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

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

It goes back to 1996 when I left Mercer.

I moved into the investment consulting practice where I kind of learned about asset allocation, investment policy work, manager research.

In 1996, I had the opportunity to start

an institutional consulting group with a local broker dealer in Richmond, Virginia.

They had a large producer who had a couple of bigger accounts, institutional accounts, and many of them were insurance companies.

One was in San Francisco.

So a couple times a year, I'd go out to San Francisco.

It wasn't the doctor's company.

About three years after that, the CFO

of that company that I was consulting to introduced me to the CFO of the doctor's company.

He was in need of external investment guidance.

Portfolio had grown about $700 million in assets.

So that kind of started my involvement with the doctor's company for 18 years.

So in 2017, the TTC portfolio had grown to about $4 billion.

So I approached them.

I said, look, you've known me for 18 years.

You know, I love the way this company is managed.

I really see an opportunity for growth, not only personally, but for the company as well.

So in September of 17, I became the first CIO.

And I proceeded to build an internal team, kind of like an internal consulting team, with staff that was already on board.

And it was very important to have that support.

While I had the investment background for all the reasons that I mentioned and what I'd learned over the years, a few things that

I wasn't aware of was treasury and cash management and investment accounting.

So I chose two individuals, identified two individuals in the company, Wilma Uribe,

she is my director of investments and treasury now, and then Harlan Shadig, who is in director of investments, but he has that investment accounting expertise which is which is critical to my job so uh with them

um you know we've been instrumental instrumental in the growth of our portfolio we're at seven billion in assets under management today and about 3.2 billion dollars in surplus insurance companies like endowments have this outflow of capital every year that they have to make in order to satisfy the insurance payments How do insurance companies differ from endowments and other type of allocators and what makes them unique as an asset class?

First of all, we are not tax exempt, so we don't have

those requirements.

We are a taxable entity.

And really, it comes down to

what our claims are and what the severity is, and being able to meet the obligations of our shareholders.

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

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

similar to endowments and foundations to distribute assets.

You guys have a $3.2 billion surplus as an insurance company.

How does that change the way you go about investing your capital?

The surplus is important.

It's one of the key indicators of our financial health, and it was a reflection of how well our company is managed.

It's really important because it does reflect our ability to absorb losses and remain solvent, even during the most extreme periods of high claims.

And it also allows us to remain reasonable when we seek to raise rates and increase premiums.

Now, from an investment perspective, it gives my team more latitude when investing across, you know, whatever asset classes are out there.

You know, having more surplus, and somebody told me this years ago, and I've always kind of applied it to surplus.

Treat the surplus kind of like the traditional endowment foundation model, whether it's 60, 40, equity debt, 70, 30, whatever.

You know,

that's where we can take our risk.

And our risk is anything that's marked to market and includes equity and many other asset classes.

It's the fun part of the job.

Because $3.2 billion, that's the portfolio.

I can invest in basically anything that's allowed by the states.

And

it's a pretty wide range.

So our strong surplus is a competitive advantage.

So when it comes to attracting new members, members want to work with a company that's financially secure.

And clearly, we're one.

We're rated A by A In Best,

which is an excellent rating, and with a stable outlook.

And surplus is certainly a part of that assessment.

And you alluded to it, you're a taxable investor.

How does that change how you invest in your portfolio construction versus maybe a non-taxable investor like a foundation or an endowment?

We do have a small allocation to municipal bonds

that obviously

have tax exemptions on the income, but it really doesn't change it too much.

All of our assets are externally managed.

Okay, so where it does impact us is if our manager, if we get a high turnover manager in our portfolio, that usually doesn't bode well for us.

We don't have any, right?

We don't want them booking gains or losses are actually okay, but we don't want them booking excessive gains.

I know that sounds kind of counterintuitive, but

we, me and my team.

Because you're taxed on the distribution of capital, not just...

All things being equal, you want it to compound a while before it comes back into your portfolio.

That's correct.

So, you know, that's it.

So again, I think that was a longer answer to what you asked, but it really doesn't impact us too much with the exception of what I just discussed.

We don't want that high turnover manager.

I don't want to age you.

You've been asset management for 35 years.

You certainly don't look that way.

But going back to 1990 at Mercer, you've been really compounding your knowledge in the space.

What do you believe differentiates the GPs that go the distance versus those that maybe do one or two funds?

What are some of those differentiating factors?

You know, I hate to use a word that we hear every day or read about every day, but you know, it's changed its definition over the years, but it's innovation.

You know, clearly those that have embraced innovation and expanded their investment management options, they've persevered because the universe, as you're well aware, of strategies and investment options has grown significantly.

You know, the public available security universe has shrunk, but that doesn't mean there haven't been other options.

And those that have kind of embraced that certainly have persevered.

You know, there are more vehicle options for companies like mine who like liquidity, as I discussed earlier, having an evergreen structure or these rated feeder notes that have come up lately,

those really resonate well with me.

And those are more kind of recent.

I know we're looking 35 years.

Most of those are in the last, you know, five to ten years at most.

I think some that have persevered have made some of their products more accessible to retail investors, bank exchange trader funds.

You can go back and look at a 25-year history and the growth of ETFs.

It's just been extraordinary.

I don't think I'm going to see it stopping.

In fact, I was in D.C.

this week at a fixed income leaders forum, and they were talking about ETFs and fixed income,

which basically weren't available or

weren't as prevalent

not too long ago, and how that's expanding.

And we use a lot of those.

On the alt side, you know, we see a lot of firms that

are surviving, that are not using leverage as much, and they're using more kind of operational improvements.

Obviously, that gets into AI, and that's a whole nother discussion.

And those who are willing to cut fees.

Fee compressions, I don't think we've seen the end of that.

Now, last thing I'll say, given my, again, my Mercer days, but really when I left Mercer and joined this regional broker dealer

who had the insurance and I started learning about insurance investments,

it was a different world.

Those who can provide regulatory support, so just think outside of investment, only investment management services, but those who can provide some of the other bells and whistles, if you will, for me,

certainly have persevered.

So, if they've carved out internal teams to support non-investment insurance management needs, so think about operations, filings, rating agency support.

Anything that's kind of

additive or accretive to just straight investment management, those companies have certainly gone the distance.

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

And there were some that were doing it in the mid-90s.

And when I first met them,

I'm really going to date myself.

And many of your listeners might not even know this firm, but

Scudder, Stevens, and Clark, back in the mid-90s, they had a big insurance group.

and they basically took me under their wing, taught me all the ins and outs of insurance asset management, but then they went beyond that because they already had that team in place.

So

other companies that have come in, and I mentioned earlier,

they've started to understand our business.

a little bit more, understand the challenges that we face from a regulatory perspective mainly, and then from a reporting perspective.

So the creation of like rated feeder notes, right, right?

That's been really good.

The evolution of private credit and the vehicles to get access to private credit,

that's a market that's expanded.

So, those that are kind of open to

those ideas and willing to commit the resources to it

certainly, you know, meet our initial screens and then some.

Tell me about rated feeder notes.

So, the rated feeder note, let me just use an example that we are invested in.

So,

we've got a limited partnership.

we're invested in a limited partnership that has a rated feeder note structure 80% of that LP is a note that's yielding 8% it's a fixed rate so we're getting that 8%

the other 20% is the equity piece so it can be and mostly it's it's mostly in private credit so when i say the equity piece it's the piece that's mark to marketing adds the juice over top of that um that eight percent note the beauty for investors like me,

when I am restricted on my Schedule BA,

and I am restricted by

my statutory laws,

I don't have to count that 100% of that LP on my Schedule BA.

I get to take that 80%, move it over from BA onto my Schedule D.

And then, so I'm only counting 20%.

So all of a sudden I'm getting a diversified exposure to market.

In this instance, I'm referring to middle market direct lending, but I'm not having to account for 100%

of my allowable limit in that.

And this is extremely attractive to insurance company investors.

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

Perhaps this is a little bit naive, but insurance strikes me as one of those industries that has 8.5 trillion in assets that a lot of managers somehow don't focus on.

Managers think oftentimes about how do you differentiate yourself to LPs.

Well, one way to differentiate is to appeal to a certain part of LP base, like insurance companies.

What else, what are some other best practices for how managers could make themselves more attractive to insurance company investors?

Knowing our business, right?

And I think it's important.

Go back to the mid-90s, Scudder, Stevens, and Clark.

They understood insurance.

So they came in.

They were telling me things I didn't even I didn't even know existed yet here I was you know as an OCIO and I should know these things

but it's really kind of knowing our business outside of the investment management space there are plenty of great managers out there who can manage assets and total return and at alpha over the long haul but in our space

if you understand our business

understand the dynamics that we're faced with because it's always changing understanding our accounting requirements.

Understanding the regulatory environment.

I think those are ways that

managers can certainly

distinguish themselves.

We don't have managers that are simply managing to a benchmark, which is kind of counterintuitive that

here's a manager, they won our business, and the first thing they say is, well, here's our track record.

I'm like, Okay, what's your track record to my guidelines?

They're like, well, we haven't seen your guidelines.

I'm like, exactly.

So the ability to customize portfolios for us is critical.

And we've had some good managers that have been able to adapt kind of their standard strategy into what's best for the doctor's company.

I asked this question of like, what are the couple things that you need to know for insurance companies?

But the real answer is you need to spend your time and know your customer.

It's like selling software to a tech company and knowing nothing about tech companies.

You can't just get one or two insights about tech companies.

You have to go in there, spend years kind of developing this competency.

You've had multiple decades in asset management.

You were in the OCIO space.

One of the things that I'm really trying to double click on is how do managers get from mono lines to, you know, Blackstone at the most extreme?

How do they evolve from a fund to a franchise?

What have you found to be some key characteristics or leading indicators that a manager will be able to cross the chasm of being a mono line fund to

a large asset manager.

It gets back to the innovation that we've talked about and

the ability to kind of have a little humility and say, okay, we're not doing things as well as we should.

We need to expand our options and our strategies that we offer.

And, you know, those that have done that certainly have

persevered through some pretty challenging times.

The ability to kind of think outside the box, always looking to improve.

There are a lot of companies and managers out there who, hey, we do this, we do it really well.

We really don't, we don't want to kind of move to the next level.

That's fine.

You know, they may get hired for their specific niche, but longer term, there's going to be a market that's really going to impact that one strategy and it's going to blow that firm up.

There's plenty of examples.

If you go back to the dot-com bubble in the GFC,

but those again who have been able to use innovation, evolve, and always look for improvement, I think

that's a telltale sign of a successful company.

Sometimes not taking a risk and expanding could be extremely risky because you have a chance of blowup any year, some percentage chance of blow up, even of the entire asset class.

Maybe the entire asset class will no longer be investable or will not be hot.

So diversifying across multiple funds itself could be diversifying.

You mentioned innovation.

I'm going to ask you to pick one of two strategies.

Do the best managers push innovative products to LPs or are they more pulling?

And I know push could have a negative connotation, but are they more kind of first principled?

Here's what I think the market should have, and I'm going to now educate my LP base, or is it more like LPs are asking for this?

We've run it internally.

We think it, you know, matches the criteria for a good strategy.

We're going to now.

release that what have you seen in your experience

yeah i've seen a little bit of both but uh more the former.

So push might not be the right word.

I'll say I'd rather use introduction.

The good managers have come to me and said, hey, this is what we're thinking about.

This is what the market is looking for.

We're getting some feedback.

Here's what we're doing.

We're not doing it now, but we're starting to put this in place.

And in 12 months from now, we're going to have something up and running I think you're going to be interested in.

Now, that gets my here, as opposed to, hey, here's what the market's asking.

We created this last night.

You know, here are the terms.

You know, are you interested in getting in?

No, thank you.

So those ones that are more patient, and it's usually the larger firms that come in with that approach, as opposed to the smaller ones really trying to ramp up AUM overnight.

You know, in the latter example that you went through.

When I sat down with Cliff Asness, he said, I'm not a broker.

meaning he doesn't just do trades that people ask for.

They have to, they may get ideas from their customers.

They might get a sense for what customers would want, but it has to be this cocentric of something they would put in their own money and something that customers want.

Yeah, it's exactly right.

I agree completely.

You guys are at 7 billion AUM.

After your acquisition, you'll be at 12 billion AUM.

Tell me about your portfolio construction.

So

it is the proposed acquisition.

You know, that was announced back in mid-March and expected to close in the first half of next year.

So right now I'm just focusing on that $7 billion.

We're an insurance company.

It's a general account.

We're relatively conservative.

80% of our portfolio is in what we call non-VAR.

So that's non-value at risk.

And for us, being private and being a statutory filer, these are assets that we don't mark to market.

The other 20% is in, you can figure it out, the VAR.

So the value at risk.

That's kind of the fun stuff.

That's everything that can be marked to market.

So, you know, that's kind of our general, it's 80-20.

And again, after-tax income is our primary objective.

Broadly speaking, looking 100% general account, we have about 50% in U.S.

investment-grade bonds.

We have, you know, there are minimum requirements

that we have to have in that area.

But we complement that with a significant list of different assets, whether it's U.S.

Treasuries,

short-term credit, short-duration, high-yield.

Real assets we love.

We ramped that up a couple years ago.

Real estate, infrastructure, renewables.

We have a dedicated convertible bond portfolio.

We do have U.S.

stocks, mostly passive through the use of ETFs, private debt, private equity, opportunistic credit, and even some venture capital.

I know I said earlier

we kind of stay away from that, but we do have

a little bit of exposure to that area.

And you mentioned some income-producing assets.

In the 20% value-at-risk, double-click on your portfolio construction on

the value-at-risk, what you call the fun stuff.

What's in that portfolio?

The whole objective: this goes all the way back to my cutting my teeth at Mercer on portfolio construction.

At the end of the day, we want the best risk-adjusted returns with a little bit of an income kick.

And we've been able to do that.

So, in that 20%,

we target 50% public equity, 25% real assets, and 25%

other.

Our equity portfolio has about a 5% dividend yield, so you can kind of see

where we are with that.

It's more on the value side, income generation.

So we're not really holding the SP.

In the real assets, we've got real estate, infrastructure, and renewables.

And then in the other section is where I hold my LPs and non-rated ETFs.

So I think opportunistic credit, private equity, venture capital, and then that equity sleeve and the rated feeder note that I mentioned earlier.

There's this meme now that private equity has not done as well last few years, and there's different views on whether it's going to be a great asset class in the future.

How do you look at private equity in the next five, 10, 20 years?

I kind of agree with that meme, if you will.

We take a different approach.

So,

our private equity investments, and this was again a unique opportunity.

And it was really me knowing people or people knowing me and my needs in the field out there.

Someone came to me a couple of years ago and said, Hey, I got this great private equity investment opportunity for you.

The portfolio is already established.

All your capital will be called on day one.

You'll get a four and a quarter percent dividend yield.

And oh, by the way, if you want an off-ramp, in four years, you can put in redemption and have your money back in five in a year so that's not your typical private equity but it was great I was like okay I kind of get this but I need to understand a little bit more so the the the the the companies were already established and had strong cash flow

and the investor

the GP went in there and said we're not coming in here to change everything.

We're injecting capital to make it even better.

We're keeping management.

We're keeping staff.

We're keeping the way that things have been done, but we're going to make things better.

And it spanned a bunch of different industries, including some that were healthcare related.

So, again, for us, private equity has a different definition than the standard that we've all come to know.

And, again,

we're not investing in something that 12 to 15 years, we're going to have to wait and see what our outcome is going to be.

Just to play devil's advocate, there's literally millions of private companies under $25 million revenue.

It seems like an infinite pool of potentially interesting companies.

Why are they so bearish on private equities or is it just late stage and large cap private equity that people are more bearish on?

Yeah, I think it's that.

I think it's the late stage.

You know, that's where people are more bearish on it.

We're more proponents and supporters of kind of early stage, especially if it can tie back into that mission that I mentioned earlier.

So, yeah, I'd have to agree that, you know, very bearish on the late stage.

And it's just so many companies out there.

And I know the private universe is expanding overnight,

but there are just so many companies out there that are trying to do this now.

You can invest in 10, and all it takes is one or two, and you're going to hit a home run with the fund.

But we don't really want to take that type of risk.

You're a big fan of evergreen funds.

What are the different types of evergreen funds and which ones do you like to invest in from it gets back to reporting so if it's not an evergreen fund and say we invest in fund two of whatever just pick anything and that closes and then we love it and then fund three comes up like okay you can invest in fund three all of a sudden now I've got two separate items that I have to deal with that I have to report on that I have to account with and I'm locked up for a significant amount of time.

The beauty about the evergreen funds, at least for us, is that it's only going to be one investment over time.

And we can add to that if we if we want to so I think that's very important and then typically most have favorable redemption terms where I can get out in 30 to 60 days which is pretty good when you're thinking about a more illiquid investment that that hits that hits home for us and is right in our right in our wheelhouse

there's a bit of a paradox also with these evergreen structures as a taxable investor if you think about a private credit fund having a certain

term limit, so 10-year fund, another way to look at a 10-year fund or a five-year fund is that it's a forced distribution.

So whether or not you need liquidity at year five, you're forced to take it out.

You're going to get it.

So correct.

You have zero liquidity until month 60.

And then 60, month 60, you have forced liquidity.

Obviously, there's...

there's extensions, different investments, return capital, different amounts.

But with an evergreen fund, you really do have the best of both worlds in that you have liquidity when you need it, but you also don't have liquidity when you don't need it.

So you're not forced to take liquidity and forced to take the tax hit.

That's a great point, David.

And for the doctor's company, we do look at that, and it is nice.

If we need liquidity and need a redemption, it's nice to have that lever, but we don't ever expect to pull that.

The only reason we would pull it is if the team managing the fund up and left or there were some significant organizational issues there.

So we want to continue to grow, but that's a very good point.

If I did need it, if I did have liquidity issues, if I didn't have a strong cash flow as I do across the portfolio,

then it would certainly be helpful to be able to withdraw when I wanted.

You've been in the investment management space for 35 years.

You've seen so many cycles up and down.

Do you focus on preparing for the next downturn and how the doctor's company and how your investment committee will act in the next downturn, or is that something that you take just in time?

Well, it's definitely not something we take just in time.

And,

you know, in our business, there's basically, you know, there's the underwriting, right?

And then there's the investments.

At the underwriting, we're taking on risk all the time.

So we got to kind of always have that balance with the investment side of it.

So we do look at our investment portfolio in a very conservative nature, as I mentioned earlier.

But downside risk protection is very important to us.

And, you know, I can give you a great example as it applied to the doctor's company.

I went through all the assets that were invested in, or at least the asset classes that were invested in.

And it was hard.

So you think of 2023, 2024, when the SP was up 25% each year.

We weren't up that much in our risk portfolio.

We were up

10, 11, 12 percent each year.

It was hard sitting back and seeing those unrealized gains,

you know, potential for unrealized gains

not available to us just because of our strategy.

I could have easily changed, but I didn't.

Fast forward to 2025, peaked a trough this year when the SP was down 19 percent, you know, through that first week of April.

We were down not even 5%.

So So that's really a testament to

the focus on risk that we have.

Not proud that we lost money, but it really was a reflection of, hey, we've kind of built the portfolio to withstand these significant drawdowns.

We're going to give up the upside.

We capture about 65% of downside historically, but we only capture about 90% of the up.

That's okay.

That's kind of consistent with our overall

philosophy of the investment and the overall management of our company.

A couple of years ago, I listened to an interview by Stan Drunken Miller, arguably one of the greatest traders of all time.

And he said that nothing looks as cheap as after it's gone up 40%.

So a stock goes up from $10 goes up to $14.

And you're like, this is a great time to buy.

And it's this evolutionary wiring that we had.

And as soon as I heard one of the greatest traders in history, say that, I gave myself the grace knowing that I could never have a better psychology than the best trader in the world.

So I focused more on structurally building my portfolio that's resilient to these kind of

evolutionary biases versus trying to go against my programming and trying to be a better trader than stand drunk in the miller.

It's so easy to say, and I agree completely with you.

But so go back to the first week of

April this year, and the markets, again, were down 20% or we'll just, I mean, yeah, we'll just call them 20%.

We actually put some money to work, right?

Because history shows when the markets are down 12, 15%,

they may go down a little bit more.

But history clearly shows that you're going to get it right more times than not over the long haul.

So I kind of had to hold my nose and

put money to work.

But to your point,

it was the right thing to do.

And I had some excess there.

And I know since we're strategic with our investment approach, that putting a little bit to work at that time

could only really help over the long haul.

And it's been two months and it's helped, but it's still too early to tell.

It's hard to think about this without thinking from an evolutionary biology standpoint, where basically you have the amygdala, which is our oldest part of the brain that's kind of fight or flight.

And then you have a prefrontal cortex, which is kind of the human brain and the rational brain.

And a lot of people focus on how do you turn off the amygdala and how do you like not panic?

But the answer is actually building out the front part of your brain.

And how do you do that?

You do that through studying history, seeing how markets fluctuate, and really getting more and more conviction in taking right action at the right time versus focusing everything on how do you not panic?

Because that's both, that is actually what's even more deeply wired in our brains from an evolutionary biology standpoint.

Much easier to say it than to do it, but doing it is

certainly said.

And there's a sense of satisfaction when you do it because you know it's the right thing.

It's just hard.

So

it's one of the themes I've been exploring, the virtue of illiquidity.

It's a paradoxical belief that actually illiquidity in many ways and in many contexts, not in every context, of course, and you always need some liquidity, but could actually severely hinder your portfolio returns.

And what's most interesting to me and maybe most entertaining kind of in a dark way is that when I talk to people about this, they always say, Yeah, I get it.

Other people, they panic.

That's not going to be me.

And then every single, every single crisis, and then I literally just saw it in April, it happened again.

It's like, no, I could control myself.

And then they sold again.

It's almost like Groundhog's Day, seeing people do the same illiquidity value destruction over and over, and always thinking like next time will be different.

We spoke earlier a bit about you're not as bullish on private equity, specifically large cap.

What would compel you to invest in a new private equity manager today?

If it aligns with our mission,

I think that's a benefit.

So the private equity investments that we do have, the small amounts, really have investments that somehow impact health care.

And, you know, that's that's very important.

And

there's just a few companies out there.

So if you bring me an idea that has that,

I think that's very compelling to me.

But you also have to have a track record.

And I know you mentioned smaller kind of startups, not startups, but smaller firms that are coming out with a private equity strategy.

And I know they don't have a track record in

this specific mandate.

But I need to know that there's experience in similar situations or similar type portfolios that I can go back and say, say, hey, these guys just didn't, you know, open up a shop, put a shingle up

yesterday, and also we're going to do health care, private equity.

They've got to have some kind of background in that.

We don't mind being early.

I love being in this position because being a seed investor or an early investor, if we do our homework and our due diligence and spend our time understanding it, when I say we, it's me and the team that I mentioned earlier, You know,

it may kind of pass our final screens.

So I think that's, you know, something that

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

There's a famous study in 1986, Brinson,

Hood, and Biebauer that showed that 90%, 9-0% of returns came from portfolio construction, not.

manager selection.

This was 1986.

So I was one years old at the time.

This was nearly 40 years.

I read that book, by the way.

So

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

Yeah, I don't know about the 90%, but I would definitely say a majority comes with the asset allocation decisions.

And I don't know what the number is.

I mean, that's a dated study.

But the challenge is,

you know, with the evolution of passive vehicles and, you know, you can get that beta in almost any market now, you can get beta exposure.

Take the risk and pay the fees for active management when you can get beta and say that 90% still holds today.

That's where you're going to make all your money.

It's to set a strategic asset allocation.

Go ahead and invest across whatever you believe in.

And that should hold true.

So I'm going to say, yes, I still believe it.

I just don't know what the exact number is.

And being strategic and not trying to time the market is very important.

And that's that's us.

We talked about, we talked earlier, we talked about, you know, not making moves, you know, when the markets are, you know, ramping up or or drawing down significantly, not making major moves, especially on the upside,

how that hurts long term.

So strategically, if you're an asset allocator like I am, kind of sticking through those tough times,

I think you're going to be rewarded at the end.

And that's consistent with that study.

I also think of it from the size of the LP.

So if taken to extreme, you have a $1 trillion LP that's made thousands of bets.

They're essentially going to get the beta of their strategy, not beta or not SP 500, but they're going to get the average of their portfolio construction.

Some managers will outperform, some managers will not perform.

But if you have somebody investing $10 million,

they might...

it might be much more about manager selection because they're able to say, I want this manager, I don't want this manager.

So it's also, I think, a function of the size of the LP as well and the LP strategy, not just the GP strategy.

Agree.

And to be honest with you, when I was able to, as a consultant, I was in many boardrooms, and we spent a majority of the time talking about relative performance, you know, why a manager, particularly on the downside, why a manager was underperforming.

There may have been some that were outperforming, and typically there were.

But it just seemed to me,

and I believe in active management to a degree but it just seemed to me why are we spending all this time talking about you know underperforming by 10 20 30 basis points and why aren't we spending more time on the structure of the portfolio which asset classes we should be investing more in or making or take making tactical shifts in either to the upside or the downside

and it just kind of got old to me so that's one of the reasons the doctor's company is mostly passively managed on the equity side and then even on the some things outside of equity we're getting beta exposure on that my boardroom we're not talking about relative performance we're talking about things that are happen now things that are happened that that we're planning to do in the upcoming year in the upcoming months and I think that's just been more productive in our room as opposed to again talking about manage why managers outperform or underperform I think that's one of the reasons our managers like me because they always used to start with hey here's my performance here's my benchmark I'm like, stop.

I know your performance and I know your benchmark.

Tell me about what's happening in the portfolio now and what you're thinking going forward.

Shock when I say that.

It's so interesting because if you think about the energy or the conversations that might happen on IC level, there is an opportunity cost.

So one would say, why not optimize?

Why not get the last 10 basis points?

on your relative performance.

Of course, you want to have that in a theoretical universe where you have millions of hours.

If you have finite focus, finite energy, you should be focusing it on the thing that matters, not on these kind of long-tail issues.

I agree.

You just mentioned your conversation with GPs.

What are some pet peeves that you wish GPs would avoid when dealing with LPs?

That's pretty simple for me.

It's really, you know, not doing your homework before contacting me.

Look, we're a private company, but you can see what we file.

You can see our balance sheet.

You can see our investments.

The data is out there.

So take a look at that before you call me.

Don't call me or send me an email and say, I'd like to learn more about your investment portfolio.

Delete.

Or I might forward it on.

That doesn't get my ear.

Rather,

I see you have about X million dollars in infrastructure debt.

I'd like to learn more about your process and rationale on that exposure.

Okay, you've done a little bit of homework and you know what I hold.

I'm I'm going to reply to you.

So just not doing your homework in this day

of electronification and data availability and how quickly things can be attained, I just feel like some managers get lazy and it's not the managers.

It's more of the client relationship and the marketing.

Some get lazy in doing their job.

You know, know my business.

We talked about that earlier.

Insurance is not an endowment.

It's It's not a foundation.

And again, know my portfolio.

It's out there.

You can look it up, spend a little time doing that.

And if you do, then the door's open.

I might not have anything for you, but at least now you've kind of got that foot in the door and the discussion is open.

And maybe a year from now, I may have an opportunity.

I'm going to ask you a difficult question.

If you take out your crystal ball and you try to predict

how AI will change as a management in the next five to ten years, what would be your prediction?

For quant managers, I think their shelf life will be shortened.

You know, there will ultimately be a perfect portfolio that any of us can build, whether you're a retail investor, an institutional investor, at the click of a button, or in this case, a voice command.

Or who knows, five, ten years now, we might even just have to think about it and we'll get a response in one form or another.

So I think that that's a reality.

And these quant managers who have built these

sophisticated quantitative models, I think that's going to be a commodity in five to ten years.

Not to say that, and they'll argue against that, of course, not to say that there isn't

value for human input into it.

But if you or I want to build a portfolio, we can kind of do it now.

But in five to ten years, we input our parameters.

What's our time horizon?

What's our spending habits?

What are our retirement needs?

So forth.

That's going to be easy for us.

Fundamental research, I think, will be affected, but I think will be even better.

The screens that managers do

will be much faster.

And getting boots on the ground, meeting with management, I think will yield better opinions, but in a much quicker fashion.

Fees will continue to go down.

I think AI will

they're already coming down, but there's much more room for lower cost, and I think AI efficiencies will drive that.

As I look at it for my business, as I mentioned at the outset, 100% of our assets are externally managed,

but

you know, will AI

advancement make it possible for me to move my asset management in-house more quickly at much lower cost?

I'm not ruling that out.

So, you know, we pay, you know,

X dollars

for asset management today.

The way the economy is at scale working, I think AI is going to make it possible for me to bring a majority of that in-house, whether I'm at $7 billion, $12 billion, $20 billion, whatever.

I think any of us sitting in my seat will have the ability to kind of effectively manage a portfolio themselves as opposed to having an external relationship.

The Canadian pension system and the Canadian fund strategy apply to more asset managers, more allocators.

What do you think is overrated as it comes to being an investor and allocator?

And what do you think is underrated?

That's a tough question because now you're asking me to talk a little bit about things that I think are a little bit overrated for what I do.

What's underrated is keeping up with strategies and information and

things

that could immediately impact your portfolio in a good way is getting more challenging.

You mentioned earlier, you know, all these smaller private equity firms coming out.

Just the availability and the speed of data right now, it's really, it's becoming almost overwhelming.

So I think it's underrated.

And I'm always thinking about it.

I can turn on the television or open,

you know, my iPad and look at a news article and say, man, why am I not doing that?

Years ago, you didn't have that.

You kind of set it and forget it.

Just to double-click on that, it's really what would be underrated is the systems on how to process that, right?

So maybe you, TC, as one person, you have fine it, but creating the rails and the ways to handle that influx could be a very useful skill for an allocator.

Absolutely.

And it's one that I feel like I'm challenged with, and it's only going to get more challenging.

So I've got to figure out a way to do that.

It's not going to be TC Wilson figuring it out, but someone in the industry or something's going to come out to make it more manageable and applicable to

maybe.

Yeah, right.

What is overrated?

If we don't manage and trade our portfolios,

I think that that's something that's

a little bit overrated for us right now.

And what I'm trying to say about that is

a lot of people think that allocators sit here and all day and are looking at a Bloomberg screen or trading platform and making decisions.

So I think what's overrated for an allocator who doesn't manage internal assets is the thought that, you know, I'm stuck to my desk every day looking at this, right?

What I'm doing more is thinking ahead.

You know, what's next for the portfolio?

Where can we expand?

How can we make it better?

So I think it's overrated that some people think that that's what we do.

And

it's definitely not the case.

It's interesting because if you take it down to a neurobiological level, refreshing your portfolio, very fast feedback response loop from doping neural pathways versus thinking about the future, very long-term feedback loop, hard, amorphous, takes a lot of energy.

So we are literally conditioned neurobiologically.

to actively manage versus handle the

bigger context questions.

If you could come go back 35 years ago to tc wilson when you were starting out in 1990 and give you one investment principle

to know throughout your entire career what would be that one investment principle i wish i knew more of the principles of extreme ownership and i think that applies to the investment management as well to the management of the investment portfolio as well so when i'm talking about extreme ownership um

there's a uh those are principles that were put out by two navy seals i I don't know if you're familiar with them or not, Jocko Willink and Leif Babin.

But they wrote a book on their experiences with the military and war

and to lessons for effective leadership, both in and out of the corporate setting.

And I've used those, and we've embraced those here at the Doctor's Company the last few years.

And I've used those in the investments of, when making investment decisions.

So basically the core concept of extreme ownership is to take ownership of things up and down the command chain and how the most effective teams embrace these specific principles.

If you have good teams,

ultimately you're going to most likely have good results.

So for me, 35 years ago when I didn't know something, I was afraid to ask my boss, Ed Mercer, in the investment consulting area, because I thought that there would be some retribution.

Maybe he wouldn't think I was capable of doing the job and I might even get fired in hindsight when in fact knowing what I know now,

it should have been just the opposite of that

should have checked my ego should have had more humility and I should have understood and understood that not by not asking I was holding up the team and the progress so I'll take that blame but my boss at the time should have also encouraged me to speak up given me the comfort that there would be no retribution and he didn't you know there was really no extreme ownership

principles at that time I give my team

you know, always the confidence to speak up.

There's no retribution.

There's no wrong answers.

if you're holding something back you're only hurting the team and they have no problem doing that I think that's what makes us a better organization

to it so I was fortunate enough fortunate enough a couple weeks ago to present the second principle to my company no bad teams only bad leaders and it was such an honor to be given that because it was a reflection of the leadership that skills that that I have displayed with my small team.

But

it was nice to get that recognition.

Knowing these principles 35 years ago would have made me much more effective leader and teammate.

And who knows where that would have ended up today?

I love Jocko Willink, and I did read Extreme Ownership several years ago.

And the best analogy for that is to use a military analogy:

you might be in the line of enemy fire, and you're just running through it.

And what most people don't realize is during during war, it's just complete chaos and complete randomness.

Every second, there might be a 0.5% chance that you get shot and you get killed.

And yet, there is still, even if there's 10%

of controlling your destiny, you do have something you can focus on.

Maybe you're running faster, maybe you're avoiding certain angles from snipers.

And focusing, even though you have 90% things out of your control and even facing imminent death, you still can can focus on that 10%

of what do you control.

And if you could do that for war, you could do that for business where the stakes are significantly lower, to say the least.

It's a very high-agency way to look at the world.

Absolutely.

And I'm so glad our firm, our company, embraced those years ago.

Again, we had Jocko out a couple times presenting to senior leaders.

And it's a reflection on all the accolades our company gets, you know, when it comes to net promoter score or best places to work, the doctor's company is really kind of

on

the very positive side on almost every metric that comes out.

And I truly believe that a majority of that is driven by what extreme ownership principles we've learned because our management and our board is so strong and each are aware of these.

So we, again, introducing this and having Jocko out

has made us the company that we are today.

Almost analogous to this, 90% of your returns are linked to portfolio construction.

It's maybe 90% of success of a firm is based on principles and culture.

These amorphous things that seem soft, you know, I want to focus on the returns.

I want to get that 10 basis points.

But if you actually

build the culture, the recruiting and everything that it takes to build a great organization, those micro decisions will be downstream of that culture.

And the culture is something you could actually affect versus kind of the day-to-day is a little bit harder to affect absolutely well tc this has been a masterclass on insurance companies we got to do this again soon how should people get in contact with you

oh they can reach out to me uh send me an email i don't mind it's tc.wilson at the doctors.com that's probably the best way to do that awesome well thank you tc and uh look forward to sitting down soon you're welcome david thank you for having me thank you for listening to join our community and to make sure you do not miss any future episodes please click the follow button above to subscribe.