E198: How Family Offices Construct Portfolios in 2025 w/Scott Welch

In this episode of How I Invest, I speak with Scott Welch, Chief Investment Officer and Partner at Certuity, a multi‑family office managing over $4 billion in assets. Scott joined Certuity’s Board of Managers in 2020, and now leads the investment strategy and participates actively in risk management across all facets of the firm's investments, including portfolio architecture, asset allocation, investment due diligence, and manager selection We talk about what’s keeping him up at night in public markets, his views on the Fed and interest rate policy, and how Certuity builds globally diversified portfolios that balance risk factor, asset class, and geographic exposure. We also go deep into taxes, where Certuity aggressively harvests losses using market-neutral overlays to create "tax alpha" for their clients.

Episode Transcript

(00:00):
Scott, I've been excited to chat.

(00:01):
Welcome to the How Invest podcast.
Thank you.
Thank you for having me.
So what keeps you up in the public marketstoday?
Well, I think, you know, there's a lot of goodnews out there.
And not unexpectedly, the Fed decided to leaverates where they where they are.
That's what I anticipated, despite the sort ofthe rhetoric coming out of the Trump

(00:22):
administration.
So I don't think there's any surprises there.
The earnings season is going well, Sort of therevenue and beat rates are historical averages.
The only thing that's troubling me is the factthat valuations are simply high.
There's really not anything cheap in any of theglobal markets.
There may be some relative value in small capstocks, both domestically and outside The US,

(00:45):
but there's no screaming buys out there.
And then, of course, within The US, you'redominated by the mega cap tech stocks.
And, you know, I think there's something like30 to 35% of the market cap of the S and P 500
index right now.
So whatever happens to them is going to affectthe overall index performance of dramatically.

(01:06):
They're doing these are very solid companies.
They generate great earnings and cash flows.
So they're high quality firms, but they're veryexpensive.
And in my opinion, they're going to have tocontinue to show very robust earnings growth to
justify those valuations.
And I think at some point, investors willsimply look at those valuations and say, I like

(01:29):
these firms, but I just don't know how muchmore upside there is from here given where
priced.
And they may start to look to reallocatetowards value or a small cap or or someplace
else.
But if you ask me what's keeping me awake,that's something that I'm keeping my eye on.
Purely from a policy framework, Tell me aboutthe downstream consequences of this, I guess,

(01:54):
tussle or disagreement on policy between theTrump administration and the Fed chair.
I I you know, I think it's, to some degree, Iyou know, these are supposed to be the dog days
of summer.
Right?
And there's an old market adage about sell inMay and go away.
I've never really ascribed to that, but it'sthere.
It exists.
Boy, if somebody had done that this year, theywould have missed out on a lot.

(02:16):
It's been a very active summer.
The budget bill, the trade negotiations, and,of course, this as you refer to the ongoing
tussle between the Trump administration and theFed.
I think it's somewhat of a distraction.
I'm very much a believer in the in theindependence of the Fed.
And I also am a big believer in them remainingdata dependent.

(02:38):
And now those are the words that they use allthe time.
And and I suspect Powell use them when he talksabout this month's decisions to keep rates
where they were.
I don't I don't like the idea of theadministration trying to influence Fed policy.
We have one bad example of that historicallyback in the late sixties when President Nixon

(03:04):
pressured then chair Arthur Burns to to cutrates ahead of the elect.
Burns did so, and we combined with the oilembargo resulting in double digit inflation for
almost ten years.
I'm not suggesting we're anywhere close to thattoday, but I I don't like the idea of of the of
the president or the administration trying tolean in too hard into Fed policy.

(03:29):
Think it's important that it remainindependent.
I do anticipate that the Fed will cut rates inSeptember.
I think they've laid the groundwork for that.
You know, if you look at the their mandates,right, which are to keep prices stable, I.
E.
Control inflation and optimize employment, andthen I'll call it a tertiary mandate, although
it's not official of keeping an eye on theeconomy.

(03:52):
The status of any of all of those three thingsdon't indicate a need to be overly aggressive
in cutting rates.
Inflation is is trending in the rightdirection, but it still remains above the Fed's
targeted 2% annualized rate.
There can be a discussion about whether or notthat's an appropriate target, but it is their
target, stated target.
And the last couple prints we've had oninflation have actually been upward.

(04:14):
So there's no particular incentive there forthe Fed to cut.
The job market has proven to be remarkablyresilient.
There perhaps is a trend, a slight uptick incontinuing claims, which means that people who
are out of work are having more difficultyfinding new work.
But the initial claims number is sort offlatlined at about 200,000, per week plus or

(04:37):
minus, meaning that people who have jobs arenot really losing them at any greater rate.
So there's nothing particularly going on in theemployment market, again, that would suggest
the need to be overly aggressive in cuttingrates.
And then the economy is chugging along.
I think the most recent forecast I saw for theQ2 GDP is about 2%, maybe a little bit less,
1.8.
That's not robust, but it's positive.

(05:00):
And the odds of a recession this year seem tobe falling almost on a daily basis.
So when you take all those things collectively,I don't see any particular catalyst for an
aggressive rate cut regime.
That all that being said, I do anticipate theywill cut 25 basis points in September and then
probably another 25 basis point cut at somepoint before the end of the year.

(05:21):
I wholeheartedly agreed with you on theimportance of an independent fed, and I think
everyone's aligned with that because if not,then the then there's gonna be a higher cost of
capital for treasuries, and there's a lot ofdownstream consequences.
You also don't want to be the Fed to bepolitical.
If if you were an independent voter and youwanted to ascertain whether Powell was being

(05:44):
political, obviously, Trump is trying topressure him.
There's no question there.
But if you wanted to ascertain whether whetherPowell was being political, what would be a
litmus test for this?
That's a very good question.
I think that one of the things that the Fed hasincreasingly been transparent about is its
guidance.

(06:05):
Right?
So it comes out on a very regular basis, notjust Chair Powell, but also other members of
the Fed.
They come out and they share their views.
They provide guidance.
They don't always agree with each other interms of their public statements, but there
typically is a very much a consensus inwhatever the decision is at any given FOMC
meeting.
And chairman Powell has been very consistent inhis guidance on things he's looking for, in

(06:30):
terms of what what would maybe catalyze the Fedto to cut rates.
So I think the the first clue, if it wasbecoming a politicized decision versus a data
driven decision, would be if the the Feddecisions all of a sudden become at odds with
what the historical guidance has been, unlessthe data had changed dramatically in the

(06:52):
meantime.
But as long as the data is as expected, andwe've seen no sign that it won't be, you know,
the only thing that the only clue that we mightget that the Fed is being politicized is if
they do something that's different than whatthey've been suggesting, and and the data
hasn't changed very much.
One of the interesting or fascinating thingsabout the Fed, the interest rates, the national

(07:12):
debt, is that it's highly dynamic.
There's game theory.
There's different actors.
There's individual actors.
There are government actors.
And one of the things that's going on right nowis people have started to lobby to be the next
federal, chair after Powell, presumably afterhis term is is up, I believe, next May.

(07:34):
But the market itself is seeing this going on.
So what's your read on how the market isalready pricing in the next federal reserve
chair?
And how do you go about kind of reacting tothis game theory and and evolving market?
Another good question.
You know, there's something out there, the thethe betting markets.

(07:55):
There's a couple different firms out therewhere investors can can place monetary bets on
what they think is going to happen on a wholevariety of issues, one of which is what's gonna
happen with chair seat of the Fed.
And the last time I looked, which was just acouple of days ago, the highest probability of
multiple choices was that chairman Powell wouldnot be replaced by the end of this year, and

(08:19):
that he would continue to serve out his termthrough May.
I I think that's probably true.
There's there's ambiguity around whether or notpresident Trump would even have the ability to,
fire the chairman if you even if he wanted to.
And I think his advisers behind I I this iscomplete speculation on my part, but I think

(08:39):
his advisers behind the scenes are saying thatprobably wouldn't be very good for the market.
That would be a relatively disruptive event.
It would cause a great deal of uncertainty.
There would be people who would cheer that, butI think generally speaking, the market would
not respond positively to that.
So I think despite the rhetoric and, you know,he doesn't Trump doesn't like to be crossed.

(09:01):
He doesn't like to have people say no to him,but I think that he will probably stick with
Powell.
He may continue to say nasty things about him,but I think he'll leave him in place.
But I think there's very little question thatwhen Powell's term expires in May, whoever
replaces him, and there's a handful of namesout there that are at the top of that list

(09:22):
right now, will be more dovish.
And in fact, the the you know, a cynic mightsay that there's been some public announcements
by exist current Fed members, who are callingfor rate cuts, sort of they're sort of falling
into the Trump camp.
But most of those people very much want to bethe replacement.
I think you have to you have to take that witha grain of salt.

(09:43):
So if I was to summarize the overallperspective from my from my side, Powell will
stay in place through May.
We'll see two rate cuts before the end of theyear, maybe some additional ones before his
term ends in May, and then whoever replaces himwill almost certainly be, far more dovish.
Keeping in mind, however, that it's not a it'snot a one person show.
It is there is a board.

(10:04):
And and so he whoever replaces Powell is gonnahave to drive consensus if that person wants to
be more aggressive in in cutting rates.
How do you prepare your clients for thiseventuality of a new Federal Reserve chair?
And and how does that practically affect yourportfolio?
Philosophically, Certuity is a, is a strategicinvestor.

(10:25):
Right?
So we try to build portfolios that we refer tothem.
It's not, it's not an uncommon phrase, but wetry to build all weather portfolios that will
perform relatively consistently regardless ofthe market regime.
So our our our portfolio positioning is notdependent on, a changing of the Fed chair.
It's not dependent on whether or not we slideinto recession or whether or not inflation

(10:48):
picks up a little bit.
Obviously, if there's complete disruptions, youknow, our portfolios would be affected, and we
might have to make some changes.
But generally speaking, we try to diversify atthe asset class level like everybody else, but
we also very much believe in globaldiversification.
So we have significant allocations outside TheUS.

(11:09):
We also believe in risk factor diversification,which is maybe a little bit more of a nuance
than other people might.
In other words, so not just asset class, butalso when you look at things like quality and
growth and value, size, dividends, we believethat if you diversify at that level as well as
at the asset class level, that you can create aportfolio that kind of regardless of what's

(11:29):
happening around you, it will continue toperform relatively consistently.
And we believe that that's important for tworeasons.
The first is that a more consistent performancehelps to drive investor discipline.
In other words, it keeps them invested whenthings seem to be going awry.
And that's very important because investors arenotorious for for getting out of the market at

(11:52):
the wrong time and then trying to get back inat the wrong time.
But the second reason is just simply the powerof compounding.
Right.
If you don't lose as much in a down market, youdon't have to make as much in an upmarket.
And over time, you will still come out ahead.
But if we can build a portfolio that performsconsistently over time, then I the rest of it,

(12:12):
I don't we don't have to get too concernedabout unless there's a dramatically disruptive
event.
Yeah.
That's the behavioral finance.
Right?
Yeah.
Absolutely.
Much you could drop without selling at thewrong time.
That's it's very undervalued aspect of Agreed.
And you have a tilt towards non US equities oryou're investing more on a global level.

(12:33):
Why are you investing globally today?
Yeah.
It's it's a good question.
So if you if you look at the at the globalmarket cap, it's called the MSCI market cap,
global market cap.
The US is roughly, I don't know the exactnumber as of today, but it's roughly 50% of the
global market cap, which means that 50% of theglobal market cap is outside The US.

(12:55):
And just very rough numbers, let's call that35% in IFA or developing international and 15%
in emerging markets.
Maybe those numbers are plus or minus.
So if you overweight The US, you are, bydefinition, underweighting half of the world.
And so that's that's kind of point number one.
And point number two, it goes back to my myanswer to your previous question, which is

(13:19):
markets cycle in and out.
This year is a good example of that for lots ofdifferent reasons, primarily among them being
the sort of steady decline of the dollar thisyear, which, by the way, we expect to continue.
The non US markets had outperformed The USmarkets.
They were not as affected by the liberation daydisruptions that we had here in The US, which

(13:41):
kind of cratered those big mega cap tech stocksfor a while.
They've all come back.
The combination of that downturn in April andthen the decline in the dollar means that the
non U.
S.
Markets have outperformed this year.
That won't necessarily continue forever.
But what has historically been true is thatwhen the Non U.

(14:02):
S.
Markets overtake The US markets, that trendtends to continue for a while.
So even if it doesn't this time, the point ofthe story is you just don't know what's gonna
happen.
And so, you know, I would rather have multiplebets in place.
As an example, in developed international, mostof the European countries, with a couple of

(14:23):
exceptions, have committed to spending more ondefense spending to honor their NATO
obligations.
That will be positive for economic growth inEurope.
The emerging markets are taking on more of theproduction process away from China as people
are sort of trying to diversify their bets, ifyou will, in terms of where they're getting

(14:45):
their supplies and their goods.
And so there's a pretty positive story to betold about the emerging markets as well.
And when you combine all of those things, wejust believe it makes sense to have a globally
diversified portfolio.
I don't have any problem.
And in fact, I think our own portfolios todayare overweight The US relative to the global
market cap, but they're not excessivelyoverweight and we're not ignoring the non US

(15:09):
markets.
And this might be a dumb question, but when yougo about finding global managers, are these
offshoots of US managers?
Do you look for very local, talented managers?
How do you go about kind of picking globalexposure?
Certuity has been in the business a long time.
We've had a lot of exposure to managers whospecialize in non US investing.

(15:31):
They typically are domestically based, notexclusively, but they tend to be based in The
US.
But their focus of their mandate as a fund oras a firm is non US investing.
So we I think we have a pretty good handle onwho the best players are in the various spaces,
be it international growth, internationalvalue, small cap emerging markets, whatever the

(15:53):
category might be.
We have a good lineup of managers that we knowand trust and that we've used for a long time.
And then, of course, we're always you know,we're on this we're out on the speaking tour in
the conference circuit extensively.
We meet managers all the time.
We're happy to talk to anybody we don't alreadyknow and hear hear what they have to say.

(16:14):
Matter of fact, I just breakfast just a coupleweeks ago with a manager that specializes in,
non US growth, stocks and has a greatperformance.
And that was a great meeting, and and we'retaking a look at them.
And then if we have prospects or clients whohave a relationship with somebody, we're always
happy to take that input as well and have aconversation with those managers.

(16:36):
So I think from a sourcing perspective, we'rein pretty good shape with that respect.
We have not historically, it doesn't mean wewon't, but historically, we have not spent much
time looking for non US managers domiciledoutside The US.
And when you were speaking previously, you saidthat, you know, you're maybe cycling a little

(16:57):
bit out of US markets because they've performedreally well and going into global markets.
It reminds me of a Stanley Drunken Millerquote, which nothing looks as cheap as after
it's gone up 40%.
And there's this I've never heard it named.
Let's call it, like, a momentum fallacyinvestors.
And I only know this because people are alwaysso surprised when I sell, like, selling, when I

(17:18):
sell a public stock.
They'll say, why are you selling it?
It's done so well.
It's done so well.
My answer is always because it's done so well.
That's the whole that's the whole logic behindrebalancing, isn't it, in asset allocation?
Right?
And it's it can be a difficult you used thephrase behavioral a couple minutes ago, and I
agree with you.
It could be a difficult behavioral conversationto go to a client and say, hey, we're going to

(17:40):
sell these things that have done really well,and we're going to reallocate into these things
that haven't done as well.
Is at a fundamental level, that's a littlecounterintuitive.
But the reason you do that is because, know, atthe end of the day, valuations matter.
And you can go through very long periods oftime, And we've been through this here in The
US where momentum and sentiment are driving themarket.

(18:02):
And clearly, over the last couple of years,momentum and sentiment have driven the rally in
the large cap growth stocks.
But eventually, fundamentals matter.
And when you look at the the valuationdifferentials in today's marketplace, the let's
just use three examples.
The valuation differential between US large capand small cap stocks is as wide as it's been in

(18:24):
twenty years.
I think it's still a little early.
If you don't already have small cap exposure,it might be a little early to go lean into that
too hard at this point because I think there'sstill a lot of uncertainty there in three
areas.
One is they tend to be more sensitive toeconomic conditions and interest rates.
And the third reason, more of a new reason, ifyou will, is that they are very much behind the

(18:46):
large cap companies with respect to being ableto adopt artificial intelligence into their
businesses.
That day will come.
When it does come, those small cap companieswill be well positioned to increase
productivity, profitability, margins and soforth.
So small caps day is coming, but it might be alittle early.
But for now, the valuation differential ismassive.

(19:07):
If I look at the valuation differential betweenU.
S.
In large gaps between value and growth, thatdifferential is about as wide as it's been in a
very long time.
That gap is closing a little bit because valuehas actually done pretty well over the last
twelve to eighteen months.
But there's still a big difference.
I think that trade actually is more timely.
You know, if you've done well, if you've beenoverloaded into our chapped growth stocks,

(19:31):
congratulations, you've done very well.
But given where the valuations are and theprices are, you know, I think a lot of people
are taking saying, hey, I had a good run.
Let's to your point, let's take some chips offthe table and let's reallocate into something
that has a better fundamental value because theupside from there is higher than the upside
from a very high priced stock.

(19:52):
And then the third example I'll give is thevaluation difference between The US and non US
markets.
The US markets are always, always is a powerfulword, but almost always priced at a premium to
non US markets.
And there's a whole variety of reasons aroundthat in terms of governance and tax, you know,
tax accounting and so forth.

(20:15):
So it's not unusual to see The US valued at apremium to non US.
But again, that difference today is as wide asit's been in decades.
And so if you are a fundamental investor, whichhistorically has proven to be a very valid way
of investing, you have to be looking at some ofthese valuation differences and saying, gosh,

(20:35):
maybe it's time to go into something that's alittle lower priced.
Today, as I mentioned, you're a $4,000,000,000CIO of multifamily office, and you have the
very interesting job of allocating yourclients' capital.
And you believe that the average familyobviously, there's many factors like liquidity,
timeline, purpose of funds, but the averagefamily should be about 20 to 25% in

(20:59):
alternatives or in private assets.
Why 20 to 25%?
It's a good question.
So, again, every individual client or family,the right answer to that question is based on
their objectives, their risk tolerance andtheir liquidity needs.
But if you just sort of take it at a blanksheet of paper level, at one end of the

(21:24):
spectrum is you're going to go into somethingthat's less liquid, be it a drawdown structure
or an evergreen, it needs to be a big enoughposition to make a difference.
Right?
So if you allocate I'll use a number if youallocate less than 10% to less liquid things,
you're probably not going to move the needle interms of the performance of your overall

(21:44):
portfolio.
At the other end of the spectrum, you know, ifyou were to run an unconstrained optimizer with
all the caveats that go along with optimizersand capital market assumptions that go into it.
The optimizer might spit out that it thinks youshould be 40 to 50% in these less liquid
strategies.

(22:05):
That, at least in my experience, is too muchfor most families because of the illiquidity
component of it.
So they might understand that the risk returnprofile is advantageous there, but they just
are not comfortable having that much of theirportfolio be illiquid.
And so what that leaves you with is the rangein between.

(22:26):
And so 15% is a number, at least in my opinion,where you can start to make a difference in
terms of your risk adjusted performance.
25% is about as much illiquidity as mostfamilies are willing to take.
So you kind of start in there, and then, youhave the discovery process with your client or
your family, and you determine what makes sensefor them.

(22:48):
I have to ask some of your more aggressiveclients, the ones that you tell them not to do
this, what percentage of their capital is inalternatives?
It's a slightly different answer than whatyou're asking.
But the, you know, a lot of our families,they're still very involved in operating
companies.
So they're still running businesses.

(23:10):
And if you want to think of that as a privateinvestment, which I would, because a lot of
them are not public, they are still privatelyheld companies, you're already at a very high
number, right?
So it's very much dependent on what's happeningoutside of the portfolio itself.
To my knowledge, and I'd to go back and look atit client by client, but to my knowledge, we
don't have anybody, at least within theportfolio level, who's loaded up more than

(23:34):
about you know, 25% into illiquids.
So I want you to take off your fiduciary hat,put it aside, and now just imagine yourself and
your own money in these situations.
And one of the things that I'm trying to squareis if you made $500,000,000 as a biotech VC,
and let's say you're still running your funds,you still have this nondiversified position to

(23:58):
your point.
It's an operating company, but let's say it's abiotech fund.
Yeah.
There's two absolutely extreme views on it.
One is you wanna have 0% of your discretionaryassets in biotech or anything adjacent, but
then you could argue that you would have alphathere.
Walk me through that decision making process,not as a fiduciary, you know, who has a
responsibility to your clients to make themvery diversified, but if you're investing your

(24:21):
own money, how would you think through
it?
I have a couple of anecdotes along those lines.
I can remember, this goes back a while, but Ican remember at one point there was, we were
dealing with a prospect who had made theirmoney in telecom.
Right.
And we said it's an it's important with a oneparticular telecom company, whatever, whatever

(24:43):
it was.
And, and we went to that person, and we said,Hey, we think you should diversify.
And he said, Oh, well, I am diversified.
I own 10 different telecom companies.
Right?
And, and but that's their mindset, becausethat's what they know.
Right?
And people a lot, you know, it's a naturalinstinct, go back to behavioral finance, it's a
very natural instinct to want to invest in whatyou know best.

(25:06):
And so it's a conversation and an educationalprocess to say, good for you, you know, you've
got this concentrated position in whateverindustry use biotech.
So let's use biotech.
You don't need to take more risk in biotech.
Let's use a probably a much more common examplewhere you've got an employee at a firm who has

(25:30):
a four zero one ks plan.
And and part of that four zero one ks, one ofthe choices within that four zero one ks plan
is to buy stock in the company.
You can be a big believer in in that company.
But I don't know that that's necessarily a gooddecision because your entire livelihood is
based on the success of that company.

(25:52):
Right?
So if you're getting your paycheck from companyx, and and then you're loading up on stock and
within your retirement plan in the company X,you put yourself at a at a pretty big risk
position.
That's different than getting options or grantsor things like that.
But if you're making the conscious decision togo and buy stock in that company, you're really

(26:12):
concentrating your bets.
And and that can go very well for you, but itcould also not go very well for you.
So I think the important thing is to have thatkind of conversation and say you don't need you
you've you've done really well in this biotechcompany, you don't need to continue to take
this kind of risk.
You know, the the the cliche, right, is thatyou get risk, you get rich by being very

(26:34):
concentrated, in this case, the person whostarted this biotech firm, but you stay rich by
being diversified.
And so, you know, how much is too much?
I mean, once you once you've hit a number thatallows you to live the life you want to live
forever, and leave the legacy you want to leaveforever.
How much more risk do you need to take?

(26:56):
And and so it's a conversation.
You don't always win the conversation.
People do it.
It's their money.
They can decide to do what they want.
But we would always have tried to encouragethem to sort of take a step back and say, Why
are you taking more risk than you need towithin your portfolio?
Now, you asked me the question before of, if itwas just me, right?

(27:19):
And what how would I be allocating to, toprivates and alts right now?
So if I sort of put my liquid portfolio to theside and just say, alright, you gave me x
amount of money.
I think the number you gave me before on ourpre call was a billion dollars.
So if I was if I was strictly looking at justthe the illiquid stuff, Personally, given my

(27:39):
age, given my risk tolerance, given myliquidity desires, currently, I would be
probably about 10 in a multi strategy hedgefund for diversification purposes.
I would be about 45% in the private creditbecause at my age and my based on my current
financial condition, yield and income is veryimportant to me.

(28:02):
I and then the rest would be I'd probably be25% in private equity.
You know, my firm has a big presence in sportsinvesting, there'd be some sports investments
in there.
And then probably 10% each into infrastructureand real estate.
I'd like you to correct my thinking.
So going back to this biotech example, the waythat I look at it first of all, the question of

(28:23):
how much enough is enough is is an unanswerablequestion.
It's philosophical, and there's many differentso I'm not gonna go there.
But if I look at it, I actually don'tnecessarily I care about diversification
secondly after I care about the expected returnof the capital and the standard deviation.
So for example, if I could get into biotechseries c company at series b pricing because of

(28:49):
my personal relationships.
This this assumes information on alpha.
This is an important assumption.
Sure.
And it has an expected return of three x, and,unfortunately, biotech's a terrible example
because the standard deviation might be, theentire return.
But let's say it has a standard deviation ofone x and I know that within two standard
deviations, I'm getting my money back and I'mmost likely gonna do a three x.

(29:10):
I would argue that there is a rational reasonand not a biased reason to invest there.
Now, it all goes back to how much money isenough, making sure you have your nest egg and
that you have plenty of money for yourself andwhoever else you're providing for.
But I think there is a rational reason to betilt maybe tilted or maybe from a perspective

(29:32):
of portfolio construction over diversified,from an individual asset, wise, it kind of
makes more sense.
You said a couple of things in there that are,I think, important to your question.
And one is the notion of informational alpha.
If you if you have it, you should you shouldcapitalize on it.
Right.

(29:52):
So that's certainly legitimate.
And secondly, it goes back to the valuationquestion that we were talking about a few
minutes ago, right?
If I can get into an investment work that Ihave a good understanding of, and I believe it
can generate this kind of return, and I can buyit at a price that's not reflective of that, to
some degree, that's an arbitrage trade.

(30:12):
And, and there's nothing wrong with that.
Right?
So if you if you have informational if you havean informational edge, and if you have and if
you have the opportunity to buy something at avaluation that you think is much lower than it
should be, I mean, that's what private equityinvestors do, right?
That's their whole MO is they try to go andthey try to find companies where they see

(30:35):
intrinsic value in that company, maybe withsome corporate restructuring, or some different
capital structure or whatever the case, youknow, some different management experience, but
they see intrinsic unlocked value in that firmthat they think they can realize an outsized
return from.
That's exactly what private equity investingis.
And if you have that ability to make thatanalysis and make that and you have the

(30:57):
opportunity to take that debt, of course, youshould take it.
As a multifamily office, you're mostly dealingwith taxable investors.
You obviously have some nontaxable buckets, butmostly taxable investors.
How does that change how you invest?
And how do you keep that in count account intothe portfolios and the models that you build?
How do you practically operationalize that?
Yeah, that's that's a good question.

(31:18):
So one of the things that we believe verystrongly is that the two things or two aspects
of wealth management that any advisor, usincluded, has the most control over are fees
and taxes.
That, you know, part of a big part of our job,I you know, we're making good decisions on the
portfolio construction and manager selectionside and building robust portfolios.

(31:43):
But we pay a huge amount of attention to tryingto minimize fees and mitigate taxes on behalf
of our client.
So because we are we're not a gigantic MFO, butwe are of size, and that allows us to negotiate
institutional level pricing with ourcustodians, with our managers, with our

(32:03):
sponsors of our private funds.
You know, we can get enterprise pricing oradvantageous pricing on behalf of our clients.
Anything that we do manage to negotiate down,we pass 100% through to our clients.
So there's no skim for certainty on that.
There's no pay to play.
So that's one aspect.
That's the fee side.

(32:23):
On the tax side, we're I'm not going to use theword aggressive because that has different as a
different connotation when you talk abouttaxes.
But we are very active in in a whole variety ofvery mainstream ways of trying to minimize
taxes.
So, of course, the first one that that mostpeople are familiar with is asset location.
So making sure that different different assetsare in different kinds of legal structures to

(32:48):
either defer or minimize the taxes.
I think most people are familiar with that.
We have a partner that we do very on the liquidside of the portfolio.
So anything that has a ticker, we're veryactive on a tax management overlay program
where we can sort of lay it on top of theirportfolio and harvest tax losses along the way
and generate what we'll refer to as tax alpha,you know, depending on how aggressive they want

(33:13):
to be on that.
It could be, you know, any you know, on a juston the default scenario, that could be anywhere
from one to 3% per year in tax loss savings.
Just on traditional long short, that's also ifyou might have public biotech or public AI
exposure, you're also aggressively tax lossharvesting?
Well, if it's a concentrated position, thisstrategy can be very effective in helping you

(33:36):
get out of it in a tax effective manner becauseit is harvesting losses as, you know, that you
can offset as you sell your position down.
The more typical scenario is somebody's got aportfolio, maybe one that we've built for them.
And then we put the long short tax managementprogram on top of it.
And so the core portfolio is doing whatever itdoes.

(33:57):
But then the long short and we typically use amarket neutral strategies because we're not
necessarily trying to add alpha on the on thelong short side of it.
We just want to pick up losses and use that tooffset gains.
So if somebody has liquidity event that theyknow is coming, you can begin using this
strategy to begin to collect and harvest lossesthat you can use when that liquidity event

(34:20):
takes place.
And or you just use it as an ongoing taxmanagement tool.
The benefit of the long short strategy, David,as you know, mean, the long only strategies in
this area have been around for decades.
And I've been using them for decades, andthey're great.
The challenge with the long only strategy isthat every time you harvest a loss, the basis

(34:43):
in your remaining portfolio drops a little bit,and you reach a point where the basis has
fallen to a level where the unrealized gainwithin the portfolio is at risk of exceeding
the tax losses that you've harvested along theway.
And you have to kind of reset it back to backto neutral.
So you get it like a five to seven yeardeferral, but eventually you're going to have
to kind of reset the portfolio.

(35:06):
With a long short strategy where you're youknow, if the stock you're making, you can
collect losses no matter which way the marketmoves.
Right.
It's the market goes up, you know, you harvesta loss on your shorts.
If the market goes down, you harvest a loss onyour longs.
And, and because of the nature of that, thatbasis drip doesn't really happen very fast.

(35:26):
And so the reset period is extendedsignificantly.
So it's, those strategies, the long onlystrategies have been around for decades, the
long short strategies, you know, maybe half adozen years, but they're they're tested and
they're tried and true.
You also you're bullish on sports teams.
To me, I I I know a lot of very smart investorsthat have made a lot of money in the space,

(35:49):
Arctos, CAS investments, they do feel a littleexpensive today.
Is sports in the category not expensive today?
Expensive is always a relative term.
Right?
And so, when you have when you have clearlysports as a investment category is exploding.

(36:12):
And it's exploding in a couple different ways.
One is that the number of professional teamsthat are offering minority interests or or
deals into their teams is growing.
Viewership, media rights, sponsorships areexploding because those sponsors and those

(36:33):
media companies realize that they have a very,very attached in dedicated audience fan base.
And then, yes, it's true that the multiplesthat you're seeing today are higher than the
ones that you saw a couple years ago, but Idon't know that necessarily means that they're
expensive.
And so I think it really is very dependent onthe team, very dependent on the sport, and very

(36:58):
dependent on the media rights and sponsorshiprights that go along with it.
I'll use an example of the NBA, where, youknow, maybe the price of getting a minority
interest in a particular team is higher than itwas a couple years ago.
But at the same time, the NBA just signed amedia rights deal That is sort of a guaranteed

(37:18):
income stream for every team, no matter howgood or bad that team is, because it's all gets
shared pro rata, the whole the whole deal getsshared with every team.
So that would that would naturally result in,you know, a markup in the valuation of that
company, right?
So it regardless of what it's trading at now,if if a league or a team signs a big media

(37:41):
deal, you would expect there to be a markup.
So then it really wasn't expensive, right?
There will reach a point just like with themega cap tech stocks where people will say is
how much more upside is there.
So I think the the notion of what's expensiveand what's not is very relative.
Because I do think that even though this iskind of a growing area, it's still pretty much

(38:03):
in its infancy.
So I think we have a ways to go before we weneed to worry about whether or not something's
too expensive to to make the investment.
And tell me how you approach the private equityspace.
There's sort of several different ways that weapproach it.
The first is to determine with our client, ifthey're interested in income oriented

(38:23):
strategies or growth oriented strategies.
Right?
So that's sort of the first decision treepoint, because there are strategies that, you
know, generate different kinds of returnprofiles.
The second is to, we look at, we believe theothers, there's a couple of dominant spaces
within private equity, right, growth equity andLBO.

(38:46):
And those have been those are a little bitcrowded, but they're still there.
But they also have been a little bit quietrecently because the traditional exit ramp for
those kinds of strategies, as in IPOs or M andA, have been a little quiet, which is not to
say that they're bad areas to be in, butthere's a lot of other areas of private equity

(39:07):
that you can invest in.
And, you know, we're looking at, for example,an infrastructure.
We think that the demand for energy in theworld and in the country, in this country in
particular, is insatiable.
And so we think there's going to be a lot ofinvestment into data centers, into energy
production and transmission.
So we think there's some really interestingopportunities there.
And so I think we try to segment it into whatthe client's looking for.

(39:31):
And then at the construction level, you know,just like in any other portfolio, we want to
have manager diversification.
We want to have strategy diversification.
And then, of course, the big thing withprivates that's different than the public
markets is you want to have vintage yeardiversification as well.
So it's not a sort of set and forget, one anddone sort of thing.

(39:52):
The idea is that over time, want to build aportfolio of private companies that once you
get through the into the distribution phase,you can begin to self fund into the next round
of whatever you might be doing.
So there's a logic there in terms of theconstruction aspect of it.
But it's also from a sourcing perspective,keeping your eyes open for, you know,

(40:16):
opportunities that may be a little bitdifferent than what everybody's always invested
to historically.
You've been in the CIO seat, not just asCertuity, but Dynasty and other places for
quite a while.
And you've got to see some great funds.
How many of the top funds are typically sourcedby the MFO and the RIA versus sometimes a

(40:37):
client has really special access?
Let's say a client was a former partner atSequoia and now could get you into Sequoia or
just has a great idea that they maybe knowthrough their network.
How often do you actually get to know managersthrough your clients' networks?
It's both.
So we certainly, again, because it's if youknow who we are at the brand level, you know

(41:02):
that we are active in the space.
And so we are constantly approached withinbound calls from managers and sponsors.
So we're constantly being introduced to newmanagers in that respect.
They're just doing their job, you know, outmarketing and selling.
Been because we've been around a while.
We don't we know the space, we know theplayers.

(41:22):
And so we do sourcing of our own.
Chances are we met or have a relationship witha whole variety of managers.
We do partner with a third party firm thathelps us upon request with due diligence and
also with sourcing.
So for example, if we say, Hey, let's take alook at the infrastructure space, we know a

(41:43):
handful of players, but we might call thatpartner and say, hey, who else do you know?
And who do you like?
And they typically have a whole list of firmsand they say, these are the three we like the
best.
And so then we'll go do our due diligence onthose.
And then we actually do get a fair amount ofinbound from our clients and prospects who say,
Hey, you know, I have a whole I'm I'm investedin this fund or I have friends who are invested

(42:05):
in that fund.
It seems to be really interesting.
Why don't you guys take a look?
And we're we're always happy to take that call.
Right.
So sourcing is not a problem, within privateequity for a firm like ours, and we're not
unique in this respect.
But if you if you deal with the kinds ofclients that we deal with and you've been
historically active and it's known that you'vebeen historically active in the space, then
sourcing is never a problem.

(42:27):
And you guys are almost the ideal size of LP.
You're not, you know, sub a billion dollarswhere you might not be a large enough check to
get look at stuff.
You're not calipers or calisters where you haveto deploy a lot of capital unless you have a
strategic alliance.
Is there ever a role of fund of funds in yourportfolio, or are you always going in direct

(42:48):
and funds?
And if so, in what cases would you ever use afund of fund?
So we have a program within Certuity that wecall Alt plus and it's a platform and it's not
commercial.
It's only available to our current and existingclients.
But it's a platform where at the collectivelevel, you know, we can soft circle, let's call

(43:12):
it 10 or $15,000,000 of commitments into a newfund or a new cap rates.
That's enough to get us a seat at the table atthe firm level.
Right.
And so and in many cases, it's enough to getus, you know, beneficial pricing and access and
minimums.
So from from the client's perspective, thebenefit is they don't have this, let's just

(43:36):
make a number up and say that the minimum forthe fund on a direct basis is a million dollars
or $5,000,000 Within alts plus they could comein for a $100,000, right?
$50,000.
But collectively, we will raise the appropriatenumber to get to the number that we sort of
quasi committed to the sponsor.
So our clients can get in at a much lowerminimum.

(44:00):
It also sort of mitigates the need for a fundof funds because let's say we have 15 choices
within Alt plus maybe it's 10.
Our clients can pick and choose the ones theywant.
So they're not, when they, if they go inthrough alts plus, they're not getting a fund
of funds.
They don't have to invest in everything that wehave on there.
They can pick and choose the ones that theywant.

(44:20):
So maybe they like three or four of thedifferent ones and they can make investments
into each of those.
And then from the Certuity side, we consolidateall the paperwork, we handle all the cap calls,
and we provide the client at the end of theyear or at the end of the tax year with one
consolidated K-one for anything that they'reinvested in.

(44:40):
So it makes the life of our client a loteasier.
It allows us to use the collective size of thefirm to get into funds that we might not
otherwise because we can bring twenty twentyinvestors in and raise $10,000,000.
And and so the combination of those two things,it it kind of negates the need for a fund of

(45:03):
funds on the private equity side for us.
On the hedge fund side, it's a different story.
Know, I would much prefer I first of all, Ibelieve in in hedge funds.
They've been very dormant for a while becausethe market conditions just weren't conducive.
I think we're entering a different marketregime now where we're going to have rising
rates and rising volatility.

(45:25):
That's the kind of environment where thesesorts of strategies have historically performed
the best.
So but in that case, I would rather have sortof a one stop solution.
So I would I would rather than trying to builda diverse portfolio of individual strategies,
I'd rather go down the multi strategy hedgefund path or although I don't love the fund to

(45:48):
fund structure, you know, if there's a good onewe use, we have a partnership with a very good
fund of funds now.
It's not my favorite structure because of thefee levels.
But but if I can find a good multi strat whereI can get the level of diversification I want
with one shop, I'm I'm very happy with that.
So that would be a case where we would use thefund to funds.

(46:08):
There's a big efficient market, Skye, and thenI spent two hours with Cliff Fastness in
Connecticut, and he made me a believer in AQRand and QuantFund.
So I'm I'm a recent convert.
Yeah.
It's hard to it's hard to not be influenced byCliff.
I've I've met he he wouldn't know me if hetripped over me, but we've met a handful of
times, and he's he's a very impressive guy.
So I'm curious, have this Alt plus platformsuper streamlined, your LPs get one k one,

(46:33):
which is really nice.
Yep.
What about from the GP side?
Is it truly is it truly that I'm just dealingwith somebody from your team?
Is it indifferentiable from a single check fromanother LP or is it kind of having to deal with
a lot of people?
Typically, most sponsors would make themselvesavailable to the individual client upon

(46:56):
request.
But but more typically, they're viewingsecurity as as the LP.
Right.
So we might have 15 or 20 investors underneaththe Alt plus umbrella, but from the sponsor's
perspective, the client is Certuity.
So we're the ones who have the quarterly updatecalls.

(47:18):
We're the ones who have the outreach to them.
We're the ones that ask them questions onbehalf of our clients.
So while they're not trying to hide from theultimate investor, they the preferred business
model is that they view certuity as the clientand then and deal with us primarily.

(47:39):
I don't want to age you.
But going back to 1985, when you graduate yourMBA, what is one piece of advice you would give
that Scott that would help him more in hiscareer, maybe avoid some mistakes or accelerate
his career further?
So when I look at my own career path, you know,I knew, you know, I had a field trip to Wall
Street when I was in business school.

(48:00):
And I grew up in a little beach town inCalifornia, didn't hadn't really given a ton of
thought to what I wanted to do.
But when I stepped off the bus, on this fieldtrip on Wall Street, I looked around really my
first time in a very big city.
And I said, don't I don't really understandwhat's going on around here, but I want to be
part of this.
And and so that's what drove me to get my myfirst drop down on Wall Street.

(48:23):
And it was, I was very happy.
It was great.
It was a great experience.
But then when you look at sort of subsequentchanges in my career path, and I'm not
suggesting this is good, bad or indifferent, itjust is my experience.
Most of them were not planned out for like, Ididn't say, okay, I'm going to do that next.
And then I'm going to do that next.

(48:44):
It was I was doing my job, I was enjoying mywork.
And then I came across an opportunity, thatseemed more interesting than what I was doing.
And I took it.
Right.
And that has worked out very well for me.
Right.
So I went from being a banker to being aconsultant to the banking industry, to being a
wealth manager, to, you know, to to being achief investment officer.

(49:05):
It was simply because I was not afraid to takechances when, what seemed to be a really
interesting opportunity came along.
So that would be my first, know, don't lockyourself in because the chances are that
whatever job you have now is not it's gonna bevery different ten years from now, if it even
still exists, right?
And artificial intelligence, literally, it's acliche, but it is going to change everything.

(49:27):
So if you're if you think that you're comingout of business school or undergrad school and
having locked into a career path, it's probablynot gonna turn out the way you think.
And and so don't don't limit yourself bytoday's definitions of what a job looks like.
And in that case, I guess the behavior changewould be you would have taken those
opportunities either quicker or moreaggressively?

(49:50):
Or, you know, or is that just like one of thestrengths that you apply to your career that
other people shouldn't apply?
And it's always easy to say and to see thingsin hindsight, And say, oh, of course, that's
what was going to happen.
Right.
But you know, as an example, with artificialintelligence, if you if you are, and I'm not

(50:10):
suggesting anybody's like this, but if you aresomeone who says, Oh, that's just a fad, or
that, you know, I don't have to pay attentionto that.
I don't have to stay on top of what's going onthere.
Crypto is another example.
Oh, I don't have to worry about that.
Well, then you're going to fall behind, right?
Because there are some things that are outthere.
You don't have prescience.
You don't have a crystal ball and you knowexactly what's going to happen.

(50:33):
But I think it's pretty clear to use AI as anexample, that it's going to change everything.
And so, you know, if I'm a young person, if I'mScott at 25 and I see what's happening, then I
know that I need to get trained up on AI andfigure out how I can either use it in the job
that I have or create a different career paththat takes advantage of that evolution.

(50:58):
From an investment perspective, the best advicetoday, Scott, could give 25 year old Scott, is
I should have been much more aggressive in mypersonal portfolio.
I was young.
I had a forty year career ahead of me and I wastoo risk averse.
I grew up in a very risk averse debt aversefamily.

(51:21):
And so I carried that with me into my ownpersonal career, my own personal investment
perspective.
And don't get me wrong, I took risk.
But in hindsight, and I tried to tell this tomy own kids who are about that age now, you
have a long time ahead of you and you can takerisks because if something goes wrong, you have
a ton of time to make it up.

(51:42):
And so, know, had I and I'm not kicking myself,you know, hindsight is twenty twenty, but no
regrets.
But if I had been more aggressive, I would I'dbe in a better in a better position today than
I
am.
To use another cliche, what about strengths andweaknesses?
In retrospect, should you have leaned in moreto your strengths, worked on your weaknesses,
build teams around that?
So give me some advice on that.

(52:03):
Two best pieces of management advice that I'veever received.
The first one was from a guy I worked with whenI was a consultant to the banking industry.
And I was looking, he knew that I was lookingmaybe to move on to a different position.
And he said, Scott, you need to understand,nobody is going to hire you to maintain the

(52:26):
status quo.
So in other words, if somebody is interested inhiring you, it's because they want you to come
in and implement change.
And so I think a lot of times, the inclinationis, hey, you don't want to rock the boat.
You want to come in, you want to fit intowhat's going on.
But that's not why they hired you.

(52:46):
The firm identified something that they want tohave changed, and they believe that you can be
a catalyst to that change.
And so don't be afraid to you don't have to bea jerk about it, but don't be afraid to say,
well, you hired me to do this and here's what Ithink, and let's figure it out together.
Right?
So that was management advice number one.
The other one that and it goes directly to thequestion you just asked is, you know, I was

(53:11):
working when I was still relatively early on inmy wealth management career.
You know, we had the very traditional, end ofyear evaluation process where you say, these
are my strengths and these are my weaknesses,and this is what I'm going to work You know,
and so I'm writing down all these things that Iperceived as my relative weaknesses and
everything that I was going to try to do to getbetter.

(53:33):
My direct report, my boss came in to me and hesaid, Scott, first of all, you've correctly
identified your strengths and weaknesses.
So congratulations on that.
But you could spend the rest of all of nextyear trying to improve your weaknesses and you
might get average.
You might get to the point where you'remediocre at those things.

(53:55):
So don't worry about them.
Accept them.
Don't, don't, don't like just dismiss them.
Don't just say, Oh, well, I can't do that.
So you can try to get better, but spend more ofyour time getting better at the things you
already do well.
Because the things that you do well, youactually do really well.
So why not just get better at those things?

(54:15):
Because that's going to be more valuable to youand more valuable to us than if you try to get
average on the things that you're weak at.
So I I think those those two pieces of advicewere the best management advice that I ever
received.
Yeah.
I think it's kind of paradoxical.
You want to be aware of your weaknesses.
You don't have to you don't have to, quoteunquote, work on them, but you have to make

(54:35):
sure somebody else, that's their strength.
So have to work on it by partnering withsomebody.
That's
the work
you have to do.
Absolutely.
Without question.
That's one of the trends in wealth management.
It's not really a trend.
It's been around for a long time, but gettingmore notice and more media attention is this
notion of teams.
Right?
I think everybody recognizes that our industryhas become increasingly complex to the point

(55:02):
where no one person or very few individualpeople can do everything well.
Right?
And so you have to partner.
You have to find a good team around you.
Right?
So maybe I'm an okay investment professional,but I know very little about tax planning or
estate planning, right?
So I could spend all my time trying to get upto speed on that, or I can go and find a

(55:23):
partner who's already an expert on that.
And then somebody who's an expert onperformance reporting and somebody who's an
expert on insurance.
Right.
And if I could build the team that delivers thewhat clients want to pay for these days, which
is advice, know, a team is the only, I think,only way to go.
It's one of the one of the many things thateducational system completely fails us as is

(55:48):
trying to find people that are a minus.
If you're an a minus in every single thing inthe education system, you're high honor roll.
In real life, you're a loser.
For lack for lack of a better lack of a betterword.
I, you know, I do think that there's truth, inin the in the expression that, you know, if
you're an a player and, you know, a playershire other a players because they're not

(56:12):
they're confident enough in their own abilitiesthat they are not threatened by people who are
very good at what they do.
Right?
So a players hire a players, b players hire cplayers.
And and I think that that's I think that'strue.
And I've seen both of those scenarios play out,you know, one to the positive and one to not
so.
Right.
So I think it's important to kind of evaluate,you know, how confident are you in what you do

(56:39):
well and therefore how how comfortable shouldyou be in bringing in people who are really
good at what they do without feeling threatenedby them.
This has been a remarkable conversation.
Thank you so much for sharing so much wisdomwith me and the audience.
That's my pleasure, David.
Thanks for having me.
Appreciate it.
Thanks for listening to my conversation.
If you enjoyed this episode, please share witha friend.

(57:01):
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