Episode #503: Jon Hirtle, Hirtle, Callaghan & Co. – OCIO Pioneer – Meb Faber Research

Episode #503: Jon Hirtle, Hirtle, Callaghan & Co. – OCIO Pioneer

Guest: Jon Hirtle is the founder and Executive Chairman of Hirtle, Callaghan & Co., a $20 billion Outsourced CIO business he founded over 35 years ago. Jon is well known for creating the OCIO model that is commonplace today.

Date Recorded: 9/27/2023  |  Run-Time: 49:03 

Summary: In today’s episode, Jon shares what led him to start his firm and the OCIO model itself over three decades ago. He walks us through the evolution of asset allocation over that time, lessons from working with countless investment teams during his career, and his broad thoughts on the current investment landscape.

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Links from the Episode:

  • 1:18 – Welcome Jon to the show
  • 2:01 – Being credited for creating the OCIO role and their founding thesis in the 80s
  • 5:48 – What the asset allocation base case was like thirty five years ago
  • 8:09 – Early day building blocks and working with enterprise families before institutions
  • 10:04 – Unique ideas they first incorporated beyond stocks and bonds
  • 13:19 – Lessons from working with families as a trusted advisor
  • 16:18 – Essential planning and creating success with certainty
  • 19:50 – Common missing pieces in an uninterrupted chain of compelling logic
  • 23:58 – Public funds struggling against the S&P as closet indexes
  • 28:48 – The popularization of the Yale model and the landscape in 2023
  • 32:21 – Jon’s thoughts on the private market space
  • 36:13 – Particular areas of interest in alternative assets
  • 39:22 – Something Jon believes that the majority of his peers do not
  • 43:00 – Jon’s most memorable investment 



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Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.


Welcome podcast listeners, we have a special episode today. Our guest today is Jon Hirtle, founder and Executive Chairman of Hirtle, Callaghan & Co., a 20 billion dollar Outsourced CIO business he founded over 35 years ago. Jon is well known for creating the OCIO model that is commonplace today.

In today’s episode, Jon shares what led him to start his firm and the OCIO model itself over three decades ago. He walks us through the evolution of asset allocation over that time, lessons from working with countless investment teams during his career, and his broad thoughts on the current investment landscape. Please enjoy this episode with Jon Hirtle.


Jon, welcome to show.


Happy to be here.


Where do we find you today?


At our Philadelphia headquarters.


Very cool. How many different offices do you guys have? Are you a modern company with a bunch of remote people all over the world now? Or are you guys mainly Philly, and any other place?


Well, we’ve got 110 people, and most of us are in Philadelphia, but we have people in Pittsburgh, Chicago, Denver, Houston, Minneapolis, Scottsdale, so those are our offices. And we don’t really have this modern structure of just having remote workers everywhere. We believe that teamwork really matters, so we try to convene everybody together regularly, and we work in teams around the country.


Well look, this is going to be a lot of fun today. We’re going to talk about a lot of different things. First I wanted to start off with, there’s a phrase, or I should say an abbreviation symbol today, 2023 OCIO, is fairly well accepted, well known, and I’m curious, you guys got started, I believe in the 1980s. Was OCIO a phrase then?


Well, we started in 1988, so we’ve been in business 35 years, and we get credit with coming up with the idea of outsource chief investment officer. And I think that’s right. We created what we thought was a better solution for serious investors, and it’s in the form of an independent investment office. So, it was really copied after the independent offices led by a CIO. So, David Swenson at Yale, Arthur Milton Berger at the R .K. Mellon Foundation. And we really believe that this notion of an independent office was structurally superior. In other words, it created better net results for clients. And one of the ways you can argue that is to just go bottom up, and talk about every dimension of why it works, and a simpler way is to say that every one of the most sophisticated, large, multi-billion dollar investors in the world use as an independent office. So, that ought to tell you something.


Tell us a little bit about the early days. What was the thesis when you guys got started late ’80s? How were you different, and other than you guys and a few endowments, anybody else taking that approach at the time?


It really was no one taking that approach. So that was heartening. I feel like I’m doing something different, but I was at Goldman Sachs at the time, prior to starting Hirtle Callaghan, and had great good fortune there. My mentor, the day I showed up, was a guy named Bill Grover, who eventually was a professor at Bucknell, that I said to him on the first day, “What’s the noble cause?” And he had been a submarine officer in the Navy and I was coming out of the Marine Corps, so he knew I wasn’t kidding. And I think a lot of people on Wall Street, if I asked that question, would’ve said, “What do you mean noble cause? This is Wall Street.” But he gave a terrific answer without hesitating, which was, “The client.”

So, started out working hard, trying to do great things for clients, and along the way, was fortunate enough to meet Arthur Miltenberger, who was the chief Investment officer at the R. K. Mellon Foundation in Ligonier, Pennsylvania. I covered Pittsburgh because I had grown up there. So I got to meet Arthur, and he was so terrific. And what I also got to understand was that the structure of the organization was superior. So they had complete open architecture, and those days, they had three and a half billion dollars, I recall, which is still a lot of money, but it was a tremendous amount of money 40 years ago, and he could really cherry-pick the world for best in class specialists in anything he wanted to do. So that was pure open architecture.

And then in addition to that, he was a highly qualified CIO. So, he had a disciplined process, dynamically allocating assets. So best in class managers, the role players, and then this additional source of value added with dynamic asset allocation. So, he was consistently outperforming Goldman Sachs, which was shocking to me when I first saw it, because here he is living in bucolic Ligonier, PA, and beating Goldman.

But it was the structure and the application that really made a difference. So, client’s a noble cause, figure out a way to do it better. In those days, Goldman didn’t even have asset management. There was no GSAM, so we really couldn’t do it at Goldman Sachs. I would make the case that Goldman still shouldn’t be in this business because of the conflicts, but we certainly couldn’t do it then. So, it got into a philosophical corner and said, “We need to leave Goldman, start this new organization that can take the advantages of a powerful, sophisticated independent office, and then make it broadly available.”


What was asset allocation like for the majority of real money institutions at the time? Was it simply 60/40 style? Were they just putting it all in corporate bonds, all US focused? What was the base case at that time, and what were you guys doing different then? And we can obviously talk about now, but 35 years ago, set the table for us.


The world was much less sophisticated, and complex than it is today. Now having said that, it was much more complex in ’88 than it had been in ’82. So in ’82, when I started in the business, it was pretty much a stocks, bonds and cash US world. So, when you think about that, that’s a three cell matrix. So, complexity of three factorial, and not that complicated. So, hedge funds were an exotic. International was an exotic. Private equity pretty much didn’t exist. I mean it was not broadly available.

So we went from a three cell matrix, stocks, bonds, cash, US, to about a 50 cell matrix over time. So, if you think about all the countries on one axis, and all the different types of securities on the other axis, the complexity, and the noise, has exploded. But when we go back to ’88, we had a lot of sophistication, but it was less complex than it is today. We spent a lot of time talking about getting access to great long only managers who were outperforming. So, it was much more straightforward than it is today. Interest rates were much higher, money market funds were paying 10% when we started the firm. So, the interest rates we have today still seem rather low by comparison.


Yeah, you have the younger cohorts certainly losing their mind about mortgage rates, and the reality of interest rates where they are today is they’re more similar to history than zero, for sure. It seems more of a return to normal than the past decade, which was certainly an odd time with a negative yield in sovereigns.


I just say, I would underscore what you just said. That is a very good point. My mom’s mortgage was six and an eighth. My first mortgage was 14. So, the last decade of free money is the aberration, if you look through history. And so, where we are today seems certainly manageable, and we’re actually getting bonds in the portfolio as a constructive component, which hasn’t been true for the last 10 years.


There was something in the water in Pennsylvania, it must’ve been. Vanguard got their start there, and you had a somewhat smaller menu of investment options, but ’80s really began the period of leverage buyouts. So, private equity was starting to become a thing, venture capital perhaps growing into more of an asset class, ditto with hedge funds as active management. What was the Lego pieces you guys were really using at that time, either pioneers, or ones that you thought were particularly interesting, as you started to build out this business, and any stories you have about working with early organizations? Was it mostly families? Was it mostly institutions? What was the early days like?


It started out mostly what I would call enterprise families. So, not old money so much as people who had created a lot of value, and their children. And I’m not really sure why that was. It’s just the area where I was most comfortable. I love talking to these value creators, people that have an idea and build a business. And so, that’s where it started. And then it was several years before we entered in the institutional business, and the way we got involved there is one of our wonderful family clients would say, “Can you help me with my alma mater? I’m on the board of the community Hospital foundation and we’re struggling. Can you help me there?”

So today our business is about 50% philanthropic families, because really in America, almost all wealthy families are philanthropic, and then the mission-driven institutions that inspire them. So, it’s been very much of a virtuous cycle, where our families take us into their favorite institutions, and then we meet other wealthy people on the investment committee, and then they tend to often become family clients, and then they lead us to another institution. So, we’re managing $20 billion today, and it’s been organic growth, and that’s how we’ve done it.


So tell me a little bit about some of the opportunity sets you used to distinguish yourself in the early days. You go chat with these families. I imagine it’s changed a ton in the last three or four decades, but what are some of the unique ideas you started to really incorporate? And I know every client’s different in your world, with every family’s got its own headaches, and desires and wants. But how did you think about incorporating on the menu of investing choices, things that started to be different than just plain old stocks, bonds? We didn’t have ETFs back then. How’d you guys start to think about it?


Well, the development of ETFs is an interesting thing that we can talk about later. It’s a corollary to one of the innovations we addressed 15 or 20 years ago. But back then it was really about finding superior managers who could outperform sub-indexes, and understanding, for example, that styles rotate. Really understanding what a manager does, and then understanding, even if they’re terrific in their space, that that style is going to rotate.

It was also what I would call the Peter Lynch era. So, in other words, it was much more possible for active managers in public markets to outperform substantially. And this was before Reg FD. So after Enron you had Reg FD, and there’s full disclosure. So it’s much harder for money managers to get an informational edge. And nowadays, some of the things that people did those days, and were just considered good research would be considered inside information. There were many more inefficiencies in the public markets, so you could find managers who could outperform substantially, and consistently.

So most of our effort back in those days was first on planning, to make sure that the client had a specific definition of success that we were working to achieve. And then it was a lot of work on finding managers who had a durable edge. And that is still true today, but it is much harder to find that in public markets. So, I’ll just pass on that moment, but, finding managers who could really outperform. One of the things I mentioned that interest rates were 10%. In those days, it was important to have great bond management, and interest rates continued to decline so you could make capital appreciation in taxable bonds. In munis, it was harder, because munis usually have call provisions, but even then municipal bond market was extremely inefficient, and you had high interest rates.

So with great managers you could add value not only in stocks but also in bonds. So, it was much more of an open architecture, find the great public manager. We didn’t get into private equity until about 10 years later. So, we’ve been investing in private equity for 25 years, but for the first 10 years, it was mostly public markets. We were involved in hedge funds earlier, because in those days, hedge funds also were able to produce consistently high returns based on asymmetric information, which today may be illegal, and high yield on their carry positions. So those interest rates helped the hedge funds generate high returns on their carry position. So, it was mostly a lot of planning, long only stocks and bonds markets, including non-US. And some hedge funds.


Do you have any general lessons that could apply to listeners about how to think about working with these organizations, as far as best practices, or challenge, or things to avoid too, when talking to families, and when it comes to money?


Well, I think that as a trusted advisor, and I tend to carefully use that term, because it’s overused, but if you really take it seriously, and you mentioned Vanguard, Jack Bogle has written some great work on trusted advisor, and I’m happy to talk about his influence on our firm. But as a trusted advisor, one of our cornerstone values is that we serve with courage. So we’ve got to say the tough thing. We’ve got to be able to be frank with people. Now having said that, a lot of this issue of institutional diversity of opinions, and different constituents, and how do you keep them happy? That really is a function of the board and the investment committee.

So the investment committee comes to us and we are the CIO, and we listen to them and we talk to them, and we say to them, “This is what we’ve done at other institutions, might that be helpful?” But it’s really the committee’s job to synthesize, or bring together all those disparate views, and say, “How are we going to move forward?” So in the planning process, that’s all pulled together.

One of the anecdotes that I always have enjoyed is that we have been tremendously privileged to manage an institutional relationship in Kentucky for over 25 years, and it’s our largest institutional relationship, and it’s been very satisfying, because of their mission, and their history is of one of tremendous social consciousness. They work with poor families in Appalachia, they call it down there. And periodically, the students will get all up in arms about SRI, socially responsible investing, and come to the committee and say, “Our large endowment needs to be positioned with an SRI overlay.”

An SRI has been around forever. It really started with Quakers in Philadelphia, way back when, but it really is an exclusive thing. You’re going to exclude certain investments. So this school that I mentioned in Kentucky has also got a Christian heritage. So in most Christian schools, you would right away think about excluding tobacco, alcohol and gambling. But Kentucky happens to have bourbon, tobacco is one of its biggest cash crops, and they have the Kentucky Derby. So, it becomes very complicated very quickly.

So the committee often said to the students, “That’s terrific. You get together, and come back to us and let us know what to exclude.” And of course, there was never consensus on what to exclude, and so we went on our way just trying to maximize returns. So, clearly there’s a dynamic on campus, and most of our institutional clients are colleges, but we also work with foundations, and we’re really pleased to manage the Homeless Project in South Florida’s money. So, a lot of this mission driven stuff, but there’s always dynamics. But I think a good committee can manage that, and then we work with the committee.


So as you guys have progressed over the years, the menu has expanded almost to the point where it’s like walking into a Whole Foods, or Ralph’s, or Erewhon, I guess I’d say here in LA, where there’s just thousands… There used to be a few choices of cereal, then when I grew up, it was more, and now it’s just unlimited. Ditto for investing choices. And you talk quite a bit about this balance beam seesaw of skilled managers, and dynamic asset allocation. Maybe talk a little more, and dig in about how you guys approach that in the more modern era. So, this new century, where, do you have a template starting point where you say, “Okay, here’s the base case new family.” So a new family or institution comes to use, says, “Look, here’s our goals, yada yada.” Do you say, “This is where we’re going to begin?” Or how does it work?


Well, planning is absolutely essential. So our goal is to create success with certainty. And to do that, we first have to define success. So, the planning is critical, whether it’s with a family or an institution, and that takes a lot of work, but it’s absolutely worth it, and it’s terrific to see that. Think about it as a medical metaphor. If you had a fitness program, you’d start out with analyzing your patient’s condition, and then talk about goals, and then develop a linear path to get to the goal of fitness. That’s what we want to do. The planning starts. Now, every great money manager has a style, and a CIO is not a consultant. Hugely important point. We’re not an information provider. We are the master money manager, the overarching investment manager.

Everyone has a style. So, when we hire subordinate managers, when we hire component managers, we want to look for a uninterrupted chain of compelling logic, and we like to follow that logic chain, and when there’s a trust me in the middle, we want to back up and say, “Tell me that again,” and where’s that link in the chain? That doesn’t mean that you can explain it to me and I can execute on it, because it’s like a doctor telling you how he’s going to repair your knee. But I want to hear him say it in a way that makes sense to me.

So, to supervise the manager, you’ve got to understand the logic. And with a CIO, a CIO also has a style, and it’s this uninterrupted chain of compelling logic. Now, a lot of what this massive menu that you mentioned, some of that is noise. So what you have to do is cut through the noise, and have a discipline process. Another phrase we use here is disassociation, and method. So, what you have to do is, especially if you’re in a tense period like the great financial crisis, or these mini crises that pop up from time to time, you’ve really got to be able to fall back on your own discipline, and understand what that is.

So these things are all linked together. Our approach, for example, divides the world into growth assets, and I don’t mean like growth versus value, I mean like stocks. So, equity ownership, private and public. Income assets is the second category, and then the third is hybrids. So, by doing that, everything in the world, you can take this tremendous array of specific products, and categorize them, the taxonomy of what we look at. Is it a growth asset? Is it an income asset, or is it a hybrid? Then by doing that, then we can start to look at where the opportunities lie within those categories, and how we fit it in to the plan, and then how we manage it over time, as prices change, and the client circumstances change.


So, as you start to characterize those assets, I think most of us would probably have a pretty good guess on what falls into where. But, what would you say when you talk to most of these organizations are the biggest missing pieces? And maybe it’s not the case, maybe they have a decent allocation, but you’re trying to improve on, with various allocations, and different skilled managers. I loved your phrase-


Uninterrupted chain of compelling logic. Because the chain is a good metaphor, or good visual because it’s got links to it. So where’s the missing piece in that chain of logic? So, anyway, that’s true. And what most people do, I’d give you three broad categories. One is insufficient planning. So, for example, we will often talk to our committees, and talk about risk. And risk is a funny thing. Risk is a… I often say here, “We should never use the term risk without a qualifier.” In other words, why saying volatility risk, reputational risk? What are the risks? And what we find when we have, and we often will do surveys that are blind surveys of the committee, and what we find out is when they’re approached properly, most committees will agree that their most important risk is mission failure.

So, mission failure is very different than short-term volatility risk. As a matter of fact, you may need to embrace short-term volatility to achieve your mission. So, that’s the notion of planning. That would be the first thing. Second thing, which is a big one, and it’s funny that it’s still so prevalent, but most long only managers, if they’re analyzed properly, are adding no value, net of fees in particular, but really no value at all. And the reason that’s true is largely a function of ERISA, the pension law that was passed in 1974.

So next year it’ll be 50 years that ERISA has been in place, and it’s really had a huge impact on the investment world, because the largest investment management firms were really focused on gathering these massive pension assets. And so they were very tuned into pension investing, and ERISA made corporate officers liable for the prudent management of the pension fund. So it became literally a liability game, not a… And I don’t mean an investment liability, I mean a legal liability game.

So, a lot of what came out of ERISA, which by the way spawned the 401K plan, and created the pension consulting industry, which became the investment consulting industry, a lot of that was not focused on ROI, it was focused on CYA. So, how do I defend my client at the Department of Labor if they get sued? So, there were a lot of things that came out of that that are actually not constructive from an investment standpoint, and one of them is tracking error. They track a manager, and how much do they vary from the index, which is not logical, because only way you get differentiated outcomes is to have differentiated behavior. So you can’t have a manager that you insist tracks an index closely and then expect that manager to outperform.

So, the industry has been colored by this for 50 years, and these big asset gathering firms tend to have large portfolios with low tracking errors. So today most clients are trying to pick between two managers, well-known name managers like for value, and, “Which, should I pick value manager A? Or [inaudible 00:21:53] should pick manager B?” And the answer is, you ought not to pick either of them, because neither one of them is going to add value, especially in net of fees. So, that’s the second thing. You really need to pay attention to where are your active fees being paid? And is it with a manager who you can reasonably expect to earn that fee? And most of the answer is, it’s not. And still to this day, most of the industry is being paid to do something that they can’t do.

And that leads into the third area, which is not enough exposure to private markets. So, private markets are highly inefficient, and it’s very important that you get with the right group, but if you do that, then your active management fees are well spent there, and you can really have differentiated returns. So, those are the three broad areas I would say that most clients need help on.


You hit on a lot of important topics. We got into a little bit of a debate, discussion on Twitter the other day, where looking at the long history of public funds, and how many simply struggle against the S&P, and part of that, of course, as you mentioned, is high fees for not doing a whole lot. And in 2023, we exist in a world where you can get the market cap index for nothing. So, if you’re going to charge 50 bips or 100 bips, or the average mutual fund, man, from 30 years ago, 150 bips, or 1.5%, listeners, you better be pretty weird and different enough in a way that you even give yourself a shot at outperforming, versus just being a closet index, because 1.5% fee means you got a pretty high bar to be able to outperform on any chance. And a lot of the historical research on these public fund managers show that many are not up to the task.


Like I say, it’s not that they’re not smart, it’s not that they’re not hardworking, but it’s a wrong mission, because of this pension influence. They’ve been asked to have a differentiated outcome without differentiated behavior, and it’s not possible. That’s illogical. And even if you have a much lower fee, one of the examples, our rule of thumb is if you’re a great manager, over time, you should be able to get about a 20% return on your tracking error. So, if I vary from the benchmark by two points, 20% of that would be 0.4%, or 40 basis points.

If my fee is 38, which would be a wholesale fee, something like we might pay an active manager, that’s still zero. And by the way, I still have the risk that the manager will underperform doing that. So, I would much rather have a custom index, which we can create a portfolio, a custom index portfolio that has a 0.95 co-variant, so it’s just tracking that manager for three basis points, because of our purchasing power. So, this is part of the evolution of the industry. On the other hand, when we do have long only managers, we want high conviction managers. So we’re much more comfortable using a manager that might have 5% of tracking error, which means that he’s going to be 5% off the benchmark sometimes, but he’s only one component of this complicated, and sophisticated multi-manager program. We want to pay for someone who’s got strong opinions, who we believe has the ability to really outperform over time.


You hit on the key issue of this entire concept, which is you have to be willing to be different. Buffett talks a lot about it. Many investors say they are willing to, and then you have a few years of underperformance. My goodness, the S&P, I think, has sent many a manager and investor to the graveyard over the past 14 years, post GFC. Many investors are not willing to endure just how long it might take to be actually different, meaning not different and right, different and wrong, or just said differently, different and not as good as whatever they perceive as a much better “benchmark.”

But to achieve that alpha, that’s often what it takes. And many of these active managers, there’s been a lot of studies by Vanguard and others, show that you go through periods of struggle, and even looking at broad asset classes here in 2023, foreign anything, particularly equities have underperformed US for a long time. Value being one that’s been much maligned, on and on, go through these periods. And I think one of the benefits of what you guys do, or really many advisors out there, is that they act as a wall in between behaviorally doing something really different, stupid, and chasing returns, which is very seductive, as humans.


You have to understand what the manager does, and why you hired him to begin with. And that sophistication of analysis allows you to stay longer, because the manager, nine times out of 10, if he was hired properly, continues to do what you hired him to do, and you made a decision early on that you didn’t want to just own large tech stocks, that there are other things you owned in the world that might be attractive. So, unless you’ve changed your opinion, that you don’t want to just own tech stocks, then it’s not appropriate to just analyze them to what’s hot right now. Every manager is going to underperform. Managers cycle. So you have to say to yourself, what do you believe? Find the most compelling investment you can find based on what underlies it, and then believe it a little bit, because you can’t really predict what’s going to happen next. You can only prepare for a uncertain future, and you do that by owning lots of different kinds of compelling investments.


Part of the great evolution of asset allocation, and research and everything over the past 50 years has certainly been the popularization of the Yale model of the multi-asset allocation model, allocating to active managers that can drive value. Talk to us a little bit about where we are here in 2023. You’ve been through a few cycles, you’ve seen some oddities, and strangeness in markets over the years. As you look around today, anything that’s in particular front of mind, you’re excited about, you’re worried about, that you think investors don’t appreciate? What’s on your brain today?


Well, you mentioned several things that come to mind. You mentioned one earlier, and that is that for the first time in a long time, we’ve got real yields in the bond market. Nobody really talks about bonds very much, but bonds are an important asset. They have two functions. They provide income, and they also stabilize the portfolio. And stabilizing the portfolio does two things. It allows investors to stick with their program longer. If a portfolio is too volatile, a lot of investors will panic at the bottom. So you want to create a portfolio that has the implied growth potential compounding, high compounding potential, but also isn’t such a rocky road that the client panics and gets out midstream. So, that’s the part between income, and growth.

And income for the long time, over the last 10 years when we’ve had zero interest rates, the price of volatility reduction was extremely high. So you were giving up basically all return on that volatility mitigating portion of the portfolio. So today we can own bonds, and get a real return for the first time in a long time. The other thing is that it wasn’t that long ago, three years ago perhaps, where the Federal Reserve was desperate to get interest rates higher, and they were trying to do that because if we ran into recession, they wouldn’t be able to cut rates if we were already at negative real rates.

So, we’ve got now today a pretty sweet combination, a pretty great mix of interest rates that are higher, but not too high, and fixed income investors, and also those who used to buy CDs, living on a fixed income, that whole component of the investment world has been revitalized. So that’s one of the things that’s on my mind right now, is the idea that bonds are back in the toolbox. And I’m very familiar with that, because for the first 30 years I was in the business, it was a really important component.

Second one, I guess, is that I still believe that private markets, and they are underutilized for a lot of investors because investors may not be accredited, but there are structural advantages to private markets that make them less efficient, and there really is an opportunity to add… True manager skill really makes a difference there. So those are the two areas that I continue to focus on.

I mentioned earlier about not paying active fees for long only managers that can’t earn their fee. So, part of what we do is look for ways to reduce cost, because that matters at a fixed compounding. So you want to both reduce cost and enhance return. So, those three areas, getting active management fees away from people who can’t earn them, and then using bonds effectively, and using private markets effectively, all in service of a sophisticated, logical, client specific plan is what leads to success with certainty.


Private markets, by definition, are something that’s a little more opaque to most investors, a little bit harder to access. The accredited rules are a little wonky, but it’s changed a lot over the past three decades. You have plenty of, not marketplaces, but platforms, and offerings, and different ways to access private markets. What are your thoughts on the space? Maybe just dig in a little bit deeper. Has it gotten… You mentioned still pretty inefficient and choice for alpha, but at the same time, there’s orders of magnitude more money in that space than there was back in the days of barbarians at the gate. So tell us a little bit more about what that landscape looks like today, in 2023.


Well, a lot of the opaqueness contributes to its inefficiency. So, hedge funds were opaque at the beginning, when they were making very high returns. So, it is true that the more transparent an industry becomes, oftentimes the more efficient it becomes, the less opportunity there is for manager skill to add value, what we call alpha in the industry, the jargon term. And there are structural advantages. Last I looked, if you counted pink sheets, almost non-investible, any public company, I think there’s 7,000 companies in the United States that are traded. The Russell 3000 has actually 2,500 names in it. So, there are not that many public companies, and the number of public companies is actually diminishing. The last I looked, there was 27 million privately owned businesses in the United States. So, just that alone is a huge factor, number one.

Number two, I was in the service for a long time and we used to say, “Never get in a fair fight if you can avoid it.” So, it’s not a fair fight. This goes to this notion of inefficiency, and asymmetric information. There are certain venture capital managers, and we, for example, go to the entrepreneurs who are creating businesses, and we say, “If you could pick any investor in the world, who would you want on your cap table?” And there are six or seven names that keep coming up. Most of them are closed to new investors, but if you can get to those names, it’s not a fair fight. They have a first look at everything that’s coming out of Silicon Valley, in effect. So there are inefficiencies in that market, and there are very capable people functioning as managers in that market.

But it’s different, because like in Wall Street, you’ll talk to someone who is managing working in public markets and somebody will say, “Well, this guy is so smart.” Well, he is so smart, but so is everybody else who’s competing with him, and he can’t get an informational edge because of Reg FD and the cheapness of computing power, and so forth. So, it’s very hard for them to get a sustainable edge in public markets.

That’s not true in private markets. There are structural advantages that make smart people who are well positioned, and well-connected, they have an advantage. So we like to say it’s not just a what you know game, it’s a who you know game in private markets. And the dispersion of returns, in other words, the difference between bad managers and good managers is as much as 25% in private markets, where in public markets, the difference between a good manager and a bad manager may be 2%.

So, it is a much broader distribution of returns. It’s a much less efficient market. The advantages are still structural, not clear how they would go away, exactly, because it is a private market. So, not everybody can take advantage of private markets. But in the process of planning, for example, one of the things we do is really go through, because these private market investments are much less liquid. Some of them are lockup periods for 10 years or more, but the return give up, in a sense, the price you pay for next day liquidity is very high. And so, we want to go in and plan, and say, “How much can we build into this portfolio without impairing the required liquidity for the client’s overall needs?”


I like one of the things you said, one of the biggest arguments we’ve said for a long time on private markets is a quant phrase, just saying there’s breadth. There’s just so many more choices, for better or worse, but certainly, in that world, than there is in the public markets. When you start to think about alts, as many investors characterize them, and many things that were alts 20, 30 years ago, or probably no longer alts, are there any areas in particular you guys are drawn to or you find interesting? I think back to the early days, the endowments, investing in Timberland, or things like that. Is there anything today, where you guys think is a particular, or interesting, or something that you guys consistently gravitate to in that world?


There’s nothing that is particularly new. A lot of the things when you think about Timberland, or even opportunistic real estate, we don’t think the return possibility there is as high as it is in venture capital, and private equity. And if you’re giving up your liquidity budget, in other words, if you say, “I’ve got 20% budget for illiquidity,” I don’t want to put it in an area that it has a lower return. So I want to use that to get the highest return I can, which is in private equity, and venture capital. We really like private credit today. Now, that’s nothing new. Private credit’s been around for a long time, but the opportunities there come and go. And today, you’ve got a publicly traded high yield bond market that’s trading at about an eight, and we’re able to get elevens in the private credit market.

But interestingly, we think they’re more secure, because the private credit issuers, because of what happened in banking and so forth, there are more substantial borrowers coming to the market, and the private credit firms are able to require higher covenants, so more security on the loans. So, we think that rather than getting an eight in the high yield public market, we can get an 11 in the private credit market, with, we believe, more security.

So, that’s the incremental return that really matters over time. So we like what I would call the traditional alts, private equity, venture capital, and private credit. We are very hesitant on hedge funds, as normally built. In other words, the Old Jones model hedge fund, which was created in Memphis, way back when, and it was a long short with leverage. And we’re not particularly optimistic about that. What we call hedge funds today, and we were able to actually disaggregate the traditional hedge fund streams and do a lot of what hedge funds do, for example, sell options premium internally for no additional cost to the client.

So, we were able to do that without using the hedge fund two and 20 model. So get rid of the two and 20 and try to attack the components of the return one by one. So, we’ve largely done that in our hedge fund space. What we call hedge funds today are more people that are high conviction managers, that may own 20 stocks with a lockup period. They need the lockup period, because they don’t want people getting in and out of what they think is a strategic position. So, that’s where we are today, is private credit, private equity, venture capital, and high conviction managers in public space that may have a lockup.


I like it. We only have you for a few more minutes, and there’s a couple more questions I wanted to squeeze in. The first is, is there anything in particular when you think about maybe your other CIOs in various seats across country, PMs at various endowments, real money institutions, what’s something that you believe, that Jon believes, that a majority of your peers don’t?


It’s an interesting question, because I actually think that most of the great investors converge on the issues that we’ve just been discussing. In other words, there’s not that much differential on these principles that I’ve just discussed. In other words, most really sophisticated, informed CIOs understand that long managers, given the constraints they have of tracking error, can’t earn their fees. They understand that there’s a whole thing called factor investing, which, in other words, you can take most long only managers and reduce their approach to a series of factors, and then you can recreate those factors in a custom index. Most people understand that.

I think there’s this notion of, I always say to people, if two scientists were working on opposite sides of the Atlantic, to try and determine the number for terminal velocity, there’s only one answer. There’s one logical answer that comes up with a way that you can maximize the return on a multi-asset portfolio while also increasing certainty of return.

Great investors don’t want high return, high risk, or high risk, high return. They want high return, low risk, they want high return with high certainty. So, how do you get high return with high certainty? And there really is only one way to do that, that we understand, and people converge on that way. You mentioned breadth. The law of active management is that success equals skill times the breadth of your opportunity set. So, if you and I have the same skill in basketball, and you get twice as many looks, you have a higher score. It’s that simple.

We want to have a global portfolio so we can look at more opportunities, maximize the breadth of our opportunity set, and apply these disciplines to that. I would say the thing that maybe people don’t understand, or don’t put enough time into, is the interpersonal work that it takes to come up with a custom plan, where the constituents, the investors, the clients, have real conviction around that plan. It’s not a one and done thing. You have to go back to it, and reinforce it, and maybe tweak it, but mostly reinforce it, so that when there’s all this noise in the market today, and of course the market is more rife with gambling, and I wouldn’t even say speculating, but gambling than ever before in history, and that’s a function of culture. We also have more gambling and sports, and more available gambling than ever before.

So, there’s this cultural shift towards gambling as opposed to an investing. So the noise surrounding the investment program has never been so loud, and so much before. So, we really have to have this notion of a plan that is well thought through, and then well-articulated, so that when there are moments in time when investors are tempted to do something that ultimately will not be wise, will be foolish, we can go back to the plan, and remember that success isn’t avoiding a loss this month, or trying to maximize returns each quarter. That actually doesn’t work. You’ve got to stick with a strategy that is highly logical, and high probability of success, and stick with it. So I think that people do converge around how to manage money wisely. Where I think they maybe need to spend more time is developing that plan, and getting the commitment to it from the clients.


Very thoughtful. I wish I had another hour to expand on a few of the things you said there, but we’ll definitely have to have you back one day. The question we love asking people, because this can go in a million different directions, is as you look back over your career, what’s been the most memorable investment? It could be something you personally did, it could be something y’all did at your company, and it could be good, and it could be bad. Anything come to mind?


Well, I always think when people ask me this, it’s not an investment. It was more of on the episode, and it was really around the great financial crisis. And people today, so that’s 15 years ago. 15 years ago right now, we were entering into the depth of this crisis, which really threatened the global financial system. And we are both impacted by recent events. So, we have recency bias, and we tend to forget history. Our society is not… I read an article one day, where a woman historian said that the most important lesson from history is that people don’t learn from history.

So, it was 15 years ago, and it was very substantial. I always think about credit, comes from the Latin word credo, which means to believe. So, if you don’t believe in the system, if you take a dollar bill out of your wallet and you say, “What is this?” It’s a piece of paper, but we believe that it represents a full faith in credit promise from the United States of America to pay 100 cents. So, if that starts to melt down, the whole system can really go away, and that’s what we were facing in 2008.

So, it was a dire point in time, and we were, like everybody else in the business, we were very focused on it, and worried about it. The market went down almost 40% that year, but as I say, more significantly than the drop, is the drop just indicated the risk that we were facing. So, we were watching it, and we were even more value focused in those days than we are today. So, we had this discipline of worrying about price to cashflow, thinking about price to cashflow, thinking about buying future earnings streams, and that’s one of the important things about investing.

So as we were watching this price go down, we really started to think about, when is it time to enter the market? And one of the terms that I like is disassociation, and method. So, I learned this in the service, and I learned it mountain climbing as well. When you get into a bad situation, you can’t invent, at the moment in time, what you’re going to do. You have to fall back on the discipline that you have developed over decades, and when the time comes, you’ve got to apply it. You’ve got to disassociate yourself from the noise of the moment, and the passion of the moment, and apply your method.

So we started to buy stocks in January, and we had been watching, in those days, everybody watched the TED spread, which was the treasury versus the Eurodollar futures rate, and it indicated the difference between a certain treasury return and the bank return. So it was how much faith do we have in the banking system? And as that started to stabilize, we became convinced that it was time to invest. And so we started to buy stocks in January, and the market didn’t turn until, I believe it was March 1st. It was certainly in March.

So that 60-day period was really a white-knuckle period, where we were applying our method incrementally, a little bit at a time, working our way back into the market. I always liken it to those old World War II movies where there’s a bomber and it’s being shot down, and it’s in a dive, and the pilot, he’s got his hand on the yoke, and he’s trying to pull the plane out of the dive, and it’s just getting worse and worse. And then at the last second, there’s this zoom, and he pulls out of the dive, and that’s what it felt like. So, being able to have the discipline, and the fortitude to apply that method, and then to have it work out in the end, was probably the most memorable experience I’ve had in investing.


Jon, thanks so much for joining us today.


Thank you, sir. It’s been a pleasure. I hope we can do it again.


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