In this first episode of 2025, we’re plunging right into the fascinating world of sovereign wealth funds with Peter Madsen, the CIO of Utah’s School and Institutional Trust Funds Office (SITFO). Peter shares his unique perspective on managing a multi-billion dollar portfolio designed to support public education in the state for generations to come. From his personal background in skiing and outdoor adventures in the Wasatch mountains to the challenges of navigating Utah’s rapid growth and development, Peter provides a captivating glimpse into the day-to-day realities of overseeing this complex institutional investor. Listeners will learn about the intricate governance structure of SITFO, the innovative approach to asset allocation and risk management, and the delicate balance of delivering competitive returns while preserving the fund’s long-term corpus. Peter also tackles common investment myths, sharing insights on the potential for diversified portfolios to outperform high-equity allocations over the long run. This episode offers a rare behind-the-scenes look at the inner workings of a state-level sovereign wealth fund, highlighting the importance of prudent stewardship and a steadfast commitment to serving the public good. Whether you’re an institutional investor, a student of finance, or simply someone fascinated by the intersection of public policy and investment management, this episode is sure to captivate and inform. SEND IT!
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Check out the complete Transcript from this week’s podcast below:
A US state with a sovereign wealth fund? Utah’s new approach to old money with Peter Madsen
Peter Madsen 00:07
There are 22 Western states that Thomas Jefferson at one point, I’m pretty sure he thought that, you know, we’d be an agrarian society, and so he drew a grid on every territory for it became a state and required that a decent portion of the state would be held in trust for public schools. And you know, instead of blocking off or being strategic about any oil and gas, etc, it’s just, every so often you have, you’re going to have a public square or a school campus of some sort, and so just all over the these 22 Western states are just this checkerboard of land that’s held in trust for public education.
Jeff Malec 00:50
Welcome to The Derivative by our RCM Alternatives.
Peter Madsen 00:53
Send it. Hello. My name is Peter Madsen. I’m the Chief Investment Officer for the State of Utah’s sovereign wealth fund, called the school and institutional trust funds office, or better known as SITFO We like to say the money’s old, going back to Thomas Jefferson and the inception of the state of Utah, but SITFO is relatively new, and I enjoyed the discussion, talking about, of course, skiing as well as asset allocation and our use of managed future strategies. Hope you enjoy coming up on the derivative.
Jeff Malec 01:41
All right, everyone. We’re here with Peter Madsen, I’m guessing coming to us from snowy Utah. Where exactly are you in Utah? I’m
Peter Madsen 01:49
downtown Salt Lake City, Utah. I live couple miles from downtown. I’m in the office today. We’re right on Main Street.
Jeff Malec 01:55
Nice. So where, as listeners know, I always spend way too much time talking skiing. So what’s your favorite ski hill? Where do you go?
Peter Madsen 02:05
Yeah, we could do a skiing podcast. Might be more might be more enjoyable, but you know, being it based in Salt Lake, it’s more of a strategy about given day and given conditions and where you think crowds are, especially with the the way the new passes work. So for example, this weekend, the plans were, we expect a little bit of snow. Should we go to the resort? Which one will it be enough snow for it to be a pouty or should we do some back country where there’s we expect there to be fewer crowds and get a little more exercise? So that’s kind of the nature of it versus it, but I did spend four winters right after high school working at Brighton ski resort. So a fondness for Brighton, love going there, and can really just kind of feel like I can let loose because I know the mountain so well. I
Jeff Malec 02:55
love it. I was a similar except after college, ski bum in Aspen for two years, sloping chilly up on the mountain, so I know it. And then I’m out there probably twice a year now with some friends houses in Park City. And so love it out there. Except I’m always torn I’m at Park City, my buddy’s got a house on Deer Valley, beautiful ski and ski out what’s not to love, except I’m like, Oh, can we go over to Alton snow bird? There’s not quite the terrain at Deer Valley that I would hope for, but Beggars can’t be choosers, right? Yeah, it’s
Peter Madsen 03:32
Deer Valley. Is the go to for icon pass holders when Alton snow bird are snowed in or the canyons closed,
Jeff Malec 03:40
yeah. And then tell me quickly about your back country. So you skinning up and skiing down. What are you doing out there?
Peter Madsen 03:48
Yeah, skinning up occasionally do something a little more adventurous that might require, you know, having some crampons, or putting your skis on your pack and post, holding up, you know, something a little steeper, but a lot of it’s, you know, in the interest of just being safe and having a good time, a lot of it’s pretty mellow. There’s a lot of low angle, you know, not really massive peaks here in the Wasatch, you know, are like snowboarding out. And some of those resorts have great steep terrain, but off on some other canyons, it’s pretty mellow. Some of them, you can take your dog. So it’s really more about getting outside, you know, getting some exercise, being with friends, and, you know, making some making some turns, but it’s not aggressive or challenging skiing typically, yeah,
Jeff Malec 04:35
and it’s always interesting. I mean, we’ve had um Vanir Ben Sally, who runs a volatility fund, super concerned with risk and hedging and volatility. And he goes out on these helicopter skiing snow bird he does this desert run, all this stuff. So his personal life, he takes a bit more risk than in his professional life. So it’s always funny, but it sounds like you’re saying, I know I’m aware of the risks in the back. Country is as well. Yeah,
Peter Madsen 05:01
we’re pretty safe. There’s a couple of us that, you know, have been around a long time, and, you know, taking safety courses and and, you know, training, avalanche rescue training, etc. So we don’t, you know, we don’t tend to just, you know, it’s a pretty select few that I’ll go out with, you know, experienced people who I trust and who have really strong knowledge about either the weather or snow conditions or, you know, avalanche safety, those kinds of things.
Jeff Malec 05:29
Oh, well, that just blew my next question of whether, when I get out there, whether you can take me on one of these back country trips. So we’ll see do an easy one, maybe. All right, I’ve passed some of that stuff I’ve always wanted to do. What’s the mountain when you’re, you’re sitting in the Snowbird, Alta parking lot. Alta parking lot, looking kind of back down valley right there, that big one, yeah, and people, you can see him going up, yeah,
Peter Madsen 05:54
superior. That’s a, that’s a great one. Pretty typically, pretty high risk to ski that one. You need the right conditions. But that whole ridge line right there is go to back country spot that, yeah, it’s, don’t, don’t get me started on on parking and infrastructure and crowds and anyway, it’s just so busy, like there’s a just a stream of people doing backcountry, especially right up in that area. Well,
Jeff Malec 06:19
I did want to ask you, you are you Utah? Born and raised? Are you a transplant or
Peter Madsen 06:25
more or less? I grew up in North Carolina, went to junior high, high school, University of Utah, moved away for almost 20 years, and then I’ve been back now about nine years. So my wife teases me because I don’t like to say I’m from Utah. I like to give the full longer history, but at some point I’m just going to have to say, I’m
Jeff Malec 06:45
afraid you’re from Utah, right? But what? What do you make of the growth like, Park City just seems to be going crazy, right? They’re going all the way out to the reservoir now, $6 million houses. Like, is that sustainable? Are Utahns? What do you call yourself you Utahns, yeah. Are they happy about that, or is it? No one’s happy about
Peter Madsen 07:07
that, all right? And you gotta, you gotta, kind of make peace with it. But, you know, growing up being able to go skiing at lunchtime, you know, when, when I learned to ski, you got on the bus out in the valley, and, you know, during lunch, and had a sack lunch and skied, you know, took lessons in the afternoon, home by dinner. And anymore, it’s like, on a weekend powder day, it might take you two or three hours to get up to alters and over.
Jeff Malec 07:37
Yeah, it’s crazy. Um, so what do you do about that, like, and then there’s this new private mountain that’s up near Snow Basin with, who knows what, that cost 5 million plus to get in. Yeah, it’s a 500,000
Peter Madsen 07:50
membership fee. And then I’m not sure if, like, the Yellowstone club, you’re required to buy a property, wouldn’t surprise me. I’m I’m just not sure about that. But because that’s, you know, ultimately, how, how they make the money, I’m not sure that they just want to sell, you know, lifetime memberships. But that resort is, yeah, that’s something else that that that was really surprising, somewhat controversial. Just, you know, the locals around there had access to that area, and, you know, now they now they no longer will. And it’s a pretty big swath of, I mean, it’s, it’s a proper resort.
Jeff Malec 08:24
Who sold it, it was privately owned, yeah, it was Yeah. It’s
Peter Madsen 08:28
kind of Yeah. It’s just interesting. It was a ranch. I guess they called it a ranch, they marketed it. But it maybe that’s still in the name. I think it might be called Wasatch peaks Ranch, the owners of Snow Basin, which is a great resort in Ogden, yeah, less traveled, but the Olymp, the 2002 Olympics, the I think, was the downhill was competition was held there. The that family, think it’s a family, the people who own Snow Basin owned that property and sold it. And not sure why. They didn’t develop it themselves, but sold it and the owner, the buyer, the condition was they couldn’t create a competing resort. So the private resort was, I don’t know if that was the original intent. I’m sure it probably was, but the that’s the stipulation for selling it. I
Jeff Malec 09:16
have the specs right here. 1 million to join, must buy land for 8 million plus, must build a 5000 square foot house minimum, and break ground inside five years. Wow.
Peter Madsen 09:29
So I’m just shy. I’m just shy.
Jeff Malec 09:32
There’s a lot going on there. All right, for all those who didn’t come here to hear us talk skiing, but what’s your overall will close up Utah? You’re you’re bullish. Everything’s going great. I mean, you must be work for the state, but you think it’ll cause problems long term, or you guys will figure it out?
Peter Madsen 09:54
Yeah, hard to say. I think we’ll figure it out. I think, you know one aspect. Of you know, Utah originally was built around this kind of original I don’t know if you call IT infrastructure, but the streets are really wide downtown. I’m sure you remember being down here, and a lot of our downtown streets are, are, you know, if there isn’t a train or bike lane, now there are four lanes, so two each way, plus a turning lane. So there’s, you know, plenty of room to, you know, all this, it’s traffic, et cetera. But if you’re just in and around salt lake in the valley, it’s not terrible. You know, public transportation is okay, the and then the the opportunity for, I think the term, is urban infill. You’re just creating density in Salt Lake City is, you know, it’s the buildings are going up rapidly. We’ve got our first couple newts, skyscraper type hotels downtown. There’s tons of luxury apartments going up. And so I think it’ll be, you know, we’ll manage. We’ll we’ll become, ultimately, like Denver or Seattle, hopefully not as traffic as LA. But you know, getting from one end of the valley to another is pretty painful, but as long as you can stay pretty close to home and manage to get out early to on a powder day, you you know, you’ll be all right ride the bus on a powder day.
Jeff Malec 11:22
Let’s get into the firm, and we’ll weave back, you said, North Carolina, and then back to Utah. So what was your kind of personal background? Got into the investment world, and how’d you end up working for Utah?
Peter Madsen 11:37
You know, I kind of fell accidentally into institutional investing. I, I was studying Russia, and spent a little bit of time in Russia. I thought I’d be an academic really like the idea of, you know, studying great novels and history and art and and, you know, sharing that with with others. I thought that was something I really wanted to do. And as I I met my wife, and things started to kind of change, and people I was meeting and things I was learning, and pivoted as quickly as I could into international relations, or, you know, International Political Economy, type of, type of classes, ultimately graduated with the Russian degree, and then went straight away into an MBA program and graduated, right? You know, at a time it was tough to get it was a it was early. Oh, one and a family friend of my in laws happened to work at Russell and and one of in a group that spun out of Russell, their manager Research Department, an individual named Jeff Hanson, great guy. I’m still friends with him. He was consulting, doing management consulting, if you will, and research for asset managers. So, you know, they’re like, maybe they want to rationalize the product line, or they’re wondering if they have the right PM, and, you know, in the right talent on the team and personality profiles and all those kinds of things. So I joined him, not really knowing much at all about investing, especially not institutional investing, you know, just
Jeff Malec 13:12
this is like Russell the index company now, or
Peter Madsen 13:15
Russell was one of the first pension consultants, and they were, you know, they were maybe the biggest pension consultant for a long time. And so their manager research group, you know, then they started managing money. Their manager research group was pretty strong, pretty big. Again, like one of the first, you know, folks even do manager research, and they were managing their own funds at one point. So, you know, a lot of resources, a lot of people, a lot of coverage, a lot of strengths and but a small one guy spun out, and a couple people joined him on contract, and I was the they all were seasoned professionals, and I was the newbie who just happened to be in the room with, you know, CEOs and CIOs of large asset managers, taking notes and running the Data, being the guy with, you know, behind the software and the spreadsheets and all that, and that was great, but we just, it was a, it was a boutique thing, and it was, what was the, the regulatory I want, not Sarbanes Oxley, but Elliot Frank Oh, was passed something that got rid of the soft dollar. Oh yeah. Really put the the dampener on how soft dollars were used. And of course, all of our fees were basically paid by soft dollars, so that we really struggled. And I ended up taking a ended up the short stint at parametric, and they were doing a lot less strategies than they do now. It was mostly passive, tax efficient, passive, separate accounts. And so that didn’t last very long. It’s, you know, great people, great shop. Invest with them today. But just you know, as a research kind of oriented person, being on a mostly passive, uh. Desk, if you will, was, you know, something that wasn’t in my destiny. So ultimately, joined our sound too exciting. Yeah, it was. It was like running optimizations on how to keep the tracking error low and what to buy and sell tax, you know, tax efficient
Jeff Malec 15:15
kind of good for the ski life. Like, that’s good. We’re all lined up going skiing. Yeah, basically,
Peter Madsen 15:22
oh yeah. Joined rVk in Portland and did some consulting there for about five years, and great people. Loved living in Portland. Family was super happy. Things were going really well. But met a group, fund to fund, that it’s kind of a hedge fund platform that had some direct strategies as well, as well as a fund to fund, and did some research, ultimately joined them, moved to London. Super important for the family. Great time. You know, talk about that all day again, yeah, and, and then that wound down as well. Just, you know, fund to funds. It was tough to raise capital when I joined, it was, we were about 1 billion when I when we decided to wind it down, it was about 1 billion, but we had also raised about 700 million during that time. So it was kind of being on a treadmill. And you know, a couple of the consultants, you know, once they saw the flows coming out, they decided, you know, they didn’t want to be the last one. And so we, you know, we ended up winding it down, and was fortunate enough to have a long runway to, you know, talk to some recruiters and and I was telling them, uh, pretty laughable, but, you know, I guess I didn’t know any better, but I was telling them what I’d really like is to be a CIO in a mountain town or, you know, on the west coast somewhere. And they were laughing like you and everyone else, and then a few weeks later, one of them that I had talked to got the contract for the CIO position to recruit here for a SIP phone State of Utah. And then she’s like, you’re not going to believe this, but this would be a great fit for you. And at the time, it’s like, you know, the pay is not great, but it’s a brand new office. And you know, that sounds like they’re going to give Whoever joins a lot of runway. And so that was nine years ago, and we’ve, you know, a lot’s changed, and 12 people now.
Jeff Malec 17:14
The a lot to unpack there. First part of me goes to everyone thinks soft dollars nefarious, right? So there was nothing nefarious you guys were doing. That was just how the game worked, right? You think that kind of got they threw out the baby with the bath water, with that whole ruling?
Peter Madsen 17:33
Yeah, I’m not really sure, just because the the it is nice to just have an explicit price for something, have a service of a product, and have a price for it. So I’m not really, you know, other than I was super happy doing what I was doing, could have done that forever, you know, it’s I wouldn’t be, you know, doing the things I’ve done. And so I’m not really too disappointed in that. And the the the idea that you’re paying for something. And you know, the fees are used elsewhere. It’s just not, it’s not ideal. So,
Jeff Malec 18:06
and then my brain did, was the CIA ever recruiting you when you were getting a degree in Russian?
Peter Madsen 18:11
I went to a school where it’s a most people were employed by one government or another, because half the student body were foreigners. He needed to speak another language. Was that kind of, kind of policy oriented school. They only have few degrees, and one of them’s policy, one’s business, one’s translation and interpretation. And what’s the school? It’s the Middlebury Institute of International Studies. It’s in Monterey, California. There’s a few military kind of things going on there, Naval Postgraduate School and defense, I can’t remember the name of it, but the defense, Defense Language Institute, or something like that. So yeah, I did get a call from like Acme incorporated or something at one point. And talked to them a couple of times, and they had me fill out this, all this paperwork and international export ships in Russia, and then had to write an essay. And this is really embarrass, you know, it’s kind of embarrassing, I guess. I don’t know. It’s funny. This is a long time ago, but, you know, Russia was in a pretty strong period of chaos, and you know, Yeltsin was a bit of a crony, right? Just put it lightly, yeah. And Russian history of, you know, the philosophy is that, you know, they need kind of a strong hand or a strong ruler, and they go from order to chaos and order to chaos, etc. And so when Putin was announced, it was like, Oh, well, here’s a strong hand, and that will be better than because when I was living there was, it was it was mid 90s, and there was a lot of suffering, a lot of poverty. Was really dramatic, actually really tragic. And so, you know, I thought I wrote my essay on why Putin’s good for Russia. Yeah, and I didn’t hear back after that. So
Jeff Malec 19:57
that may someone may argue that. That was the case. Maybe not good for the rest of the world, but maybe good for Russia. Let’s get into the firm. Or do you even call yourselves a firm? What do you what do you call yourselves?
Peter Madsen 20:14
We are? We call ourselves a sovereign wealth fund. Really nice. Yeah. A lot of folks would, historically, would have called this the Permanent Fund. Yeah,
Jeff Malec 20:25
there are a few there, like in Alaska,
Peter Madsen 20:28
yeah. So like Alaska, if you’d like, I could kind of describe this. There’s a cohort of us I could kind of describe, yeah, definitely, we are. And so there’s, there are 22 Western states that Thomas Jefferson at one point, I’m pretty sure he thought that, you know, we’d be an agrarian society, and so he drew a grid on every territory before it became a state, and required that, I think it’s once, it’s either one, it must be 116 I always forget the exact number, but a decent portion of the state would be held in trust for public schools. And you know, instead of blocking off or being strategic about any oil and gas, etc, it’s just, every so often you have, you’re going to have a public square or a school campus of some sort. And so just all over the these 22 Western states is just this checker board of land that’s held in trust for public education. And you know, different from Alaska, who set their sovereign wealth fund up, just as you know, benefit royalties from the royalties of oil and gas, they also have 22 this public education type of trust slightly different. But some of us, you know, or have oil and gas. Some of us have a ton of oil and gas. Some just have land that they sold off and and just, you know, distributed the money right away. But a few, a few of us are pretty active, endowment like strategies, if you will, teams that kind of look somewhat like a pension fund, somewhat like an endowment, portfolios that are kind of between and, you know, some of us have more public scrutiny than others, but one of the, you know, New Mexico is growing rapidly, really strong performance, lots of oil and gas money, you know, really important to the state. I think they have multiple trusts now, and, you know, offsetting taxes and supporting other programs. So we’re about 3.7 billion. We distribute about 100 you know, we’re all unique in our in some ways, those are the kind of basic. So that’s 22
Jeff Malec 22:40
I’m trying to think, how many states are west of the Mississippi, but basically, yeah, basically those, yeah,
Peter Madsen 22:47
yeah, Oklahoma, Texas, and, you know, kind of west and north. And we distribute about 100 and 100 million to K through 12 schools every year. And those checks go to what’s called a Community Council, which is majority parents of the school. And then there’s someone you know, representing the School on that council, but that, you know, kind of advising the parents, or, you know, recommending how that money be spent to the parents. And you know, there’s an auditing function to make sure it’s being spent on, you know, education or academics and but, yeah, we’re those that’s, it’s really great leverage, because it isn’t part of the overall education budget. It’s goes directly to the school who has a certain need in a certain year.
Jeff Malec 23:35
And so, what year was this where he put these all, who? Who’d you say it was Thomas? Jefferson? All right, so way back, way back. So way before they were even states,
Peter Madsen 23:47
yeah. So the, it’s called the enabling act. And when a territory becomes a state, there’s, you know, that that’s basically the enabling act, and it’s part of that. So it’s kind of like the constitution of the US, the enabling act, and then the state constitution for for Utah, and it’s so it’s super senior in terms of, you know, where it sits, and what, what claims it has. Anytime there’s a national park or something like or, you know, they’re not many national parks these days, but these national monuments that get created, the feds have to make us whole, so to speak. So there’s a whole separate office, separate group that does land management and optimizes and generates revenues, etc, from these royalties or disposal of land and, and, but anytime that, that usually a really great windfall for us. So, you know, we’re for in terms of the assets under management. We like to see those, you know, feds do these big projects, and then we get to cherry pick what BLM land we might want, and, you know, group it together and make sure it’s near oil or near a development, developing what’s BLM land? Bureau of Land Management got it kind of which is federally owned. Yeah, it’s like most of the West is, yeah, the BLM land.
Jeff Malec 24:57
Wait, so that’s separate from your trust. Lands. That’s right, trust, okay? And so some of these states just went ahead and sold the land to raise money. And then how you get money? Or it’s kind of,
Peter Madsen 25:10
it’s kind of an, yeah, it’s some fared a lot better. And some, like I said, have you know, oil and gas and and just good governance early on. But for example, State of Utah was the, I think it was 1896 right around there, that this, we became a state in this trust was technically established. And in two, let’s see, in 1995 ish, so about 100 years later, there was 100 million in the trust. And most of the, you know, like, half the land was disposed of already, Oh, no. 100 years, you know, not much growth, and then it got professionalized, you know, legislation oriented around making sure that it had a secure future. And now we’re at 3.8 billion.
Jeff Malec 26:01
Who’s the gold standard in this kind of, in this club?
Peter Madsen 26:05
Oh, man, we all have our beside yourselves. Yeah, we talk to each other quite a bit. There’s a there’s a dozen or so of us that are pretty active and, you know, have kind of long term pension or or endowment like portfolios, because some are just held in cash, for example, they haven’t bothered to change the statutes and or change the constitution, but for example, but we have a lot of the characteristics that an entity like us should have. So we we have four independent trustees. The State Treasurer is always the chair, and he’s elected official. And then there’s, you know, independent committees that work to nominate the other four who there’s criteria about them being investment professionals, basically, to become a trustee. And then there are, and then their, you know, their responsibilities are outlined really well in the statutes. So they have to live in Utah. No, you don’t have to live in Utah. All right, throw my hat in the ring. Okay, I’ll put your name in the ever growing list of people who are kind and generous enough to take, you know, take this on and help us out. But the we are given discretion, you know, to manage the portfolio, the team, you know, the CIO, and you know, through that the team, we obviously have transparency requirements and reporting, but we don’t, you know, our trustees look at, you know, asset class, asset allocation, asset class level, performance, total fund performance, long term horizon we talk about, you know, governance matters, investment philosophy, investment policy, intergenerational equity, to make sure you know we’re, we’re not favoring one generation over another. So it’s, it’s actually really great.
Jeff Malec 27:50
That’s not a thing in the United States. Did they know that? Right? You’re supposed to just kick the can down the road and screw the next generation. Yeah, we get you guys didn’t get the memo. Yeah, I guess not the so I want to back up for a second, and I’m going to ask about the trustees. But backing up so you had that 100,000,095 How did and you’d sold half the land. So how did it become? Besides investment gains, how did you get the three, three and a half billion in there? Like, what are the ways you get revenue out of there, whether in your in Utah specifically, or some of these, some of the others. Alaska is clear, right? It’s just a piece of every oil barrel. So, yeah.
Peter Madsen 28:30
So the the more the larger groups, these larger funds, it really is about the oil and gas money for the most part. The you know, it’s dominant. But there’s also you can, like, well, one of the one, one of the so we can do, you can lease it for, you know, mining, so, you know, gravel pits or grazing. You know, if we, if we had owned that ski mountain, you know, probably, yeah, that would be nice. But the big windfall for us was shortly after that professionalization, if you will, of both the land management of the land management office the Clinton administration designated the grand staircase escalani National Monument in southern Utah, yeah, and all of those lands were, you know, these, these plots of land are, like, a few acres every few miles or so, and so that it’s really hard to just do something on, you know, three acres and make get a lot of value out of it, especially if it’s in an area where there is no oil and gas, or there is no development, you know, The zoning, whatever. So when they created that massive national monument, all of those lands that you could argue were trapped, were were traded for land adjacent to a town called Saint George, which is growing Southern Utah. It’s just a couple hours away from Vegas. And so all the new homes and all the development down there is more or less on trust lands. And so that was a big windfall then. And so any disposal of land, or any use of these lands, you know, those royalty checks or or proceeds from the sale come into the trust, and then is from the US government. What’s that? From the US government? No, it’s like, well, like, if you want to, you know, this Black Desert I play trust lands will, you know, they’ll, they’ll strike a deal with you, and you’ll pay a certain, you know, leasing fee, royalties, etc. So
Jeff Malec 30:29
that Black Desert golf course in outside St George, I played in an outing there. Oh, yeah, in October, yeah, flew into Vegas, drove over. So that is crazy, right? It’s like, you’re on the moon. There’s lava rock, everything. It doesn’t look like anything else in Utah, but you’re that area was, was traded for this, in this scheme, more or less, yeah, yeah, cool. And then I’ve also driven from Moab to Zion, and you go down that grand staircase, but that was weird. You’re like, what? I don’t get it. You see the signs, and you’re just driving, and then all of a sudden, you’re on a, like, six foot wide road with everything that’s falling off beside you. Like, okay, I get it. Yeah, yeah, that’s great. Um, but so And sorry, I’m being dense here. But like, the for you guys to succeed, you have to constantly be selling off pieces of it, or not ignoring the investment piece, which we’ll get to for a second. But in order to get any new money, you have to be selling off pieces of the land, or you could or leasing
Peter Madsen 31:29
- Yeah, selling it. We the mineral rights are always retained. So to the extent you wanted to do some fracking under some land, you already sold. And, you know, you could arguably do that still, there’s some, you know, there’s some land out that, like it could be repurposed for solar, you know, there, I think there were some coal mines at one point that are maybe winding down, and there’s some discussion on, you know, a solar farm going in in that area. So, just these constant they’re constantly innovating and optimizing and and generating strong, you know, it’s, it’s been a strong few years of cash flows, which you would think, you know, just be declining, but, yeah, that’s cool, but it’s been great. And at some point, you know, if you think about it, that’s really just one trust. Some of it happens to be physical, and then we have the financial trust. But if, even if, that did stop, you know, cash flowing, it’s, you know, if you value the two at once, it’s sort of, you know, it’s, it’s basically just like, one big trust at the inflation plus plus 5% kind of,
Jeff Malec 32:37
and then are you required to pay out that 100 million? Or you’re paying out basically what you can we
Peter Madsen 32:43
have a distribution policy that is really thoughtful, I think. And actually, we’ve, we’ve changed the state constitution twice now, wow, amended it to increase that distribution, which is one of the more important restrictions that was lifted that some of these other sovereign wealth funds haven’t worked on yet, or haven’t, you know, don’t think it’s, you know, worth the lift maybe, but a lot of them were only meant to be invested, or defined to be invested in bonds and distributing the coupon, And that’s kind of how the original language reads.
Jeff Malec 33:22
You’ve mentioned the trustee so that’s kind of a smaller trustee group versus most institutional would you agree? Versus most endowments? Or who know,
Peter Madsen 33:30
um, I yeah, I think that’s fair to say. I think there’s some research that says any group larger than seven starts to make worse decisions than smaller groups that
Jeff Malec 33:41
was going to be my follow up. Like, how, I mean, not to get yourself in trouble, but how are they to work with? Right? There’s horror stories about trustees punting right, CalPERS punting on long vol right before the spike happened, and all that stuff. So trustees kind of get a bad rap for not understanding the investment side as well as they need to, and making kind of retail investor type mistakes over the years. Yeah,
Peter Madsen 34:06
we’re super fortunate in that does that. So when we when cipho was established, so the the money is, I like to say the money is really old, but sit for is pretty new. And when cipho was established, it was, it was a, basically a task force or study group, because it started, it got to about $2 billion and the beneficiaries were like, Hey, how’s this being managed? And, you know, we talked to these other groups, and they have, you know, a team and this and that and consultants. And it was held passively or managed. It was held mostly at Vanguard. Absolutely fine way to go, if you don’t, you know, have a big budget for managing a portfolio. Probably should be, you know, just a straight do no harm approach. Things are going pretty well. A lot of money coming in from land management. Strong growth from a 7030 portfolio, get to 2 billion. And someone was like, you know, should we be diversifying and having an investment committee and, and, you know, staff, etc, and that task force really kind of took a as best they could, a best in class approach. So these things like, you know, the the trustees, the four trustees, need to be investment professionals or investment experts, and they’re in there’s a committee that chooses, there’s a committee that chooses, a committee that chooses the trustees, and they nominate two and the treasurer as the Chair picks one. So it’s pretty independent, and these guys are great because we’ve had it’s they’re all volunteers, and they’re either former CIOs or current, you know, CIOs or director level folks at family offices. And they we meet once a quarter. We have an annual summit, and we talk in between these quarterly meetings, just me and a couple of them, or one or two of them at a time. And it’s great. I mean, we’re, you know, they, they really focus on governance and not trying to micromanage. Don’t, not worried at all about meeting the managers. It’s
Jeff Malec 36:20
probably smaller than some of the family offices, the whole portfolio that that makes me depressed, that it’s hundreds of years of Utah’s pristine natural resources, and it’s 1/40 of Elon Musk’s net worth, right? I think we have our priorities screwed up as a country. What? What is sitfo stand for as I’m burying the lead 40 minutes into our talk here,
Peter Madsen 36:44
school and institutional trust funds, office, all
Jeff Malec 36:49
right. Do we like that name? I feel like we need a better name. I feel like cipho is the way to go. Sit for all right, we’ll keep it for now. And I meant to ask this before, like is this does. Utah doesn’t have a state lottery. I don’t believe right? No, no, illegal, which is probably for different reasons, but Right? Our other East Coast states are running lotteries to do the same thing. This seems a much better, better setup,
Peter Madsen 37:17
yeah. Well, Idaho has both a sovereign wealth fund and a lottery. So, so
Jeff Malec 37:22
they get, they get double I’ve never seen anyone all excited, like we built this whole new school because of the lottery, but maybe it just feeds the beast, and nobody knows about so let’s get into the investment structure. So what did you come in with your whole own philosophy? Or, as you said, it was on Vanguard. And how did that work of starting to diversify it and get it into, you know, you’re here because you believe in alternatives and do alternatives. So what’s the current portfolio look like, and what was the journey to get there?
Peter Madsen 37:57
You know, when I was fortunate to when I was a consultant at rVk, one of my clients that I worked really closely with was this sovereign wealth fund for the state of Oklahoma. And so I was really familiar with the structure, the, you know, kind of the constraints, if you will, around that original constitutional language. And we worked, I worked with Oklahoma to try and change to amend their constitution as well. So I had some pretty good experience and understanding with what it would take to run this office, and having had a lot of clients, you know, at rVk, just being in and out of a lot of different, you know, entities, seeing the investment committees and, you know, the team structure, team size, team, you know, the talent, all those kinds of things. I felt like I was in a and then having a little bit of a management consulting experience, felt like I was in a pretty good place to to, you know, build something from scratch, if you will, at here at CIP for with the idea in my mind that, you know, it will grow over time. It will be sophisticated. We’ll have a strong team, well compensated, all the resources we need. That was kind of a gamble, you know, anyone takes starting a new job, yeah, and, you know, it’s, it’s really paid off. But it started with, I remember the first meeting I had with the trustees. I came up with a I did a quick mean variance analysis where we were still under the the dividends and interest only framework, and it was 20, late, 2015 early, 2016 and there was a bit of a correction going on. And so I recommended BDCs, MLPs, EMD, high yield. Um, yeah, I think that might, I think that might have covered it. And this little, you know, basic optimization, and talking about how we can increase, uh, return, you know, get some diversification, and also increase the dividend and interest payments. And one of the great trustee. Who’s been with us the longest was like, We need a we need a document our investment beliefs, and we need an investment policy before we do anything else. And I was like, Oh man, the timing’s really good right now, I think. But anyway, so we, we, we took the right approach, because we had really strong Trustees with experience to set the governance up and make sure we, you know, had consultants early on and worked with them to build out, you know, some important parts of the portfolio. It was a pretty tough slog for the first few years trying to get resource, additional budget and funding for growing the team and being able to attract and retain the right talent. And so this first call it like the first half was pretty rough, and that was it kind of easier. Was COVID, and was kind of like a really, really tough spot right then, but things just really picked up from there. I
Jeff Malec 40:59
was gonna say 15 MLPs had just gotten hammered, right? And oil and everything got hammered in 14. So you were not just picking here’s these highest performing things you were doing, real work. Unfortunately,
Peter Madsen 41:13
it was six years later until MLPs actually, actually took off. So it was a rough road. We
Jeff Malec 41:22
have a good blog post we’ll put in the show notes called but the you, but the you, right? People are, like, down 80% on their principle and arguing, like, but I get 12% Yeah, yeah. It’s weird to think of this. This thing’s literally supposed to be there for hundreds of years, right? Yeah, forever, right? I need to say, like, oh, it’s really good timing. But like, in the scope of the thing, what is, what is good timing? Yeah, it doesn’t matter. So, so you started to get these pieces in, and what’s the portfolio look like now?
Peter Madsen 41:54
Yeah, well, actually, there’s an important point I should raise about a lot of these sovereign wealth funds where, you know, one of the things that I like about New Mexico, that they do better than us from a governance perspective, is there’s something called the corpus in the Constitution, which defines every contribution to the financial trust, or every contribution to the trust as the corpus, and we’re not allowed to breach it. So we can’t we. So it’s basically like having a cost basis. And theoretically everything shuts down if we go below that cost basis in terms of a drawdown. So that’s a really important starting point. And so it can
Jeff Malec 42:41
exist through return. It’s like a principal protected bond kind of thing, like, once
Peter Madsen 42:46
you get, yeah, it is supposed to be that way. But, you know, I made the argument pretty long and pretty forcefully, unsuccessfully over the last nine years that you know, modern portfolio theory suggests that you shouldn’t worry about that you should manage your risk appropriately. But if you have a long enough time horizon, you know, certain types of drawdowns should be tolerable and but that’s, you know, not, that’s not, that wasn’t the thinking in 1896 and so here we are. And so that’s an important part of you know, how we started building the portfolio. And I’ve always been a fan of sound of other strategies, so to speak, which by that I mean not just equities, and when you think about the potential returns from a fair few other asset classes. And you know the volatility, the relative volatility, you can get competitive returns from a forward looking basis, from a lot of lower vol strategies, maybe they have, you know, more of a left tail or maybe not. But so we do a lot of things in what we call income, real assets and defensive and then we also have growth, obviously, which is public and private equity. But we’re targeting about 40% private markets. And we have a, we don’t have a much of a we have a 15% liquid daily liquidity, you know, risk framework that we put on ourselves, that’s roughly three years of distributions and then, you know, but we have more than that in data liquid and a lot of semi liquid stuff. So you think about these tweener type of strategies, a lot of hedge fund structures within what you might call, you know, credit or private credit or structured credit, MD, ils, things like that, and and then in defensive we and real assets is what you’d expect. Everything kind of real assets oriented, but no duration. So, so growth is, you know, equity beta supposed to be mostly equity oriented returns, not just beta, per se and like private. Equity obviously has equity beta, but you know, you need to proxy it to show it income is or yet. So we call it grid, so real assets, REITs, you know, natural resources, MLPs, but we try to avoid duration, so not as much real estate as what you would call real assets. And then in income, we have open end credit, open ended private credit funds, hedge funds, in structured credit that do semi liquid, let’s call it and ILS and distressed emerging market debt, and then defensive. We have 30 year strips and macro and trend
Jeff Malec 45:45
right. No long ball in the defensive we we
Peter Madsen 45:51
slugged it out for a long time, for about six years, with what we call it systematic convexity that part of the portfolio, and we spend a lot of time trying to construct it, and think about working with the consultants to pick managers, and we ultimately went with a fund of funds. And that approach was having a having a trend in macro is, call it the core, and then the tail hedging, and then carry to kind of pay for the tail hedging. But the way it worked out was those two things kind of canceled each other out, and we didn’t have enough trend in macro, and we didn’t have enough fall, yeah, we rebuilt that portfolio where our manager count is is, you know, not super high. I can’t remember where we are now, but let’s, let’s say, if we’re at nine to 12, is like a range of of tolerable head count for managers in that space. But we’re trying to get as high of all we can. So like one of our managers has 40 vol we try and talk, if they don’t have a high vol share class, we try and talk them into creating one and or like these options based strategies where the vault or the VAR can be really high, but you just put a small dollar amount in. So that’s that’s kind of how the trend in macro portfolio looks like. And that the theory is that those should do well over times on a standalone basis, whereas the carry in the tail hedge combos kind of gets you nowhere, and the tail might, the tail hedge might not pay off, actually.
Jeff Malec 47:35
So grid is growth, real estate, income, defensive, real assets, real assets. Yeah, what did I say? Real Estate? No, not real estate. Real estate. And so talk to me for a sec the real assets and duration piece that was interesting. How do you how do you think of that just because you have to hold real estate for a period of time, is what you’re saying? Or so
Peter Madsen 47:58
so for us, factors are pretty important. And so we, you know, we’re, we’re looking at each of these. If you think, you know, at a, at a really high level, the growth portfolio has the equity factor, the real assets portfolio has the inflation or, you know, commodity, natural resource type factor. That’s the idea, is that it helps with inflation. But if you’re doing like real estate lending, and, you know, like we saw in 2022 and anything with duration got hammered, and things that were equity in nature, the equity share class linked to, you know, commodities or resources, in some way, typically did well. And that’s, that’s the thesis we have. And fortunately, worked out in 2022 quite nicely, because there hasn’t been a real period of inflation to test that theory. And then income is supposed to be competing with equity returns. While, you know, we don’t expect it to necessarily beat equity returns. We expect it to be more competitive. And we expect it to be kind of, call it higher in the capital stack, even if it’s, you know, not necessarily lending to a corporation. You can just think of these as contractual, you know, contractually obligated cash flows. So a lot of the return we that comes from there, not all of it, but a lot of it is from some kind of coupon. And that’s, that’s and then you had defensive is meant to be the diversifier and contribute negatively on a on a risk basis.
Jeff Malec 49:33
And then, how are you putting these together? They have a set percentage, or it’s risk weighted. What is the overall structure look
Peter Madsen 49:41
like? We went through a pretty fun process that took about a year. We wanted to be really thoughtful recently. So every year we do an asset allocation, and we’ve we’ve evolved it over the years and working with consultants and doing it ourselves to try and look at not just the mean variance optimization, but make sure we’re doing stress testing. Scenario analysis, looking at mean downside, and, you know, mean Cvar and all these things, and putting them all together. And, you know, this is, you know, putting them all in a table. And then we worked with this consultant called I period on hope I’m saying that correctly, based in Chicago, and they have a multi variant optimization tool that you can include like kind of any factor. So we included the the probability of breaching our corpus, the probability of meeting our CPI, plus five, the probability of a forced rebalancing due to illiquidity. And I think that was it. We might have had just regular drawdown in there, just to be different from the corpus breach. And we put those on all on one frontier, if you will. And worked with that consultant to have some cool kind of not very deterministic analyzes that ultimately got us to the current asset allocation we have. And then we have pretty wide ranges around we have, like a healthy range around growth. And then within growth you have public and private equity and healthy ranges around that. But if you think about the very high level, we sort of have an equity beta expectation that we should be delivering. And if we can do like, for example, we we decreased our defensive allocation because we were able to improve the contribution to volatility from that part of the portfolio, and then we put that into other other parts of the portfolio, increased our return with a little bit and improved our risk and then took advantage of the lack of reported volatility, because that corpus breaches, if that’s an call it arcane accounting cork, then the accounting cork of private market funds is something we can use to Our
Jeff Malec 51:59
advantage. Yeah. What? What are your thoughts on that that’s just everybody’s playing that game. So why not? Like, it seems, it seems weird, for lack of a better term, right? Of like, everyone knows they’re not really true marks. Everyone using them, knows they’re not really true marks. So you just kind of bake that into the into the pie, yeah,
Peter Madsen 52:20
you know, there could be a different way, I guess, you know, the the open in real estate funds, you know, go out and get appraisals every so often, on a on a decent part of the portfolio, and kind of cycle through that quarterly. That’s maybe something that could be, you know, standardized in in other private markets and, and, in fact, for example, these 40 Act funds that invest in private deals have daily marks, yeah, yeah. So there’s a way, not sure how meaningful it is, but I don’t think it really bothers most of us who spend a lot of time with it, because, you know, it’s such a huge the private sector, the private markets are such a huge part of the economy to not invest there, would, I think, be imprudent, as long as you can tolerate the illiquidity and you think you have the resources to work with the right GPS in in private markets. I mean, there’s definitely risk there, and make sure, you know, tread carefully, etc. But to, like, most of the companies are actually private, yeah, well, I’m not going to invest in most of the economy because I don’t like how they, you know, get to mark their portfolios, not quite right. And we spend, you know, most of us spend a decent amount of time looking, you know, you go once a year, you go on site somewhere with the manager and talk about the portfolio in detail. And hopefully, you know, they’re, they’re quite transparent about the successes and failures of how things are going in these mostly private equity companies, and then not a lot changes quarter to quarter. So, you know, you kind of forced to be patient, forced to, forced to stick it out and and then in the other markets, you know, real assets is the same way. But in private, lending does a nice cattle you know, they either amortize or, you know, the coupons being paid back. And, you know, liquidity is decent. In terms of the life of the funds are shorter, and there’s oftentimes money coming out, you know, quicker. Let’s it’s a little more liquid. That’s also why we have probably a little more real assets and and income, especially on the private market side, than a lot of others, because when you do the analysis, you see that they’re lower risk competitive return and more liquid.
Jeff Malec 54:35
And so I was that you pre ran my Do you think you have less private equity than other institutional investors. We
Peter Madsen 54:42
we just upped our target to 20% and our total private markets target is 40% and I think a fair few folks have 40% in private equity, yeah.
Jeff Malec 54:55
And then have you seen the right I think we at the conference we met at, there was. Lot of talk of distributions not getting paid, right? There’s kind of a hold on money coming out of private equity. You’re seeing that personally.
Peter Madsen 55:07
Yeah, we’re definitely experiencing that. We’re in a really great spot right now in terms of being below our target. So a lot of folks are trying to, you know, manage their they were overweight private equity, their relationships that they want to keep, they’re trying to make sure, and, you know, keep those relationships, and they’re having trouble rebalancing, yeah, so they’re not able to commit or re up as much. And so there’s less competition for these capacity constrained GPS. So we’ve managed to, you know, get access to some strong names over the last few years because of that, and then we’ll probably organize a secondary sale, our first one ever here pretty soon. And, you know, the the sophisticated groups, I don’t know if they say sophisticated, but a lot of folks who’ve been in private markets for a long time kind of regularly harvest their private market portfolio, do a secondary sale every, I don’t know, two or three years, maybe every five years. And just as you know, there’s, there becomes a lot of that tail end capital, which,
Jeff Malec 56:16
yeah, so what? What if that look like? There’s investors out there that want access to such and such fund that they can’t get access to, so you’re selling them a piece of your portfolio, essentially, yeah,
Peter Madsen 56:25
sometimes that’s the case. A lot of times it’s these secondary funds themselves, or these 40 Act funds where, you know, you can get a nice IRR, put some leverage on it. You know, it’s a really diversified portfolio. Put some leverage on it, and, you know, get a 15% IRR, maybe not, a very high multiple. And, and the the money comes out pretty quickly. So there’s, you know, that works for the 40 Act funds, and they’re growing quite rapidly. And then secondary funds are, you know, everyone has a, you know, typically has a small allocation of secondary, so that’s a pretty big market. And, and growing as well. So there’s, there’s some liquidity there. It just doesn’t operate in the you just, you just need to be really forward thinking about that, and be really careful about how much illiquidity you take on.
Jeff Malec 57:10
But us private equity haters, that’s probably not quite a fair term, but just right in being in my career, managed futures the whole time, that’s marked to market minute by minute every day, I was like, ah, went into the wrong business, but, but that doesn’t worry you at all, that they’re not paying out, like it’s just part of the cycle, or is there growing angst about amongst institutional that this could be a problem? Well,
Peter Madsen 57:33
we’re only, we’re only, you know, kind of five to seven years into it. So we’re, you know, we’re we our plan was that, you know, at about this time, we’d start to see some distributions, and we are seeing some distributions, but we’ve only had, you know, you know, when you go from zero to we’re now at about 10 or so percent private equity, you know, a lot of that’s new or newly deployed. And so we don’t have any expectations yet. So we’re not in a very much of a crunch situation. And we, we actually got, you know, this December, maybe a 50 million in distributions from our managers, on a, you know, on a call it a 30% maybe allocation to the private markets. So that was just one month.
Jeff Malec 58:26
So moving on, kind of what you looking at in the markets, what, what does keep you up at night? That’s not a huge worry. What is a huge worry for you? Or do you think you’ve got it set up nicely where you don’t have to worry very much?
Peter Madsen 58:37
Well, I’ve, I have two, yeah. Well, the Firstly, I’d say we’re, we’re so diversified that my biggest worry is that we don’t deliver strong enough returns
Jeff Malec 58:50
that you’re just the T bill rate essentially, yeah, we’re,
Peter Madsen 58:53
we’re, if we, if, like everyone looks at the s, p or the NASDAQ, and then they look at our performance. I mean, that’s not unique to sitfo. It’s every CIO out there is, like, dealing with even their sophisticated trustees who are like, Oh yeah, s, p was up 24% this year. How much were you guys up? You’re like, 15 or whatever. And they’re like, oh. And then you have to explain to them, you know, like the drivers, and they, you know, they, they’re like, oh, yeah, I know, but you just kind of get that sense of disappointment. And then when you talk to some lay folks or present to the legislature, they’re like, Why aren’t you in all equities? Why aren’t you in the video? Yeah. And so my biggest worry is upside participation not being robust enough. I think we have good downside, like 2022 we were, according to some peer groups we looked at, we were, you know, top performer, just because we were flat and but this year, like I said, we’re, you know, we don’t have a ton of public equities. We were overweight. We had some good strategies. In the book Good Manager. So we, I think we’re calendar year to date, you know, maybe, maybe 15% so, you know, feeling really good about that, but I do worry that we don’t have enough upside participation and, and that’s really what stresses me out, is that and outperforming my benchmark, which does have a lot of equity beta in
Jeff Malec 1:00:18
it, what, what is the benchmark?
Peter Madsen 1:00:21
It’s a Acqui basically for growth.
Jeff Malec 1:00:25
Oh, each bucket has s, p,
Peter Madsen 1:00:27
real assets and high yield one to three and 30 year strips and hfri macro and CTA indices.
Jeff Malec 1:00:38
And then, do you worry that? Or does your waiting fix that? Of like that, those defensive, right? How do you let the carry? In theory, manage futures. 30 year strip should carry positive over time, but over some three, one to three year period, they could carry negative easily, right? So, how do you wait? Just a waiting concept to make sure that negative carry doesn’t over. Take the the growth and the income strategies, right? Because when in the past two years, when incomes also been down, then you have an unexpected negative carry in income. Yeah, it
Peter Madsen 1:01:15
30 year strips. Has not been pleasant, yeah, last few years, but especially the nature of the drawdown in 2022 but when you look, you know over time, and you look at the stress periods, ultimately treasuries, there’s only a few quarters in 2022 is one of those time periods where there’s a negative return from duration, from treasuries when equity markets are down. So there ultimately tends to be a flight to quality. I’m not here to guarantee any you know that that will continue. We took our last three weeks would be another example. Yeah. We took, yeah, that’s a good that’s a good point. We, we took. We started out with seven in strips and five in trend and macro type strategies, and we then flipped that to be five in strips and seven in trend and macro, and now we’re seven in trend in macro and 3% in strips with a tactical duration extension, kind of leverage model, with a third party group.
Jeff Malec 1:02:26
Nice, and do you ever, do you get that feedback from trustees or whomever your neighbor, like, Dude, what are you doing? Why would you be long bonds right now? Like, all the time, right? Like, be like, because this is abnormal.
Peter Madsen 1:02:42
The ILS one was really painful for a period too. And that was, that’s something that, you know, our trustees were like, We really need to revisit this allocation here. And was like, fair enough. And we did. And fortunately, they were, they were like, We get it. We get why you want to do it. We get where things are right now. And so fortunately, we topped up the last couple of years, and it’s been, you know, like a high teens, you know, net return the last couple of years from, from that,
Jeff Malec 1:03:13
anything else keeps you up at night, and that’s it. Our, our,
Peter Madsen 1:03:16
our overweight and small and micro right now, really, really losing sleep over that one. They closed it out as soon as the election results came in. But
Jeff Malec 1:03:27
the Russell proxy, essentially, yeah, we have, we’ve got, fortunately, we’ve
Peter Madsen 1:03:31
got some good active managers in that space. So they, you know, their downside protection is really nice, and then, you know, they tend to participate in the upside and but yeah, it’s been, it’s been a rough six weeks.
Jeff Malec 1:03:43
And how do you view things like that when it’s become right? The rust growth, or the Russell 2000s usually what I look like and long bonds have basically become equal, right? Every time rates go up, those get hammered. So when, when correlations shift like that, are you guys on deck and looking at that or longer term. Let it
Peter Madsen 1:04:03
we try and make sure we’re taking a longer term view. And you know, we do have cash flows that come in and cash flows that go out. So instead of a formal like annual or quarterly rebalancing each week, we were looking at cash flows and forecasting out cash flows for the next kind of six weeks. And it’s like, okay, well, in each quarter we have about a one, well, yeah, one and a quarter percent payout. And so we like, look like, oh, well, this is a good, you know, this is attractive. Or, you know, we tend to look at value. We try and have an understanding of the macro economic view through some third party providers, and then we have a valuation and momentum score for each of the sub asset classes. We roll that up into a simple kind of quantitative model, and it scores in ranks. And we’re, we look at it and say, Yeah, I just, I just don’t think it should come all from this. You know. Know, whatever it is. And, you know, do we really want to sell, you know, small cap right now, we just, you know, added, and it went really well, but then we had a drawdown. And, you know, should we pull from elsewhere? Should we cut risk? We have those conversations all the time, but fortunately, we have money coming in, and we just deploy, you know, to kind of offset those things and kind of move in in tranches, very rare that we make a big, you know, rebalance, or big tactical move, and most of the stuff is really just on the margin.
Jeff Malec 1:05:32
Have you seen over time? Do you measure at all like to get a rebalancing premium?
Peter Madsen 1:05:38
I don’t think that. I think there is a rebalancing premium, but it it’s not much. It’s more of a it’s better to rebalance than than to let your risk drift and be unaware of you know, where your equity beta is, for example, as it’s growing over time. But so we’re more we, we think of it more along those lines, but it can be hard to rebalance if you have, you know, head distressed emerging market debt managers, for example, with, you know, either their capacity constrained, and if you redeem, you can’t get back in, or you have to get in the queue to get back in, and things like that. So, right? Or it’s a prudent thing to do last management tool than anything else, I think, yeah, right.
Jeff Malec 1:06:21
If you’re selling your s, p, s, to buy more Russell all year, every month or every quarter, that was a losing proposition. Yeah, here we’re gonna finish up with our new segment Myth Busters. So if you can what’s a market myth, investor myth out there that you want to get to work busting
Peter Madsen 1:06:46
one of the I kind of alluded to this in the philosophy and asset allocation work we’ve done, but I don’t think you need to be max equities in order to get a strong return. I think you can compete with equity like returns, having a diversified portfolio, it’s obviously dependent somewhat on the cycles we’re in. But there is a there’s this guy, Edward McQueary, who recently has, I think, I don’t know if there’s a book or just a research paper, but I heard him on a podcast, and was really excited, because I’ve always thought, you know, like, look, there’s a few lost decades out there, just in the last, you know, not about 100 years. And, you know, do you really want to have it go 10 years as a trust like us with the expectation of making these payouts and having the corpus and, you know, rocking up with 0% or worse return with 60% exposure or something you’re saying, yeah, so that, so, you know, so, yeah, so why? Why would you want a 0% decade return, right? And a lot of people are like, well, it’s about the long you know, it’s about the long run. And you should tolerate that volatility, tolerate that uncertainty, for the for the payoff, but I think you can compound at a competitive rate without taking that kind of risk. And in fact, the Edward Macquarie guys research shows that, I’m not going to get this exactly right, but bonds sometimes outperform equities over the long run, depending on when you start and stop the clock. And that some of that research that was done that was called stocks for the long run, I think was the name of the book. A while back that research, the bond portion of that research, turns out, was quite selective. So the early segment of that research looked the earliest history of that research. The bonds they used were, I think it was just one issue from a boarding school in New England. So there’s like, 10 or 20 years of this one bond competing with equities. And then, you know, as they stapled on, like, you know, what other bonds or whatever, to look at the full history, turns out bonds, about 50% of the time outperformed equities over really long horizons, and I don’t remember the very specific details on we’re talking about, like, rolling 10 and 20 year periods of bonds outperforming equities.
Jeff Malec 1:09:11
Wasn’t Warren Buffett’s bet against the names escaping me now, right of hedge funds versus equities, yeah. And actually, they both put the money for the bet into like, some more advanced bond program that outperformed both,
Peter Madsen 1:09:26
oh, I didn’t know about that, yeah.
Jeff Malec 1:09:30
So yeah, I hear you. So the myth is you gotta have at least 60% in equities. You’re saying, I’m not sure, to get it. People say, Yeah, to outperform
Peter Madsen 1:09:38
or to get high performance that you know, for your pension or your endowment or your personal retirement account, you need to have a large and significant portion in equity. And I think,
Jeff Malec 1:09:54
or if you’re a young person, that’s a big one, right? Like, oh, you can afford to have 90% in equities. You’re young,
Peter Madsen 1:09:59
yeah? But. And but as you know, if you do the research and you look at, you know, trend and macro, if you have any skill manager selection, but even if you don’t, well, I guess the survivorship bias, if they haven’t solved for that in the HFR, I don’t remember, but you put that time series up against 7030 portfolio, which is, you know, predominantly equity risk, and it outperforms over over most long term horizons. And recently it had, you know, leading up to 2022, was really terrible for that strategy, but the key land performances and or rolling long term performance, you know, lots of things compete with or cannot perform equity. My
Jeff Malec 1:10:37
theory is there’s a macro managed futures vary, and they just see everyone get disgusted with it and throw it, throw it away, and then they sprinkle some performance dust on it, and it comes right back. But maybe so right, because it’s without fail, like, oh eight, crushed it. Oh nine. Redeem, redeem, redeem, yep. Um, awesome. Well, thanks so much, Peter. It’s been fun. Um, we’ll definitely give you a call next time I’m in Utah. Cool. We’ll grab a beer or coffee or some get some turns. Yeah, that’d be great. All right, thanks so much.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.