix. Where you know, the investment research team, you know, defines the rows of by strategy in which managers are in it. Where each family is a column. The difference being that we both inherit a lot of managers. We have a lot of sophisticated clients who source and we help vet their own managers.

• 32:52Speaker 03

  So they don't necessarily have to use the manager we picked for each one of those intersecting boxes. And for clients where access is a problem, you know, it's a $5 million foundation. We're going to have only a few hundred thousand and absolute returning strategies. You know, we'll create a commingled vehicle. We've got clients who either go direct because they want to be customized or because they're big enough to go direct. Or and we'll pool either smaller stuff or where our clients are more interested in not dealing with the administrative headaches of of going direct.

• 33:21Ted Seides?

  Is there a model asset allocation framework that these client representatives start with?

• 33:29Speaker 03

  There, there is, and so they are guides, not rules. So there's no model portfolio.

• 33:35Ted Seides?

  Just to give a sense, what do those look like across strategies?

• 33:38Speaker 03

  Sure. So all else being equal in public equities, we want to be about 50 50 passive and active on the long side. All else being equal, more aggressive strategies will own more private equity and more long only equity and less long short equity. You know, more conservative strategies or more conservative portfolios, all else being equal, should own more bonds and less absolute returning hedge funds as part of that stable returning lower risk mix. So as the person who oversees the investment management, investment research process here, I actually look at how all of our money is invested on a roll up basis. And I'd say about 65% of it is in higher returning, higher risk strategies.

• 34:23Speaker 03

  But for us. That is still probably a modestly lower amount than most. So if you looked at your average high net worth portfolio, you know, 65% equities is probably about right. We're 65% higher risk strategies, but call it only roughly half of that in public equities.

• 34:43Ted Seides?

  So let's dive in a little bit. I mean, as you said, most of your investing, if not all of it, is through third-party managers.

• 34:49Speaker 03

  Almost exclusively, yes.

• 34:50Ted Seides?

  Yeah. Where did they come from?

• 34:51Speaker 03

  Sure. Well, we have a team of people here who do nothing but manager, research and diligence. We meet over 2,000 managers across the spectrum, you know, literally from wireless spectrum to muni bond managers. So our database-

• 35:08Ted Seides?

  That's 2,000 a year?

• 35:09Speaker 03

  A year. So we've got thousands and thousands and thousands in our proprietary database here. And so, quite honestly, the research team meets every two weeks to talk about who'd you meet with and what's everyone working on.

• 35:22Ted Seides?

  So let me ask you a question. Why do you need to meet 2,000 managers every year? That's a lot of new meetings.

• 35:28Speaker 03

  That is a lot of new meetings. It's interesting that you ask it that way because quite honestly, I get the question the other way. If you were to hire a consultant, you know, one of the pension consultants, you know, Cambridge, it's out of the world, I'm guessing the number is multiples of that, right? So if what you really wanted was a good database of understanding who all the peers are, what are all the options, tracking all the data, the number would actually be much, much bigger than that. So for us, we're interested in doing a lot of meetings. We learn a lot about strategies that way. You know, we meet as a team every two weeks, just to talk about who people have met, what we're working on. I would say most of our ideas come from managers. You'll meet a manager who'll talk about the interesting things they're

• 36:11Speaker 03

  doing in residential real estate, and they probably aren't a manager you want to hire, but they'll tell you, hey, this is something that sounds like an interesting opportunity. We should learn more about it. Let's talk to other people who are involved in the space. Let's go find other managers that are either directly or tangentially involved, get their opinion. And so I think you learn a lot about, by just talking to smart people all day about What they're doing and what they think is interesting. So there's a lot of value from those meetings, even if, you know, we're going to hire, you know, 10 to 20 managers a year. That's a pretty small percentage of the folks you meet.

• 36:46Ted Seides?

  And what are the total number of managers that you'd consider core?

• 36:50Speaker 03

  We have about 50 public market managers that are core. Now, not everyone owns them all, but if you look from munis, apps returning hedge funds, you know, active long only, passive managers, et cetera. You know, private equity tends to proliferate because a commitment you made 10 years ago is still in the portfolio.

• 37:09Ted Seides?

  How many private, how many privates you think?

• 37:11Speaker 03

  We probably have an equal number of private managers we've committed to over the years, but probably half of whom are at most are sort of active re-ups today. But we have hundreds of managers, many hundreds of managers with whom we have $1 on behalf of one client because of things we've inherited and things we've done, you know, my son's college roommate's hedge fund I'd like to invest in, et cetera, et cetera. And we're willing to be that customized.

• 37:40Ted Seides?

  And will you and the team follow that $1 as much as one of your core allocations?

• 37:48Speaker 03

  We will absolutely follow it. I would say if it's a material investment for a client, absolutely the same way. You know, what ends up happening is it's a small amount of money and the client's often indifferent. Like it's, it's my son's roommate. He could be down 50%. I have a $100,000 investment out of my $200 million net worth. We're not going to ever fire him.

• 38:09Ted Seides?

  I've had that conversation with particularly a lot of former money managers who now have their own family offices. And there's almost a bucket of, these are relationship investments. They're not driven by returns. We're never going to redeem. They're just people we know. And you almost separate that out from the normal indulgence process.

• 38:28Speaker 03

  And to be fair, that's their prerogative. It's their money. We're here to give an opinion. And quite honestly, we'll often say this is not something we'd otherwise invest in. Usually it's, this is perfectly fine to invest in, but our bar to make a new investment is a lot higher than it's fine. And we'll oversee it.

• 38:49Ted Seides?

  What do you think you have trained your team to do? That gets at the kinds of decisions that you'd like to see.

• 38:57Speaker 03

  Sure. One, we put a huge premium on the quality of people and the consistency of process. So, one of the things we do is we ask lots of people at the firm the same question separately. You know, even though you think you know the answer, you know, asking analysts over and over again, different ones, how do you interact with the portfolio manager? Asking the portfolio manager, how you interact with the analysts, you know, are you getting the same answers? Are they talking about the same ideas? Are they sourcing them the same way? Are the things that they like and they're getting in the portfolio have the same characteristics? Making sure that all of those people are not only incredibly smart, incredibly knowledgeable, incredibly articulate and passionate about that, but that you're getting those same consistent answers.

• 39:41Speaker 03

  The other thing that we found very helpful is just given our networks, there shouldn't be anyone who's such a secret that I can't find at least three or four third-party unprovided references where we can get very detailed thoughtful opinions on those managers. If I can't do that and they can't all be positive, we can't make an investment. And where one of those is 50/50 at best, we won't make an investment.

• 40:12Ted Seides?

  And that ties into that your thought about quality of people. What are the temperament to such an important and difficult to measure quality of successful investment managers? How do you go about trying to figure out, first of all, what is the right quality of person? I guess there's an obsession that some of these guys have that...

• 40:31Speaker 03

  Well, I think, I think when I talk about quality of people, I mean that in the most basic sense of are they good people? Are they good partners? Do they treat me as someone who's their partner and whose money they're managing? Or are they treating me as a counterparty? Is it someone when things are going poorly that they are still is wanting to get on the phone and discuss about what's going on poorly? When they're ultimately successful, are they pawning us off on their investor relations guy? Because they're too important to deal with me? You know, early on, there's no such thing as a good deal with bad partners. I firmly believe that. Are they, do they view our relationship as a partnership and are they willing to be good partners? As it relates to temperament, I don't think there's one right answer.

• 41:13Speaker 03

  I think temperament and approach is one of the ways to get diversification. And so I'll get a question from a client or prospective client, you know, if a, if a stock's down, do you like managers who buy more or do you like managers who have stopped losses and cut their losses? And the answer is yes, I like both. I want people with both approaches. But what's most important is the managers need to know their approach ahead of time and execute on it consistently.

• 41:39Ted Seides?

  Yeah, okay. So let's talk a little bit about the actual decision-making process. So your team's out there doing work, you're assessing the quality of the managers, the consistency of their process, how they do the research, how good are they? And then ultimately, someone has to make a decision. Who makes that decision at your firm?

• 41:56Speaker 03

  We have an investment committee here that is made up of all of the senior members of our investment research team, as well as a number of other people around the firm.

• 42:07Ted Seides?

  How many people total?

• 42:08Speaker 03

  There are nine people total on the committee and you need seven to vote yes to get an idea approved. And separate of that, our chief compliance officer who oversees operational due diligence has a unilateral veto as well. So it's a high bar to get something approved.

• 42:23Ted Seides?

  And then if you're investing in a money management firm and they told you, hey, for us to make a decision, we have nine people around the table and seven have to say yes. I was watching the most recent episode of Billions last night.

• 42:32Speaker 03

  I'm one episode behind, so no spoilers.

• 42:36Ted Seides?

  No spoilers, but, but when you look at sort of the, the inner dynamics in any of the episodes of what happens in the DA's office, even these senior people with a great mission have this sort of jockeying for tit for tat, how am I going to get myself positioned to get what I want? So on that, even on the research team, how do you think about seven people independently forming their own view as opposed to the natural tendency of groups to want to coalesce, treat each other well, they're employees, some if not all are partners? So how do you?

• 43:13Speaker 03

  How do you think about that decision-making unit? That's a great question, and it's actually something we've thought about a lot. And one of my partners, Todd White, who manages the research team day-to-day, he and I have talked about that a lot. I think it's inherent in both structure and culture. First, from a structural perspective, all of the senior people are generalists. And so if you're a hammer, everything looks like a nail. If you're the private equity specialist, every investment problem has a solution that looks like a private equity fund. From our perspective, all the senior people are generalists. Now, people know more about certain areas than others. I've got partners on the team who are more expert in structured products. I've got other people who know more about private equity, or macro, or whatever it happens

• 43:58Speaker 03

  to be. But anyone can work on anything, and all the senior people are expected to be generalists. And so, one, it's not, "I'm fighting for allocations for my area." Everyone thinks the whole portfolio is their area. Two, from a cultural perspective, this is a tough crowd. There are a lot of very smart, very intellectually curious people who are not along for the ride. And so whenever we're discussing an investment idea, usually earlier stages, if they're skeptical, you've got to get them on board pretty early, just to make sure that your time's allocated to that project, long before you get to investment committee, right? Because the scariest resource we have is people's time, right? You meet all these managers.

• 44:43Speaker 03

  The question is, who do you go meet the second time? And what do you go spend more time on? And unless you can convince folks that it's worth your time, which is, again, a pretty high bar, it's not something we're going to meet a second time, third time, and start working more seriously on diligence. How have you improved the way you make decisions over time? Interesting.

• 45:09Speaker 03

  We think that there are two types of hiring mistakes you can make. One is you can hire a manager you wished you hadn't, or make an investment you wished you hadn't, or not make an investment you wished you had. And I would say we are comfortable with the latter and really uncomfortable with the former.

• 45:31Ted Seides?

  Yeah, so fine with the error of omission.

• 45:33Speaker 03

  Right. And so, one, I would say our bar has been constantly raised. One of the ways we measure are we making those decisions the right way is by tracking our turnover stats. You know, if you're firing 30, 40, 50% of your managers every year, you probably made a lot of bad hiring decisions. And so, on average, our turnover has been about 15% a year. There's been years it's a little lower, a little higher. The highest number has been kind of low 20s. The lowest number is kind of high single digits. But we look at that data. Now, we do look at that data ex post, right? It's not the old GE where you fire the bottom 10% each year. But, you know, 15% a year means your average holds about seven years.

• 46:16Speaker 03

  That means our hiring bar is high enough. Two, to the extent.

• 46:21Ted Seides?

  And by the way, does that change? I mean, private equity is a different animal. But in the public managers, do you find the turnover is higher with a hedge fund manager?

• 46:29Speaker 03

  Yes, but marginally. I mean, quite often, it's managers where it's smaller teams. And so, a key departure is more relevant. Or it's a smaller niche. And so, asset growth is something that we're going to be less tolerant of. Or it's an opportunistic investment, like something we want to be doing in Argentina or in a particular structured product niche that just happens to have played out.

• 46:57Ted Seides?

  You mentioned small managers. Where do you guys like fishing?

• 47:00Speaker 03

  Sure. Tends to be earlier and smaller. At the end of the day, managers who are focused on earning a management fee and keeping assets and just not underperforming. You know, your average mutual fund, whose job it is, is to never be below three or four Morningstar stars so that the. 401k consultants never pull the money. I don't ever want to be there. And so we want to be in managers that are driven by performance. That might be performance fees, it might be their own money, it might just be their own ego. And actually, I think the last, just having the personality where success matters to them is a key, a key characteristic. And you tend to find those folks a little bit earlier in their careers.

• 47:42Speaker 03

  We also have a bias to that if you're going to be in active strategies, generally speaking, not always, but generally speaking, it's easier to turn 500 million into a billion, although that's no small feat, than 20 billion into 40 billion in terms of trying to find those inefficiencies. And lastly, almost like two more points. One, if you want to be in a niche, those niches tend to be smaller and don't lend themselves to big managers. And the point I was going to make as well is relates to fees. We're in an environment where returns are hard to come by. That means when you can generate those returns, you want to pay, you want the highest quality folks, you don't want to just be in the lowest fee managers, but you want to pay as little as possible. And one of the ways we do that is guys

• 48:26Speaker 03

  and gals who are earlier in their life cycle or smaller in their assets, where our asset base makes a difference and we can accelerate them and get our pound of flesh and fees for that.

• 48:36Ted Seides?

  You know, one of the things we've seen from the Endowment Foundation world is some of the now persistent performance leaders, the Yales, Princeton's, MIT's, Bodens of the world. The CIOs have been there for a long time. Now Yale, it's 30 plus years. You also have that benefit. You've been here now 17 years doing the same thing. Many of the people on your team have been with you for a long time. And then you also have the capital behind you. This family capital is very long duration. How do you leverage those strengths in your investment process?

• 49:09Speaker 03

  Absolutely. I mean, you should, I should bring you to my next prospect meeting. Cause you laid it out perfectly, you know, being onshore, being long-term, being thoughtful investor makes us, I would argue, a preferred partner. By actually demonstrating that over 17 years.

• 49:29Speaker 03

  We have a reputation of being that preferred partner. You know, when someone's looking to launch and they don't want to meet with everyone and they want a handful of high-quality investors, there's very few folks where we're not on that list.

• 49:41Ted Seides?

  And how, what are those action steps that you've taken that demonstrate that over time?

• 49:46Speaker 03

  I would say the single biggest one goes back to our allocation philosophy, which is buying dips and selling rallies. You know, we have managers who are closed, who are happy to take any amount of money from us over time, because when they were losing assets and they were underperforming, we were adding money. Because all else being equal, you know, we, we will only invest in things that are transparent. You have to be able to understand that the process hasn't changed, the people hasn't changed, the opportunity set hasn't changed. So if you're underperforming, it's just because there are periods of under and outperformance. The investment business is not a smooth business. If the, all the things you loved about a manager and the strategy and the people and the approach aren't changing and they're underperforming, most folks pull money.

• 50:31Speaker 03

  We write checks. And so there are a handful of managers we've been with for years where you, they, they think we have been the best long-term partners because we're the folks adding.

• 50:40Ted Seides?

  One last investment question, turn to some other things. What, where are you finding the most exciting opportunities today?

• 50:46Speaker 03

  Interesting. I would say the most interesting things we're doing today are esoteric and off the run. There are a lot of folks in our business, there's a lot of money looking for returns. Most things that are quote, "on the run," you know, plain vanilla strategies that have a lot of capacity are quite crowded and their return expectations are modest at best. And so, you know, I mentioned wireless spectrum, we've looked at international trade settlements, music royalties, things that are pre-institutional, I would say are things that we're pretty excited about today.

• 51:19Ted Seides?

  Talk about music royalties, that's a new one to me. What's the play?

• 51:23Speaker 03

  The play there is it's both a yield and a growth investment. You know, historically-

• 51:29Ted Seides?

  These like David Bowie bonds?

• 51:30Speaker 03

  Very similar, but if you think about it, the music industry's been massively disrupted, right? That historically artists made money selling albums- Cassettes, CDs, that doesn't exist anymore and that you make modest amounts, very modest amounts of money for streaming. And that the real incremental revenue to owning the intellectual property is from other uses. Being in commercials, TVs, movies, things along those lines. And so a particular piece of music will generate generally a pretty consistent, you know, but not, you know, yield. You, you buy it based on the yield.

• 52:08Speaker 03

  And then if you can manage that asset better, promote it, get it into television commercials where you get a royalty every time it's on. You can actually really radically increase the yield. So we've got a seasoned manager who's been in this space a long time.

• 52:22Ted Seides?

  The space being the music space?

• 52:24Speaker 03

  The music, both the purchase of music royalties and the management of the intellect, musical, intellectual property. I think merging those together in terms of sourcing, diligencing them and paying the right price. And then not just being a passive financial investor, but actively managing the asset to increase the yield. Leads to some pretty interesting returns in today's environment.

• 52:48Ted Seides?

  Really cool.

• 52:49Speaker 03

  The other thing, by the way, just because I, I wanted to mention it is we also think there are a lot of assets that fall between the cracks. I.e. they used to be owned by hedge funds, but they're less liquid. And as hedge funds have put a big premium on liquidity, they can't own them. They're not high enough returning or plain vanilla enough to be private equity investments. The type of investments that used to be on Goldman Sachs or Morgan Stanley's balance sheet back when they were 20, 30 times levered. But, you know, in a, in a Dodd-Frank world, they can't own, you know, things like non-performing loans off of European bank balance sheets. You know, we're talking about things that have a couple of year duration, low double digit returns.

• 53:30Speaker 03

  We're finding that in all kinds of different asset classes that are really interesting today, just because there's not a natural home for them. And we've allocated quite a lot to that in the last year or two as well.

• 53:41Ted Seides?

  And on the flip side, what are you worried about the most these days?

• 53:44Speaker 03

  I worry about how.

• 53:48Speaker 03

  The unwind of the post-global financial crisis world is going to be, we have now have a generation of investors who think interest rates are only low and that central banks are always there to bail them out. And I don't think that's always going to be the case. I think in general, as that changes, it's probably a buying opportunity. And generally speaking, I think any modest correction is a buying opportunity. We've actually done some really interesting work on that in the last month or so, in terms of when, when do you want to be overweight potentially, or when do you want to be underweight? But if people, people, i.e. folks on the buy side, you know, this is a young man's game, younger than you and me these days, and they just haven't seen, you know, they weren't

• 54:32Speaker 03

  even in business in 08, nine years ago now. What happens when interest rates are 4%, 5%, 6%? That's a pretty high hurdle to own a different, more aggressive strategy. Where today, people are willing to take some, I would argue, crazy risks to generate a 6% return and high yield than other places. That's going to be a regime change that could really scare a lot of folks.

• 54:54Ted Seides?

  All right. I always like to do a set of closing questions. They're going to vary from episode to episode, but here you go. What's your favorite thing to do that's a complete waste of time?

• 55:04Speaker 03

  Play Flight Simulator with my sons.

• 55:07Ted Seides?

  Wow.

• 55:08Speaker 03

  You sit there and you fly a plane from airport to airport, and it's, it's interesting. They both love it. I love doing it with them.

• 55:17Ted Seides?

  Is that a computer game?

• 55:19Speaker 03

  It's on X-Plane for the Mac.

• 55:21Ted Seides?

  X-Plane for the Mac. There you go. Wow, that's a good one.

• 55:24Speaker 03

  But I'm, those are hours I'll never get back.

• 55:26Ted Seides?

  That's true.

• 55:27Speaker 03

  But it's high-quality time with my sons.

• 55:29Ted Seides?

  What's your favorite or most disappointing recent purchase?

• 55:33Speaker 03

  I'm not a big purchaser. Oh, I just bought new Sperry Dock Siders that you don't have to tie, no laces. I'm very excited about this.

• 55:41Ted Seides?

  But in the middle of winter. That's contrarian, but there you go.

• 55:45Speaker 03

  It's springtime. Summer is coming.

• 55:49Ted Seides?

  What do you know now that you wish you knew 10 years ago?

• 55:52Speaker 03

  As your business grows, the demands on your time versus how you'd like to spend your time investing, and I'm not sure I answered that well, but I would say my biggest work challenge today is that I like to be an investor. I think my highest invest use is focusing on being an investor and driving results for clients. And 10 years ago, we had a business where I could spend most of my time doing that, and it wasn't a challenge to carve out that time. That as the number of employees grows, numbers of clients grow, just the issues of running a business grow, how much effort I need to make to carve out time to do that.

• 56:32Ted Seides?

  And how about anything about life? In life, what do you know now that you wish you knew 10 years ago?

• 56:37Speaker 03

  How fast it goes, and particularly as it relates to my twin boys, back to twins who are 11, although they would argue they are almost 12 and would correct me. But Shutterfly is this really neat thing where they will send you an email saying, "On this day, eight years ago, on this day, 10 years ago, this happened."

• 56:55Ted Seides?

  Yeah, Facebook does the same thing.

• 56:56Speaker 03

  And my wife's done a great job of making Shutterfly albums over the years. So we get a lot of Shutterfly emails and just, "I can't believe it was seven years ago that my kids looked like this," or "It was 10 years ago today that we were doing that." It's incredible how quick time flies, particularly as it relates to quality time with my kids.

• 57:13Ted Seides?

  Okay, so in your waning days, you're now 100 years old, sitting in your very sturdy rocking chair.

• 57:19Speaker 03

  Very, for me, especially.

• 57:21Ted Seides?

  What advice would you give yourself, looking back on your life?

• 57:25Speaker 03

  Again, that how you spend your time is really important, and that time is the most fleeting of all assets, and you should spend it on things that you really enjoy and at which you're the most productive.

• 57:40Ted Seides?

  Fantastic. Brett, so much fun. Thanks so much.

• 57:43Speaker 03

  Thanks for including me. This has been great to have you.

• 57:46Ted Seides?

  Thanks for listening to this episode. I hope you found a nugget or two to take away and apply in your investing and your life. If you've liked what you've heard, please rate a review on iTunes or Google Play to help others find out about the show. Have a good one and see you next time.