E181: Why Portfolio Construction Beats Manager Selection w/$7 Billion CIO

In this episode, I speak with T. C. Wilson, Chief Investment Officer of The Doctors Company (TDC Group), the nation's largest physician-owned medical malpractice insurer with $7 billion in assets under management. T. C. shares how he built an internal investment office, how insurance investing differs from endowment and foundation models, and why he treats surplus like an endowment portfolio. We dive into his framework for portfolio construction, his views on innovation in asset management, the underrated value of evergreen structures, and the specific ways GPs can tailor their approach to win over insurance LPs. T. C. also shares why he’s cautious on large-cap private equity, how he thinks about downside protection, and what extreme ownership has taught him as a leader. If you want to learn how a CIO with decades of experience invests across public and private markets with an eye toward solvency, surplus growth, and long-term resilience, you’ll want to listen to this one.

• 0:00Speaker 00

  So tell me the story of how you became the CIO of TDC Group.

• 0:04Speaker 01

  It goes back to 1996 when I left Mercer, I moved into the investment consulting practice. Where I kind of learned about asset allocation, investment policy work, manager research. Ninety six, I had the opportunity to start an institutional consulting group with a local broker dealer in Richmond, Virginia. They had a large producer who had a couple of bigger accounts, institutional accounts, and many of them were insurance companies. One was in San Francisco. So a couple of times a year, I'd go out to San Francisco. It wasn't the doctor's company. About three years after that, the CFO of that company that I was consulting to introduced me to the CFO of the doctor's company.

• 0:50Speaker 01

  He was in need of external investment guidance. Portfolio had grown to about 700 million in assets. So that kind of started my involvement with the doctor's company for 18 years. So in 2017, the TDC portfolio had grown to about 4 billion. So I approached him and said, look, you've known me for 18 years. You know, I love the way this company is managed. I really see an opportunity for growth, not only personally, but for the company as well. So in September of 17, I became the first CIO. And I proceeded to build an internal team, kind of like an internal consulting team with staff that was already on board. And it was very important to have that support.

• 1:33Speaker 01

  While I had the investment background, for all the reasons that I mentioned and what I had learned over the years, a few things that I wasn't aware of, it was treasury and cash management and investment accounting. So I chose two individuals, I identified two individuals in the company. Wilma Rebe, she is my Director of Investments and Treasury now, and then Harlan Shadig, who is a Director of Investments, but he has that investment accounting expertise, which is critical to my job. So with them, you know, we've been instrumental in the growth of our portfolio. We're at 7 billion in assets under management today and about 3.2 billion dollars in surplus.

• 2:15Speaker 00

  Insurance companies like endowments have this outflow of capital every year that they have to make in order to satisfy the insurance payments.

• 2:25Speaker 00

  How do insurance companies differ from endowments and other type of allocators? And what makes them unique as an asset class?

• 2:33Speaker 01

  First of all, we are not tax exempt, so we don't have those requirements. We are taxable entity. And really, it comes down to what our claims are and what the severity is. And being able to meet the obligations of our shareholders.

• 2:53Speaker 01

  I'm in a very unique position with a very strong company where I've never had to sell a security to pay a claim.

• 3:02Speaker 01

  We are positive cash flow, so we don't have any requirements, if you will,

• 3:08Speaker 01

  similar to endowments and foundations to distribute assets.

• 3:12Speaker 00

  You guys have a $3.2 billion surplus as an insurance company. How does that change the way you go about investing your capital?

• 3:19Speaker 01

  The surplus, it's important. It's one of the key indicators of our financial health. And it was a reflection of how well our company is managed. It's really important because it does reflect our ability to absorb losses and remain solvent, even during the most extreme periods of high claims. And it also allows us to remain reasonable when we seek to raise rates and increase premiums. Now, from an investment perspective, it gives my team more latitude when investing across, you know, whatever asset classes are out there. You know, having more surplus, and somebody told me this years ago, and I've always kind of applied it to surplus. Treat the surplus kind of like the traditional endowment foundation model,

• 4:02Speaker 01

  whether it's 60, 40 equity debt, 70, 30, whatever, you know, that's where you can, that's where we can take our risk. And our risk is anything that's marked to market and includes equity and many other asset classes. It's the fun part of the job, right? Because 3.2 billion, that's the portfolio. I can invest in basically anything that's allowed by the states. And it's a pretty, it's a pretty wide range. So our strong surplus is a competitive advantage. So when it comes to attracting new members, the members want to work with a company that's financially secure. And clearly, we're one. We're rated A by AM Best, which is excellent, an excellent rating and with a stable outlook.

• 4:47Speaker 01

  And surplus is certainly a part of that assessment.

• 4:52Speaker 00

  And you alluded to it, you're a taxable investor. How does that change how you invest in your portfolio construction versus maybe a non-taxable investor like a foundation or an endowment?

• 5:05Speaker 01

  We do have a small allocation to municipal bonds that obviously have tax exemptions on the income, but it really doesn't change it too much. All of our assets are externally managed. Okay, so where it does impact us is if our manager, if we get a high turnover manager in our portfolio, that usually doesn't bode well for us. We don't have any, right? We don't want them booking gains or losses actually, okay, but we don't want them booking excessive gains. I know that sounds kind of counterintuitive, but we, me and my team.

• 5:44Speaker 00

  So you're taxed on the distribution of capital, not just, all things being equal, you want it to compound a while before it comes back into your portfolio?

• 5:55Speaker 01

  That's correct. So, you know, that's it. So again, I think there was a longer answer to what you asked, but it really doesn't impact us too much with the exception of what I just discussed. We don't want that high turnover manager.

• 6:06Speaker 00

  I don't want to age you. You've been asset management for 35 years. You certainly don't look that way. But going back to 1990 at Mercer, you've been really compounding your knowledge in the space. What do you believe differentiates the GPs that go the distance versus those that maybe do one or two funds? What are some of those differentiating factors?

• 6:26Speaker 01

  Um, you know, I hate to use a word that we hear every day or read about every day, but you know, and it's changes definition over the years, but it's innovation. You know, clearly those that have embraced innovation and expanded their investment management options, they've persevered because the universe, as you're well aware of, strategies and investment options has grown significantly. You know, the public available security universe has shrunk, but that doesn't mean there haven't been other options. And those have kind of embraced that, certainly have persevered. You know, there are more vehicle options for companies like mine who like liquidity, as I discussed earlier, having an evergreen structure or these rated feeder notes that

• 7:11Speaker 01

  have come up lately, those really resonate well with me. And those are more kind of recent. I know we're looking 35 years. Most of those are in the last, you know, five to 10 years at most. I think some that have persevered have made some of their products more accessible to retail investors. I think exchange traded funds. You can go back and look at a 25 year history and the growth of ETFs. It's just been extraordinary. I don't think I'm going to see it stopping. In fact, I was in DC this week at a fixed income leaders forum and they were talking about ETFs and fixed income, which basically weren't available or not, not available, weren't as prevalent, you know, not, not too long ago and how that's

• 7:54Speaker 01

  expanding. And we use a lot of those. On the alt side, you know, we see a lot of firms that are, that are surviving, that are not using leverage as much and they're using more kind of operational improvements. Obviously that gets into AI and that's a whole nother discussion. And those who are willing to cut fees and fee compressions, I don't think, Christine, the end of that. Now, last thing I'll say, given my, again, my Mercer days, but really when I left Mercer and joined this regional broker dealer, who had the insurance and I started learning about insurance investments, it was, it was a different world. Those who

• 8:35Speaker 01

  can provide regulatory support. So just think outside of investment, only investment management services, but those who can provide some of the other bells and whistles, if you will, for me, certainly have persevered. So if they like carved out internal teams to support non-investment insurance management needs, so think about operations, filings, rating agency support, anything that's kind of, you know, additive or accretive to just straight investment management, those companies have, have certainly gone the distance.

• 9:10Speaker 00

  What's an example of a firm that's done that well? And what exactly have they done?

• 9:14Speaker 01

  And there were some that were doing it in the mid 90s and I first, when I first met them, you know, I'm really going to date myself and many of your listeners might not even know this firm, but, you know, Scudder Stevenson Clark, you know, back in the mid 90s. They had a big insurance group and they basically took me under their wing. Taught me all the the ins and outs of insurance asset management. But then they went beyond that because they already had that team in place. So other companies that have come in and I mentioned earlier. They've started to understand our business a little bit more. Understand the challenges that we face from a regulatory perspective mainly. And then from a reporting perspective. So the creation of like rated feeder notes.

• 9:59Speaker 01

  Right, that's been really good. The evolution of private credit in the vehicles to get access to private credit. You know, that's a market that's expanded. So those that are kind of open to to those ideas and willing to commit the resources to it. Certainly, you know, meet our initial screens and then some.

• 10:22Speaker 00

  Tell me about rated feeder notes.

• 10:24Speaker 01

  So the rated feeder note, let me just use an example that we're invested in. So we've got, we've got a limited partnership. We're invested in a limited partnership that has a rated feeder note structure. Eighty percent of that LP is a note that's yielding eight percent. It's a fixed rate. So we're getting that eight percent. The other twenty percent is the equity piece. So it can be and mostly it's mostly in private credit. So when I say the equity piece, it's the piece that's marked the marketing adds the juice over top of that. That eight percent note. The beauty for investors like me. When I am restricted on my Schedule BA.

• 11:05Speaker 01

  And I am restricted by my state, my state, my statutory laws. I don't have to count that one hundred percent of that LP on my Schedule BA. I get to take that eighty percent, move it over from BA onto my Schedule D. And then so I'm only counting twenty percent. So all of a sudden I'm getting a diversified exposure to market. In this instance, I'm referring to middle market direct lending. But I'm not having to account for one hundred percent of my allowable limit in that.

• 11:39Speaker 00

  And this is extremely attractive to insurance company investors.

• 11:45Speaker 01

  Yeah, because of the income and then because of the accounting benefit. Yeah, because you get to put that that 80% or whatever it is on scheduled day.

• 11:54Speaker 00

  Perhaps this is a little bit naive. Insurance strikes me as one of those industries that has 8.5 trillion in assets that a lot of managers somehow don't focus on. Managers think oftentimes about how do you differentiate yourself to LPs? Well, one way to differentiate is to appeal to a certain part of LP base, like insurance companies. What else? What are some other best practices for how managers can make themselves more attractive to insurance company investors?

• 12:21Speaker 01

  Knowing our business, right? And I think it's important. Go back to the mid 90s, Scudder, Stevenson, Clark. They understood insurance. So they came in, they were telling me things I didn't even, I didn't even know existed. Yet here I was, you know, as an OCIO and I should know these things. But it's really kind of knowing our business outside of the investment management space. There are plenty of great managers out there who can manage assets and total return in at alpha over the long haul. But in our space, if you understand our business, understand the dynamics that we're faced with, because it's always changing. Understanding our accounting requirements, understanding the regulatory environment.

• 13:04Speaker 01

  I think those are ways that, you know, managers can certainly, you know, distinguish themselves. We don't have managers that are simply managing to a benchmark, which is kind of counterintuitive that, you know, here, here's a manager. They want our business. And the first thing they say is, well, here's our track record. I'm like, okay, what's your track record to my guidelines? They're like, well, we haven't seen your guidelines. I'm like, exactly. So the ability to customize portfolios for us is critical. And we've had, we've had some good managers that have been able to adapt kind of their standard strategy into what's best for the doctor's company.

• 13:42Speaker 00

  I asked this question of like, what are the couple of things that you need to know for insurance companies? But the real answer is you need to spend your time and know your customer. It's like selling software to a tech company and knowing nothing about tech companies. You can't just get one or two insights about tech companies. You have to go in there, spend years kind of developing this competency. You've had multiple decades in asset management. You were in the OCIO space. One of the things that I'm really trying to double click on is how do managers get from mono lines to, you know, Blackstone at the most extreme? How do they evolve from a fund to a franchise? What have you found to be some key characteristics or leading indicators that a manager will be

• 14:25Speaker 00

  able to cross the chasm of being a mono line fund to a large asset manager?

• 14:31Speaker 01

  It gets back to the innovation that we've talked about and the ability to kind of have a little humility and say, okay, we're not doing things as well as we should. We need to expand our options and our strategies that we offer. And, you know, those that have done that certainly have persevered through some pretty challenging times. The ability to kind of think outside the box, always looking to improve. There are a lot of companies and managers out there who, hey, we do this, we do it really well, we really don't, we don't want to kind of, kind of move to the next level. That's fine, you know, they may get hired for their specific niche, but longer term,

• 15:16Speaker 01

  there's going to be a market that's really going to impact that one strategy and it's going to blow that firm up. There's plenty of examples, to go back to the dot com bubble in the GFC. But those again, who have been, use innovation, evolve and always look for improvement. I think that's, you know, that's a telltale sign of a successful company.

• 15:38Speaker 00

  Sometimes not taking a risk and expanding could be extremely risky because you have a chance of blow up any year, some percentage chance of blow up even of the entire asset class. Maybe the entire asset class will no longer be investable or will not be hot. So diversifying across multiple funds itself could, could be diversifying. You, you mentioned innovation. I'm going to ask you to pick one of two strategies. Do the best managers push innovative products to LPs? Or are they more pulling? And I know push could have a negative connotation, but are they more kind of first principle to here's what I think the market should have and I'm now educate my LP base? Or is it more like LPs are asking for this, we run internally, we think it, you know,

• 16:19Speaker 00

  matches the, the criteria for a good strategy, we're going to now release that. What have you seen in your experience?

• 16:27Speaker 01

  Yeah, I've seen a little bit of both, but more the former. So push might not be the right word. I'll say I'd rather use introduction. The good managers have come to me and said, hey, this is what we're thinking about. This is what the market is looking for. We're getting some feedback. Here's what we're doing. We're not doing it now, but we're starting to put this in place. And in 12 months from now, we're going to have something up and running I think you're going to be interested in. Now that gets my here as opposed to, hey, here's what the market's asking. We created this last night. You know, here are the terms, you know, are you interested in getting in? No, thank you. So those ones that are more patient and

• 17:09Speaker 01

  it's usually the larger firms that come in with that approach as opposed to the smaller ones really trying to ramp up AUM overnight, you know, in the latter example that you that you went through.

• 17:20Speaker 00

  When I sat down with Cliff Asness, he said, I'm not a broker, meaning he doesn't just do trades that people ask for. They have to, they may get ideas from their customers. They may get a sense for what customers would want, but it has to be this co-centric of something they would put in their own money and something that customers want.

• 17:39Speaker 01

  Yeah, it's exactly right. I agree completely.

• 17:41Speaker 00

  You guys are at 7 billion AUM. After your acquisition, you'll be at 12 billion AUM. Tell me about your portfolio construction.

• 17:49Speaker 01

  So it is the proposed acquisition. You know, that was announced back in mid-March and expected to close in the first half of next year. So right now, I'm just focusing on that 7 billion. We're an insurance company. It's a general account. We're relatively conservative. 80% of our portfolio is in what we call non-VAR. So that's non-value at risk. And for us, being private and being a statutory filer, these are assets that we don't mark to market. The other 20% is in, you can figure it out, the VAR. So the value at risk. That's kind of the fun stuff, right? That's, that's, that's everything that can be marked to market. So you know, that's kind of our general, it's 80 20.

• 18:34Speaker 01

  And again, after tax income is our primary objective. Broadly speaking, looking 100% general account, we have about 50% in US investment grade bonds. We have, you know, there are minimum requirements that we have to have in that area. But we complement that with a significant list of different assets, whether it's US treasuries, short-term credit, short-duration, high-yield. Real assets, we love, we ramped that up a couple of years ago. Real estate, infrastructure, renewables. We have a dedicated convertible bond portfolio. We do have US stocks, mostly passive through the use of ETFs, private debt, private equity, opportunistic credit, and even some venture capital.

• 19:18Speaker 01

  I know we said, I said earlier, we, we, we kind of stay away from that. But we do have a little, a little bit of exposure to that area.

• 19:25Speaker 00

  And you mentioned some income-producing assets. In the 20% value at risk, double-click on your portfolio construction on, you know, the, the value at risk, what you call the fun stuff. What's in that portfolio?

• 19:39Speaker 01

  The whole objective, this goes all the way back to my, cutting my teeth at Mercer on, on portfolio construction. At the end of the day, we want the best risk-adjusted returns with a, with a little bit of an income kick. And we, we've been able to do that. So in that 20%, we target 50% public equity, 25% real assets, and 25% other. Our equity portfolio has about a 5% dividend yield. So you can kind of see, you know, where we are with that. It's more on the value side, income generation. So we're not really holding the S and P. In the real assets, we've got real estate, infrastructure, renewables.

• 20:20Speaker 01

  And then in the other section is where I hold my LPs and non-rated ETFs. So I think opportunistic credit, private equity, venture capital, and then that equity sleeve and the rated feeder note that I mentioned earlier.

• 20:35Speaker 00

  There's this meme now that private equity has not done as well last few years. And there's different views on whether it's going to be a great asset class in the future. How do you, how do you look at private equity in the next five, 10, 20 years?

• 20:54Speaker 01

  I kind of agree with, with that meme, if you will. We take a different approach. So

• 21:02Speaker 01

  our private equity investments, and this was again, a unique opportunity. And it was really me knowing people or people knowing me and my needs in the field out there. Someone came to me a couple of years ago and said, hey, I got this great private equity investment opportunity for you and invest in the portfolio is already established. All your capital will be called on day one. You'll get a four and a quarter percent dividend yield. And oh, by the way, if you want an off ramp in four years, you can put in redemption and have your money back in a year. So that's not your typical private equity, but it was great. I was like, okay, I kind of get this, but I need to understand a little bit more. So the, the, the companies were already established and had strong cash flow.

• 21:45Speaker 01

  And the investor, the GP went in there and said, we're not coming in here to change everything. We're injecting capital to make it even better. We're keeping management. We're keeping staff. We're keeping, you know, the way that things have been done, but we're going to make things better. And it spanned a bunch of different industries, including some that were healthcare related. So again, for us, private equity has a different definition than the standard that we've all come to know. And again, we're not, we're not investing in, in something that 12 to 15 years. We're going to have to wait and see what the, what our outcome is going to be.

• 22:23Speaker 00

  Just to play devil's advocate, there's literally millions of private companies under 25 million revenue. It seems like an infinite pool of potentially interesting companies. Why are they so bearish on private equities? Or is it just late stage and, and large cap private equity that people are more bearish on?

• 22:45Speaker 01

  Yeah, I think it's that. I think it's the late stage. You know, that's where people are more bearish on it. We're more proponents and supporters of kind of early stage, especially if it can tie back into that mission that I mentioned earlier. So yeah, I'd have to agree that, you know, very bearish on the late stage and there it's just so many companies out there. And I know the private universe is expanding overnight. But there are just so many companies out there that are trying to do this now. You know, you can invest in 10 and all it takes is one or two and you're going to hit a home run with them. But we don't really want to take that type of risk.

• 23:23Speaker 00

  You're a big fan of evergreen funds. What are the different types of evergreen funds and which ones do you like to invest in?

• 23:31Speaker 01

  It gets back to reporting. So if it's not an evergreen fund and say we invest in fund two of whatever, just pick anything. And that closes and then we love it and then fund three comes up like, okay, you can invest in fund three. All of a sudden now I've got two separate items that I have to deal with and I have to report on that I have to account with. And I'm locked up for a significant amount of time. The beauty about the evergreen funds, at least for us, is that it's only going to be one investment over time. And we can add to that if we if we want to. So I think that's very important. And then typically most have favorable redemption terms where I can get out in 30 to 60 days, which is pretty good.

• 24:14Speaker 01

  When you're thinking about a more illiquid investment, that hits that hits home for us and is right in our right in our wheelhouse.

• 24:23Speaker 00

  There's a bit of a paradox also with these evergreen structures. As a taxable investor, if you think about a private credit fund having a certain term term limit, so 10 year fund. Another way to look at a 10 year fund or a five year fund is that it's a forced distribution. So whether or not you need liquidity a year five, you're forced to take it out.

• 24:44Speaker 01

  You're going to get it. Correct.

• 24:45Speaker 00

  You have you have zero liquidity until month 60 and then 60 month 60, you have forced liquidity. Obviously, there's there's extensions, different investments, return capital, different amounts. But with an evergreen fund, you really do have the best of both worlds in that you have liquidity when you need it. But you also don't have liquidity when you don't need it. So you're not forced to take liquidity and forced to take the tax hit.

• 25:12Speaker 01

  That's a great point, David. And then for the doctor's company. We do look at that and it is nice if we need liquidity and need a redemption. Uh, it's nice to have that lever, but we don't ever expect to pull that. Right. The only reason we would pull it is if the team managing the fund up and left, or there were some significant organizational issues there. So we want to continue to grow, but that's a very good point. If I did need it, if I did have liquidity issues, if I didn't have a strong cash flow as, as I do across the portfolio, uh, then, then it would certainly be helpful to be able to withdraw when I wanted.

• 25:50Speaker 00

  You've been investment management space for 35 years. You've seen so many cycles up and down. Do you focus on preparing for the next downturn and how the doctor's company and how your investment committee will act in the next downturn? Or is it something that you take just in time?

• 26:08Speaker 01

  Uh, well, it's definitely not something we take just in time. Um, and you know, in our business, uh, there's basically, you know, there, there's the underwriting, right? And then there's the investments, right? The underwriting, we're taking on risk all the time. So we got to kind of always have that balance, uh, with the investment side of it. Uh, so we do look at our investment portfolio, uh, in a very conservative nature, as I mentioned earlier, but downside risk protection is very important to us. Uh, and you know, I can give you a great example as it applied to the doctor's company. I went through all the assets that were invested in, uh, or at least, at least the asset classes that were invested in. And it was hard.

• 26:50Speaker 01

  So you think of 2023, 2024, when the S and P was up 25% each year. We weren't up that much in our risk portfolio, right? We were up, uh, you know, 10, 11, 12% each year. It was hard sitting back and seeing those unrealized gains. Um, you know, the potential for unrealized gains, um, not available to us just because of our strategy. I could have easily changed, but I didn't. Fast forward to 2025, peaked a trough, uh, this year when the S and P was down 19%. You know, through that first week of April, uh, we were down not even 5%.

• 27:29Speaker 01

  So that's really a testament to the focus on risk that we have, not proud that we lost money, but it really was a reflection of, hey, we've kind of built the portfolio to withstand these significant drawdowns. We're going to give up the upside. We capture about 65% of downside historically, and we only capture about 90% of the up. That's okay. That's kind of consistent with our overall philosophy of the investment and the overall management of our company.

• 28:02Speaker 00

  Couple of years ago, I listened to an interview by Stan Druckenmiller, arguably one of the greatest traders of all time. And he said that nothing looks as cheap as after it's gone up 40%. So a stock goes up from $10, goes up to $14, and you're like, this is a great time to buy. And it's this evolutionary wiring that we had. And as soon as I heard one of the greatest traders in history say that, I gave myself the grace knowing that I could never have a better psychology than the best trader in the world. So I focused more on structurally building my portfolio that's resilient to these kind of evolutionary biases versus trying to go against my programming and trying to be a better trader than Stan Druckenmiller.

• 28:46Speaker 01

  It's so easy to say, and I agree completely with you. But so go back to the first week of April this year, and the markets, again, were down 20%, or we'll just, I mean, we'll just call them 20%. We actually put some money to work, right? Because history shows when the markets are down 12, 15%, they may go down a little bit more. But history clearly shows that, you know, you're going to get it right more times than not over the long haul. So I kind of had to hold my nose and put money to work. But to your point, you know, it just, it was the right thing to do. And I had some excess there. And I know since we're strategic with our investment approach, that, you know, putting a little

• 29:30Speaker 01

  bit to work at that time could only really help over the long haul. And it's been two months, and it's helped, but it's still too early to tell.

• 29:38Speaker 00

  It's hard to think about this without thinking from an evolutionary biology standpoint, where basically you have the amygdala, which is our oldest part of the brain, that's kind of fight or flight. And then you have a prefrontal cortex, which is kind of the human brain and the rational brain. And a lot of people focus on how do you turn off the amygdala and how do you like not panic? But the answer is actually building out the front part of your brain. And how do you do that? You do that through studying history, seeing how markets fluctuate and really getting more and more conviction and taking right action at the right time versus focusing everything on how do you not panic? Cause that's both, that is actually what's even deep, more deeply wired in our brains from an evolutionary biology standpoint.

• 30:23Speaker 01

  Much easier to say it than to do it, but doing it is certainly, there's a sense of satisfaction when you do it, because you know what's the right thing. It's just as hard. So.

• 30:35Speaker 00

  It's one of the themes I've been exploring, the virtue of illiquidity. It's a paradoxical belief that actually illiquidity in many ways, and in many contexts, not in every context, of course, and you always need some liquidity, but could actually severely hinder your portfolio returns. And what's most interesting to me and maybe most entertaining, kind of in a, in a dark way, is that when I talk to people about this, they always say, yeah, I get it. Other people, they, they panic. That's not going to be me. And then every single, every single crisis, and I literally just saw in April, it happened again. It's like, no, I could control myself. And then they sold again. It's almost like Groundhog's Day, seeing people do the same illiquidity,

• 31:20Speaker 00

  value destruction over and over, and always thinking like, next time will be different.

• 31:24Speaker 01

  Right.

• 31:25Speaker 00

  We, we spoke earlier a bit about you're not as bullish on private equity, specifically large cap. What would compel you to invest in a new private equity manager today?

• 31:39Speaker 01

  If it aligns with our mission, I think that's, that's a benefit. So the, the private equity investments that we do have, the small amounts really have investments that somehow impact healthcare. And you know, that's, that's very important. And there's, there's just a few companies out there. So if you bring me an idea that has that, I think, you know, that's very compelling to me. But you also have to have a track record. And I know you mentioned smaller kind of startup, not startups, but, but smaller firms that are coming without with a private equity strategy. And I know they don't have a track record in this, in this specific mandate. But I need

• 32:22Speaker 01

  to know that there's experience in similar situations or similar type portfolios that I can go back and say, hey, these guys just didn't, you know, open up a shop, put a shingle up yesterday. And also, we're going to do healthcare on private equity. They've got to have some kind of, they've got to have some kind of background in that. We don't mind being early. You know, I love being in this position because being a seed investor or an early investor, if we do our homework and our due diligence and spend our time understanding it, when I say we, it's me and the team that I mentioned earlier, you know, well, we, it may kind of pass our funnel screens. So I think that's, you know, something

• 33:06Speaker 01

  that, that has worked well for us recently. And it's something we're going to continue to build out.

• 33:12Speaker 00

  There's a famous study, 1986, Brinson, Hood and Bebauer, that showed that 90%, nine zero percent of returns came from portfolio construction, not manager selection. This was 1986. So I was one years old at the time. This was nearly 40 years ago.

• 33:30Speaker 01

  I read that book, by the way.

• 33:31Speaker 00

  So do you believe that that still holds today, four decades later?

• 33:36Speaker 01

  Yeah, I don't know about the 90%, but I would definitely say a majority comes with the asset allocation decisions. And I don't know what the number is. I mean, that was, that's a dated study.

• 33:52Speaker 01

  But the challenge is, you know, with the evolution of passive vehicles and you know, you can get that beta in almost any market now, you can get beta exposure. Take the risk and pay the fees for active management. When you can get beta and say that 90% still holds today, that's where you're going to make all your money. Just to set a strategic asset allocation, go ahead and invest across whatever you believe in and you know, that should hold true. So I'm going to say yes, I still believe it. I just don't know what the exact number is. And being strategic and not trying to time the market is very important. And that's us. We talked about, we talked earlier, we talked about, you know, not making moves, you know,

• 34:36Speaker 01

  when the markets are, you know, ramping up or, or drawing down significantly, not making major moves, especially on the upside, how that hurts long-term. So strategically, if you're an asset allocator like I am, kind of sticking through those tough times, I think you're going to be rewarded at the end and that's consistent with that study.

• 34:58Speaker 00

  I also think of it from the size of the LP. So if taken to extreme, you have a $1 trillion LP that's made thousands of bets, they're essentially going to get the beta of their strategy, not beta or not S and P 500, but they're going to get the average of their portfolio construction. Some managers will outperform, some managers will not perform. But if you have somebody investing $10 million, they might, it might be much more about manager selection because they're able to say, I want this manager, I want, don't want this manager. So it's also, I think, a function of the size of the LP as well and the LP strategy, not just the GP strategy.

• 35:33Speaker 01

  Agree. And to be honest with you, you know, when I was able to, as a consultant, I was in many boardrooms and we spent a majority of the time talking about relative performance, you know, why a manager, particularly on the, on the downside, why a manager was, was underperforming. There may have been some that were outperforming and typically there were, but it just seemed to me. And I believe in active management to a degree, but it just seemed to me, why are we spending all this time talking about, you know, underperforming by 10, 20, 30 basis points? And why aren't we spending more time on the structure of the portfolio, which asset

• 36:13Speaker 01

  classes we should be investing more in or making or take making tactical shifts in either to the upside or the downside? And it just kind of got old to me. So that's one of the reasons the doctor's company is mostly passively managed on the equity side. And then even on some things outside of equity, we're getting beta exposure on that. My boardroom, we're not talking about relative performance. We're talking about things that are happened now, things that are happened that that we're planning to do in the upcoming year, in the upcoming months. And I think that's just been more productive in our room as opposed to, again, talking about why managers outperform or underperform. I think that's one of the reasons our managers like me because they always used to start with, hey, here's my

• 36:58Speaker 01

  performance. Here's my benchmark. I'm like, stop. I know your performance and I know your benchmark. Tell me about what's happening in the portfolio now and what you're thinking going forward. Shock when I say that.

• 37:09Speaker 00

  It's so interesting because if you think about the energy or the conversations that might happen on IC level, there is an opportunity cost. So one would say, why not optimize? Why not get the last 10 basis points on your relative performance? Of course, you want to have then a theoretical universe where you have millions of hours. If you have finite focus, finite energy, you should be focusing it on the thing that matters, not on these kind of long tail issues.

• 37:37Speaker 01

  I agree.

• 37:38Speaker 00

  You just mentioned your conversation with GPs. What are some pet peeves that you wish GPs would avoid when dealing with LPs?

• 37:46Speaker 01

  That's pretty simple for me. It's, it's really, you know, not doing your homework before contacting me. Look, we're a private company, but you can see what we file. You can see our balance sheet. You can see our investments. The data's out there. So take a look at that before you call me, right? Don't call me or send me an email and say, I'd like to learn more about your investment portfolio. Delete, right? Or, you know, or I might forward it on. That doesn't get my ear. Rather, you know, I see you have about X million dollars in infrastructure debt. I'd like to learn more about your process and rationale on that exposure. Okay, you've

• 38:26Speaker 01

  done a little bit of homework and you know what I hold. I'm going to reply to you. So just not doing your homework in this day of electronification and data availability and how quickly things can be attained. I just feel like some managers get lazy and it's not the managers. It's more of the client relationship and the marketing. Some get lazy but in doing their job. You know, know my business. We talked about that earlier. Insurance is not an endowment. It's not a foundation. And again, know my portfolio. It's out there. You can look it up. Spend a little time doing that. And if you do, then, you know, the door's

• 39:09Speaker 01

  open. I might not have anything for you, but at least now you've kind of got that foot in the door and the discussion is open and, you know, maybe a year from now, you know, may have an opportunity.

• 39:21Speaker 00

  I'm going to ask you a difficult question. If you take out your crystal ball and you try to predict what AI, how AI will change as a management in the next five to 10 years, what would be your prediction?

• 39:31Speaker 01

  For quant managers, I think their shelf life will be shortened. You know, there'll ultimately be a perfect portfolio that any of us can build, whether you're a retail investor or an institutional investor at the click of a button, or in this case, a voice command, or who knows, five, 10 years now, we might even just have to think about it. And, you know, we'll get a response in one form or another. So I think that that's a reality in these quant managers who have built the You know, sophisticated quantitative models, I think that's going to be a commodity in five to 10 years.

• 40:10Speaker 01

  Not to say that, and they'll argue against that, of course, not to say that there isn't, you know, value for for human input into it. But if you or I want to build a portfolio, we can kind of do it now. But in five to 10 years, we input our parameters, you know, what's our time horizon? What's our spending habits? What are our retirement needs? So forth. That's that's going to be, that's going to be easy for us. Fundamental research, I think, will be affected, but I think will be even better. The screens that that managers do will be much faster and, you know, getting boots on the ground, meeting with management. I think we'll yield better opinions, but in a much quicker fashion.

• 40:53Speaker 01

  Fees will continue to go down. I think AI will, they're already coming down. But there's much more room for lower costs, and I think AI efficiency should drive that. As I look at it for my business, as I mentioned at the outset, 100% of our assets are externally managed. But, you know, will AI investment make it possible for me to move my asset management in-house more quickly? At much lower cost, I'm not ruling that out. So, you know, we pay, you know, X X dollars for for asset management today. If the way the economy is a scale working, I think AI is going to make it possible for me to bring

• 41:36Speaker 01

  a majority of that in-house, whether I'm at 7 billion, 12 billion, 20 billion, whatever. I think any of us sitting in my seat will have the ability to to kind of effectively manage a portfolio themselves as opposed to having an external relationship.

• 41:53Speaker 00

  The Canadian pension system and the Canadian Canadian fund strategy apply to more asset managers, more more allocators. What do you think is overrated as it comes to being investor? An allocator and what do you think is underrated?

• 42:08Speaker 01

  Um, that's a tough question because now you're asking me to talk a little bit about things that I think are a little bit overrated for what I do. What's underrated is keeping up with strategies and information and things that could immediately impact your portfolio in a good way is getting more challenging. You mentioned earlier, you know, all these smaller private equity firms coming out. Just the availability and the speed of data right now, it's really, it's becoming almost overwhelming. So I think it's underrated and I'm always thinking about it.

• 42:47Speaker 01

  I can turn on the television or open, you know, my iPad and look at a news article and say, man, why am I not doing that? Years ago, you didn't have that. You kind of set it and forget it.

• 42:59Speaker 00

  Just to double click on that, it's really, what would be underrated is the systems on how to process that, right? So maybe you TC as one person, you have finite, but creating the rails and the ways to handle that influx could be a very useful skill for an allocator.

• 43:17Speaker 01

  Absolutely. And it's one that I feel like I'm challenged with and it's only going to get more challenging. So I've got to figure out a way to do that. It's not going to be TC Wilson figuring out, but someone in the industry or something's going to come out to make it more manageable and applicable to, uh, maybe, yeah, right.

• 43:36Speaker 00

  What is overrated?

• 43:37Speaker 01

  If we don't manage and trade our portfolios, I think that that's something that's a little bit overrated for us right now. We, and what I'm trying to say about that is a lot of people think that allocators sit here and all day and are looking at a Bloomberg screen or trading platform and making decisions. So I think what's overrated for an allocator who doesn't manage internal assets is the thought that, you know, I'm stuck to my desk every day looking at this, right? What I'm doing more is thinking ahead, you know, what's next for the portfolio? Where can we expand? How can we make it better?

• 44:22Speaker 01

  So I think it's overrated that, that some people think that that's what we do and it's not, it's definitely not the case.

• 44:30Speaker 00

  It's interesting because if you take it down to neurobiological level, refreshing your portfolio, very fast feedback response loop from opening neural pathways versus thinking about the future, very long-term feedback loop, hard, amorphous, takes a lot of energy. So we are literally conditioned neurobiologically to actively manage versus handle the more, the bigger context questions. If you could go back 35 years ago to TC Wilson, when you were starting out in 1990, and give you one investment principle to know throughout your entire career, what would be that one investment principle?

• 45:12Speaker 01

  I wish I knew more of the principles of extreme ownership. And I think that applies to the investment management, to the management of the investment portfolio as well. So when I'm talking about extreme ownership, there's a, those are principles that were put out by two Navy SEALs. I don't know if you're familiar with them or not, Jaco Willink and Leif Babin. But they wrote a book on their experiences with the military and war and to lessons for effective leadership, both in and out of the corporate setting. And I've used those and we've embraced those here at the doctor's company the last few years. And I've used those in, in the investments of, when making investment decisions.

• 45:54Speaker 01

  So basically, the core concept of extreme ownership is to take ownership of things up and down the command chain and how the most effective teams embrace these specific principles. If you have good teams, ultimately, you're going to most likely have good results. So for me, 35 years ago, when I didn't know something, I was afraid to ask my boss at Mercer, in the investment consulting area, because I thought that, you know, there would be some retribution. Maybe he wouldn't think I was capable of doing the job and I might even get fired in hindsight, when in fact, knowing what I know now, it should have been just the opposite of that. Should have checked my ego, should have had your humility, and I should have understood

• 46:35Speaker 01

  and understood that not by not asking, I was holding up the team and the progress. So I'll take that blame, but my boss at the time should have also encouraged me to speak up, given me the comfort that there would be no retribution, and he didn't. You know, there was really no extreme ownership principles at that time. I give my team, you know, always the confidence to speak up. There's no retribution. There's no wrong answers. If you're holding something back, you're only hurting the team. And they have no problem doing that. I think that's what makes us a better organization to it. So I was fortunate enough, fortunate enough a couple of weeks ago to present the second

• 47:16Speaker 01

  principle to my, my company, no bad teams, only bad leaders. And it was such an honor to be given that because it was a reflection of, of the leadership that skills that I have displayed with my small team. But it was, it was nice to get that recognition. Knowing these principles 35 years ago would have made me much more effective leader and teammate. And you know, who knows where that would have ended up today.

• 47:41Speaker 00

  I, I love Jaco Wiegand, and I did read Extreme Ownership several years ago. And the best analogy for that is to use a military analogy is you might be in the line of enemy, enemy fire and you're just running through it. And what most people don't realize is during, during war, it's just complete chaos and complete randomness that every second, there might be a 0.5% chance that you get shot and you get killed. And yet there is still, even if there's 10% of controlling your destiny, you do have something you can focus on. Maybe you're running faster, maybe you're avoiding certain angles from snipers and

• 48:23Speaker 00

  focusing, even though you have 90% things out of your control and even facing imminent death, you still can focus on that 10% of what do you control? And if you could do that for war, you could do that for business where the stakes are significantly lower, to say the least. It's a very high agency way to look at the world.

• 48:43Speaker 01

  Absolutely, and I'm so glad our firm, our company embraced those years ago. Again, we had Jaco out a couple of times presenting to senior leaders. And it's a reflection on all the accolades our company gets. You know, when it, when it comes to net promoter score or best places to work. The doctor's company is really kind of on, on the very positive side on almost every metric that comes out. And I truly believe that a majority of that is driven by what extreme ownership principles we've learned because our management and our board is so strong and each are aware of these. So we, again, introducing this and having Jaco out has, has made us the company that we are today.

• 49:28Speaker 00

  Almost analogous to this, 90% of your returns are linked to portfolio construction. It's maybe 90% of success of a firm is based on principles and culture. These amorphous things that seem soft, you know, I want to focus on the returns. I want to get that 10, 10 basis points. But if you actually build, build the culture, the recruiting and everything that it takes to build a great organization, those micro decisions will be downstream of that culture. And in the culture, something you could actually affect versus kind of the day to day is a little bit harder to affect.

• 50:01Speaker 01

  Absolutely.

• 50:02Speaker 00

  Well, TC, this has been a masterclass on insurance companies. We got to do this again soon. How should people get in contact with you?

• 50:08Speaker 01

  Oh, they can reach out to me, send me an email. I don't mind. It's [email protected]. That's probably the best way to do that.

• 50:18Speaker 00

  Awesome. Well, thank you, TC, and look forward to sitting down soon.

• 50:22Speaker 01

  You're welcome. David, thank you for having me.

• 50:25Speaker 00

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