E244: Structural Alpha vs. Storytelling w/Alan McKnight
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this deep-dive conversation, Alan McKnight, Executive Vice President and Chief Investment Officer at Regions Asset Management, shares his framework for managing capital across public and private markets with $70 billion in AUM and $175 billion under advisement. (00:00) The discussion explores the critical differences between advising pension funds versus smaller family offices, with McKnight emphasizing that liquidity tolerance - both willingness and ability to bear illiquidity - is the primary differentiator between client types. (00:25) He reveals how private market allocations can generate 200-500 basis points of additional return but require careful liquidity planning. (01:26) The conversation covers emerging trends like interval funds, structural alpha opportunities in secondaries, and McKnight's process-driven approach that prioritizes process accountability over outcome accountability to separate skill from luck in investment decisions. (36:30)
- Main Theme: How elite allocators build durable investment processes while managing the behavioral and structural challenges of capital allocation across different client types and market environments.
Speakers
Alan McKnight
Executive Vice President and Chief Investment Officer at Regions Asset Management, overseeing investment strategy, risk management, and portfolio construction across the firm's platform managing $70 billion in AUM and $175 billion under advisement. McKnight brings decades of experience from leadership roles at Truist, SunTrust, Equitable, and Morgan Stanley, having started his career in 1994. He earned his business degree and graduated from business school in 2002, building expertise across both public and private market allocations for institutional and family office clients.
Key Takeaways
Master the Liquidity Framework Before Allocating
McKnight emphasizes that understanding both willingness and capacity to bear illiquidity is the cornerstone of effective allocation strategy. (00:25) He explains that clients who can bear more illiquidity can "clip a much higher return" - specifically 200-500 basis points additional return through private equity allocations. (01:26) The key insight is reframing liquidity conversations: instead of asking "how liquid do you want to be," ask "if liquidity costs you 3-4% annually, how much do you actually need?" (02:06) This forces clients to critically assess true liquidity needs versus psychological comfort, enabling more optimal allocations to illiquid, higher-returning assets.
Implement Process Accountability Over Outcome Accountability
McKnight's approach to generating alpha centers on "process accountability over outcome accountability" - evaluating investment decisions based on the quality of the decision-making process rather than just results. (36:30) He explains that successful investing requires unpacking whether you "did the right work upfront to actually make that allocation" versus "really confusing skill and luck." (37:12) This means conducting thorough post-investment analysis: even when investments perform well, ask whether the process was sound or if positive outcomes resulted from luck. Conversely, maintain conviction in strong processes even when short-term results appear poor.
Leverage the "Virtue of Illiquidity" for Behavioral Alpha
McKnight highlights a counterintuitive benefit of private market investing: "when you are locked up, in many cases, you can't do anything about it. And that's a huge benefit that people don't talk about quite as much." (27:00) This "virtue of illiquidity" prevents investors from making emotional decisions during market stress, as the inability to act "limits that human desire to jettison an asset." (27:14) For most investors, especially in volatile asset classes, illiquidity serves as a behavioral guardrail that can generate better long-term returns than liquid alternatives where panic selling is possible.
Build Team-Centric Alpha Generation
McKnight emphasizes that sustainable alpha generation comes from building high-functioning investment teams rather than relying on individual brilliance. (38:30) He advocates for "fact before opinion investment teams" that reinforce "curiosity, accountability, candor, and awareness" because "our assets go up and down the elevator every day. Our people are decision makers." (38:58) The team becomes "the factory creating the process that is the alpha" - essentially, team members work daily "with their hammer building out the process." (39:10) This requires creating an environment where failure becomes learning and maintaining willingness to be wrong without undermining overall strategy.
Pursue Structural Alpha Over Manager Alpha
McKnight advocates focusing on structural alpha opportunities where returns are embedded in market structures rather than relying solely on manager skill. (30:16) His primary example is secondaries markets, where distressed sellers (like endowments facing liquidity pressures) create opportunities to buy positions at 10-20% discounts with "very clear understanding and transparency around what those assets are worth." (30:15) These structural opportunities require maintaining liquidity to act decisively when they arise, supporting his "barbell approach" of combining "hyper liquid and hyper private" allocations to capitalize on market dislocations while avoiding the middle ground of semi-liquid investments.
Statistics & Facts
- Private market allocations can generate 200-500 basis points of additional return compared to public markets, specifically through private equity investments. (01:26) McKnight emphasizes this premium comes with the trade-off of potential longer lock-up periods and reduced capital access.
- The top five alternative investment firms (Apollo, Blackstone, etc.) account for 95% of the roughly $15 trillion in "retail" capital flowing into alternatives, despite retail being defined as investors with over $5 million. (05:54) This concentration highlights the challenge smaller managers face in accessing this growing market segment.
- The average tenure for Chief Investment Officers at public pension funds is 6.3 years, while endowment CIOs serve 5.8 to 10 years on average. (40:51) This creates a fundamental misalignment since private market investments typically span 10-year fund cycles, with optimal investment periods covering 2-4 fund cycles or roughly 20 years.
