E198: How Family Offices Construct Portfolios in 2025 w/Scott Welch

In this episode of How I Invest, I speak with Scott Welch, Chief Investment Officer and Partner at Certuity, a multi‑family office managing over $4 billion in assets. Scott joined Certuity’s Board of Managers in 2020, and now leads the investment strategy and participates actively in risk management across all facets of the firm's investments, including portfolio architecture, asset allocation, investment due diligence, and manager selection We talk about what’s keeping him up at night in public markets, his views on the Fed and interest rate policy, and how Certuity builds globally diversified portfolios that balance risk factor, asset class, and geographic exposure. We also go deep into taxes, where Certuity aggressively harvests losses using market-neutral overlays to create "tax alpha" for their clients.

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

• 0:00David Weisburd?

  Scott, I've been excited to chat. Welcome to the How to Invest podcast.

• 0:04Speaker 01

  Thank you. Thank you for having me.

• 0:05David Weisburd?

  So what keeps you up in the public markets today?

• 0:08Speaker 01

  Well, I think, you know, there's a lot of good news out there. And not unexpectedly, the Fed decided to leave rates where they are. That's what I anticipated despite the rhetoric coming out of the Trump administration. So I don't think there's any surprises there. The earnings season is going well. Sort of the revenue and beat rates are historical averages. The only thing that's troubling me is the fact that valuations are simply high. There's really not anything cheap in any of the global markets. So there may be some relative value in small cap stocks, both domestically and outside the US. But there's no screaming buys out there. And then, of course, within the US, you're dominated by the mega cap tech stocks.

• 0:52Speaker 01

  And I think there's something like 30 to 35% of the market cap of the S and P 500 index right now. So whatever happens to them is going to affect the overall index performance dramatically. They're doing, these are very solid companies. They generate great earnings and cash flows. And so they're high quality firms, but they're very expensive. And in my opinion, they're going to have to continue to show very robust earnings growth to justify those valuations. And I think at some point, investors will simply look at those valuations and say, I like these firms, but I just don't know how much more upside there is from here, given where they're priced.

• 1:35Speaker 01

  And they may start to look to reallocate towards value or a small cap or someplace else. But if you ask me what's keeping me awake, that's something that I'm keeping my eye on.

• 1:45David Weisburd?

  Purely from a policy framework, tell me about the downstream consequences of this, I guess, tussle or disagreement on policy between the Trump administration and the Fed chair.

• 1:59Speaker 01

  I, you know, I think it's, to some degree, you know, these are supposed to be the dog days of summer. Right? And there's an old market adage about sell in May and go away. I've never really ascribed to that, but it's there. It exists. And boy, if somebody had done that this year, they would have missed out on a lot. It's been a very active summer. The budget bill, the trade negotiations, and of course, this, as you refer to, the ongoing tussle between the Trump administration and the Fed.

• 2:27Speaker 01

  I think it's somewhat of a distraction. I'm very much a believer in the independence of the Fed. And I also am a big believer in them remaining data-dependent. And those are the words that they use all the time. And I suspect Powell will use them when he talks about this month's decisions to keep rates where they were.

• 2:49Speaker 01

  I don't like the idea of the administration trying to influence Fed policy. We have one bad example of that historically, back in the late 60s, when President Nixon pressured then-chair Arthur Burns to cut rates ahead of the election. Burns did so, and we, combined with the oil embargo, resulted in double-digit inflation for almost 10 years. I'm not suggesting we're anywhere close to that today, but I don't like the idea of the President or the administration trying to lean in too hard into Fed policy. I think it's important that it remain independent.

• 3:32Speaker 01

  I do anticipate that the Fed will cut rates in September. I think they've laid the groundwork for that. You know, if you look at their mandates, right, which are to keep prices stable, i.e. control inflation, and optimize employment, and then I'll call it a tertiary mandate, although it's not official, of keeping an eye on the economy. The status of all of those three things don't indicate a need to be overly aggressive in cutting rates. Inflation is trending in the right direction, but it still remains above the Fed's targeted 2% annualized rate. And there can be a discussion about whether or not that's an appropriate target, but it is their target, stated target. And the last couple of prints we've had on inflation have actually been upward. So there's no particular incentive there for the Fed to cut.

• 4:17Speaker 01

  The job market has proven to be remarkably resilient. There perhaps is a trend, a slight uptick in continuing claims, which means that people who are out of work are having more difficulty finding new work. But the initial claims number is sort of flatlined at about 200,000 per week, plus or minus, meaning that people who have jobs are not really losing them at any greater rate. So there's nothing particularly going on in the employment market. Again, that would suggest the need to be overly aggressive in cutting rates. And then the economy's chugging along. I think the most recent forecast I saw for the Q2 GDP is about 2%, maybe a little bit less, 1.8. That's not robust, but it's positive. And the the odds

• 5:01Speaker 01

  of a recession this year are seem to be falling almost on a daily basis. So when you take all those things collectively, I don't see any particular catalyst for an aggressive rate cut regime. That that all that being said, I do anticipate they will cut 25 basis points in September, and then probably another 25 basis point cut at some point before the end of the year.

• 5:21David Weisburd?

  I wholeheartedly agree with you on the importance of an independent Fed, and I think everyone's aligned with that, because if not, then the then there's going to be a higher cost of capital for Treasuries, and there's a lot of downstream consequences. You also don't want to be the Fed to be political. If you were an independent voter, and you wanted to ascertain whether Powell was being political, obviously, Trump is trying to pressure him. There's no question there. But if you wanted to ascertain whether whether Powell was being political, what would be a litmus test for this?

• 5:53Speaker 01

  That's a very good question. I think that one of the things that the Fed has increasingly been transparent about is its guidance, right? So it comes out on a very regular basis, not just Chair Powell, but also other members of the Fed. They come out and they share their views. They provide guidance. They don't always agree with each other in terms of their public statements, but there typically is a very much a consensus in whatever the decision is at any given FOMC meeting. And Chairman Powell has been very consistent in his guidance on things he's looking for in terms of what what would maybe catalyze

• 6:32Speaker 01

  the Fed to to cut rates. So I think the the first clue, it it was becoming a politicized decision versus a data-driven decision, would be if the the Fed decisions all of a sudden become at odds with what the historical guidance has been, unless the data had changed dramatically in the meantime. But as long as the data is as expected, and we've seen no sign that it won't be, you know, The only thing that the only clue that we might get that the Fed is being politicized is if they do something that's different than what they've been suggesting and the data hasn't changed very much.

• 7:07David Weisburd?

  One of the interesting or fascinating things about the Fed, the interest rates, the national debt is that it's highly dynamic. There's game theory, there's different actors, there's individual actors, there are government actors. And one of the things that's going on right now is people have started to lobby to be the next federal chair after Powell, presumably after his term is is up, I believe, next May. But the market itself is seeing this going on. So how what's your read on how the market is already pricing in the next federal reserve chair? And how do you go about kind of reacting to this game theory and and evolving market?

• 7:51Speaker 01

  Another good question. You know, there's something out there, the betting markets. There's a couple of different firms out there where investors can can place monetary bets on what they think is going to happen on a whole variety of issues, one of which is what's going to happen with chair seat of the Fed. And the last time I looked, which was just a couple of days ago, the highest probability of multiple choices was that Chairman Powell would not be replaced by the end of this year, and that he would continue to serve out his term through May. I think that's probably true. There's ambiguity around whether or not President Trump would even have the ability to fire the chairman, even

• 8:33Speaker 01

  if he wanted to. And I think his advisers, this is complete speculation on my part, but I think his advisers behind the scenes are saying that probably wouldn't be very good for the market. That would be a relatively disruptive event. It would cause a great deal of uncertainty. There would be people who would cheer that. But I think generally speaking, the market would not respond positively to that. So I think despite the rhetoric and, you know, he doesn't Trump doesn't like to be crossed. He doesn't like to have people say no to him. But I think that he will probably stick with Powell. He may continue to say nasty things about him. But I think he'll leave him in place. But I think there's very

• 9:13Speaker 01

  little question that when Powell's term expires in May, whoever replaces him, and there's a handful of names out there that are at the top of that list right now, will be more dovish. And in fact, the

• 9:27Speaker 01

  You know, a cynic might say that there's been some public announcements by exist current Fed members who are calling for rate cuts, sort of falling into the Trump camp. But most of those people very much want to be the replacement. I think you have to, you have to take that with a grain of salt. So if I was to summarize the overall perspective from my, from my side, Powell will stay in place through May, we'll see two rate cuts before the end of the year, maybe some additional ones before his term ends in May, and then whoever replaces him will almost certainly be far more dovish. Keeping in mind, however, that it's not a, it's not a one person show, there is a board. And, and so whoever replaces Powell is going to have to drive consensus if that person wants to be more aggressive in cutting rates.

• 10:12David Weisburd?

  How do you prepare your clients for this eventuality of a new Federal Reserve Chair? And how does that practically affect your portfolio?

• 10:20Speaker 01

  Philosophically, Certuity is a, is a strategic investor. Right? So we try to build portfolios that, we refer to them, it's not, it's not an uncommon phrase, but we try to build all weather portfolios that will perform relatively consistently regardless of the market regime. So our, our, our portfolio positioning is not dependent on a changing of the Fed Chair. It's not dependent on whether or not we slide into recession or whether or not inflation picks up a little bit. Obviously, if there's complete disruptions, you know, our portfolios would be affected and we might have to make some changes. But generally speaking, you know, we try to diversify at the asset class level, like everybody, but we also very much believe in global diversification.

• 11:05Speaker 01

  So we have a significant allocations outside the U.S. We also believe in risk factor diversification, which is maybe a little bit more of a nuance than, than other people might. In other words, so not just asset class, but also when you look at things like quality and growth and value, size, dividends, we believe that if you diversify at that level as well as at the asset class level, that you can create a portfolio that kind of regardless of what's happening around you, it will continue to perform relatively consistently. And, and we believe that that's important for two reasons. The first is that a more consistent performance helps to drive investor discipline. In other words, it keeps them invested when things seem to be going awry.

• 11:46Speaker 01

  And that's very important because investors are notorious for, for getting out of the market at the wrong time and then trying to get back in at the wrong time. But the second reason is just simply the power of compounding. Right? If you don't lose as much in a down market, you don't have to make as much in an up market. And over time, you will still come out ahead. But if we can build a portfolio that performs consistently over time, then the rest of it, we don't have to get too concerned about unless there's a dramatically disruptive event.

• 12:16David Weisburd?

  Yeah, that's the behavioral finance, right?

• 12:18Speaker 01

  Yeah, absolutely.

• 12:20David Weisburd?

  Knowing how much you could drop without selling at the wrong time. It's very undervalued aspect of investing.

• 12:26Speaker 01

  Agreed.

• 12:27David Weisburd?

  And you have a tilt towards non-US equities or you're investing more on a global level. Why are you investing globally today?

• 12:35Speaker 01

  Yeah, it's a good question. So if you look at the global market cap, let's call it the MSCI market cap, global market cap. The US is roughly, I don't know the exact number as of today, but it's roughly 50% of the global market cap. And which means that 50% of the global market cap is outside the US. And just very rough numbers, let's call that 35% in EFA are developing international and 15% in emerging markets. Maybe those numbers are plus or minus. So if you overweight the US, you are by definition underweighting half of the world. And so that's kind of point number one. And point number two, it goes back to my answer to your previous question, which is markets cycle in and out.

• 13:21Speaker 01

  And this year is a good example of that for lots of different reasons. Primarily among them being the sort of steady decline of the dollar this year, which by the way, we expect to continue. The non-US markets have outperformed the US markets. They were not as affected by the liberation day disruptions that we had here in the US, which kind of cratered those big mega cap tech stocks for a while. They've all come back. But the combination of that downturn in April and then the decline in the dollar means that the non-US markets have outperformed this year. That won't necessarily continue forever, but what has historically been true is that when the non-US markets overtake the US markets, that trend tends to continue for a while.

• 14:07Speaker 01

  So even if it doesn't this time, the point of the story is you just don't know what's going to happen. And so I would rather have multiple bets in place.

• 14:18Speaker 01

  As an example, in developed international, most of the European countries with a couple of exceptions have committed to spending more on defense spending to honor their NATO obligations. That will be positive for economic growth in Europe. The emerging markets are taking on more of the production process away from China as people are sort of trying to diversify their bets, if you will, in terms of where they're getting their supplies and their goods. And so there's a pretty positive story to be told about the emerging markets as well. And when you combine all of those things, we just believe it makes sense to have, you know, a globally diversified portfolio. I don't have any problem, and in fact, I think our own portfolios today are overweight

• 15:03Speaker 01

  the U.S. relative to the global market cap, but they're not excessively overweight and we're not ignoring the non-U.S. markets.

• 15:10David Weisburd?

  And this might be a dumb question, but when you go about finding global managers, are these offshoots of U.S. managers? Do you look for very local, talented managers? How do you go about kind of picking global exposure?

• 15:25Speaker 01

  Certitude's been in the business a long time. We've had a lot of exposure to managers who specialize in non-U.S. investing. They typically are domestically based, not exclusively, but they tend to be based in the U.S., but their focus of their mandate as a fund or as a firm is non-U.S. investing. So I think we have a pretty good handle on who the best players are in the various spaces, be it, you know, international growth, international value, you know, small-cap emerging markets, whatever the category might be. We have a good lineup of managers that we know and trust and that we've used for a long time. And then, of course, we're always, you know, we're on this, we're out on the speaking tour and the conference circuit extensively. We meet managers all the time.

• 16:09Speaker 01

  We're happy to talk to anybody we don't already know and hear what they have to say. As a matter of fact, I just had breakfast just a couple of weeks ago with a manager that specializes in non-U.S. growth stocks and has a great performance, and that was a great meeting, and we're taking a look at them. And then if we have prospects or clients who have a relationship with somebody, we're always happy to take that input as well and have a conversation with those managers. So I think from a sourcing perspective, we're in pretty good shape with that respect. We have not historically, it doesn't mean we won't, but historically we have not. Spent much time looking for non-US managers domiciled outside the US.

• 16:52David Weisburd?

  And when you were speaking previously, you said that, you know, you're maybe cycling a little bit out of US markets because they've performed really well and and going into global markets. It reminds me of a Stanley Drunken Miller quote, which nothing looks as cheap as after it's gone up forty percent. And there's this, I've never heard it named, let's call it like a momentum fallacy investors. And I only know this because people are always so surprised when I sell like selling, when I sell a public stock, they'll say, why are you selling it's done so well?

• 17:22Speaker 01

  It's done so well.

• 17:22David Weisburd?

  My answer is always because it's done so well.

• 17:26Speaker 01

  That's the whole, that's the whole logic behind rebalancing, isn't it, and asset allocation. All right. And it's, it can be a difficult, you used the phrase behavioral a couple of minutes ago, and I agree with you. It could be a difficult behavioral conversation to go to a client and say, hey, we're going to sell these things that have done really well. And we're going to reallocate into these things that haven't done as well. That, that is at a fundamental level, that's a little counterintuitive. But the reason you do that is because, you know, at the end of the day, valuations matter. And you can go through very long periods of time, and we've been through this here in the US where momentum and sentiment are driving the market. And clearly, over the last couple of years, momentum and sentiment have driven the rally in the large cap growth stocks. But eventually fundamentals matter.

• 18:12Speaker 01

  And when you look at the, the valuation differentials in today's marketplace, the, let's just use three examples. The, the valuation differential between US large cap and small cap stocks is as wide as it's been in twenty years. I think it's still a little early. If you don't already have small cap exposure, it might be a little early to go lean into that too hard at this point, because I think there's still a lot of uncertainty there in three areas. One is they tend to be more sensitive to economic conditions and interest rates. And the third reason, more of a new reason, if you will, is that they are very much behind the large cap companies with respect to being able to adopt artificial intelligence into their, into their businesses. That day will come. And and when it does come, those small cap companies will be well positioned to increase

• 18:57Speaker 01

  productivity, profitability, margins and so forth. So the day, small caps day is coming, but it might be a little early. But the, for now, the fund, the, the valuation differential is massive. If I look at the valuation differential between US, it's just in large caps between value and growth, that differential is about as wide as it's been in a very long time. That gap is closing a little bit because value has actually done pretty well over the last 12 to 18 months. But there's still a big difference. I think that trade actually is more timely. You know, if you've done well, if you've been overloaded into large cap growth stocks, congratulations, you've done very well. But given where the valuations are and the prices are, you know, I think a lot of people are taking, saying, hey, I

• 19:39Speaker 01

  had a good run. Let's, to your point, let's take some chips off the table and let's reallocate into something that has a, a better fundamental value because the upside from there is higher than the upside from a very high, a high-priced stock. And then the third example I'll give is the valuation difference between the US and non-US markets. The US markets are always, always is a powerful word, but almost always priced at a premium to non-US markets. And there's a whole variety of reasons around that in terms of governance and, and tax, you know, tax accounting and so forth. So it's not unusual to see the US valued at a premium to non-US. But again, that difference today is as wide as it's been in decades.

• 20:24Speaker 01

  And so if you are a, a fundamental investor, which historically has proven to be a very valid, you know, a very valid way of investing, you have to be looking at some of these valuation differences and saying, gosh, maybe it's time to go into something that's a little lower priced.

• 20:38David Weisburd?

  Today, as I mentioned, you're a $4 billion CIO of multifamily office and you have the very interesting job of allocating your clients' capital. And you believe that the average family, obviously, there's many factors like liquidity, timeline, purpose of funds, but the average family should be about 20 to 25% in alternatives or in private assets.

• 21:03David Weisburd?

  Why 20 to 25%?

• 21:05Speaker 01

  It's a good question. So again, every individual client or family, the right answer to that question is based on their objectives, their risk tolerance and their liquidity needs. But if you just sort of take it at a blank sheet of paper level, at one end of the of the spectrum is if you're going to go into something that's less liquid, be it a drawdown structure or an evergreen,

• 21:32Speaker 01

  it needs to be a big enough position to make a difference. Right? So if you allocate, I'll use a number, if you allocate less than 10% to less liquid things, you're probably not going to move the needle in terms of the performance of your overall portfolio. At the other end of the spectrum, you know, if you were to run an unconstrained optimizer, with all the caveats that go along with optimizers and capital market assumptions that go into it,

• 21:58Speaker 01

  the optimizer might spit out that it thinks you should be 40 to 50% in these less liquid strategies. That, at least in my experience, is too much for most families because of the illiquidity component of it. So they might understand that the risk return profile is advantageous there, but they don't want to, they just are not comfortable having that much of their portfolio be illiquid. And so what that leaves you with is the is the range in between. And so, you know, 15% is a number, at least in my opinion, where you can start to make a difference in terms of your risk-adjusted performance. 25% is about as much illiquidity as most families are willing to take.

• 22:38Speaker 01

  So you kind of start in there and then you have the discovery process with your client or your family and you determine what makes sense for them.

• 22:48David Weisburd?

  I have to ask, some of your more aggressive clients, the ones that you tell them not to do this, what percentage of their capital is in alternatives?

• 22:57Speaker 01

  It's a slightly different answer than than what you're asking, but the, you know, a lot of our families, they're still very involved in operating companies. So they're still running businesses. And if you want to think of that as a private investment, which I would, because a lot of them are not public, they are still privately held companies, you're already at a very high number, right? So it's very much dependent on what's happening outside of the portfolio itself.

• 23:25Speaker 01

  To my knowledge, and I have to go back and look at it client by client, but to my knowledge, we don't have anybody, at least within the portfolio level, who's loaded up more than about 25% into illiquids.

• 23:37David Weisburd?

  So I want you to take off your fiduciary hat, put it aside, and now just imagine yourself and your own money in these situations. And one of the things that I'm trying to square is if you made $500 million as a biotech VC, and let's say you're still running your funds, you still have this non-diversified position to your point. It's an operating company, but let's say it's a biotech fund.

• 24:00Speaker 01

  Yeah.

• 24:01David Weisburd?

  There's two absolutely extreme views on it. One is you want to have 0% of your discretionary assets in biotech or anything adjacent. But then you could argue that you would have alpha there. Walk me through that decision-making process, not as a fiduciary, you know, who has the responsibility of your clients to make them very diversified. But if you're investing your own money, how would you think through it?

• 24:22Speaker 01

  I have a couple of anecdotes along those lines. I can remember, this goes back a while, but I can remember at one point, there was, we were dealing with a prospect who had made their money in telecom, right? And we said, it's important, with a one particular telecom company, whatever it was. And we went to that person, and we said, hey, we think you should diversify. And he said, oh, well, I am diversified. I own 10 different telecom companies, right? And, but that's their mindset, because that's what they know, right? And people, you know, it's a natural instinct, go back to behavioral finance,

• 25:02Speaker 01

  it's a very natural instinct to want to invest in what you know best. And so it's a conversation and an educational process to say, good for you, you know, you've got this concentrated position in whatever industry, you use biotech, so let's use biotech. You don't need to take more risk in biotech. Let's use probably a much more common example, where you've got an employee at a firm who has a 401k plan. And, and part of that 401k, one of the choices within that 401k plan is to buy stock in the company.

• 25:41Speaker 01

  You can be a big believer in that company. But I don't know that that's necessarily a good decision because your entire livelihood is based on the success of that company. Right? So if you're getting your paycheck from company X. And then you're loading up on stock and within your retirement plan in the company X. You put yourself at a pretty big risk position. That's different than getting options or grants or things like that. But if you're making the conscious decision to go and buy stock in that company. You're really concentrating your bets and that can go very well for you, but it could also not go very well for you. So I think the important thing is to have that kind of conversation and say, you don't need.

• 26:23Speaker 01

  You've done really well in this biotech company. You don't need to continue to take this kind of risk. You know, the cliche, right, is that you get risk, you get rich by being very concentrated. In this case, the person who started this biotech firm. But you stay rich by being diversified. And so, you know, how much is too much? I mean, once you've hit a number that allows you to live the life you want to live forever. And leave the legacy you want to leave forever. How much more risk do you need to take? And so it's a conversation. You don't always win the conversation. People do it, it's their money, they can decide to do what they want.

• 27:03Speaker 01

  But we would always have, try to encourage them to sort of take a step back and say, why are you taking more risk than you need to? Within your portfolio? Now, you asked me the question before of if it was just me, right? And how would I be allocating to privates and alts right now? So if I sort of put my liquid portfolio to the side. And just say, all right, you gave me X amount of money. I think the number you gave me before on our pre-call was a billion dollars. So if I was strictly looking at just the illiquid stuff. Personally, given my age, given my risk tolerance, given my liquidity, you know, desires.

• 27:45Speaker 01

  Currently, I would be probably about 10% in a multi-strategy hedge fund for diversification purposes. I would be about 45% in the private credit. Because at my age and my, based on my current financial condition, yield and income is very important to me. And then the rest would be, I'd probably be 25% in private equity. You know, my firm has a big presence in sports investing, so there'd be some sports investments in there, and then probably 10% each into infrastructure and real estate.

• 28:16David Weisburd?

  I'd like you to correct my thinking. So going back to this biotech example, the way that I look at it, first of all, the question of how much enough is enough is an unanswerable question. It's philosophical and there's many different, so I'm not going to go there. But if I look at it, I actually don't necessarily, I care about diversification secondly, after I care about the expected return of the capital and the standard deviation. So for example, if I could get into biotech, Series C company at Series B pricing because of my personal relationships, this assumes informational alpha. This is an important assumption.

• 28:53Speaker 01

  Sure.

• 28:53David Weisburd?

  And it has an expected return of 3X. And unfortunately, biotech's a terrible example because the standard deviation might be the entire return. But let's say it has a standard deviation of 1X, and I know that within 2 standard deviations, I'm getting my money back, and I'm most likely going to do a 3X. I would argue that there is a rational reason and not a biased reason to invest there. Now, it all goes back to how much money is enough, making sure you have your nest egg, and that you have plenty of money for yourself and whoever else you're providing for. But I think there is a rational reason to be maybe tilted, or maybe from a perspective of portfolio construction, over diversified, but from an individual asset, why is it kind of makes more sense?

• 29:38Speaker 01

  You said a couple of things in there that are, I think, are important to your question. And one is the notion of informational alpha. If you have it, you should capitalize on it, right? So that's certainly legitimate.

• 29:53David Weisburd?

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• 30:37Speaker 01

  And secondly, it goes back to the valuation question that we were talking about a few minutes ago. Right? If I can get into an investment work that I have good understanding of, and I believe it can generate this kind of return, and I can buy it at a price that's not reflective of that. To some degree, that's an arbitrage trade. And and there's nothing wrong with that, right? So if you if you have informational, if you have an informational edge, and if you have, and if you have the opportunity to buy something at a valuation that you think is much lower than it should be. I mean, that's what private equity investors do. Right? That, you know, they, that's their whole MO is they try to go and they try to find companies where they see intrinsic value in that company, maybe with some,

• 31:22Speaker 01

  some corporate restructuring or some different capital structure or whatever the case, you know, some different management experience. But they see intrinsic unlocked value in that firm that they think they can realize an outsized return from. That's exactly what private equity investing is. And if you have that ability to make that analysis and make that, and you have the opportunity to take that bet, of course, you should take it.

• 31:43David Weisburd?

  As a multifamily office, you're mostly dealing with taxable investors. You obviously have some non taxable buckets, but mostly taxable investors. How does that change how you invest? And how do you keep that account account into the portfolios and the models that you build? How do you practically operationalize that?

• 32:00Speaker 01

  Yeah, that's, that's a good question. So one of the things that we believe very strongly is that the the two things or two aspects of wealth management that any advisor, us included, has the most control over are fees and taxes. And that, you know, part of a big part of our job, hopefully, I, you know, we're making good decisions on the portfolio construction and in manager selection side and building robust portfolios. But we pay a huge amount of attention to trying to minimize fees and mitigate taxes on behalf of our client. So because we are, we're not a gigantic MFO, but we are of size. And that allows us to negotiate institutional level pricing with our custodians, with our

• 32:45Speaker 01

  managers, with our sponsors of our private funds. You know, we can get enterprise pricing or advantageous pricing on behalf of our clients. And anything that we do manage to negotiate down, we pass 100% through to our clients. So there's no skim for certuity on that. There's no pay to play. So that's one aspect. That's the fee side. On the tax side, we're, I'm not going to use the word aggressive because that has different, that has a different connotation when you talk about taxes. But we are very active in, in a whole variety of very mainstream ways of trying to minimize taxes. So of course, the first one that, that most people are familiar with is asset location.

• 33:27Speaker 01

  So making sure that different, different assets are in different kinds of legal structures to either defer or minimize taxes. I think most people are familiar with that. We have a partner that we do very, on the liquid side of the portfolio, so anything that has a ticker, we're very active on a tax management overlay program where we can sort of lay it on top of their portfolio and harvest tax losses along the way and generate what we'll refer to as tax alpha, you know, depending on how aggressive they want to be on that. It could be, you know, any, you know, just on the default scenario, that could be anywhere from one to three percent per year in tax loss savings.

• 34:05David Weisburd?

  Just on traditional long short, that's also if you might have public biotech or public AI exposure, you're also aggressively tax loss harvesting.

• 34:14Speaker 01

  Well, if it's a concentrated position, the, this strategy can be very effective in helping you get out of it in a tax effective manner because it is harvesting losses as, you know, that you can offset as you sell your position down. The more typical scenario is somebody's got a portfolio, maybe one that we've built for them, and then we put the long-short tax management program on top of it. And so the core portfolio is doing whatever it does, but then the long-short, and we typically use a market-neutral strategy because we're not necessarily trying to add alpha on the long-short side of it. We just want to pick up losses and use that to offset gains. So if somebody has a liquidity event that they know is coming, you can begin using this

• 34:58Speaker 01

  strategy to begin to collect and harvest losses that you can use when that liquidity event takes place, and/or you just use it as an ongoing tax management tool. The benefit of the long-short strategy, David, as you know, I mean, the long-only strategies in this area have been around for decades, and I've been using them for decades, and they're great. The challenge with the long-only strategy is that every time you harvest a loss, the basis in your remaining portfolio drops a little bit, and you reach a point where the basis has fallen to a level where the unrealized gain within the portfolio is at risk of exceeding the tax losses that you've harvested along the way, and you have to kind of reset it back to neutral.

• 35:43Speaker 01

  So you get like a five- to seven-year deferral, but eventually you're going to have to kind of re-set the portfolio. With a long-short strategy, where you're, you know, if the stock, you're making, you can collect losses no matter which way the market moves, right? It's, if the market goes up, you, you know, you harvest a loss on your shorts, and if the market goes down, you harvest a loss on your longs. And, and because of the nature of that, that basis drip doesn't really happen very fast, and so the reset period is extended significantly. So it's, those strategies, the long-only strategies have been around for decades. The long-short strategies, you know, maybe half a dozen years, but they're tested and they're tried and true.

• 36:23David Weisburd?

  You also, you're bullish on sports teams. To me, I know a lot of very smart investors that have made a lot of money in the space, Arcos, CAS Investments, but they do feel a little expensive today. Why is sports in the category not expensive today?

• 36:41Speaker 01

  Expensive is always a relative term, right? And so when you have

• 36:49Speaker 01

  When you have, clearly, sports as a investment category is exploding. And it's exploding in a couple of different ways. One is that the number of professional teams that are offering minority interests or deals into their teams is growing.

• 37:09Speaker 01

  Viewership, media rights, sponsorships are exploding because those sponsors and those media companies realize that they have a very, a very attached and dedicated audience, fanbase. And then, yes, it's true that the multiples that you're seeing today are higher than the ones that you saw a couple of years ago, but I don't know that necessarily means that they're expensive. And, and so I think it really is very dependent on the team, very dependent on the sport, and very dependent on the media rights and sponsorship rights that go along with it. I'll use an example of the NBA.

• 37:49Speaker 01

  Where, you know, maybe the price of getting a minority interest in a particular team is higher than it was a couple of years ago. But at the same time, the NBA just signed a media rights deal. That is sort of a guaranteed income stream for every team, no matter how good or bad that team is, because it's all gets shared pro rata, the whole, the whole deal gets shared with every team. So, that would, that would naturally result in, you know, a markup in the valuation of that company, right? So, regardless of what it's trading at now, if, if, if a league or a team signs a, a big media deal, you would expect there to be a markup. So then, it really wasn't expensive, right?

• 38:31Speaker 01

  There will reach a point, just like with the mega cap tech stocks, where people will say, is, how much more upside is there? So, I, I think the, the notion of what's expensive and what's not is very relative. Because I do think that even though this is kind of a growing area, it's still pretty much in its infancy. So I think we have a ways to go before we, we need to worry about whether or not something's too expensive to, to make the investment.

• 38:55David Weisburd?

  And tell me how you approach the private equity space?

• 38:59Speaker 01

  There's sort of several different ways that we approach it. The first is to determine with our client if they're interested in income oriented strategies or growth oriented strategies, right? So that's sort of the first decision tree point. Because there are strategies that, you know, generate different kinds of return profiles. The second is to, we look at, we believe, you know, there's, there's a couple of dominant spaces within private equity, right? Growth equity and LBO. And those have been, those are a little bit crowded, but they're still there. But they also have been a little bit quiet recently because the traditional exit ramp

• 39:39Speaker 01

  for those kinds of strategies, as in IPOs or M and A, have been a little quiet. Which is not to say that they're bad areas to be in, but there's a lot of other areas of private equity that you can invest in. And, you know, we're looking at, for example, at infrastructure. We think that the demand for energy in the world and in the country, in this country in particular, is insatiable. And so we think there's going to be a lot of investment into data centers, into energy production and transmission. So we think there's some really interesting opportunities there. And so I think we try to segment it into what the client's looking for. And then at the construction level, you know, just like in any other portfolio, we want to have manager diversification.

• 40:22Speaker 01

  We want to have strategy diversification. And then, of course, the big thing with privates that's different than the public markets is you want to have vintage year diversification as well. So it's not a sort of set and forget, one and done sort of thing. The idea is that over time, you want to build a portfolio of private companies that, once you get through the, into the distribution phase, you can begin to self-fund into the next round of whatever you might be doing. So there's, there's a, there's a logic there in terms of the construction aspect of it. But it's also, from a sourcing perspective, keeping your eyes open for, you know, opportunities that may be a little bit different than what everybody's always invested to historically.

• 41:06David Weisburd?

  You've been in the CIO seat, not just at Certuity, but Dynasty and other places for quite a while. And you've got to see some great funds. How many of the top funds are typically sourced by the MFO and the RIA versus sometimes a client has really special access. Let's say a client was a former partner at Sequoia and now could get you into Sequoia, or just has a great idea that they maybe know through their network. How often do you actually get to know managers through your clients' networks?

• 41:37Speaker 01

  It's both. So we certainly, again, because it's, if you know who we are at the brand level, you know that we are active in the space. And so we are constantly approached with inbound calls from managers and sponsors. So we're constantly being introduced to new managers in that respect. They're just doing their job, you know, out marketing and selling. We've been, because we've been around a while, we don't, we know the space, we know the players. And so we do sourcing of our own. Chances are we've met or have a relationship with a whole variety of managers. We do partner with a third-party firm that helps us if, upon request, with due diligence and also with sourcing.

• 42:21Speaker 01

  So if, for example, if we're wanting, if we say, hey, let's, let's take a look at the infrastructure space. We know a handful of players, but we might call that partner and say, hey, who else do you know and who do you like? And they typically have a whole list of firms and they say, these are the three we like the best. And so then we'll go do our due diligence on those. And then we actually do get a fair amount of inbound from our clients and prospects who say, hey, you know, I have a whole, I'm invested in this fund, or I have friends who are invested in that fund. It seems to be really interesting. Why don't you guys take a look? And we're always happy to take that call, right? So sourcing is not a problem within private equity for a firm like ours. And we're not unique in this respect. But if you, if you deal with the kinds of clients that we deal with and you've

• 43:05Speaker 01

  been historically active and it's known that you've been historically active in the space, then sourcing is never a problem.

• 43:11David Weisburd?

  And you guys are almost the ideal size of LP. You're not, you know, sub a billion dollars where you might not be a large enough check to get look at stuff. You're not calipers or calsters where you have to deploy a lot of capital unless you have a strategic alliance. Is there ever a role of fund of funds in your portfolio? Or are you always going in direct in funds? And if so, in what cases would you ever use a fund of fund?

• 43:37Speaker 01

  So we have a program within Certuity that we call Alts Plus. And it's a platform, and it's not commercial. It's only available to our current and existing clients. But it's a platform where at the collective level, you know, we can soft circle, let's call it 10 or 15 million dollars of commitments into a new fund or a new cap raise. That's enough to get us a seat at the table at the firm level. Right? And in many cases, it's enough to get us, you know, beneficial pricing and access and minimums. So from the client's perspective, the benefit is they don't have, let's just make a number up and say that the minimum for the fund

• 44:21Speaker 01

  on a direct basis is a million dollars or 5 million dollars. Within Alts Plus, they could come in for 100,000, right? 50,000. But collectively, we will raise the appropriate number to get to the number that we sort of quasi committed to the sponsor. So our clients can get in at a much lower minimum. And we can, so it also sort of mitigates the need for a fund of funds because we, you know, let's say we have 15 choices within Alts Plus. Maybe it's 10. Our clients can pick and choose the ones they want. So they're not, when they, if they go in through Alts Plus, they're not getting a fund of funds. They don't have to invest in everything that we have on there. They can pick and choose the ones that they want. So maybe they like three or four of the different ones

• 45:06Speaker 01

  and they can make investments into each of those. And then from the Certuity side, we handle, we consolidate all the paperwork. We handle all the cap calls. And we provide the client at the end of the year or at the end of the tax year with one consolidated K1 for anything that they're invested in. So it makes the, it makes the life of our client a lot easier. It allows us to use the collective size of the firm to get into funds that we might not otherwise because we can bring 20 investors in and raise 10 million bucks.

• 45:42Speaker 01

  And so the combination of those two things, it kind of negates the need for a fund of funds on the private equity side for us. On the hedge fund side, it's a different story. You know, I would much prefer, first of all, I believe in hedge funds. They've been very dormant for a while because the market conditions just weren't conducive. I think we're entering a different market regime now where we're going to have rising rates and rising volatility. That's the kind of environment where these sorts of strategies have historically performed the best. And so, but in that case, I would rather have sort of a one-stop solution. So I would, rather than trying to build a diverse portfolio of individual strategies,

• 46:27Speaker 01

  I'd rather go down the multi-strategy hedge fund path. Or although I don't love the fund-to-fund structure, you know, if there's a good one, we use, we have a partnership with a very good fund of funds now. It's not my favorite structure because of the fee levels. But if I can find a good multi-strat where I can get the level of diversification I want with one shop, I'm very happy with that. So that would be a case where we would use the fund of funds.

• 46:52David Weisburd?

  It was a big efficient market, Sky, and then I spent two hours with Cliff Asness in Connecticut, and he made me a believer in AQR and quant funds. So I'm a recent convert.

• 47:03Speaker 01

  Yeah, it's hard to, it's hard to not be influenced by Cliff. I've met, he wouldn't know me if he tripped over me, but we've met a handful of times and he's, he's a very impressive guy.

• 47:11David Weisburd?

  So I'm curious, you have this Alts Plus platform, super streamlined, your LPs get 1K1, which is really nice.

• 47:19Speaker 01

  Yep.

• 47:19David Weisburd?

  What about from the GP side? Is it truly, is it truly that I'm just dealing with somebody from your team? Is it, is it indistinguishable from, from a single check from another LP? Or is it kind of having to deal with a lot of people?

• 47:33Speaker 01

  Typically, you know, the, the, most sponsors would make themselves available to the individual client upon request. But, but more typically, they're viewing Certuity as, as the LP. Right? So we might have 15 or 20 investors underneath the Alts Plus umbrella. But from the sponsor's perspective, the client is Certuity. So, so the, you know, we're the ones who have the quarterly update calls. We're the ones who, you know, have the outreach to them, you know? We're the ones that ask them questions on behalf of our clients. So while they're not trying to hide from the, the ultimate investor, they, the preferred.

• 48:18Speaker 01

  Business model is that they view Certuity as the client and then and deal with us primarily.

• 48:23David Weisburd?

  I don't want to age you, but going back to 1985, when you graduated your MBA, what is one piece of advice you would give that Scott that would help him more in his career? Maybe avoid some mistakes or accelerate his career further?

• 48:34Speaker 01

  So when I look at my own career path,

• 48:38Speaker 01

  you know, I I knew, you know, I had a field trip to Wall Street when I was in business school. And I grew up in a little beach town in California, didn't hadn't really given a ton of thought to what I wanted to do. But when I stepped off the bus on this field trip on Wall Street, I looked around, really my first time in a very big city. And I said, I don't, I don't really understand what's going on around here, but I want to be part of this. And and so that's what drove me to get my my first drop down at Wall Street. And it was, I was very happy. It was great. It was a great experience. But then when you look at sort of subsequent changes in my career path,

• 49:17Speaker 01

  and I'm not suggesting this is good, bad, or indifferent. It just is my experience. Most of them were not planned out for like, I didn't say, okay, I'm going to do that next. And then I'm going to do that next. It was I I was doing my job. I was enjoying my work. And then I came across an opportunity that seemed more interesting than what I was doing. And I took it, right? And that has worked out very well for me, right? So I went from being a banker to being a consultant to the banking industry, to being a wealth manager, to, you know, to to being a chief investment officer. It was simply because I was not afraid to take chances when what seemed to be a really interesting opportunity came along. So that would be my first, you know, don't lock yourself in because the chances are that whatever job you have now

• 50:01Speaker 01

  is not, it's going to be very different 10 years from now, if it even even still exists, right? And artificial intelligence, literally, it's a cliche, but it is going to change everything. So if you're, if you think that you're coming out of business school or undergrad school and having locked into a career path, it's probably not going to turn out the way you think. And so don't, don't limit yourself by today's definitions of what a job looks like.

• 50:26David Weisburd?

  And in that case, I guess the behavior change would be you would have taken those opportunities either quicker or more aggressively? Or, you know, or is that just like one of the strengths that you applied to your career that other people should apply?

• 50:41Speaker 01

  And it's always easy to say and to see things in hindsight, right? And say, oh, of course, that's what was going to happen. Right. But, you know, as an example, um, with artificial intelligence. If you, if you are, and I'm not suggesting anybody is like this. But if you are someone who says, oh, that's just a fad. Or that, you know, I don't have to pay attention to that. I don't have to stay on top of what's going on there. Crypto is another example. Oh, I don't have to worry about that. Well, then you're gonna, you're gonna fall behind. Right. Because there are some things that are out there. You can't, you don't have prescience. You don't have a, a crystal ball and you know exactly what's gonna happen. But I think it's pretty clear to use AI as an example, that it's going to change everything.

• 51:22Speaker 01

  And, and so, you know, i- i- if I'm, if I'm a young person, if I'm Scott at 25 and I see what's happening, then I, I know that I need to get trained up on AI and, and figure out how I can either use it in the job that I have or create a different career path that ta- that takes advantage of that, of that evolution. From an investment perspective, um, the best advice I today, Scott, could give 25 year old Scott

• 51:51Speaker 01

  is, uh, I, I should have, I should have been much more aggressive in my personal portfolio. I was young, I had a 40 year career ahead of me. And I was too risk averse. I grew up in a very risk averse, debt averse family. And so I, I carried that with me into my own personal career, my own personal investment perspective. And it, don't get me wrong, I, I, I took, I took risk. But in hindsight, and I try to tell this to my own kids who are about that age now.

• 52:20Speaker 01

  You have a long time ahead of you and you can take risk. Because if you, if something goes wrong, you have a ton of time to make it up. And so, you know, had I, and I'm not kicking myself, you know, hindsight's 2020, but no regrets. But if I had been more aggressive, uh, I, I would, I'd be in a better, in a better position today than I am.

• 52:37David Weisburd?

  To use another cliche, what about strengths and weaknesses? In retrospect, should you have leaned in more to your strengths, worked on your weaknesses, built teams around that? So give me some advice on that.

• 52:47Speaker 01

  Two best pieces of management advice that I've ever received. The first one was from a guy I worked with when I was a consultant to the banking industry. And I was looking, uh, he knew that I was looking maybe to move on to a different position. And he said, Scott. Need to understand, nobody is going to hire you to maintain the status quo. You know, so in other words, if somebody is interested in hiring you, it's because they want you to come in and implement change. And so I think a lot of times, you know, the inclination is, hey, you don't want to rock the boat. You want to come in, you want to kind of fit into what's going on, but that's not why they hired you.

• 53:29Speaker 01

  Right? They, they, the firm identified something that they want to have changed. And they believe that you can be a catalyst to that change. And so don't be afraid to, you know, you don't have to be a jerk about it, but don't be afraid to say, well, you hired me to do this and here's what I think and let's, let's figure it out together. Right? So that's, that was management advice number one. The other one that, and it goes directly to the question you just asked is, you know, I was working when I was still relatively early on in my wealth management career. You know, we had the very traditional end of year evaluation process where you say, these are my strengths and these are my weaknesses. And this is what I'm going to work on, you know, and, and so I'm writing down all these things that, that I perceived as my, my relative weaknesses

• 54:13Speaker 01

  and everything that I was going to try to do to get better. And my, my direct report, my boss came into me and he said, Scott, first of all, you've correctly identified your strengths and weaknesses. So congratulations on that. But you could spend the rest of all of next year trying to improve your weaknesses. And you might get average. You know, you might get to the point where you're mediocre at those things. So don't worry about them. Accept them. Don't, don't, don't like just dismiss them. Don't just say, oh, well, I can't do that. So you can try to get better, but spend more of your time getting better at the things you already do well. Because you, the things that you do well, you actually do really well.

• 54:57Speaker 01

  So why not just get better at those things? Because that's going to be more valuable to you and more valuable to us than if you try to get average on the things that you're weak at. So I, I think tho- those, those two pieces of advice were the best management advice that I ever received.

• 55:11David Weisburd?

  Yeah, I think it's kind of paradoxical. You want to be aware of your weaknesses. You don't have to, you don't have to quote unquote, work on them, but you have to make sure somebody else, that's their strength. So you have to work on it by partnering with somebody. That's the work you have to do.

• 55:25Speaker 01

  Ab- absolutely. Without question. And that's, you know, one of the trends in wealth management. It's not really a trend, it's been around for a long time, but getting more notice and more media attention is this notion of teams, right? I think everybody recognizes that our industry has become increasingly complex to the point where no one person, or very few individual people can do everything well. Right? And so you have to partner. You have to find a good team around you. Right? So maybe I'm, maybe I'm an okay investment professional, but I know, I know very little about tax planning or estate planning. Right? So I could spend all my time trying to get up to speed on that, or I can go and find a partner who's already an expert on that.

• 56:09Speaker 01

  And then somebody who's an expert on performance reporting and somebody who's an expert on insurance. Right? And I, and I, if I could build the team that delivers the, what, what clients want to pay for these days, which is advice. You know, a team is the only, I think the only way to go.

• 56:26David Weisburd?

  It's one of the, one of the many things that educational system completely fails us as, is trying to find people that are A minus. If you're an A minus in every single thing in the education system, you're a high honor roll. In real life, you're a loser.

• 56:42David Weisburd?

  For lack of a better, lack of a better word.

• 56:44Speaker 01

  Now, you know, I do think that there's truth uh, in, in the, in the expression that, you know, if you're an A player. And you know, A players hire other A players because they're not, they're confident enough in their own abilities that they are not threatened by people who are very good at what they do. Right? So A players hire A players, B players hire C players. And, and I think that that's, I think that's true. And I've, I've seen both of those scenarios play out. You know, one to the positive and one to not so, right? So uh, I think it's important to kind of evaluate, uh, you know. How confident are you in what you do well? And therefore, how comfortable should you be in bringing in people who are really

• 57:29Speaker 01

  good at what they do without feeling threatened by them?

• 57:33David Weisburd?

  This has been a remarkable conversation. Thank you so much for sharing so much wisdom with me and the audience.

• 57:38Speaker 01

  That is my pleasure, David. Thanks for having me. Appreciate it.

• 57:41David Weisburd?

  Thanks for listening to my conversation. If you enjoyed this episode, please share with a friend. This helps us grow, also provides the very best feedback when we review the episode's analytics. Thank you for your support.