How I Invest with David Weisburd
E166: $20 Billion CIO: Why Small Cap Stocks Have Underperformed (and why that’s unlikely to change) w/Brad Conger
23 May 2025
Brad Conger has a rare view into the evolving dynamics of institutional portfolios—and how allocators can adapt. As Chief Investment Officer of Hirtle Callaghan, a $20B OCIO, Brad is responsible for investment decisions across public and private markets, and he's developed a highly nuanced view of what's working, what's broken, and where alpha really comes from. In this episode, we cover the structural decline of the small-cap index, how private markets have siphoned off the highest-quality growth companies, and why illiquidity can actually be a feature—not a bug. Brad also shares how he builds conviction in contrarian positions, what makes a great spinout manager, and why bigger private equity funds may still outperform. If you're building or managing portfolios across public and private markets, this episode is full of actionable insights.
Full Episode
So even though I have the greatest manager, I'm asking them to do the wrong thing. Today, I'm joined by Brad Conger, the CIO of Hurdle & Callahan, an outsourced CIO managing roughly $20 billion. On today's episode, Brad discusses why he believes the small cap index has fundamentally changed and how the rise of private equity has impacted the public markets.
Brad shares his insights on balancing portfolios in this new economic environment, the virtue of illiquidity, and common investment mistakes. We'll also explore his contrarian bet on Europe and how a strong investment thesis can help weather even the most difficult of market fluctuations. Without further ado, here's my conversation with Brad.
Eugene Fama famously won the Nobel Prize for his three-factor model, which showed that small and value stocks had outperformed for many decades. You believe that may not be the case today. Why?
The small cap... index has fundamentally changed in its composition since those numbers, the numbers that were used in that study. And so, for example, the small cap index now, I believe, is much lower quality. It used to be companies transitioning from small to large. There were also companies, fallen angels, so large that had fallen on hard times.
And then there were permanent residents, meaning sort of companies that just trundled along and never really grew. I think those last two baskets of small cap have increased dramatically. And the reason is that I think the PE industry, by keeping companies under advisement longer, has truncated the ability of the small cap index to capture growth in entrepreneurial capitalism at an earlier stage.
And so I think those numbers were fine as they were computed. I think that the index has changed over time.
So historically, the small cap were just smaller, higher growth companies, similar to the large cap companies. Today, they're just fundamentally different businesses. They're fundamentally adversely selected. Double click on the types of small cap companies that you see in the market today, 2025.
There's a meme out there that something like 40% of the Russell 2000 companies have an EBIT less than their interest expense. In other words, they're zombie companies. I don't know if that number is really true or not, but it's clear that the default risk, the bankruptcy risk in small cap stocks has dramatically escalated. The debt to equity is much higher than it has been historically.
So I think that is one of the consequences of this, you know, PE taking the growth out of the public markets.
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