Podcast Summary: E198 - How Family Offices Construct Portfolios in 2025 with Scott Welch

Release Date: August 11, 2025
Host: David Weisburd

In Episode 198 of "How I Invest with David Weisburd," host David Weisburd engages in an insightful conversation with Scott Welch, Chief Investment Officer (CIO) of Certuity, a prominent multifamily office managing approximately $4 billion in assets. The episode delves into Welch's perspectives on public markets, Federal Reserve policies, portfolio diversification, alternative investments, and personal career advice. Below is a detailed summary capturing the key discussions, insights, and conclusions from their dialogue.

1. Current Landscape of Public Markets

Scott Welch opens the discussion by addressing his concerns and observations regarding the current state of public markets.

• High Valuations and Market Concentration: Welch notes that while the earnings season is positive, valuations across global markets are elevated. He points out the significant weight of mega-cap tech stocks in the S&P 500, constituting about 30-35% of the index's market cap. This concentration means that movements in these large tech firms heavily influence overall index performance.

  “The earnings season is going well, sort of. The revenue and beat rates are historical averages. The only thing that's troubling me is the fact that valuations are simply high.” [00:08]

• Future Growth Expectations: He emphasizes that these high-quality companies will need to sustain robust earnings growth to justify their current valuations. Welch anticipates a potential shift where investors might reallocate their portfolios towards value or small-cap stocks due to diminishing upside in mega-cap tech firms.

  “I think they're going to have to continue to show very robust earnings growth to justify those valuations.” [00:08]

2. Federal Reserve Independence and Policy Implications

The conversation shifts to the interplay between the Trump administration and the Federal Reserve (Fed), highlighting the importance of Fed independence.

• Historical Context and Current Dynamics: Welch draws parallels to the late 1960s when President Nixon pressured Fed Chair Arthur Burns to cut rates, leading to prolonged high inflation. He expresses concern over any attempts by the administration to influence Fed policy, advocating for the Fed's autonomy.

  “I don't like the idea of the administration trying to influence Fed policy... it's important that it remain independent.” [01:59]

• Anticipated Rate Cuts: Despite current economic indicators like inflation slightly trending upwards and a resilient job market, Welch predicts that the Fed will implement modest rate cuts in the near future, specifically a 25 basis point cut in September and another later in the year.

  “All that being said, I do anticipate they will cut 25 basis points in September and then probably another 25 basis point cut at some point before the end of the year.” [05:21]

3. Market Expectations for the Next Federal Reserve Chair

David Weisburd probes into how the market is reacting to speculation about the next Fed Chair following Jerome Powell's term.

• Market Positioning: Welch indicates that betting markets currently favor Powell's continuation until May without a replacement looming imminently. He suggests that abrupt changes in leadership could destabilize the market, a scenario unlikely due to potential economic repercussions.

  “Powell will stay in place through May. We'll see two rate cuts before the end of the year, maybe some additional ones before his term ends in May.” [07:28]

• Dovish Successors: He forecasts that successors to Powell will likely adopt a more dovish stance, aiming for further rate cuts, although consensus within the Fed board remains crucial for such policy shifts.

  “Whoever replaces him will almost certainly be far more dovish.” [07:28]

4. Portfolio Construction and Diversification Strategies

Welch elaborates on Certuity's approach to building resilient portfolios that perform consistently across varying market conditions.

• All-Weather Portfolios: Emphasizing diversification, Welch explains that Certuity constructs portfolios diversified not just across asset classes but also across risk factors such as quality, growth, value, size, and dividends.

  “We try to build all weather portfolios that will perform relatively consistently regardless of the market regime.” [10:21]

• Behavioral Finance Insights: He highlights the importance of maintaining discipline and avoiding emotional investment decisions, particularly during market downturns, to leverage the power of compounding over time.

  “Consistent performance helps to drive investor discipline... you don’t have to get too concerned about unless there’s a dramatically disruptive event.” [10:21]

5. Global Diversification and Investment Rationale

The discussion moves to the significance of global diversification in investment portfolios.

• Market Capitalization Considerations: Welch points out that the US represents roughly 50% of the global market cap. Overweighting US markets inherently means underweighting international markets, which hold substantial investment opportunities.

  “The US is roughly 50% of the global market cap... if you overweight the US you are by definition underweighting half of the world.” [12:35]

• Regional Opportunities: He discusses various growth drivers in international markets, such as increased defense spending in Europe and the diversification of production away from China in emerging markets, presenting favorable investment prospects.

  “Markets cycle in and out... in Europe, the emerging markets are taking on more of the production process away from China.” [12:35]

6. Selecting Global Managers and Sourcing Strategies

Welch details Certuity's methodology in sourcing and selecting top-tier global investment managers.

• Partnerships and Due Diligence: Primarily relying on established relationships and active participation in the investment community, Certuity collaborates with specialized partners to identify and evaluate potential managers, ensuring a robust and trusted lineup.

  “We have a good lineup of managers that we know and trust and that we've used for a long time.” [15:25]

• Local vs. US-Based Managers: Historically, Certuity has focused on US-based managers with a mandate for non-US investments, though they remain open to exploring talented managers domiciled outside the US.

  “Historically we have not spent much time looking for non US managers domiciled outside the US.” [15:25]

7. Managing High-Performing Investments and Behavioral Challenges

Addressing the challenges of managing successful investments, Welch emphasizes the importance of strategic rebalancing over succumbing to momentum biases.

• Rebalancing Strategy: He advocates for rebalancing portfolios by selling high-performing assets and reallocating into undervalued areas to optimize valuations and enhance long-term returns.

  “The valuation differentials... indicate the need to reallocate towards something that's a little lower price.” [17:23]

• Valuation Considerations: Welch provides examples of significant valuation gaps between large-cap and small-cap US stocks, value versus growth stocks, and US versus non-US markets, underscoring the rationale for strategic reallocations.

  “When you look at the valuation differentials... you have to say, maybe it's time to go into something that's a little lower price.” [20:38]

8. Alternative Investments and Private Assets Allocation

Scott Welch shares his philosophy on allocating capital to alternatives and private assets, recommending a balanced approach tailored to individual client needs.

• Recommended Allocation: He suggests that the average family should allocate approximately 20-25% of their portfolio to alternatives and private assets, balancing the need for impactful positions without excessive illiquidity.

  “20 to 25% is about as much illiquidity as most families are willing to take.” [21:05]

• Client-Specific Strategies: Welch discusses how allocations vary based on client objectives, risk tolerance, and liquidity needs, emphasizing the importance of personalized investment strategies.

  “It’s dependent on what’s happening outside of the portfolio itself...” [22:26]

9. Tax Efficiency and Portfolio Optimization

The conversation explores strategies for minimizing taxes and optimizing portfolio performance for taxable investors.

• Tax Management Programs: Certuity employs tax-efficient strategies such as asset location, tax loss harvesting, and employing long-short strategies to create what they term "tax alpha," enhancing after-tax returns for clients.

  “We can lay it on top of their portfolio and harvest tax losses along the way and generate what we'll refer to as tax alpha.” [34:20]

• ALTS Plus Platform: Welch introduces Certuity's ALTS Plus, a platform enabling clients to partake in private equity funds with lower minimum investments, streamlining the investment process and consolidating tax reporting.

  “It allows us to use the collective size of the firm to get into funds that we might not otherwise because we can bring 20 investors in and raise 10 million bucks.” [43:54]

10. Private Equity Investment Approach

Welch outlines Certuity's approach to private equity, focusing on diversification across strategies, vintages, and sectors to mitigate risks and capitalize on opportunities.

• Strategy Diversification: Emphasizing growth equity, leveraged buyouts (LBOs), and emerging sectors like infrastructure, Welch highlights the importance of aligning private equity strategies with client goals.

  “We want to have manager diversification, we want to have strategy diversification.” [39:16]

• Sourcing and Manager Relationships: Certuity leverages both internal sourcing and client networks to identify and invest in top-performing private equity managers, ensuring access to high-quality investment opportunities.

  “Sourcing is not a problem within private equity for a firm like ours.” [41:54]

11. Career Advice and Personal Reflections

In a candid exchange, Welch shares personal career insights and advice for aspiring professionals in the investment industry.

• Embracing Opportunities and Flexibility: Reflecting on his career trajectory, Welch emphasizes the importance of being open to unexpected opportunities and not rigidly adhering to predefined career paths.

  “Don’t lock yourself in... you don't have to limit yourself by today's definitions of what a job looks like.” [48:50]

• Leveraging Strengths Over Fixing Weaknesses: He advises focusing on enhancing one's strengths rather than solely attempting to improve weaknesses, suggesting that excelling in core competencies is more valuable.

  “Get better at the things you already do well... that's going to be more valuable to you and more valuable to us.” [53:04]

• Building Complementary Teams: Welch highlights the necessity of surrounding oneself with a team that complements individual strengths and compensates for weaknesses, fostering a collaborative and effective work environment.

  “A team is the only way to go.” [55:42]

Conclusion

Episode 198 offers a comprehensive exploration of portfolio construction strategies from the perspective of a seasoned CIO managing significant family office assets. Scott Welch's insights into market valuations, the importance of Fed independence, global diversification, alternative investments, tax efficiency, and personal career growth provide valuable guidance for institutional investors and family offices aiming to navigate the complexities of the investment landscape in 2025.

Note: Advertisements, introductions, and outros have been omitted from this summary to maintain focus on the core content.