I've been thinking about the investment office playbook and what managers don't see when they meet with allocators.

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How will we generate returns to meet important spending needs in an increasingly unforgiving world?
One answer is “Internal Alpha’ – making fewer mistakes alongside making great investments.
Generating internal alpha is rarely taught in the investment field, which is why we created Capital Allocators University.

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I'm excited to share our fourth annual letter.

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Sarah Samuels, the head of manager research at powerhouse consultant NEPC and a past guest on the show, is also the Board Chair of the CFA Society in Boston. She’s created a podcast series for the Society called “Pull Up a Chair,” and I was honored to be her inaugural guest.

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Financial market participants tend to stretch at the end of a cycle in ways that look silly in retrospect. In 2000, public companies with millions of “clicks” (and minimal revenue) held market caps in the billions of dollars. In 2008, structured products that sliced and diced subprime mortgages professed to spin junk credit straw into AAA gold. After their fall from grace, dot.coms became dot.bombs, and the only sighting of precious metal attached to defaulted mortgages was on the “silver” screen.

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Investors following David Swensen too often miss the mark in their interpretation of his theory. Like children playing the game telephone, they listen to other voices and echo beliefs with shakier foundations than Yale’s.

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Ted sat down with Barry Ritholtz on the Masters in Business podcast in August 2023.

About twenty years ago, I sat down with a leading long-short hedge fund in Korea. The portfolio manager spent forty minutes offering an articulate bull case for Samsung, in which he had a 20% long position. When he finished his impassioned presentation, I responded with a single question: “That sounds great, but why are you net short Samsung?”

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Back in 1994, I was overseeing Yale’s boring, internally managed bond portfolio. We benchmarked the portfolio to the Lehman Brothers Government Bond Index and occasionally sought to add value buying securities with the same characteristics as a bond at a discount. [1] One example was the Morgan Stanley Government Income Trust (“GVT”) a closed-end fund comprised of securities backed by the full faith and credit of the U.S. Government that traded around a 10% discount to net asset value (“NAV”).

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I ask every guest on the podcast “What is your biggest investment pet peeve?” Mine is investors who express absolutes in a world of probabilities. The late Peter Bernstein defined risk as “you don’t know what will happen,” adding “even when you think you do.” There’s a fine line that investors walk between conviction and humility, but those who believe they know the future without a shadow of a doubt fall a notch in my estimation.

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What return was available on a 5-Year U.S. Treasury two years ago? Observing market conditions, you might have said 0.8%. That was the paltry current yield on a 5-Year U.S. Treasury at the time.

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David Swensen lived and breathed long-term investing. From his license plate ENDOW to his aphorism “Don’t be so short-term,” David walked into the office every day with a mindset that embodied Yale’s perpetual time horizon. The issues I raised in Short-Term Gain, Long-Term Pain three weeks ago would have resonated with him.

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Morgan Housel became one of the most popular investment writers by telling stories about the psychology of money and markets – the same today as it’s ever been. Sometimes that knowledge can elicit positive change. Sophisticated institutions can build processes to increase their awareness of behaviors that might comprise optimal decisions. More often, we repeat the same patterns of behavior, which is why Morgan has so many stories to share.

Ted recently appeared on the Panic with Friends Podcast with Howard Lindzon, where they discussed the recent FTX fraud; he was around in the days of Bernie Madoff and has a really different take on how managers should think about these events. Howard got Ted's take on how the SEC has been rambling on recently about the ability for LPs to sue Venture Capitalists and what it all means for the industry.

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“Our community already knows most of what matters within the field. It’s the interdisciplinary education outside of investing that allows us to identify new sources of return.” The hardest day to invest is always today. That investment truth seems particularly apropos today – a time managers competition has intensified and allocators are more sophisticated than ever before. In order to meet client needs, institutions will need to identify the next frontier, which I believe will come from inside organizations rather than from the external market environment. We’re here to help at Capital Allocators University.