Why Tracking Error Isn’t the Right Risk Lens

How should a public pension build an active equity and absolute-return program—without diluting alpha or chasing the “hot” manager? In this episode, I go deep with Brian Miller, Senior Investment Officer at the Sacramento County Employees’ Retirement System (SCERS), on constructing a $6B public-equity book inside a ~$15B plan, sizing managers, and using absolute-return strategies as true diversifiers. Brian reflects on 16 years at Tukman Grossman Capital Management (value, long-term compounding, and staying consistent), the realities of “LP capture” across cycles, and why tracking error isn’t the right risk lens. We unpack manager due diligence (including on-site visits), active vs. passive trade-offs, the global/US mix, and how SCERS uses MSCI Caissa for whole-portfolio visibility.

Highlights:

• Lessons from Tukman Grossman Capital Management: consistency, long-term compounding, and fitting the “value/core” role for top LPs.
• LP capture in practice: how client flows can force or fund decisions—08/09 liquidity, 2020 upgrades, and who doubles down in drawdowns.
• Value vs. growth & small-cap value today: quality dispersion, a smaller small-cap universe, and why “stocks follow earnings” over time.
• Portfolio construction at SCERS: shifting to include global vs. pure international; active where it counts with ~half of US equity passive.
• Tracking error ≠ risk: focus on downside risk; information-ratio “gotchas” when TE is kept too low.
• Absolute Return (7% sleeve): diversifiers (event-driven, macro, market-neutral, derivatives-based arb) that protected in 2022 and target mid-single-digit returns with low vol.
• Tooling: how MSCI Caissa gives top-to-holdings look-through across public & private to manage exposures.
• Manager selection & diligence: narrow the funnel, visit on-site, prevent false positives, and stay rooted in the original thesis.
• Career advice: be a continual learner, build networks early, and develop conviction to hold through criticism.

Guest Bio:

Brian Miller is a Senior (Retirement) Investment Officer at the Sacramento County Employees’ Retirement System (SCERS), where he focuses on Global Public Equity and Absolute Return programs. Before SCERS, he spent 16 years at Tukman Grossman Capital Management in research and portfolio roles. At SCERS he leads manager selection and portfolio construction across public equity and diversifying strategies.

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(0:00) Introduction (4:20) Long-term investing and its impact on success (8:22) Navigating market crises and opportunities (12:29) Dynamics of small cap value investing (16:51) Public-private market crossover and manager transitions (21:10) Manager evaluation and selection insights (27:46) Investment thesis and building a robust portfolio (33:44) Diversification and trade-offs in manager selection (40:50) Role of absolute return strategies (45:12) Portfolio diversification using MSCI tool (47:12) Career advice and the importance of networking (50:31) Investment process and conviction (50:48) Masterclass on public equity and value investing (51:01) Closing remarks