Speaker 12020 was this manager's worst year. He was down an additional 30%. We thought 2019 was the worst year, but it turns out 2020 was the worst year so far. That led to a real moment of soul searching. You have a drawdown that's starting to get close to 50% at the trough. Over the course of that year, I went back and spent a lot of time with that manager. I think I met with them at least seven or eight times. And this manager works out of Dallas. He's very responsive, but really is best to meet in person. No IRBD function, nothing like that. And it was COVID. It just happened to be that this manager got kicked out of his office because his landlord wanted to do construction. This manager was between offices having a terrible run. Also, I knew a lot of his other investors and about half the capital left that year. So I'm sitting down with this manager at what ended up being our local spot. We'd sit there for two or three hours, talk to the portfolio, what's working, what's not working, how he's behaving. And I'm sitting down with this manager at what ended up being our local spot. It doesn't always work out this way, but things started to turn in 2021. And from 21 to 26, it's been a 5x. So he's compounded significantly over this period.
Speaker 2I'm Ted Seides, and this is Capital Allocators. The CIOs of the largest pools of capital have jobs that require broad skill sets. They cover the world. They're also leaders, managing people in an investment office, working with a board, and taking care of all their stakeholders, whether students, grantees, pensioners, family members, insured recipients, or sovereign states. It's a complex role that involves far more than just investing. But they don't care. They don't do it alone. Behind every successful CIO is a talented team who focuses most, if not all of their time, on investing. We've spent time with many of these senior decision makers at our summits and find they're closest to the action and deeply insightful about investment opportunities and the investment process. This miniseries, Senior Decision Makers, features conversations with investors that have not yet ascended to the CIO seat. These professionals are the primary driver of decisions that lead new ideas into a portfolio or exits from a manager's strategy and are at a fascinating point in their career. My partner and the CEO of Capital Allocators, Hank Sturmack, will take the mic and lead an exploration of the investment thinking and role of senior decision makers.
Speaker 3Our first guest on the Senior Decision Makers miniseries is Nick Sisco. Nick is a managing director at the Trinity Wall Street Endowment, where he joined CIO Meredith Jenkins at the founding of the investment office in 2016 and has spent the last decade helping build a young endowment inside a 320-year-old institution. Today, the endowment has grown to over $6 billion. Nick's path into investing is a fascinating one. He studied composition and earned his doctorate of music at Juilliard. While there, he talked his way into an internship at Juilliard's endowment, and never looked back. Our conversation covers the lessons he carried from music into investing, his investment philosophy, and the details of his process. Manager selection sits at the heart of his work, and he articulates what separates the relationships that endure from ones that don't. Nick is a remarkable storyteller and shares a number of real-life examples of manager relationships, some that worked out well, some that didn't, and others with insights for allocators and managers alike.
Speaker 2Before we get going, The Bear has dropped its final season on Hulu and Disney+. If you're a fan of the show, you might already know that Will Gadara, author of the bestseller Unreasonable Hospitality and wildly popular recent guest on the show, is a consultant to The Bear. That's not a coincidence. The Bear is fundamentally about what happens when someone who's learned from the best tries to become the best. It's a theme you often hear from guests on The Bear, translating what they know to the practice of investing and imparting that wisdom to you. So if you know someone who loves The Bear and hasn't found Capital Allocators, send them an episode. I suspect they'll recognize something familiar. If you haven't watched The Bear, you're in for a real treat. But if you don't have time, no need to stop you from spreading the word about Capital Allocators to anyone wanting to learn from the best. Thanks so much for spreading the word. Capital Allocators is brought to you by AlphaSense. Here's something for you. Most AI tools today are very good at sounding right. But can you actually trace it back to a filing, transcript, or specific passage that drove the answer? Or are you just trusting the confidence of the output? For allocators, that's not a minor concern. A missed filing, incorrect source, or context that gets lost somewhere, and a retrieval chain aren't edge cases. They're how decisions go wrong. AlphaSense is the AI platform built specifically for this. They own the content. Over 500 million curated documents, from broker research and expert transcripts to filings and earnings calls. And they own the retrieval layer on top of it. That means every answer can link back to an exact, verifiable source. Because the answer is only as good as what's underneath it. And with AlphaSense, you know exactly what that is. See it for yourself. Try a free trial at alpha-sense.com slash capital. That's alpha-sense.com with a hyphen in the middle slash capital. Capital Allocators is also brought to you by Morningstar. In a sea of data, you need to know what you can trust. Morningstar's data, analytics, and research helps bring clarity across public and private media. Connecting independent research and data into the tools and AI platforms you use every day. So insights are easier to spot and act on. Morningstar. Nothing in your way. Visit morningstar.com slash game on to learn more. Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs. GPs that build the strongest and most durable relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations. And having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com slash capital Allocators.
Speaker 3Please enjoy this first conversation of our Senior Decision Maker series with Nick Sisko. Thanks so much for doing this. Thanks for having me. It is very customary of a Capital Allocators interview to start with your background. I'm especially excited to dive into this subject with you because it's rare that someone finds their way into the investment industry from music. Why don't you share with us a little bit about that? Share how you got into this industry in the first place.
Speaker 1Music brought me to New York to study at the Juilliard School. During my master's, I was studying composition, trying to make ends meet, working a lot of jobs. Then all of a sudden, I stayed and joined the doctoral program at Juilliard, and it was free. And the doctoral program came with a stipend. I didn't know what to do with that stipend because I was working and paying rent and doing the things people do. I put it in a brokerage account and started buying stocks. It was a whole experience. It was 2012. In 2007, I felt smart for a little bit. Then 2008 happened, and I felt the opposite. But it was certainly volatile, and I fell in love. I didn't know why, but I wanted to figure things out. I started reading and listening to everything I could. That drove me to try to become an investor. I talked my way into Juilliard's endowment's investment office. I was their first and only intern. At the time, it was in-house. It's since been outsourced. The gentleman there at the time gave me a shot, and I started to learn about this whole job. That ended up through a bunch of steps. Meeting my first real mentor and a gentleman named Bill Peterson, who was the CIO of the Sloan Foundation, let me have a shot. I joined the Sloan Foundation, took it from there.
Speaker 3What was it about investing in stocks in 2007 that prompted you to say, I want to pivot my career interests to investing as opposed to music? I was entered in this different world
Speaker 1of trying to figure out why businesses, is do what they say. they do and then how that applies to economies as a whole, countries, geopolitics. And it was fascinating. I've always wanted to just keep learning. And it turns out that investing is one of the best ways to learn about everything. I got hooked. How did you talk your way into an internship? I don't remember, but I remember the moment I got the call. I did one of those cliche fist pumps to myself because I felt like I'd accomplished an unpaid internship was real something. Candidly, I was in the system. I was already student teaching. I met the background checks to be in the building. And so they said, if this doesn't work in a week, we can rotate down to one of the MBAs that's applied because the job market was tough. So I grinded and they let me
Speaker 3stick around. What lessons did you learn from your time in music that you've been able to take to your career in investing? I would highlight three is that relationships matter.
Speaker 1When you're doing anything that involved in music, you're working with ensembles. You have different components. You might be the composer. You're going to then work with the ensemble. And then you're going to have to deal with an audience. You have all these stakeholders. Your relationship with all of them becomes critical in terms of the output. From day one, I realized that truly everything is relationship business. Certainly music is. This other element is a bit trickier, but every great composer is balancing the horizontal, the melody, the line of the music, and the vertical, which is the composite, what it creates, the harmony. And I think about that between managers and portfolios. The best composers make the least amount of sacrifices or the most graceful things in the compromises they make on the horizontal or the melody to make the harmony work. You often hear the top and the bottom of a piece of music, the melody and the bass, but that stuff in the middle is really what drives the music. And I think that's what I'm trying to do. I'm trying to think about what drives great music. And that's also, in my mind, what drives a great portfolio. The last thing is pretty basic, but if you're going to be a musician, if you're going to be out there, everyone senses if you're being authentic. Everyone senses if you're being true to yourself, because that just comes through. And when it is, people open up and people say, oh, that was great. You touch someone and then they react. The best investors I meet know themselves and they spend their whole life trying to be that authentic version. And it's really hard to be that authentic version. And it's really hard with investing because you get all this feedback, positive and negative, and all this noise. And the whole time you're just trying to figure out what kind of investor I am, who am I, and a not loose side of that.
Speaker 3Meet your mentor. You joined the Sloan Foundation. What were you focused on earlier in your career?
Speaker 1An investment meeting for someone who doesn't speak the language is like sitting through a foreign language class. Things go by that you miss. As you start to come up the curve, things slow down and you start to understand what's going on. I had great people around me that were willing to talk me through things. Some of my best friends in the industry today I met around that time. I still remember folks taking me through what a DCF is. I had endless questions of why people own gold. And there's a sitting CIO who knows who he is, who's been really kind to me through all these moments of my development in life that's been there. I was fortunate enough to stumble into some great relationships and folks that really helped me. What prompted then the move to Trinity? I'd been at Sloan for almost five years. I had the opportunity to meet Meredith Jenkins. She happened to be building a team at Trinity and Trinity was this new endowment inside of a 320-year-old institution. She took a shot on me. I took a shot on her. We started building Trinity out in 2016.
Speaker 3What was that like joining an organization that didn't have an established investment office? We had to figure a lot of things out.
Speaker 1We had to set an internal culture, decide what we wanted to be, start to meet the world and say, we existed. Trinity has a unique story. So it was a fun story to tell. I had previously seen National Treasure with Nicolas Cage and that was my conception of where Trinity's origin story was. It was a bit off. It was fun from day one. It was even more learning. We've ramped from then and it's been a decade of fun.
Speaker 3What were some of the tenets of the culture that you wanted to create at that time? Trinity as a whole is a very
Speaker 1warming, welcoming place. And that's certainly the ethos of Meredith. I'm not sure I was setting it. I was following. I embraced it from day one. We wanted to bring what we think the ethos of the institution is into our relationships as investors. We started with that and we started with a lot of relationships we had and folks that we could trust to get going because we had a pool of capital to get to work right away. We did inherit a portfolio that was fully invested. So it was a combination of getting to know that and then rotating into things that we didn't know. So it was a combination of getting to know that and then rotating into things that we felt fit our strategy better.
Speaker 3What were the tenets of the portfolio and the portfolio strategy that you wanted to establish even though you were inheriting a new portfolio? Trinity has a lot of stakeholders.
Speaker 1The first thing we dealt with was trying to understand their needs, their concerns, meeting them where they were. Our first line of defense was, let's know what we own and let's really know who we partner with. That skewed us towards fundamental managers. We certainly have diversifiers that have different approaches in some quantitative and systematic strategies. But by and large, it pushed us towards managers that were transparent and managers that often concentrated in specific holdings, all to be able to more easily speak to our stakeholders as to where the capital was and in what kind of businesses Trinity invested.
Speaker 3Why don't we dig into some of those core tenets that you mentioned? Transparency being the one that you called out as a top priority for a pool like yours. What does that mean and what does that look like from your seat?
Speaker 1I'd start with the disclaimer that everyone has their own style. I don't think there are right ways. There's just a lot of wrong ways. With the base condition that investing is hard, luck and skill plays a role in everything everyone does every day. I'm convinced that every investor will have rough patches. The base condition and idea is that you want to prepare for those moments in advance. You want to prepare for those moments in advance. If relationships are always going to be tested, then we want to behave and we look for our partners to behave with the mindset of being prepared for those moments so that if you imagine yourself in your worst moment, that's how you behave in the good times. It serves as this baseline for how you want to communicate, how you want to treat your partners, how you want to be. In that case, transparency builds stability and duration into relationships and it's tested during periods of stress. The normal reaction for people when they're challenged is to put their guard up, is to become defensive. A lot of times I've found the opposite is the most successful in investing. If you let someone in and they understand where you're coming from, what you're struggling with, the decisions you're thinking to make, you can have a lot more success. And that way, all of a sudden, capital stops being fungible because it's no longer just money, it's a partnership. I want to be clear that this is a two-way street. It's not that we look for our partners to be great. We want to be great to our partners. If we can be perceived as a top quartile or potentially even top decile partner, we will reap those rewards over time. Access to the manager themselves or unique opportunities that present themselves along the way.
Speaker 3I would love to hear an example of when a manager went through a tough time and you were patient. And stuck through with them what that looked like.
Speaker 1I'll give you an example of a fund that I would call an old school long short fund. This manager just cares about investing, loves shorting, has an innate ability to short, and has made a lot of money shorting over the years. This manager started their business in 2008. They've had a great long-term track record. But I would say that some people have just periods of meh and other people have real periods of stress. We invested with this manager in 2017 and the first few years were good because I'd known that manager for a long time. We had a pretty high level of transparency. Every fund is going to be different. Every fund's ability to share what they're doing, what they own, how they own it is going to change over time and it's going to be bespoke. This manager specifically was very open about sharing his whole portfolio to the extent that he would just, he still does, sends his entire portfolio in an Excel file to me monthly because he doesn't have any concerns about what we would do with that information. This manager is the type of manager that closed outside capital when he was about 300 million in assets because he didn't want to be over five, 600 million and had that logic that's not there with most folks. That is, I should close about half of my capacity because I want to double the money before I'm returning capital. This was all good. The setup was good. But 2019 was this manager's worst year in the firm's history. They were down 14%. We spent a lot of time that year talking about what was going on. The short book was really getting tested and it was challenging him in extreme ways. Down 14, that's not the world's worst year. Coming into 2020, we added to this position. I still remember he came to our office. We came out of that saying, this is the time to add. It wasn't the time to add. Over the course of that year, I went back and spent a lot of time with that manager, I think I met with them at least seven or eight times. And it was COVID. And it gave me confidence to not quit. In hindsight, I wish we would have added more. But in those moments, you feel challenged and you feel paralyzed sometimes. What I could tell myself is that I believed in the underlying holdings. This manager had no quit in him. It was clear that even though the AUC. UM was challenged, the business was not. He kept saying, I really want to earn back your capital. I want to reward you for your patience. And it was a different dynamic because what normally happens is assets down, performance poor, managers start this whole trope of, okay, well, I'm going to shut down and start a family office. That's okay to each their own. But this manager was going the exact opposite. So we hung in there. So what happened next? It doesn't always work out this way, but things started to turn in 2021 and from 21 to 26, it's been a 5X. And so it turned into, can we stay? We should have added to constantly trimming this manager to manage a position overall. What was funny in that whole rhetoric of, I hope to reward you for your patience is he started going down a different path of saying, someday I've become my capital in the fund. It continues to compound and I'd like to get it over 50%. And someday you think I should just have a family office. As we've been trimming, there's been the interesting dynamic. We would trim X amount and he would call two days before that redemption was going to happen. And he'd say, hey, do you mind if I send 2 million more dollars? He was doing the math for himself. And then he was constantly looking at, hey, what do I want to own versus my AUM? And if I want to own things that my AUM doesn't work for, I'm just going to send money back. He is totally a rare bird, but that is an instance where we got rewarded for being patient.
Speaker 3You suggested that the underlying whole. The buildings were good. The business was good. What was it in addition to those things that gave you the confidence to see it through with this manager? In my role, I'm always going
Speaker 1to have a view on the securities held, but I also have to balance that with my roles to pick managers and to trust them to check my own bias. If we just had a portfolio of things that I thought were good, we wouldn't end up with a diversified portfolio. When I zoomed out on this manager. Because of his skills. Because of his skill on the short side, because of the types of holdings he had, I was able to zoom out and say, this has been painful, but we don't have anything else like this in our portfolio. This is a hedge. If things get a lot worse in certain areas, because remember 2020 and 2021 were these really euphoric years. Then all of a sudden we had 2022. In a lot of ways, this manager's long book recovered in 21 and then the short book thrived in 2022. The message to the team, because as you get further away from that manager, the team has more and more questions and it's reasonable. That's there to check your bias. They just look at the numbers and go, this is terrible. Why do we have this? It wasn't just that I believed in the manager, they weren't going to quit and I liked what they own. It was they served a distinct role in the portfolio and that was
Speaker 3worth fighting for. When the team has questions and even beyond that, when the board has questions about an underperforming manager for a substantial period of time. How do you effectively communicate that message to both the team and the board to stay patient? It's difficult.
Speaker 1I don't want to leave the impression that I do it perfectly, nor do we always make the right choice. Generally, once you're already in that period of underperformance, that drawdown, certainly things can get a lot worse. But if you can limit some of the left tails, you probably experience most of the pain. Then it's what's next at the team level. It's a lot of meetings. It's a lot of conversations. And an example like this, we will often bring in a colleague. So one of my favorite colleagues on the team joined me in a lot of these trips down to the restaurant in Las Colinas. She was a great check on my bias that also helped build towards a consensus on the team to be patient. Fortunately, we have a board that is less focused on that kind of volatility at the line item level. They certainly care and they certainly ask, but we've been able to build a relationship where there's real patience there. It all worked together in this example to allow us to survive the path and where we started is that's why relationships matter because you have to prepare for those moments. You never know when they're going to happen and you rarely can predict them. That groundwork was laid with our
Speaker 3stakeholders and our board. So that's a fun example where the outcome was favorable for everybody. How about an example where a manager went through a tough time and they weren't as transparent? And they were more guarded.
Speaker 1So we've certainly had those two. There's this weird phenomenon that if I had to lay the course of a business, it would be for a PM to have one of their rough patches early in the fund's life. Hopefully not in the first year, but within a relative short period of time, because there's so much learning about oneself and a team in those moments, the example I'd speak to is someone who had a great 10 year run and then things started to falter. They hadn't built that muscle or prepared for that moment. Instead of sharing more with their LPs, they started to tense up and not share. They ended up doing some non-LP friendly actions in terms of liquidity and otherwise, it made that moment that we were just speaking about in terms of how do you survive the path with a team not tenable. The moment that the institutional base, the team. The investor starts to doubt the relationship. The patience just disappears. In that case, it was a, we need to move on from this relationship because there's not the ability to survive that path. The interesting thing here is the manager is still at it. I think they have a great chance of performing in the future, but with a very different investor base. I'm not exactly sure they've learned the right lessons from that experience for themselves. But again, each person has to figure it out for themselves and everyone has their own path.
Speaker 3Transparency clearly is an important driver in your investment philosophy. Do you have any examples of a time when a manager was too transparent?
Speaker 1Yeah, I think it's hard to normalize for transparency. Every situation is different. We had a manager we worked with for a long time put together a great track record. It's a long only shop and he let us know that one of his employees had departed. What you normally get is some kind of story. And that's it. That's the industry and that's okay. We should protect individuals mostly. He felt compelled to tell us what happened. And effectively, without getting into too many details, the analyst lied to him. And he called him out on it. And then he lied to him again. And he basically said, at that point, you can't work here anymore because we don't lie. We don't lie to each other. That's not what we do. We had this conversation with all the details. And of course, he was embarrassed to share the story. And he wasn't happy because he invested in this person, time, money, everything. And he believed in this person. But what he showed us was his compass around, call it ethics or just the right way to be, drove everything he did. I still remember getting off that call and turning to my colleague. She asked me, is he not good at managing people? Does he have a deficiency? We had to keep talking about it. And we said, no, actually, he's just more transparent because it's framed to us that all these firms are perfect. And professional the way we want them to be. But inside of them are humans and humans are complicated. A window into that gives us more empathy and understanding and support for this manager long term. But it was a real risk to share that much with us. We ultimately appreciate it. It's a fine line to balance.
Speaker 3How long does it take to establish that strong relationship with a manager?
Speaker 1Everyone's different. We want to know people long enough. So that we're ready to commit to them and stand by them. There is a great manager that we work with that only has a handful of investors. Manages a meaningful amount of money for them. He prioritizes relationships more than I've seen anyone else. He's a very unique manager in that way. He has this annual meeting. I spent about six years getting to know him. I enjoyed all the conversations. And over that period, his returns were extraordinary. You watch those returns and you say, well, I wish I was in this firm. I wish I was in this fund. More importantly, you get to know the person and you say, this is just a really great person. That's the kind of person I want to spend time with. He's a really great investor. It's a fun get together. It's like a mini Berkshire in some ways. It's over the weekend. You travel to get there. I went for my second year of now, I think on seven or eight, we still weren't invested. And it was certainly on my mind. And he is very capital conscious and only likes to take capital when there's a dislocation or idiosyncratic opportunity in his portfolio. I still remember, of course, he's spending time with lots of people, but I run into him. him and we're having a conversation and I say, do you think we should talk about potentially partnering? Then he says, don't you think we should spend more time getting to know each other? I so appreciate that moment now, but I was so focused on investing and he was very focused on what I've learned matters the most. So I really appreciate it.
Speaker 2Love that. We're going to take a quick break in the action to tell you about Ridgeline, the investment management platform built for firms who are rethinking how work gets done. You're at your desk looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. Ridgeline is built to change that line's trajectory, to be the inflection point that takes your growth from incremental to exponential. To accelerate it with the team you already have in place. Ridgeline is the only AI native investment management platform that brings together the front, middle, and back office with one set of data and powerful AI agents that automate away operational drudgery. So your talent can shift from managing old technology to materializing new ideas. Ridgeline helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai slash trajectory. If you file form ADV, your firm is already there. Then talk to Ridgeline about how you can do more with the team you already have.
Speaker 3One of the things that comes to mind from these examples is the potential bias for smaller managers, given that they might be more transparent than larger managers. I'm curious if that's true, if that comes to fruition as one of your potential biases. It's a real bias and we try to address it.
Speaker 1We work to try to be diversified on the age of firm, the size of firm, not to look away from large funds because some of those funds are absolutely great and where you want to be. There's a specific example with a very well-known spin out of another well-known fund. I sat down with this individual when they were launching and I said, we really like to have relationships. I don't like to have relationships with people who are different. I think we could ever have the relationship that would work for me, but I find what you do compelling and it could serve a great role in our portfolio. It was interesting because somehow that seemed to resonate with him and he took the challenge on. They sit at over 30 billion in assets today. Certainly then it's evolved as he's had more demands on his time. Then he took the challenge full hog. We had phone calls. We were texting. This was a very different relationship than I expected from someone in that seat. What the firm's done as a team, it's been a very different relationship. What the firm's done as a team, it's been a very different relationship than I expected. What the firm's done as a team, it's been a very different relationship than I expected from someone in that seat. What the firm's done as it's grown is figured a way to keep that kind of connectivity and transparency. It's never just, hey, I need to know what you own at all times. It's help me understand what you're doing so that I can tell that message, so I can understand performance, so that I can be your advocate and I can also know when to lean in. This specific firm has found a way to navigate that path. It's especially hard because a fund of this size is often in the press. They have to be careful and garbage. about what they own, but they've come up with pretty unique ways about getting LPs together, be it group dinners or otherwise. And then they've built out a robust team of IRBD individuals that fill in that gap. Because we started at one place, I still feel that there's this connection with this individual. It's not about my feelings in this relationship, just to be clear, I don't need to be everyone's best friend, but it's simply how do you know enough to understand the individual, what they're doing. And then that leads into understanding when they start to stray from that
Speaker 3path, from who you thought they were when they start to flail. You mentioned an interesting point, which is when you engage with investor relations. This is one example of a firm that you suggest does this quite well. What are some other examples that you have of managers effectively utilizing investor relations for relationships with you?
Speaker 1We have a great COO PM team that's produced great results. The COO started as the IRBD person. Earlier, I spoke to this idea of when a manager has a rough patch shapes the way that they, I think, view themselves and how they talk to LPs and often how they interact with their team. This individual spun out of fun that we had a relationship with over time and we backed him at launch. He was a manager who didn't have any kind of acute underperformance at inception or in the first few years, but had a string of subpar years. It was mostly due to his cyclical focus. He was in sectors that were out of favor. The first five years had this muted return, mid-single digits when the market was chugging along at high single, low double, but he was generally outperforming his sectors and security selection was there. Another trait that I like that's so rare is he's a great shorter. This fund has made money since inception shorting in their 11th year. But because of that period in the beginning where the firm was tested, it was tested in a bunch of ways. They lost a partner early on who, for example, challenged the PM's everything from identity to choices. The now COO was critical in becoming everything from a product specialist to managing relationships in ways that everyone understands what's going on. So yes, that's being transparent about holdings, but it's also say it's a short book and you don't want to be talking about each specific short. It's making sure you communicate that at a level, say themes or sectors or anything so that someone can understand and support it. Mostly because of his personality, but I also think it's a great way to make sure that everyone understands. So yes, that's being transparent about holdings, but I also think because of how he was tested early, he listens to her and they challenge each other. I would argue they come to the relationship as equals, even though he's the PM and it's his firm. They set a culture of doing things that are pretty exceptional. It's a public hedge fund, cross-cap structure, but mostly equities. And they have an annual meeting. At that annual meeting, every one of the analysts spends time with investors. You end up spending the day in groups of five, six people rotating rooms. And you're by yourself with the analyst that's covering oil and gas or the analyst that's doing something else. And there's no script, there's no prompt. They just show that they trust their people. They're not trying to over-script it because they're trying to be authentic to who they are. I still remember this firm had this really meh period of returns for the first five years. And I remember a phone call I got from a friend who was looking at these returns and said, why are you in this fund? I was getting similar push from our team. And it was a fair question. It was, we don't have a lot of exposure to this area. There could be a day when it works. And I see this manager getting better every year, every day. And their mentality is such that all they want to do is improve. Along that same time, it was the depths of COVID. This is also where their performance turned. Another friend of mine asked me to have a phone call with their CIO to convince them not to fully redeem out of this manager. It was one of those testable moments. But the crazy thing is that you look at the fund now and everyone says, oh, well, they're just a great firm. The run since 2020 has been a 6x. The returns have been great. It's because they were battle tested early and built a business there and they haven't lost that culture.
Speaker 3It's a remarkable example. I'm curious what your advice would be to funds that don't approach relations in that manner.
Speaker 1Every firm is different and they have different needs. So I don't ever want to prescribe one path, but a lot of it seems to start with egos. And yes, the investment team, the PM is driving the P&L of that firm. But it's more than that because it's about communicating. When you view your IRBD as an ancillary function, you're missing a really big resource. That is your front line. That is your time saver. That is so many other things for your firm. It's very hard for anyone to check their ego and try to be a partner with everyone at their firm. But if you can get every resource on your team optimized, it really pays.
Speaker 3This has been a fascinating dive into a lot of the tenets of your investment philosophy. I'd love to turn to discuss your process to find out more. About how you approach finding new managers and keeping and maintaining relationships with managers. To start, sourcing. Sourcing is every LP's bread and butter and critical to your job. What's your perspective on sourcing?
Speaker 1It's critical, but it has to start with what are the resources of the team? Too often, some of the large organizations are looked to in the same way that a small organization thinks it should behave. If you don't have the resources, you can't meet every manager and you have to be careful. With your time, much of our industry is focused on finding the best managers and then hoping for the best in terms of what it does in creating a portfolio. Everybody wants the best managers, but more than half of the role in sitting at an institution and investing its capital is being a portfolio manager, is optimizing the team you have and working every day to make sure your money-weighted return is better than your time-weighted return. It sounds so easy to add to what's not working. Sourcing is being willing to be out there. Sourcing is using your network to meet great people. But it's also being willing to take a cold call. But at the same time, you can't take all the cold calls. It feels a lot like hit and miss. But when someone stands out, it's usually because they're exceptional in a way that seems so basic. And it's just that they are themselves. The authenticity comes through, the curiosity with investing, the fascination with investing. Then it starts to become, okay, they're a great investor, but what role do they serve in our portfolio? And it's having discipline around saying, you know what? We already have exposure to biotech. How much biotech should we have? We can't only own biotech. There's different sections of a portfolio. You're going to be more benchmark aware in your public book than you're going to be maybe in your hedge fund book. It needs to be constructed for diversification. You need to have portfolio effects that are meaningful. Sourcing absolutely matters, but it's just one piece of the puzzle.
Speaker 3Once you've determined the portfolio fit, you've determined you need to pursue this particular area. How do you then structure your time effectively to uncover all of the rocks that you could uncover in that particular area?
Speaker 1In our seat, we're constantly being challenged with requests for our time, when a lot of times having space to think and do desk work would probably be more valuable. That said, when there is someone you want to partner with, there's no amount of time that isn't well-spent. When you start to think about five to ten year plus relationships, you really want to spend time with these individuals as humans. It's balancing that time. It is a battle for everyone that does this job because it is easy to go chase a shiny thing. You have to know when is enough. The best investors we work with can take a hundred data points and tell you the one to three that they think matter. That's a skill that we're trying to hone and work on. You absolutely need to do a CompSend analysis. You absolutely need to know what else is out there. But I'm not sure there's a lot of value in looking at the 30th fund that does the same thing that you're looking at as potentially your investment. It's really hard to say that, to say there might be an indifference point here. That goes back to portfolio construction and how that matters so much. Different managers end up giving you unique betas, and those betas are very important. But how they work together, is your responsibility, not theirs. And of course, you're always looking for the idiosyncratic, alpha, et cetera. However, it's still got a huge beta component. You need it all to work together. That's where the art and science come together of all of this work because everything you do quantitatively is backward looking and it's very important and it informs decisions. But you need a sense of where you think that manager might go and what that does to your aggregate portfolio. Once you've determined,
Speaker 3you've determined fit in the portfolio, you've honed in on a particular manager, how then do you make decisions on making an allocation or not?
Speaker 1There's an institutional momentum that starts to be its own type of inertia. Being able to fight that is very important. There was a PM that I used to run Central Park with, and he had a big, well-known endowment, spending a lot of time with him. On one of our runs, I just said, "Hey, how many hours have you spent? With this organization?" He said, "Oh, 70." And I said, "Oh, they're going to invest." That's not always the case, but there is this correlation of time. I don't say that to say that that's the way it should be. I say that because that's just this bias that we always have to check. You need to be willing to turn away at any point if, for some reason, it doesn't fit the portfolio the way you thought. They aren't who you think they were. For us internally, we have a tight process of how things bubble up into our internal IC. Those conversations. Those conversations are robust, lots of different perspectives. That's the design. You want to be challenged before you go into the investment because you need to be able to make the investment such that if that manager has that rough patch that we've talked about in the first year of your investment or the first three years of your investment, you understand why and you're hopefully there to dig through it and maybe even add. Every case is different. But if you don't have that conviction from the start, you shouldn't make the investment.
Speaker 3So you're a generalist with an emphasis on public markets and hedge funds. I'm curious how you approach sourcing and decision making across public and private market investments. The
Speaker 1difference between public and private is private is a lot less reversible. The irony is that private funds generally don't allow you the same access that publics do. And they generally show up and say, "Hey, we're closing in a month. Are you in or are you out for the next 10 to 15 months?" The strategy there is to be spending time with managers when they're not raising, to request as much time as possible so that you feel okay with that relationship. Some of our best private relationships come through spending that time for the same reasons that applied on the public side. The big difference is you don't have all this noise. You don't have Mr. Market in all these erratic moments being euphoric and then depressed. There's less decision points, but it's really hard at institutions to wait your time in correlation to the size of investment and/or its outcome. A 5% position and a 5 basis point position can often get the same amount of airtime at an internal investment committee meeting. That's not necessarily the way it should be. And it's certainly something that we continue to try to frame. When you just say dollars, you probably should also say percent. We try to not say, "Hey, it's X million dollars." You say so many basis points. That just reframes things. All these things can matter. A 10X on a small position can be just as meaningful as a slowly or meaningfully compounding big position.
Speaker 3But balancing that is hard. You're invested with the manager. You're maintaining relationships. You've talked about the importance of transparency. Let's talk about the situation where the relationship and performance has soured and you need to exit. How does that happen? In hindsight, we
Speaker 1exit too late in most cases because when something turns and doesn't improve, you look back and say, "Well, we should have left earlier." I gave some examples of where we were rewarded for patience. The main difference is that there need to be a few factors to have patience. That's stability of business, grit in the manager to keep going, and a belief in what they own. Inside of that is watching for style drift, watching for erratic behavior, all kinds of things that are telltale signs of someone truly doubting themselves. If you've ever experienced a 30 or 60% change, a 50% drawdown, you'd be insane not to doubt yourself. It's balancing that. We certainly do part ways with managers. We try to do it in the best way possible. I can think of a story of a manager that has since shut down. In hindsight, he started to flail in terms of what he was doing with his portfolio. Statistically, you could see that the turnover was increasing. Our conversations led to uncovering a real self-doubt. That was creeping into everything he was doing. We felt the fund would shut down. We felt it was time to leave. This is someone that I'd gotten to know for four or five years and felt was just a great human and great investor, truly, despite the period of rough luck. This manager happened to be in Singapore. I had other reasons to be there, but flew out to Singapore, let him know what we were doing in person, face to face. It was the way I'd like to do this side of the business because ultimately, you have to recognize how difficult that is in their seat. Today, we still have a good relationship. The irony in most of these situations is what that manager owned in today's market
Speaker 3would be doing incredibly well. Style drift, analysis of the underlying holdings, erratic behavior. What are some of the other tenants that you consider exiting from a manager position?
Speaker 1Certainly any improper behavior. You're done. Anything illegal is game over. There's a lot of gray area that when the partnership starts to be not prioritized, there's better things to do with your capital. There's plenty of times you move on from manager because the portfolio has different needs. There was a time where manager A did something and manager B did something different. Now both managers are doing something similar and you have to make a choice. That's okay too. The hardest thing to understand in these periods of stress is if the manager has the grit to keep going. These are often well-off individuals. Sometimes they decide it's not worth it. That distance to high watermark matters. The direction of AUM matters. The reality is you need to be consistent. You need to say, are we the type of team that's going to generally favor mean reversion? Or are we going to try to be a momentum shop? But when you start to go between the two, you set yourself up to always miss the bus stop. If you will, I don't think anybody could get 10 out of 10 calls when a manager is having a tough time, right? But if we can get six to seven to eight of those calls, right, we end up being rewarded significantly because even if you got six out of 10, those six will probably have much more meaningful returns on the upside than the four that petered out from there. Because usually by the time you're at that point, you're already somewhere towards the trough of that drawdown.
Speaker 3You mentioned a tight decision-making process with the team and robust dialogue that happens with the board when it comes to allocation decisions, how does that process differ when exiting a relationship? At Trinity, we have internal
Speaker 1discretion. We started with working with our board on every decision. The goal there was to make sure they understood what we did and what we're doing, to have real support. Over time, the first thing that was passed on to not need approval was exit and trim decisions. The logic there is simple. If you lose faith, you should be out. Those generally happen faster. When a manager is struggling, we will do what we call a formal review. These happen periodically regardless, but they get pulled forward if there's a moment of pain. This is a way to get everyone on the same page in something and prose effectively with, of course, a bunch of data in there to understand what's going on. You basically have three choices, sell, hold, buy, but it's great challenging and saying, hey, look, if we're not adding here, why are we holding this? The opposite is when something's working, we should maybe trim so that if it stops working, we could add. Needless to say, exit decisions generally need to happen faster because they always feel gradually than all of a sudden. When that happens, you wish you'd already made the decision one quarter year earlier.
Speaker 3Something that you've already mentioned is the importance of portfolio management in addition to the manager selection process. I'm curious how your relationship forward transparent approach to manager selection ultimately informs the portfolio management and asset allocation of your book.
Speaker 1Where we benefit from the level of transparency we've worked very hard to get with our managers is we have a better sense of, say, daily P&L. Now, in our seat, you should do nothing with that because you need to stay long term. However, that also allows for a much better sense of where exposures are, be it geographic sector, or otherwise, on a mid-month basis. When we have volatile months like we've experienced recently, it's very nice to know where you are in real time, not where you were at last month's end. That changed the dynamic around portfolio management, but it doesn't really change the end goal. It's simply, what are the aggregate risks? We need to be making bottom-up manager selection decisions that build. And then we have to make sure that we're making the right decisions. We have to manage those tilts because our managers have no idea what the aggregate portfolio looks like. Specifically, in a long-only portfolio, when you're much more benchmark aware, it's managing the aggregate tilts in a way that allows you to not be out of bounds with the benchmark in a way that wouldn't be long-term advisable. Because the thing you definitely want to check is people in our seat making too many top-down calls because we do not have the tools to do that. Nor are we experts in those spaces.
Speaker 3How do you effectively manage those tilts, especially in a market environment today with so much concentration, especially in public equity markets?
Speaker 1Public equities have been a tough place to be. Managing tilts has everything to do with starting with a risk framework around what would we accept in terms of over-underweight the US, over-underweight something. You need to do that in reference to your benchmark. Going from, there, it's also knowing the toolkit and the speed at which we can operate. It starts with portfolio construction because we're not making a lot of mid-month adjustments to exposures. It's a long-term goal and it's a moving target. It starts with the discipline around, do we need to add exposure to country X right now because we already are overweight that benchmark? Then it becomes, we have 2X the acquies exposure to country Y, we need to be trimming there. It's just on the margin, but it really matters over time because investing is hard. Benchmarks have been especially hard in recent years because of the concentration. Then it's also you're under overweight to the top holdings of the benchmark. Thinking about how you want to address that.
Speaker 3Would love to turn to get your thoughts on today's market environment. One area in particular that is top of mind for all LPs is liquidity. Curious how you and Trinity approach the liquidity dynamic with exits so slow on the private side and your focus is on the public markets.
Speaker 1We're in an okay position because we started building our private portfolio in 2016. We have a meaningful private allocation, but it's not as illiquid as some. Liquidity across the industry has been rough. Liquidity doesn't seem to have a clear path in a lot of cases going forward. There's some large IPOs coming through. That'll be its own interesting dynamic with record size. We're in a position where we're going to be able to make sure that the current record size will be something to watch and learn from. In many cases, it's slowed down the deployment of additional capital into privates, but it's also changed the dynamic of the conversation. You pair that with a public market that's vastly outperformed the broad private market measured on, say, a Cambridge index level, and it's causing most people I know to have very difficult conversations around what is the future path of private allocation in our portfolio. Then the contrarian says, at what point is it going to be a great time? At what point are we going to see some really amazing vintages because of where the market's going? The other side of that is, have too many companies waited too long to go public? That's what's going to be really interesting with the next few quarters and the market dynamic we see and how the public market digests IPO volume 2x, anything we've seen in history.
Speaker 3What is your answer to what's going on in the market? What's going on in the market? What's happening? What private market allocations role are in an institutional portfolio?
Speaker 1It's hard not to be skeptical at this point because private markets have, and this is dangerous to generalize, but gotten a pass in a way that the public markets don't. Being someone who lives more public, you deal with the day-to-day of all, you envy the private seat that says be patient. We do discuss and say that privates are not essential. meaning we should choose to have them because of the return we believe they will deliver over time. And that return needs to be in excess of what's offered in public markets. It can be a diversifier as well, but it needs to be a real diversifier, not just because of quarterly marks or some other kind of laundering of capital. We are questioning the path forward. We will certainly have private exposure in the future. We are excited about the partners we have. It's hard to look at a private market that's struggling to produce the liquidity that investors are hoping to see in a public market near or at all-time highs. You would think now is the time. Then you start to go down this path of, if you can't sell now, what does that say about marks on a broad basis? What did we do to ourselves in 20 and 21? That was a euphoric time in the private markets. It's where funds came back to the market instead of at the third year, maybe at the 12th month. I don't have an answer in terms of what comes next, but it's not binary. It's cautious. And at some point, there'll be a great opportunity to partner with groups that have a little less demand than they're used to. And also partner with new funds that are going about it the right way. Can you believe it that we've not mentioned the words AI? I'm so proud of us.
Speaker 3What do you have to say about AI?
Speaker 1Look, it's important. It's meaningful. Who's not excited? There's a great market character named Marco Poppich who loves to say that the 11th commandment that Moses dropped on his way down from Mount Sinai was all CapEx cycles end in tears. You see something like the railroad, boom. You look back and you go, well, that was silly. Why would you need three railroads to one location? I don't know what the right parallel is, but the more you look at periods like that, you realize it made sense to the people at the time. They didn't get silly overnight. There was a logic to it. It would be great if I knew where this goes wrong or where the hiccup is, but I don't. And I don't think anyone does because it's usually the thing you're not expecting. That being said, the thing I'm most worried about is everything being called or becoming AI. Everything is adjacent to AI. But then if you start to talk about an investment thesis or what is our experience? Exposure to AI or how do we get more AI in the portfolio? You're probably having the wrong conversation. You have to go a layer deeper and understand what that means. It's life changing. It's pivotal. It's going to be defining our times.
Speaker 3All right, Nick, this has been a lot of fun. So appreciate all of the anecdotes that you've been able to share. Want to turn to some closing questions before we let you go. What is your favorite hobby or activity outside of work and family?
Speaker 1I'm working to become what's called a master mason. That's in the dry stone wall category. It has a four level track. I'm preparing for my second level test. It feels like one of these baking shows because you have to build a component of a wall in about eight hours. You're being judged as it goes. It's like when the cooking shows, when they say there's 10 minutes left and everyone starts running. I have fallen in love with stacking stones.
Speaker 3Amazing. What was your first paid job and what'd you learn from it?
Speaker 1I was an art model. It turns out that you could work in the cafeteria or you could make double if you were the art model for your peers in art class. Apparently, I thought that was the economic choice. I learned that that can be embarrassing, but it's character building. I also learned that standing still or striking a pose for extended periods of time is very hard for me. What is your biggest investment pet peeve? We as an industry have a lot of expressions. I find some of them to be really hard. I would love us to find new ones. Whenever there's an executive summary, I'm always wondering if there's a regular summary or if a consultant just added a word. I don't believe that any baby has ever been thrown out with the bathwater. So let's find a better one. And then one I think we really should stop using is decimate. It literally means down 10%. It was referring to Roman soldiers losing their lives. And so it was emotional. And so maybe emotional decimation, but it doesn't work when you say a stock was decimated because that's a price movement. And I think 10% in my
Speaker 3head. I don't know who we have to talk to. Any of these, but we'll write a letter to someone. Deal. All right, Nick, last one. What advice would you give to a young allocator that you wish you knew earlier in your career?
Speaker 1You're never going to know. So it's okay not to know. Meaning the more comfortable you can get with not knowing the answer and being okay with that there is no answer, the better investor you can become. It doesn't mean you don't have to do a bunch of work to try to understand what it is you're doing. But to think that there's a spreadsheet or a copilot. The answer is just not a thing.
Speaker 3Nick, thank you so much for doing this. Loved our conversation. Thank you for having me.
Speaker 2Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com where you can access past shows, join our mailing list and sign up for premium content. Have a good one and see you next time.
Speaker 4All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions and securities discussed on this podcast.
PodcastTranscript AI