Robert Morier: Welcome to the "Dakota Live" podcast. I'm your host, Robert Morier. The goal of this podcast is to help you better know the people behind investment decisions. We introduce you to chief investment officers, manager research professionals, and other industry leaders to help you sell in between the lines and better understand the investment sales ecosystem. If you're not familiar with Dakota and our "Dakota Live" content, please check out our website at dakota.com. Before we get started, I need to read a brief disclosure. This content is provided for informational purposes and should not be relied upon as recommendations or advice about investing in securities. All investments involve risk and may lose money. Dakota does not guarantee the accuracy of any of the information provided by the speaker, who is not affiliated with Dakota, not a solicitation, testimonial, or an endorsement by Dakota or its affiliates. Nothing herein is intended to indicate approval, support, or recommendation of the investment advisor or its supervised persons by Dakota.
Today's episode is brought to you by Dakota Marketplace. Are you tired of constantly jumping between multiple databases and channels to find the right investment opportunities? Introducing Dakota Marketplace, the comprehensive institutional and intermediary database built by fundraisers for fundraisers. With Dakota Marketplace, you'll have access to all channels and asset classes in one place, saving you time and streamlining your fundraising process. Say goodbye to the frustration of searching through multiple databases and say hello to a seamless and efficient fundraising experience. Sign up now and see the difference Dakota Marketplace can make for you. Visit dakotamarketplace.com today. Well, this is a very special episode for us to release here at "Dakota Live." We have taken the show on the road a few times over the past few years, previously to North Dakota State University, where we met with both students as well as the foundation leaders. And we did something very similar again for you in this episode. After interviewing Loyola University of Chicago and their staff, we had a wonderful introduction and opportunity to visit Loyola University of Chicago on campus. So, we reached out to a few special guests to join in this conversation. First, we are joined by Aoifinn Devitt. Aoifinn is a senior investment advisor with Moneta. We were also joined by Stephanie Szymanski. Stephanie is the Chief Investment Officer of Lakeview Capital Management. And then finally, our host, Katharine Wyatt, Chief Investment Officer of Loyola University Chicago's endowment. Not only are we about to listen to three extraordinary investors, but we also get to listen to the students and their questions. The students were as much a part of this conversation as were our panelists. It was an exciting time for everyone to be able to talk about manager research, due diligence, and the underwriting process. Unfortunately for me, I was not feeling well, so I was unable to travel to Chicago. But thankfully, Aoifinn has a very important role in addition to what she does with Moneta, is that she is the podcast host for the "Fiftyfaces" podcast. I was very happy to be a guest on that podcast. She's interviewed many of the same allocators that we have on this show and has done it in a way that is truly interesting and differentiated. So, we highly recommend that podcast as well. I'm grateful to Aoifinn for picking up the microphone and moderating the panel discussion with these three extraordinary investors. With that, I'm going to pass it over to Aoifinn.
Aoifinn Devitt: Great, well, welcome, everyone. I'm not Robert Morier, but I am stepping in for Robert today.
Robert Morier: Just in case you missed it, this is Aoifinn Devitt, Senior Investment Advisor with Moneta.
Aoifinn Devitt: Robert hosts, of course, the "Dakota" podcast, which is known for the wide selection of professional investors that he features. He takes a storytelling approach to those investors, starting with their background and moving into their investment process and philosophy today. So, I know that both Stephanie and Katharine would have been guests on his podcast, maybe already have, but certainly, the reason he had identified them is because he knows they have both compelling investment stories to tell in their own way in terms of how they approach the investment world. We're here to start with discussing manager research and selection, so how we go about that. And I think given that the backgrounds are so varied of all of us, I'm currently in an RIA, so working with the private wealth side of the spectrum. Compared to Stephanie's single-family office, we would work with families that are somewhat below having their own family office but are still at a critical mass that they can invest in alternatives. They would generally be $3 million of… of net worth plus, and that would allow them to invest in alternatives. But they're investing at different parts of the spectrum. So, I suppose before we dig into manager research, I might just ask a very overarching question for each of you in terms of perspective, from both an endowment and also a family office. I suppose, why use managers at all? Given the passive approach, you could say, is cheap. It's recently been just as good. Active managers have underperformed passive for the most part over the last, say, certainly 18 months, 2 years. It's been a very momentum-driven market we're in. We're talking about the Mag Seven. We've got large cap stocks really dominating. So why active and then how active?
Stephanie Szymanski: So, we have over half of our long-only portfolio in passive or mostly passive.
Robert Morier: Just to jump in quickly and give some context, this is Stephanie Szymanski, Chief Investment Officer with Lakeview Capital Management.
Stephanie Szymanski: So, when I think about long-only equity, absolutely passive, you really have to be generating… I don't want alpha, I want just strong outperformance. I want positive performance, outperformance. I need to see it over the long term. Because alpha… I feel like when you're… well, now I'm getting way off base already. I'm thinking about managers who say they generated short alpha, but they actually lost money, but they lost… they made less than a long-only. So, it gets very complicated. I want somebody who's making money, not losing money, net, net, net after hour fees, after their fees, after their incentive. And that's hard to find. I think it's especially hard to find in the United States, markets here. If you're not in the Mag Seven over the past few years, you really weren't making good returns. It's tough. And so, for US exposure, I want highly passive. For [INAUDIBLE] US exposure, I think emerging markets you really want active management because you want people who are on the ground in the weeds, understand the geopolitical situation, the regulatory situation and all of that, and can really make a difference by choosing companies instead of broad indices for developed Europe. It's kind of a crapshoot, I would say. And so, for the rest of our portfolio, we use active management in our diversifying investments and our private investments, because those investments aren't meant to just be generating positive returns and beating the equity benchmark. Those are meant to be offering lower correlation with equity markets, lower volatility, sort of that diversification piece, so that when equity markets eventually get hurt, hopefully these investments are helping to protect. And so, because of the family I'm investing for and their very specific situation with their ages, what they want out of the portfolio, we have a very protective portfolio that I call all weather, so very passive in long-only because it's so hard to make money being active in long-only, but then a whole lot of active elsewhere creating protection.
Aoifinn Devitt: And I would say this is a question we ask ourselves over and over again, too, is, why are we in active manage… I do think that it's not something that we kind set and forget and say, well, I believe there will be skill-based investment and alpha generation forever more, in this asset class. I think it's a question I ask myself at almost every week. So, I'm not just asking… it's basically, it is an important question we ask ourselves more than once, what's your perspective?
Katharine Wyatt: Yeah. Well, first of all, I was trained as a stock picker, so I may be drinking the Kool-Aid a little bit.
Robert Morier: And this is Katie Wyatt, Chief Investment Officer with Loyola University of Chicago.
Katharine Wyatt: From our perspective, we're very different. We're almost exclusively active management, even in the US. And what that requires is a really high bar and really intensive manager research, which we will get into. As an endowment, we have to generate enough money to support the university operations today, but we need to provide a similar level of support 50 years from now, 100 years from now. So, typically, a lot of endowments approach the whole thing with an absolute return mindset. Even in our long-only portfolio, which is obviously way more market beta than… it's not a hedge fund, it's not absolute return. But we're looking for companies that are going to generate long-term capital appreciation and compound earnings for a very long period of time. And so, we tend to partner with managers who run very concentrated portfolios, things with very high active share. Because if you look at the history of capital markets, a handful of companies have really delivered all the returns in 10-, 20-year periods. And so, if you can find those companies, and they're not always the obvious companies like the Google or the Amazon. Obviously, that's been driving markets more recently. But there are companies that will just compound their earnings at high teens or 20% a year. And if you can concentrate a portfolio in that, you can deliver some exceptional results. And we've partnered with managers who have a track record of delivering 400, 500 basis points over the benchmark annualized for their entire careers. I will say, as we will get into, it does raise the bar, because most of the industry, active management does not beat the benchmark. So that's the reality we're dealing with. And what we've found over a career lifetime is that there are certain characteristics of portfolios and managers that have a higher probability of delivering those returns.
Aoifinn Devitt: Kat, what we love about the content of our podcasts is when we talk about new content and what's new. So, we won't, perhaps, rehash the process of manager selection. I'll just briefly summarize how we generally go about it. But I'd love to focus on is what's new, what's changed. Generally, there's this inverted pyramid. You start with the universe. You start with screening. There will be quantitative methods, qualitative methods, inbound inquiries, cap intro events, that type of event, that's the sourcing that goes behind it, a lot of referrals, a lot of reference checking. I suppose, when it comes to, though, what's different today, I know there's a traditional kicking of the tires. And that was not possible during COVID, so everything went remote. Manager selection, the white of the eyes, that connection, the human connection wasn't as possible. For some, that made no difference because they don't add a lot of new managers. But for some, that really changed fundamentally the due diligence chemistry and the dynamics. So that was different. We also now have AI tools. We have screening that could be so much faster, so much better when it comes to that filter process. And then we also have the reality that we've had very challenging markets. And some managers just lose their mojo. So how do you account for that, going off track or the… and there's also succession planning at a lot of managers. Many managers who've been doing this for 30 or 40 years don't have a succession plan in place. So, I suppose, bringing it to today's manager selection reality, I'll start with Katharine. How would you say that… what are you employing today in terms of manager research? And has anything changed at all?
Katharine Wyatt: I think both, it's changed and it's stayed the same. So, today, we have a lot more tools. We have, like you said, a lot of quantitative software that we can get to the meat of, we can answer the question, is this worth my time? I mean, it's an extensive time to start with a manager… tell me your background. It's kind of like a first date a little bit. But you can cut through a lot of it and just say, is this worth an hour of my time for an intro call? So that's changed quite a bit. I think the amount of information, and this would be especially on the private equity side and the venture capital side, the amount of information that we have today that we did not have when I started is, it's enormous. So, we subscribe to databases for private equity and deals. And we can actually, instead of taking a look at the fund, and the manager gives you the pitch book, and all of their deals in there, we can go in and see, independently verify their deals in their portfolio. So, we can track their deals versus other deals of the same type. So, I'll give you an example. We were looking at a manager in, let's say, private equity buyout. And they have all these terrific deals that they made two times their money on in industrials company. Well, that sounds pretty good. But I can go back and say, for all the deals, let's say there's 450 deals done this year in industrials companies. How have their deals done compared to all of their peer groups? Maybe their peer groups made three times their money. So, the manager that looked good maybe doesn't look as good when you are privy to a wider information set. So, we can do deal level benchmarking. We can look through and see, are they telling us everything. Because now there's databases for private companies, especially, that just really didn't exist. Public markets, it's much more transparent. And I'm not going to say it's easier, but you can get information more quickly because you file with the SEC. But I think it's really transformed on the private side with our ability to independently see the deals, and see who the lenders are, and how much leverage they put on it, and who they bought it from, and who they sold their prior deals to. So, I think that it puts a lot more… it just puts a lot more power in our seat to be able to evaluate their performance.
Aoifinn Devitt: And sometimes, the nature of manager research is this the DDQ, the due diligence questionnaire, the 50-page document that lands usually from a consultant. And it's no fun to read, no fun to write, and no fun to respond to. But it is, that tends to be a little bit just where things have come. I'm guessing, Stephanie, you don't, or maybe you do, does that DDQ form part of your manager research process? Or how do you go about—
Stephanie Szymanski: I'm still old school. I still like the DDQ and the PPM, the private placement memorandum. I do feel like that's where the manager has put most of their time into writing what they do, why the market opportunity exists. And then you can triangulate by talking to the lead portfolio manager, by talking to that person's analysts, and seeing, is the story that they wrote, actually the story that they are telling and the story that they are investing? Does it all tie together? Because you want to make sure they're doing what they're saying and that they're doing it well. So, I do still like those old school things. I still use the same due diligence checklist that I created 17 years ago at that first family office. And I might not literally check everything, but I should be, because I want to make sure I don't forget some important step in the process. I'd say we've sort advanced a bit is, again, technology. You used to have to build a portfolio optimization yourself in Excel. And now there's software tools that will do it for you. And you can mix and match and create portfolios to see which looks best. Honestly, the AI question, which might be coming up a little bit more, we've asked AI, I use Perplexity, we've asked AI, how do I nicely ask the analysts working for this portfolio manager if he's a bully like these articles say he is, without so to ask the question, without coming right out and asking it. It seems a little silly, but I would rather use AI for that than asking it to do an analysis or provide data because it hallucinates. It told me Prague, Budapest, and Krakow are countries, which, obviously, they are not. So, I trust it for helping me write but not for real facts.
Aoifinn Devitt: And would you say that the manager selection process has got any faster, slower? Or is it still as much an art? Because I think what you're giving me, there's a science and art aspect to it. And, in a way, you can't really speed up that art part because you also have to see a manager doing the work. You cannot really speed that process up. You have to see them go through multiple cycles and see how they react.
Stephanie Szymanski: Yeah, and that's the hard part between… you want to support newer, more passionate younger teams, but then you also want them to have a track record through cycles, which is the impossible ask. So, definitely, it really… I would say it depends on the strategy. How long does it take me to fully understand the strategy? How long does it take me to go through and meet with all of the team multiple times, my own research and reading reference calls? So, there's a lot, a lot of art to it.
Aoifinn Devitt: And let's get to the future of due diligence, because I think we're all speaking, thinking of jobs that can be replaced by AI and what cannot be replaced. And we think about accounting rules and drafting contracts and doing due diligence on a manager. To what extent can AI take out some of that? And what will never be replaceable?
Katharine Wyatt: For me, and famous last words, and I know this is probably going on the internet, so you will look back 10 years ago, 10 years from now, and maybe I'll be just full of it. But, for us, due diligence is very much of a relationship-based endeavor. I can cut through numbers. I can crunch numbers. I can tell you where they made money, how much risk they took, what was the distribution of their returns. I can tell you their VAR and all of that. And a machine can do that. We form long-term relationships based on trust. I mean, we spend a ton of time talking to managers either, virtually, but we're always on site. We always meet them in person if we're going to allocate dollars to them. And I think there is something just irreplaceable about understanding the person who you are entrusting to your money. How do they think? What is their psyche? How do they react to situations? I mean, if you have an awkward meeting, that tells you something too. How do they respond when they get upset or nervous? And I don't see AI replacing that interpersonal, this is a people business more than anything else. And there's nothing like sitting across the table from somebody, and you're making a value judgment on their character, on how committed they are to their process. And so, for me, there's just a very personal, we're not hiring machines, we're hiring people. And you really need to get inside their head and understand what makes them tick, how excited are they about their portfolio. And that, to me, that's not replaceable by AI.
Aoifinn Devitt: I mean, maybe… sorry, Stephanie, just to build on that for your question, one of the areas we worry about today is squeezing out of emerging managers, smaller managers' startups, because the barriers to entry are getting so high in terms of regulatory burden, minimum level of assets that the size you need to be. And some of this is triggered by some of the questions on those DDQs. What size are you? You have to have x billion in assets before we can consider you. Do you have a well-built out back office to outsource some of those functions? Or do you do them yourself? But how do you thread that needle? Because I would imagine in your case, Stephanie, single family office with an entrepreneurial founder who knows alternatives, because that's where they made their career. So, they probably might be inclined to want to put some money with this startup, first-time venture fund that may not have the extensive back office and blue-chip CFO. How do you overcome some of those boxes that don't get ticked?
Stephanie Szymanski: I thankfully have a great external investment committee as well who have a career in launching emerging managers. So, I have a lot of advisory people in my role as well, which is great. But, as far as emerging managers, we do have that flexibility. And it's part of our investment values to use our ability to be nimble, to find really differentiated opportunities, strategies, managers. And, if we came pounding the table about a new launch manager, we would surely be able to do it. And so, one example was, we had the opportunity to make an investment in a new launch for February 1st and get premium economics. So, pay a lower incentive fee, a lower management fee, better redemption terms if we went in day one. Well, we found out about this probably six weeks ahead of time. And I thought, look, it's Christmas, it's New Year. There's no way we're getting this done. I believe very much in work-life balance. So, we decided we would review the legal documents and make a toehold investment and then give ourselves time after that small toehold to finish our due diligence. And that due diligence will… they do have a DDQ, very excited about that. But this will be a case where we're going to call the portfolio managers prior boss too, he worked for two other funds before. And we'll ask them what this person's attribution was like, what this person's personality was like, how they might be as a leader. It's like we'll really rely more on reference calls with prior employers, prior employees, prior coworkers, anybody we can find, not the people they tell us to call, but the people we find out, you sort of stalk them on LinkedIn, and you figure out who you know and triangulate. So, it's definitely a different process because we don't have any of that quantitative part. And that's where, to Katie's point, it's that relationship. And you really build that relationship. And we've met this person in person. They're in London. We've met live. We've talked to their analysts via Zoom. And we'll just keep digging and over the next six months and finding anybody we can who knows him better than we do to figure out if we should put in the rest of our money.
Aoifinn Devitt: I think that's a really good point and a good opportunity to bring up the counterfactual of some of that. I recently interviewed someone who hated storytelling. Most people talk about storytelling as a way to tell stocks stories. She actually felt it was too seductive, that you may end up with this story that you like, and you fall in love with, and then you can't actually… can't lose it, think of a counter situation. And I think with sometimes these relationships, there's a danger there too, that we are all faced with unprecedented market circumstances, challenges, geopolitical events, changes like AI that actually fundamentally undermine what we thought were fundamentals that would be in place forever. So, I suppose we have to also question those relationships too and be always… and I think you as perhaps coming in as junior members of a team, that's the freshness and perspective that you bring. And I would hope you join teams that give you the psychological safety to express that opinion. And the question, a narrative question whether we've actually checked or verified, not just trusted, but verified the stats we're seeing, I do think that that's a key part of it as well as the relationships. And I might segue now to just some of the career progression points before we go back, because I think this is something… how do as junior professionals get on that ladder of building relationships, networks, and trust? I will say that talked about kicking the tires and the insight on place visits. A lot of that comes to being in person as an apprentice, carrying the briefcase, maybe, so to speak, of the people who've done it and sitting in the rooms. I'm not sure whether you've had any sense of how you get to that point of judgment.
Katharine Wyatt: I think a lot of this business is pattern recognition. When you're in a junior level, maybe you're an analyst or a senior analyst, you want to take as many meetings as you possibly can. There are so many different approaches to managing money, so many different investment philosophies to just hear a lot of it. And as you form your personal investment philosophy, you will start to see what works and what doesn't. I have seen a lot of managers… I know a guy who owns 5 stocks, and I have seen managers who own 150 and what they bring to the table. After you take a ton of meetings, there's this pattern recognition that you start to see, I've seen this before, this worked or this didn't. And so, it's really an apprenticeship business in that as you do it longer and longer, it just becomes second nature. So how do you get to that? Take a lot of meetings. But go to conferences, talk to senior people and try to get in whatever meeting that you can. And then after that meeting, if you can debrief with somebody and say, I liked the meeting or I didn't, what was your takeaway? And just try to build that knowledge base as much as you can.
Stephanie Szymanski: Yeah, it's reps. This is what I did when I first started 17 years ago. It's what I've done with every young person that's joined the team. Let's just take meetings, build up to that person asking questions in the meetings. Notetaking is huge. If you're in the meeting, you can take a lot of notes. But how do you even learn what notes are important to take? And so, there's even just that building up. So, the more meetings you're in, the more strategies you'll hear about, the more personalities you'll see, the more, just the more questions you'll hear asked and all of that. To me, just keep doing that. I mean, maybe I'm a great manager, maybe I'm not. I sent my analyst to Boston by himself during his second week on the job. He was a new graduate from undergrad, and just said, here's this amazing meeting with thousands of people over three days. Are you comfortable doing it? And he said yes. And he went off and did it. And what valuable experience. Because then he just… I just feel like that exposure to just do it. Start, the rest is easy, is one thing a mentor said to me long ago and it's absolutely true.
Katharine Wyatt: Can I just double-click on one thing you said, which I thought was awesome? Pay attention to other people's questions. I've learned so much by listening to what questions other people ask, because it will tell you one of two things. One, ooh, I never thought of that. Or two, I shouldn't be afraid to ask that question because I was going to ask the same thing, but I was afraid to do that.
Stephanie Szymanski: Absolutely.
Aoifinn Devitt: And I'd love to just go through… so we've done a lot of the theory of manager selection and how we get to build that muscle and doing the reps, et cetera. But if someone lands in a role today, what is the landscape for manager selection like today? In terms of large, I mentioned emerging managers and their challenges. Some of these managers facing the headwinds of being active management. There is a plethora of new strategies, particularly in alternatives. How would you take the temperature on the manager universe today?
Katharine Wyatt: So, if you're looking to get into this job, I would say you're best suited… it would be a great entry point to go work for an investment consultant. You will get a lot of exposure because they cover everything. After that, you can maybe narrow in on an asset category or strategy that you really like, but there are so many different ways to manage money. And getting as broad of exposure as you possibly can, I think, is a good idea when you're first starting out.
Aoifinn Devitt: Where do you see opportunity? I presume there are different places—
Stephanie Szymanski: It's overwhelming. It's overwhelming. Everybody's got a spinoff of a spinoff of a spinoff. And I have a personal philosophy. There's one particular lineage where if it's a spinoff, we're not doing it. We're not doing the meeting. I don't want that ilk of investor. So that's knocks those out of the way. But there's so many exciting new strategies, exciting new approaches, exciting new people in the market. And this is the one that we did the toehold for February. Really excited after just a few meetings. I want to take that chance, perhaps, even if it's small for now. There's so much to consider. We've had to really stop taking meetings for anything that is completely out of what we're looking at to take, because even the few strategies we're looking to add to our portfolio, there are so many meetings to take for those. We can't take the fun meetings for funds that aren't a fit now. We just have to punt them to the side. So, we have an entire spreadsheet of deferred meetings that just one day we'll get back to them. There's just so many meetings to take. And my rule this year is two meetings a day, because we were doing four to five meetings a day. And that's… you just can't anymore.
Aoifinn Devitt: That's still a lot. Two meetings a day is still a lot.
Stephanie Szymanski: It's still a lot.
Aoifinn Devitt: There's a lot of information coming in at those.
Stephanie Szymanski: Talk to me in March when we finally start a –
Aoifinn Devitt: 10 a week. That is, what, 500 a year. Yeah, that's a lot. Katie, anything in terms of what is appealing strategy wise or size wise today?
Katharine Wyatt: Well, size wise, so just to build on the conversation about emerging managers, that's an area we are very active in. So just to go in on that, we have a preference for managers who are smaller and more nimble. Our investment philosophy recognizes that size can be the enemy of returns often, especially if you're operating in less liquid areas of the market like emerging markets, or small cap, or trading strategies that are very heavily trading-oriented, like biotech. There's a lot of strategies where size is not necessarily your friend. So, we are looking for smaller managers. And a lot of the emerging managers that we tend to do… they're emerging, but they're really not. Stephanie mentioned spinouts. And we love spinouts because you get a chance to see what they've already done. And you're not necessarily getting something completely new and unknown. So, a couple of examples. We have an emerging markets manager who, maybe many of the people in this room have met, was a portfolio manager at a very large institutional asset management group. A group like that, we refer to them as asset gatherers. You want to get as much assets under management as you possibly can because you're paying a fee, a percentage of assets. And as those are assets go up, you get a huge, huge paycheck. But then, pretty soon, you're not able to operate in some of these better ideas. So, he spun out, emerging manager, and we backed him day one, almost, because we've seen his track record at a big, big shop. Now he's got his own. He had institutional quality, outsourced service providers. So, opportunities like that are strategies that we really love because you can get to a manager at a firm that you work with, and you know what their track record was, even if they weren't the portfolio manager, you know what stocks they covered. And then they spin out, start their own firm. And you can get some attractive economics if you're willing to back somebody. day one. So, we have a very good mix of people have just been around for a long time, a fund with 15-year track record. And then we have some investments where we were day one investors. But these aren't… this is not their first rodeo. They've run a fund for a long time before.
Aoifinn Devitt: I'd love to see if there are any questions from the audience… we have some other topics we can cover, but we'd like to be here as a resource to you as well. Go ahead.
Audience Member: So, with regards to pattern recognition, and I guess I'm more so talking about in the realm of investing, how do you know those patterns will continue to work two years from now, three years, five years, etc?
Katharine Wyatt: So, my answer is, you don't. [LAUGHS] Let me clarify. Every manager has a life cycle, I think. There are managers that we have, and they've done a great job, but then something changes. And it's that soft skill of manager research to say, you're telling me about the portfolio you've built now, the stocks that you own. The takeaway from every meeting that you have with them is, so is this the same, especially when his stocks aren't working. I mean, is the philosophy the same? Is the process the same? And if it's the same, then I'd say stick with it. But sometimes, things change. And I've seen a lot of things go off the rails either. Your process and philosophy is one thing. And then you start doing something totally different. That's a big red flag. I would say, for us, what changes a lot of times is organizational. One of our just pet peeves is you sell a chunk of your business. We like to invest with owner operators. The portfolio manager owns the business and then they sell part of it to a very large asset management firm. So, you've taken that alignment characteristic that we liked, and you've changed the dynamic there. So, organizationally, something can change. So, pattern recognition applies to when to keep going, but it also applies to saying when it's time to leave. And even though we build long-term relationships with managers, sometimes it's time to part ways if something changes.
Aoifinn Devitt: For me, I think it comes in a different part. You can have a pattern recognition in an algorithm. You can have pattern recognition in how a business works, in terms of the personnel and the succession, etc. You can also have pattern recognition how the industry works. Is it about Blackstones and Apollos gobbling up all the small groups? And how does that… is it about these groups moving into private wealth? Yes, they are, in a big way now. So, I think you can have that different level. And I think the reason we keep talking about it is because the point is you don't necessarily have to have a degree in manager research to do this role. You can have pattern recognition that is well developed through being a math major or a history major, particularly, history really has these motifs that trace their way through, liberal arts as well. And that's why I say the likes of Larry Fink will always like to hire from liberal arts backgrounds, because I think that way of looking at the world is really translatable. And I'm sorry, Stephanie.
Stephanie Szymanski: No, please. I was going to say, pattern recognition, on a negative performance side, let's say over and over when there's negative returns, the manager says, oh well, it was thesis mistake. Oh well, it was a thesis mistake. Oh well. Are they not learning from what-- are they continuing to make these sorts of same types of mistakes? That's a pattern that I look for, because, I mean, you're right, the positive will change over time. The market changes over time. The strategies will change over time. The opportunities, that changes over time. But how are they reacting when things go wrong? And even through market cycles, if you have somebody who's got more experience over a market cycle, how did they react to something, not necessarily like did they do great in every environment, do they continue to return positively, but how did they respond when things went wrong? That's an important pattern that I like to look at too.
Audience Member: Thank you.
Audience Member: I know you talked about the ESG space. And I was a little curious, how do you actually differentiate between the firms that or the funds that can generate alpha in that space and those that actually are maybe more on the greenwashing end on themselves? And tagging on that question as well, might be a little too specific, but how much of those funds actually focus in the ESG bond markets as opposed to the equities? Because I know that I've heard that maybe there is more alpha return in the bond market within that sector. And I was just curious to hear your thoughts on that.
Aoifinn Devitt: It's a really good question. I think it brings… I'll start because I've spent a lot of time working in a place where ESG still has some meaning. Even there, the labeling is probably questionable. I'd say there's an increasing evolution of thought that ESG is not a… first of all, it's an improper umbrella because it has so many thrown under it… social issues, environmental issues, governance issues. Everyone should be concerned about governance issues. And environmental issues can be costly in some cases, they can be beneficial in others, so they can be quite controversial. So, I'd say just in terms of the terminology, it's more of a risk management inquiry. Most ESG questions now are related to risk management questions that you would ask across any business line and any investment. So, it's really, how is your portfolio resilient? That is a key question we all need to know at our portfolio level as well as at a manager level and is it resilient against all these possible risks, some of which could be environmental risks, flooding, regulatory risks coming from that. So, it's really a risk management exercise. As to how we distinguish who… the alpha question is, across the board, not just in ESG answer. I think it really gets to the authenticity of whether they are in fact to say something is a positive impact, positive impact fund, for example, how do they measure impact? You really have to dig into the claims, to the labels. And that's how you establish whether there's greenwashing or not. There's even definitions in Europe in terms of when you can actually use such a label. And that would help us to get through the cutting through that, the percentage of the fund that needs to be in such a vehicle. So, there are scientific ways. And then there's the more artistic way, which is where it's actually coming from. Predominantly, these funds are equity funds, not bond funds. And that it has been more challenging. You can certainly have ESG as a due diligence factor, risk factor in the due diligence process for any instrument, fixed income or equity. But they have tended to be more equity funds.
Audience Member: Thank you.
Audience Member: For somebody that's in, say, the wealth industry looking to learn a little bit more about the research space, so you're not necessarily in the investment type of role, do you have any advice or educational resources in addition to joining meetings or asking questions that you would give to somebody?
Katharine Wyatt: I think one of the things that you could do is, assuming you're already out of college and not pursuing a degree, you could work towards getting a CFA charter. I'm a big advocate of that because I think what it does is it sends a message to the marketplace. It standardizes the knowledge base that you have. So, anybody that you would be looking to go work for is looking at your resume and you say, I know where you are as far as knowledge base. So that is one suggestion you could do.
Stephanie Szymanski: I would say I'm a huge proponent of starting to build your network very early. And it's something that I wish I had done far earlier than I did because my network has become such an important part of my personal life and my business life. And I would say if you start to build that network, you might get invitations to a manager meeting. I mean, if you let it be known that you'd love to have exposure to something like, I don't know, I'd have you come along for a meeting. I don't care. You might have really great questions that I wouldn't have thought to ask, back to that point. If you build that network, somebody might just have you come tag along. And you might as well ask. I know with certain cap intro is when the banks help to introduce funds to investors like us. I think there might be some regulatory things that would prevent you from sitting in on those meetings. But something where I'm having a meeting, like, yeah, start to build your network.
Aoifinn Devitt: I'd say consume the financial press hungrily. Some of it is simplified and inaccurate, because they certainly don't grasp some of the nuances of the alternatives field as well as they should. But I think that is the biggest thing for private wealth, because I work in that segment now. The clients will come in and want to talk about what just happened with tariffs or with geopolitical risk. And so even though there may be still long-term investors and are not investing tactically based on that, they still will want to talk about that. And when we haven't even talked here about digital assets and Bitcoin, because they don't tend to come into mainstream meetings much, but there's still a significant segment of clients who will want to flutter, perhaps, in that area. And we, at this point, are generally sticking to the education part of it, by providing education, coaching them as to how that asset is likely to perform in different market environments, which we are still learning because it hasn't been through enough cycles yet. But equally, then we would talk about sizing of something like that, because clearly, when you don't have some kind of a back test to do, you have to size appropriately, in other words. So that would be just how we think about some of the other areas. But definitely staying abreast of terminology is important as well.
Audience Member: So, most banks and institutions are expecting lower returns for the public markets in the next 10 years. How do you think that changes the active and passive management relation? And do you think that opens a space for alternative investments or even more like active management?
Aoifinn Devitt: I can start and we can go down. I'd say that that has been the case for some time, that a lot of these managers have been predicting lower returns that has not actually transpired. The public equities have really surprised on the upside, particularly US large cap, has been frustrating for fundamental analysts who would say this should revert to the mean. And, in a way, it's almost getting to those dangerous words of, it's different this time, because of the US exceptionalism as well as just the momentum behind large tech. What I see is happening is large tech stocks are starting to look more like safety stocks, which they would never have looked like before. They would have been seen as the more fringe, high octane. But because of how big tech is, and I think how well tech is now entrenched in the current administration, I think it could be seen as a safer bet, more volatility, but safer. So that said, I'm not sure that these will pan out these low expectations. In theory, it should work well for active management, because active managers do not perform well in very strong environments. They tend to lag somewhat because they tend to have more diversified portfolios. Some are more concentrated, but there wouldn't be as concentrated as the markets say. So that should be a stock picker's market. Although I've been hearing that for the last 15, 20 years, I think, that it's a stock picker's markets just around the corner. It's time for differentiation. It's been often an empty promise. So, I'd say, in theory, it should work well. I will say, the march of ETFs of passive investment has not ceased. That is going to be a phenomenon that we will have to contend with even more so. Some are, of course, dying a death and we don't hear about them. There's a survivorship bias around ETFs. But I will say that this is probably the most challenging environment I've seen for active management in some time. As to how that translates to alternatives, I think it bodes well for alternatives. The point of alternatives, and we haven't really… we could do a whole separate session on portfolio construction… is that alternatives are there to give diversification, ballast, and different sources of return to a portfolio. So, ideally, you want to isolate non-market risk with your alternatives. Some of that will be manager skill, say operational improvement in a private equity sector. But a lot of it could just be contractual payments. So contractual payments such as on a private debt instrument, or on a toll road, or in a lease, that shouldn't be that dependent on market activity. That should be year in, year out, month in, month out, that contractual payment comes. It could be royalty on pharmaceuticals or music rights. So, if you want to include those in a portfolio, you will ideally have less volatility and less market risk. So, I actually think that we are poised to have a bit more volatility in equity markets than we've had now because of this uncertainty… the backdrop, the tariffs, the massive destructive force that's going on within the administration. Whatever your political view, there is change coming. And that is going to I think, have an impact on equity market volatility. We've already seen quite a high fixed income volatility, much higher than we've seen in the past. So, there's already a lot of volatility there. Probably more volatility coming to equities. So where will you get less volatility then? It's likely to be in your alternatives. You can't liquidate them. So, they're illiquid. That's the nature of them. And you have to understand that and never think of it as the place you will get easy money. But it should perform. It's not marked to market. So, it should perform in a different way. And I think that stacks up well today. So, yes, let's see what comes through in terms of the bank predictions. But either way, I think it bodes well for alternatives.
Stephanie Szymanski: It's funny you ask that because right before I came here today, I was collecting capital markets, long-term assumptions to put in the model I have to refresh the family's sort of efficient frontier and what their asset allocation looks like versus what it could look like. And I'm noticing, to Aofinn's point, the numbers aren't that much different than they were last year. I feel like we've been pessimists for so long. And I mean, I would rather that and choose this asset allocation for the family based on that worst case scenario and make sure we have protection, because we're looking to protect capital, not go gangbusters and make a lot. So, very different sort of outlook for what we want and need. And the conservativeness plays into how our portfolio is structured anyway, because we're 70% alternatives.
Aoifinn Devitt: I suppose one last question, maybe, on the point of resilience. I spoke before, but that is ultimately what we're all going for… resilience of our own careers, of our institutions, and choosing managers that are resilient. How do you build in resilience to a portfolio today? I always think of the kind of… I do a lot of macro discussions, but we think about inflation, interest rates, equity markets, geopolitics, and then other, the other being Bitcoin or other alternative private debt developments or defaults or whatnot. How do you think about… those are the things we're thinking about in the backdrop; how do you make a resilient portfolio?
Katharine Wyatt: Well, the thing I would say kind of goes back to what I said originally is, even in our long-only equity portfolio, we try to approach it with an absolute return framework. We are going to have market beta, and that's unavoidable. And to the question about are go forward returns going to be a lot lower, if you're using active management, you can identify companies that are still growing their earnings. A lot of the low expectations in the equity markets right now are really driven by valuations. If you can find companies that maybe are underrecognized and they still have the potential to grow their earnings, maybe they are cheaper than the broad market, that builds resiliency. Companies that are going to be just compounding their earnings growth, whatever the valuation does. Doesn't mean you won't get whacked if the market pulls back. But if you can actually identify businesses that are going to compound and grow their operating earnings, you're going to be fine over the long term. And I think in the sense of the alternatives portfolio, I think even you said a lot of just different sources of return. We have long-short equity. In theory, they can short when the markets go down. I hope they're great market timers. But we also do things like there are sectors of the market that are really inefficient like biotech. We have partnered with a number of biotech investors who really, really know the science, but they also understand the business and they also understand just the dynamic and M&A markets and just the entire ecosystem. If you can do that long and short, what we're creating is not necessarily biotech beta, but we're creating a return stream that somebody can generate an absolute return long and short from this very niche segment of the market. So now we have an absolute return source. So, building in just different ways to make money, different strategies. If everybody's a long-biased portfolio, they're all going to make money at the same time. And they're also all going to lose money at the same time. But if you have different strategies, it's more about how they make money and how they can generate this sort of steady return stream. So, in the hedge fund portfolio, we don't necessarily even just focus on what asset class it is. It's like, what's the strategy.
Stephanie Szymanski: Yeah. And I'd echo that. Over half of our portfolio is in what I'd call diversifying investments. So, a lot of hedge funds. But I don't want five long-short funds that are all doing the same thing. I want a long-short fund. I want an event-driven fund. It has to be relatively tax efficient, which is like finding a needle in a haystack. But I found it. And so, we just invested in that one [INAUDIBLE] one as well. I want somebody who's sort of distressed, a little distressed credit. So, trying to find the best in each of these categories and comparing, assuming they have a track record, how they've performed, sort of looking at their correlation to each other as much as looking at their correlation to the various markets to make sure that they're all acting differently from each other. And then that's going to help provide protection. If equity markets do stink finally, then hopefully, our diversifying portfolio actually does something good for us and makes money, which it's actually done really well even in these strong equity markets. We've been really lucky with that portfolio. So, it's just, find that right person. Don't fall in love with someone because you really like the relationship. Make sure you're choosing the best person for the strategy.
Aoifinn Devitt: And my answer, because I work with smaller clients, has generally been around inflation resilience. And you cannot protect, you cannot hedge against inflation, but you can participate in inflation, because, the truth is, do not be, I think, put off by this 3% number. I think that is not realistic for most individuals. Most individuals experience far higher inflation if they're paying college fees, health insurance, that's far higher than 3% So, whatever return we show in their portfolio has to be net of inflation still meaningful. We have to take inflation out, look at the real return. And I would say there we're looking at how do you insulate against inflation or participate, you have to have growth assets. You need to have equities. You need to have something like a real estate that is going to participate real assets and participate, and maybe gold today. That was the ultimate Trump trade, was investing in gold.
Robert Morier: Well, thank you, everyone. That was an incredible conversation with three leaders in the investment industry. We're grateful to Aoifinn Devitt for organizing the conversation in my absence. Thank you so much, Aoifinn. To Katie Wyatt to being an extraordinary host and allowing us and the students to take part in this incredible conversation. And finally, Stephanie Szymanski, thank you for joining this panel discussion as well. We wish you all the best of luck. If you want to catch up with previous "Dakota Live" content, please check out our website at dakota.com. If you like what you're hearing and seeing, please be sure to like, follow, and share these episodes. We welcome your feedback as well. Thank you again to Aoifinn, Katie, and Stephanie. Thank you to the students at Loyola University of Chicago. And to our audience, thank you for investing your time with Dakota.
