E217: How to Manage $15B: Insights from Sacramento County's Pension Fund

Episode Summary

Executive Summary: Brian Miller, Senior Investment Officer at Sacramento County Employees Retirement System ($15B AUM), discusses his 16-year tenure at value investor Tuckman Grossman Capital Management and his subsequent eight years managing the $6B public equity and absolute return portfolio. He emphasizes the importance of consistency, long-term investing, and understanding LP dynamics. The conversation covers value investing, active management, portfolio construction, and the shift from manager to allocator.

Main Topics: Value Investing and Consistency (Priority: 5/5): Miller learned from Tuckman Grossman the importance of a consistent investment approach over long periods, focusing on long-term compounding and not being swayed by market shifts. LP Capture and Client Base Impact (Priority: 4/5): The quality of an LP base (e.g., Yale, Stanford) can positively or negatively affect a manager's ability to weather market cycles, providing liquidity during crises or capital during downturns. Active vs. Passive Management (Priority: 5/5): Miller believes active management can still add value, especially with a long-term perspective, and that tracking error is necessary for generating alpha. He advocates for a 50% active allocation in US equity. Small Cap Value Dynamics (Priority: 4/5): The small cap value universe has changed due to fewer public companies and the rise of private markets, but it still presents alpha opportunities for skilled managers. Manager Selection and Portfolio Construction (Priority: 4/5): Miller describes a targeted manager selection process, emphasizing the importance of visiting managers in person, writing down investment theses, and avoiding false positives. Absolute Return Strategies (Priority: 3/5): Sacramento County uses absolute return strategies (7% allocation) as diversifiers, focusing on low-correlation, low-beta strategies like event-driven, macro, and market-neutral to deliver positive returns with low volatility. Technology in Portfolio Management (Priority: 3/5): The use of MSCI's CAISA tool helps the lean team understand total portfolio exposure across public and private markets, aiding in diversification and allocation decisions.

Key Arguments: Consistency in investment approach is crucial for long-term success, even in the face of market headwinds. Active management requires a long-term timeframe to weather performance variations and generate alpha. The quality of an LP base can significantly impact a manager's ability to be opportunistic during market downturns. Small cap value is fundamentally different today due to fewer public companies and adverse selection from private markets, but still offers alpha for skilled managers. Tracking error is a biased term; managers need to take active risk to deliver excess returns. Manager selection should focus on understanding decision-making processes through in-person visits and written theses. Absolute return strategies should be evaluated on risk-adjusted returns and their role as diversifiers, not just absolute returns. Technology tools like CAISA are essential for lean teams to gain total portfolio visibility. Being a continual learner and forward-looking helps investors identify large trends early. Conviction in investment theses requires deep work and the ability to withstand social criticism.

Data Points: AUM of Sacramento County: $15 billion - Total assets managed by the pension system. Public Equity and Absolute Return Book: $6 billion - Size of the portfolio Miller manages. Tuckman Grossman AUM at peak: $12 billion - Assets under management at the firm where Miller worked. Years at Tuckman Grossman: 16 years - Duration of Miller's tenure at the firm. Years at Sacramento County: 8 years - Miller's tenure at the pension system. Active vs. Passive in US Equity: 50% active, 50% passive - Allocation within Sacramento County's US equity portfolio. Absolute Return Allocation: 7% - Target allocation for absolute return strategies in the portfolio. Expected Absolute Return (trailing 5 years): 5-6% - Return expectation with low volatility for absolute return strategies. Investment Team Size at Sacramento County: 4 people - Size of the investment team for many years.

Pivotal Quotes: "I think they followed a really consistent approach over a long number of years that led them to kind of fill that niche in the face of a lot of headwinds in the market... And so that really taught me a lot of lessons about, you know, finding what you do that you can be successful at and then staying consistent with it." — Brian Miller: Reflecting on the key lesson from Tuckman Grossman's success. "You really have to shift your focus from individual company analysis to portfolio. And how you're evaluating managers." — Brian Miller: Describing the biggest shift when moving from manager to allocator. "Writing down your investment thesis: have things changed? If they have, then you might want to sell, even if it's doing really well. And then if they haven't, you might want to hold, even if there's noise and it's going poorly." — Brian Miller: Emphasizing the importance of documenting investment theses for discipline.

Implications: For allocators, the conversation underscores the value of a long-term, consistent approach to active management, the importance of understanding LP dynamics, and the need for targeted manager selection. The shift in small cap value and the role of absolute return as a diversifier are key considerations for portfolio construction. Technology can help lean teams gain total portfolio visibility.