Jeff Assaf - Protecting Clients and Assets at ICG (EP.398)

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2:31Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at CapitalAllocators .com. All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

3:11Clients of capital allocators or podcast guests may maintain positions and securities discussed on this podcast. My guest on today's show is Jeff Asoff, the founder and chief investment officer of ICG Advisors, where he oversees $7 billion in assets for a highly curated group of 80 client families. While Jeff keeps his client names confidential, ICG manages money for a roster of successful athletes, entertainers, and business professionals with a combination of tailored investment solutions and white glove service. Many of those clients he's served for decades. Our conversation covers Jeff's path to investment allocation through Oppenheimer, Bear Stearns, and eventually ICG.

3:56We discuss defining client objectives, selecting managers, building low volatility portfolios, assessing re -ups in private equity, and serving as a good partner to managers and clients. Before we get going, as I'm sharing this week's clip, you might notice my voice sounds a little different. This time, it's not our good friend fake Ted, the AI version of my voice. Instead, it turns out I've been knocked out all week by our little enemy called COVID. Four years ago, COVID knocked out our economy and familiar lives. Fortunately, this time, it just took me down for the count. I had it before, I've been vaccinated twice, and still, I got whacked worse this time around.

4:42When you're weary and tired, there isn't a whole lot you can do that's productive. And I definitely don't recommend giving a try to what I'm about to say. But if you do find yourself afflicted with COVID, yeah, you probably know where I'm going with this. I'll say it anyway. There's no better time to close your eyes and do nothing but listen to the soothing sounds of the Capital Allocators podcast. By the time you hear this, I imagine my voice will be back to full throttle, and this will all be but a happy memory, at least the listening to podcasts part of it. Thanks so much for spreading the word about Capital Allocators to your friends dealing with COVID.

5:21Please enjoy my conversation with Jeff Asaf. Jeff, great to see you. Thanks, Ted. It's great to see you. Why don't you take me back to how you first got in the business? When I finished business school, which was 84, my economics professor kind of became my unofficial advisor. And I didn't know what I wanted to do, which is actually why I went to business school. So now I'm finishing business school. I still don't know what I want to do. And I asked my econ professor, what do you think I should do? And he said, you should go to New York and work for one of the money center banks. They have these MBA training programs.

5:59and do one of them. They're all comparable. They're all good because it'll give you some training and you might get some ideas. So I applied to, I don't remember how many, and had plenty of offers. And I purposely chose the program. It wasn't the highest paying one, although they were all within a few grand of each other. It was the shortest program. It was a four -month program. Okay, that's good enough. So I took it. I come to New York, August of 84. It's hot, it's humid, it's gross. The city was not great back then. It wasn't my cup of tea, but that's fine. Like I had a buddy who did the same thing.

6:42He was at UCLA. I went to SC. He was a fraternity brother. He came to New York. He went to a different money center bank. But his job when he finished training was in LA. My job when I finished training was in New York. I just like, I cannot now start a job here. And I don't like New York. I don't like big money center banks and being a credit analyst. And I don't like the bureaucracy. This is not good. I'm going to have to just quit. I told my dad. And my dad's like, I did not pay for you to go to business school to quit after four months. And my dad had his same job at his company for his entire career.

7:21He started as an engineer, ended as president, did the whole ascent. So he was of that culture. Could probably use more of that today. But anyhow, so when he was away on a trip in London, I quit. I'm talking to one of my other fraternity brothers who was a broker at what was Shearson at the time. He had been a broker for a year or two. And he was making eight times. And he said, you should go into the investment business. I'm good at it and you'd be better than me. So if you want to go in, I'll introduce a bunch of places. So I go back to LA and he starts introducing me to different firms, Kidder, Goldman, Oppenheimer, whatever.

8:05I ended up getting offers and I took Oppenheimer. And I'm basically an assistant to a senior broker who, when I did my first interview, that senior broker was on his honeymoon. And so the manager of the office, who's the one who interviewed me, said, there's this guy who I think might be interested in hiring you, but he's on his honeymoon. Can you come back next week and meet him? And that's what happened. And I met him and he hired me. This was back when the business was transactional. So during trading hours, I would be doing whatever transactions needed to be done that he was telling me to do.

8:41In the afternoon, my job was cold call, try to build a business. One thing leads to another. I wasn't cut out for that. My boss decided the first time Joe Biden ran for president was back then, 84, 85, 86. This guy decided to take one year off to go work on Biden's campaign, a sabbatical. So he came to me and he said, I'm going to do this. You've got this under control. I want you to run my book. And he changed the way I was compensated from a salary to a piece of the action. and that caused my comp to almost triple. What happened was I would do the transactional stuff in the mornings and in the afternoons, I started calling money managers.

9:27I wanted to talk to buy side guys about why they owned whatever the stock was because I had this view about the way the business was set up and the incentives for sell side research to recommend a transaction because back then, that's how they made their money. That led to me building a database of money managers who I thought were smart. And this went on for a couple of years. And then Oppenheimer figured out I was doing it and said, why don't we use that? Why don't we start a business with that? Which was my intention, but give them credit. The manager at the time had this idea and I said, yeah, that'd be great.

10:05And so we started this business called the Oppenheimer Consulting Group. and that business was advising the brokers at the firm who had clients that had wealth. So we did that. We started it. I think we had eight or 10 people, something like that. And it was good, but we were starting to outgrow Oppenheimer and it was becoming political and the New York people were starting to meddle too much. So fast forward 10 years at Oppenheimer and it was time to leave. And the guy who had hired me at Oppenheimer had three or four years earlier moved to Bear. And he knew me and I knew some of the Bear guys and they had had conversations about you should come to Bear Stearns and do this thing.

10:49And anyhow, it accelerated. And now I was frustrated at Oppenheimer and felt I really needed to do something different. The bottom line is, started talking to them, decided it's a good fit, decided we're going to move to Bear Stearns. We're going to call it the Bear Stearns Investment Consulting Group. That's what ICG is, by the way. And we start Bear Stearns Investment Consulting Group. And it was the same sort of model where we did manager research. And there was one guy who literally on the very first day that I was there comes downstairs, introduces himself to me, and says, I've got a client for you.

11:27First day. Now, he's never met me before. He has heard of me. it then turns out that his assistant who now works for us today went to college with me in any case i meet this guy i love this guy he was just the greatest and he completely believed in us and he started bringing us lots of business and the business grew i would say five years into being a bear we were there for 13 years some of our clients started saying you really should leave and go start your own shop you know that old thing about if it ain't broke don't fix it. It's like the bear guys were great. Everything they said they were going to do, they did.

12:03Every promise they made, they kept. They didn't meddle. They didn't bother me. They provided legal. They provided compliance. They let me go around to the different branches and do roadshows with their broker so that the brokers would know that the service was available so that we could grow the business. They were great. The deal we had made was very fair. And people were saying, well, you should go. You'll make more money somewhere else. I said, Of course I would, because obviously Bear's making money from us being here, but I've got to deal with them. And they've never broken a word of it. They've always kept their word.

12:37I'm not going to just say to a partner, you know what? Thanks for the memories, but I'm going to leave you now after you've helped me get to here. So that's just not the right thing to do. Plus, there's no reason to do it. If it ain't broke, don't fix it. It eventually did break. Because in 2008, Bear went away effectively. J .P. Morgan bought us. And then there was probably a four or five month period of seeing if we could stay at JP Morgan. JP Morgan wanted us to stay. They were great too. But we figured out that because they have this massive funds placement business, that business had conflicts with ICG.

13:16And when we figured it out, I went to the compliance people and I called our lawyers and said, isn't this a conflict? This is a problem. They go, yeah, it is. So I called the people I was dealing with at JP Morgan and said, look, guys, I keep trying to figure out if there's a way for us to stay here, but there's actually not. And I've checked with legal and compliance and here are the problems. We couldn't stay and do what we were doing if they wanted to keep the funds placement business intact. We got to go. They were awesome. They said, take your time. There's no rush. Find your real estate, get your new firm set, do everything you need to do.

13:45All good. Then of course, the fourth quarter turns into the fourth quarter. You get to the end of the year and it's a train wreck. And we're spending more time dealing with portfolios and clients and stuff, and not as much time as we needed to to set up ICG advisors. So the end of January were JP Morgan, Bear Stearns, and February 1 were ICG advisors. That was 15 years ago. So when you started to go through this process all the way back to Oppenheimer and through Bear of looking for external managers, what did you learn along the way about what worked other than the premise, hey, if they're smart, that's probably a good thing?

14:23Being smart is a good thing, but the problem with that as a screening criteria is that most people in the investment business are smart. They are. They may not be geniuses, and some are smarter than others, but there's not a lot of people that you would look at and say, that guy's an idiot. They're smart and they're ambitious, but that doesn't mean they can make money or raise money or control risk or even know how to control risk. It doesn't mean lots of things. It means they think they can and they probably have good PowerPoint skills and they can make a good pitch deck and they probably pretty good at speaking and gift of gab and they can convince people.

15:11But there's a reason they say that most money managers don't beat the market because most money managers don't beat the market, even though they're smart. And that's before you've got the last decade of zero interest rates that made it even harder to beat the market because in a zero rate environment, there's more competition from the market itself and security selection is less important because the rising tide lifts all boats. So it's not about are they smart? It's about what differentiates them? How easily can it be replicated? How quickly will it be replicated? How good is it when you adjust it for the kind of risk they take to get whatever the results are?

15:52Maybe the returns are 20 % lower than the market and the risk is 80 % less than the market. There can still be alpha there. And so what we're trying to assess is, do they have a process that we believe looking forward can generate alpha for our clients. Because the truth is, if you think the answer is no, then you should just buy the market. You're guaranteeing yourself no alpha, but over time, you'll get the market's return with the market's volatility. And so we're trying to find managers that we believe have something about them that gives them an advantage to generate alpha for the foreseeable future.

16:35And then our job is to stay on top of them and make sure that that continues to be true. And when we think it's not, it's time to say thanks, but we're going to move on now because there's too much competition in whatever you do or your head of research left and this was a research -driven process and your new people don't have the chops at the old people, whatever the reasons are. Where have you found those sources of advantage over time? They tend to be smaller than larger. They're not managing hundreds of billions of dollars generally. So we spend way more of our time looking at smaller firms than we do at larger firms.

17:14Then of course, small and large is all relative to the asset class in which they're investing. If you're a small cap equity manager, a large small cap equity manager might be a couple billion dollars, but that's a small large cap equity manager. It's adjusted for the marketplace in which they participate and what it is they're doing and the inefficiency of the market in which they're participating. But generally, they tend to be smaller. They tend to be independent. They always have real identifiable risk control processes in place. At some point along the spectrum of doing the investment diligence, there's enough interest where we think there's really something there.

17:57And we start beginning the process of doing some of the operational diligence. And operational diligence can kill investment diligence. They can say, there are these problems that they have to get fixed or they won't fix these problems. And so that's the end of that. What's ICG today? 80 -ish clients. Most of them are taxpayers. A dozen are small and mid -sized institutions, museum, a hospital, school, things like that, but mostly families or people. I don't know what our AUM is, but it's probably between seven and eight billion or approximately. 27 employees? How have you tackled the investment challenge for your clients?

18:43we want to protect our clients. So we spend a lot of time with our clients, understanding what it is they want and making sure that they understand that what they are saying they want, they really know what that means. Because the worst thing for clients is they get a portfolio that they're not comfortable with because it's too volatile. The strategies are too complex and they don't understand them. Some of our clients don't understand the strategies they're in, but they don't care. But if they care, they need to understand it. And if they can't understand it, they're uncomfortable. And when you get uncomfortable, you start making decisions based on emotion rather than based on finance and economics.

19:31We're trying to make sure that when we build a portfolio for our clients, that it's really inside a framework that makes sense for them, both in terms of their own comfort level, but also that will deliver for them the returns that either they want, because they just have a goal, or that they need. It's an endowment, and they're giving away 5 % a year. If you're giving away 5 % a year, and you want to have a perpetual endowment, you can't just earn 5 % a year. because first of all, you're not going to earn 5 % every single year. You're going to have some years where you're up and some down and you're going to average five.

20:11But if you average just five and you're giving away five, you're going to slowly lose purchasing power. So you really have to earn more than that. And then you have to factor in there's fees. Now there aren't taxes for our foundation. But the point is we want to make sure that clients have objectives that they sign off on as comfortable for them and we sign off on as achievable for them. And we'll actually give them what they really do need. That's a fair amount of the work we do in the beginning so that we have a higher probability of delivering a solution to clients that makes them happy. Do you have a favorite story about the ups and downs of getting there with a particular client?

20:54We have a family that's been a client for many years, approaching 30. I think we actually worked at Oppenheimer on the day they hired us, but that was maybe a month before we left Oppenheimer. So then they went all through bear with us. And now they've been with us at ICG and it's a healthy size family trust. They were talking about their long -term returns and we're very focused on portfolio volatility. If you and I each have a million dollars and we go invest it for the next 10 years or 15 years. And we both earn the same 10 % per year average return. And you do it with 20 % ball and I do it with 10.

21:39But during that 10 or 15 years, neither one of us puts any more money in and we never take any money out. We just leave it alone. When you get to the end of the measuring period, we'll have the same amount of money because we both compounded at 10 % a year. but if we both earn 10 % a year and you do it with 20 % vol and I do it with 10 and there's cash flows I'm pulling money out because I have to pay taxes or I have to support the kids or I'm adding money because I sold the business and I'm putting money if there's cash flows along the way I'm going to have more dollars than you will if I compounded with half the vol this client that I was referring to asked us about that recently and the client basically wanted to understand the returns that they've gotten over time, which were maybe one or one and a half percent per year better than that benchmark, but with a lot less volatility, less than half the ball.

22:34They wanted to understand what would have happened if we had instead just done the benchmark passively and rebalanced it every year. I said, well, you have to make some assumptions. You have to make the assumption that whatever cash flows you had for the last 25 years, that you had them in this make -believe model. Whenever you gave us money, we have to add it to that. Whenever we took it away, we have to take it away. When we ran that number, it's huge. The differential was in the hundreds of millions of dollars. I knew it was going to be big. I didn't know how big. It was very eye -opening to them.

23:06And I did it because I said, I really want you to understand why volatility matters as much as it does. It doesn't matter a lot if you're talking about reducing vol from 20 % to 18%. It'll help. But when you reduce it by half or two -thirds, it makes a big difference. And how do you do that? By diversifying. But real diversification, not five long -only equity managers whose correlation to one another is 90. Real diversifying strategies that this zigs, that zags, and you rebalance. We're going to take a quick break in the action to tell you about SRS Aquium. Want to make sure your M &A processes aren't stuck in the past?

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24:40And now, back to the show. I'd love to take that into how you've gone about investing on behalf of your clients. What are your thoughts on some of the other asset classes you've participated in? Well, we haven't had long only investment -grade fixed income in client portfolios for probably more than the last 10 years, maybe the last 10 or 15 years. And if we had it, it was really short duration, almost extended duration cash type stuff, but no traditional investment grade bond portfolios. Or when I say no, I don't mean zero. Very, very little. But I didn't understand why do you buy bonds? You want liquidity.

25:22Bonds give you liquidity. You want return. They weren't giving you return. And you want safety. They're not actually safe when they yield 2%. They run the risk of price compression when rates rise. And of course, the investment highway is littered with people who think they know what interest rates are going to do, and you don't know. What you do know is if I own a bond portfolio with duration, and it's got a 2 % average yield, I know when rates rise, that portfolio is going to go down. And people don't invest in bonds for that. Somebody who invests in the stock market, they don't like it when their portfolio is down 20%, but they know it can be.

26:01And that's the price of admission. Nobody invests in the bond market thinking they can be down 20%. They just don't do that. We're just now starting to really consider beginning to add some of that asset class back into portfolios and are pretty close to done with the work we're doing to identify the managers we'll use to put that in place for some of our clients where it's an appropriate allocation. Have you thought about the whole alternative space? You hear more of the trajectory you've been on that more private equity, more of this is coming to this high net worth channel. I'd love to get your experience and what you've done and what you're seeing more broadly.

26:42Well, the interesting thing about it coming to that high net worth channel is how it gets there. If it gets there through aggregating vehicles, there are shops that are in the business of making private equity and other alternatives accessible to a universe of clients that are smaller than ours. a good chunk of the returns that our clients will get from that, they won't get. Because the shop that's putting it together is taking it in fees and expenses to do it, and then the fees they charge to do it. So while it'll add some diversification to those clients' portfolios, I think they're probably going to be disappointed with the level of returns, but we'll see.