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2:18

Hello.

2:20

I'm

2:20

Ted Sides, and this is

2:23

capital allocators. This

2:25

show is an open exploration of

2:27

the people in process behind capital

2:29

allocation. Through conversations

2:32

with leaders in the money game, we

2:34

learn how these holders of the keys

2:36

to the kingdom allocate their time

2:38

and their capital. You can join

2:40

our mailing list and access premium

2:42

content at capital allocators

2:44

dot

2:45

com. My

2:47

guest on today's show is Charles

2:49

Van Vleet, the Chief Investment Officer

2:51

of Textron, where

2:52

he manages ten billion dollars in defined

2:55

benefit assets and five billion

2:57

dollars of defined contribution assets.

2:59

Charles joined Textron a decade

3:01

ago after or eight years at the pension fund

3:03

of Technologies and is

3:05

widely respected as one of the most

3:07

thoughtful and outspoken CIOs

3:10

in this space. Our conversation

3:12

covers Charles' background and turns

3:14

to the objectives of corporate pension

3:16

funds, Textron strategic asset

3:19

allocation and Charles' implementation

3:22

of value added opportunities across

3:24

asset classes. Along the

3:26

way, he shares a host of opinions

3:28

about what works and doesn't for institutional

3:31

investors. Before we get

3:33

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5:29

Please enjoy my conversation with

5:31

Charles Van complete. Charles,

5:34

it's great to see you. Great to be here. Well, why don't

5:37

we go through a little bit your background and

5:39

path to the c Textron? Ted,

5:41

that'd be in nineteen seventy nine. I

5:43

went to work for Mitsui Bank in

5:45

San Francisco selling certificates

5:47

of deposit at eighteen percent

5:50

these were in the early vulture years. And

5:52

then having worked at the Japanese

5:54

bank, my first then

5:56

true career was at Nomura Securities in Tokyo.

5:58

I had spoke a bit of Japanese. I had some

6:00

financial background. I went off to Tokyo for three

6:02

years in a training program and

6:04

was a JGB trader in between

6:06

Tokyo and New York. trading

6:09

JGBs, you know, they call it the widowmaker, right?

6:11

Because you're short of the four percent short of again,

6:13

the three percent short of again, two percent this is ridiculous

6:15

and rates go to zero when you get fired. So

6:18

with that trading background, I went into the buy

6:20

side of Brown Brothers Harman, done a ten wall,

6:22

and from there, a succession of other

6:24

asset management firms. mostly

6:26

with a fixed income focus, alliance

6:28

capital, fund investments, credit risk

6:30

asset management. At the end of credit risk asset

6:32

management, at the end of my I had a hank

6:34

up period. I came over to the planned sponsor

6:37

side in two thousand five, and that was with

6:39

Robin DeMante, who was still there. And

6:41

again, I will her that opportunity to be invited

6:43

to the buy side. So I've been on all

6:45

three sides of the business. I call the broker

6:47

dealer side, the asset management side, and the

6:49

allocator side you mentioned that

6:51

when you were first starting with CDs,

6:53

they're yielding eighteen percent. What

6:55

perspective did that give you when you launched

6:58

into your career in a rate environment

7:00

like that. Well, of course, I was,

7:02

you know, twenty twenty one at the time, I was finishing

7:04

up my last year at UC Berkeley and

7:06

remember seeing you know, we were always putting an

7:08

effigy of somebody out in the middle of Sprout

7:10

Hall and and it was Paul Walker and I remember

7:12

looking and saying, I don't know who that guy is, but, you

7:14

know, that seemed a little rough. you know, so

7:16

he

7:17

was not afraid to be an enemy of the

7:19

party as they say. So experiencing his years,

7:21

along with the years in the greenspan, it's been a

7:23

one way ride after off nineteen eighty two,

7:25

the collapse of rates to where we perhaps

7:27

have seen a turn. What we're seeing unravel,

7:29

you know, here even today is When

7:31

you lift rates from a negative

7:33

one and a half reel to a positive one and a half

7:35

reel, stuff just breaks because you

7:37

would spend so many years with no

7:39

volatility in rates. that almost

7:41

has broken the country of the UK and now

7:43

it's breaking the whole crypto because

7:45

people aren't gonna put up with earning

7:47

zero on their crypto when I can get

7:49

four percent Industry t bill. So it's phenomenal

7:52

to see this happening.

7:54

And

7:54

on the other side, you tend to go over

7:56

to Japan, and that widowmaker

7:58

has lasted and continues to

8:00

last to some extent. How does that

8:02

change your view of thinking about timing

8:05

in markets? Don't get too smart for yourself

8:07

and don't get married to your traits. are we gonna

8:09

see the end of Japan and yield curve control?

8:11

As you know, it's highly rumored, can they

8:13

extract themselves without again breaking

8:15

something, perhaps even breaking the US Treasury

8:17

market? forty five billion

8:19

dollars in currency intervention. That money had

8:21

to come from a store where it came from US treasuries. So

8:23

it'll be interesting if if Japan can

8:25

extract themselves without something

8:27

breaking here. What did sitting

8:29

on the cell side contribute to

8:32

your awareness when you then went to

8:34

the buy side? I'm allowed to use

8:36

swear words, of course. You know what's a great thing about the

8:38

Allocators? There's like a there's like a sign of the door

8:40

that says no assholes allowed. It's just

8:43

so refreshing. The broker

8:45

dealer side of the business, it is,

8:47

you know, you get up to go

8:49

for

8:49

for a long weekend and you come back and I'm

8:51

sure your chair is gonna be there. It is

8:54

really that cutthroat. And and for that

8:56

reason, probably that's why it pays so

8:58

very well because of there is

9:00

less security certainly than there is on the

9:02

on the allocator side. From

9:03

having that breadth of experience,

9:05

what did you take from that

9:07

as you've seen over the years in the allocator side when

9:09

you first got the UT? Well, in

9:11

particular, I think it makes me think about

9:13

or it's a great line, Paul Volker, somebody said, you

9:16

know, mister Volker, all these amazing

9:18

financial innovation that the United States has come

9:20

up with from CLOs, the CDOs,

9:22

to seed CDeal Squared

9:24

to knockout options to

9:26

what do you think was the most exciting great

9:29

financial development that you've experienced in

9:31

your four year career? And he kinda scratched head and

9:33

he said, oh, no.

9:35

The automatic cash machine?

9:38

In other words, we just mix

9:40

stuff up. similar product just in a different

9:42

package. It doesn't make it a bad package, but

9:44

we really do. I had somebody coming

9:46

in yesterday pitching infrastructure. And

9:48

I said, what is infrastructure? I I really I've

9:50

truly go Jimmy. I don't understand what this is. They said,

9:52

well, it's it's an airport or bridge or a road. I said,

9:54

well, oh, it's just real estate. They said, no, no, it's

9:56

infrastructure. They said, well, it's real estate

9:58

with some unique patterns, but it's

10:00

really just you got this asset. If you

10:02

don't have tenant for it. It's worth nothing. And so

10:04

you get a cash flow off of that and you might get

10:06

to increase your rent with inflation if it's a

10:08

bridge, but we just make stuff up. It's

10:10

just real estate. What was

10:12

the path to the point where

10:14

you felt ready to

10:15

go run a pension

10:17

fund on your It

10:18

was just something I'd always wanted to do.

10:21

Robin's very young and bright and

10:23

energetic. I always tease her. She could go on to get

10:25

on the board of any fortune five hundred companies

10:27

she wanted. She but she loves where she is

10:29

and I I'm just just hitting that that glass

10:31

ceiling. You know, she's also out there to

10:33

embrace the DEI cause.

10:35

She is very strongly embracing.

10:37

I heard her the other day. I represent an

10:40

audience of three hundred, and she's up there speaking about

10:42

her work with diversity, the

10:44

DEI, diversity inclusion. And at the

10:46

end of this talk, she kinda saw me on

10:48

the audience. She said, but let me

10:50

caution everyone here. The objective is

10:52

diversity diversity of thinking.

10:54

and

10:54

we shouldn't necessarily conflict diversity of

10:57

thinking with diversity of gender

10:59

eraser color. They may go together, they

11:01

may not she goes looked to mention that ten years

11:03

ago, I had two tall white males

11:05

working for me. They couldn't be more

11:07

opposite. One, if you give him, you know, a

11:09

question to answer, he needed you

11:11

know, ten thousand gigabits of data

11:13

and to be going to his office for

11:15

ten days. And the other, and she looks

11:18

at me, you give him the limit, and he would

11:20

think and respond from his gut.

11:22

And she said, so I had an entirely

11:24

different diversity from two tall

11:26

white males. And that's That

11:28

is the goal. And I'm thinking, good for her.

11:30

Good for her to say, don't necessarily

11:32

complete the truth. They they may be related, they may

11:34

not, but that's really what the

11:36

goal is. So

11:36

when you came into the seat, how did

11:39

you take the lessons you learned, both

11:41

those types of leadership lessons from Robin

11:43

and then portfolio struck ensure lessons and

11:45

start thinking about how you frame out the

11:47

challenge of investing them? Well, Robin, I

11:49

think very differently about the market. So

11:51

there's not nothing at all similar

11:53

about that. I think I'm a kind of unique

11:55

beast and and seabed that I came

11:57

from a Wall Street background. and

11:59

her fear about bringing in a Wall Street person,

12:01

which is a legitimate fear, is

12:03

that they tend to be too transactional because

12:05

as a PM of a bond portfolio,

12:08

what putnam or Credit Suisse

12:10

or you're making hundreds of trades a

12:12

year. You come to side. You're

12:14

making three three things because

12:16

to much bigger and more expensive and

12:19

moving around a large amount of

12:21

capital. So that was a concern of hers,

12:23

and I had to be watchful of, yes,

12:25

my tendency to over trade,

12:27

over transact. And

12:28

how about the broader question

12:30

of how did you wanna set

12:32

out managing the capital at Textron? Well,

12:34

you know, I thought, Ted, that we

12:36

have all these artificial constructs, you know, we

12:38

have one person doing private equity with

12:40

another person doing public equity and go with

12:42

escrow, so just equity. we've created these

12:44

artificial constructs about what we call asset

12:46

classes. And so I've tried to break away from that a

12:48

little bit. I really only think there's two asset

12:50

classes. There's rates as in

12:52

government rates. And then there's equity,

12:54

then there's equity proxies called

12:56

Spreads. So High Yield is just

12:58

an equity proxy with a zero point four

13:00

and BDCs are an equity proxy with a one

13:02

point two beta and spreads

13:05

is just an equity proxy.

13:07

And I'd even go so far to

13:09

say real estate really is just a

13:11

spread product. It's a bond. It's

13:13

a fixed income. The building itself is worth nothing

13:15

if it doesn't have tenants. real estate's

13:17

really just a fixed income portfolio

13:19

of credits, and the credits are

13:21

the tenants. And the

13:23

building is your residual value. just

13:25

like the investment grade bond. So if

13:27

you take those three layers, how did

13:29

you put that into a portfolio construct?

13:31

Everything we have in our portfolio, we

13:34

assign an equity beta it. And I know

13:36

it's all bad math. So like I said,

13:38

we assign a point four to high yield.

13:40

Sometimes it trades like a point two, sometimes like a point

13:42

eight, I think I'm in the bad

13:44

math ballpark. with a point four. So

13:46

everything in the portfolio will roll

13:48

up. And this I'm not saying anything brave here. I think

13:50

probably if we had the BlackRock

13:52

Aladdin system or one of these one of the

13:54

bar systems, it would probably do the same kind

13:56

of thing. But we assign a beta

13:58

so that just

13:59

because I have, you know, a

14:01

bunch of money in high yield, I don't call it a bond. It's

14:03

not a bond. It comes out on average right now

14:06

about point six S and P. So it

14:08

means that I'm overweight that portion of the

14:10

SP or else I need to take out of my equity

14:12

portfolio. That's my philosophy and

14:14

how that's very different to

14:16

my peer group. these

14:17

days, there's at least a lot

14:19

more awareness on the actual

14:21

investment challenges for

14:23

pension fund. and would love to get your

14:25

take over these last years.

14:27

You've been in the seat how you

14:29

frame out what the investment challenges.

14:32

in two thousand and six was a watershed legislation

14:35

called the PPA Act, the Protection

14:37

Act. And it's at that time when they changed

14:39

smoothing rules for the asset returns of

14:41

a corporate pension to

14:44

materially shorter. If you have a twenty year

14:46

smoothing, I guarantee you over twenty

14:48

years stocks will outperform bonds.

14:50

You know how I know that? because if

14:52

stocks don't outperform bonds, we're gonna have much

14:54

bigger problems. So stocks will outperform

14:56

bonds over twenty years. So if smoothing

14:58

is twenty years, then then your company will say

15:00

I have a bond like liability, but I

15:02

have an equity like asset. And I know

15:04

over time, the asset will outperform

15:06

that liability. In two thousand six, by substantially

15:08

shortening that smoothing period. There

15:10

was a rush to say gee, maybe we should act more

15:12

like an insurance company and

15:14

cash flow and batch our

15:16

mortality tables with a cast roll bond

15:18

that matured in the same year. So there's

15:20

been a slippery slope since that time.

15:22

But often people like to have they're

15:24

caking it too. So that said, well, I will

15:26

only use half of my assets to

15:28

achieve eighty percent hedging, and I'll use

15:30

the other half of my assets during main events in the stock

15:32

market. The way you do that is two ways. One

15:34

is you what's called the key

15:36

rate duration mismatch? Or if I have a

15:38

bunch of tenure liabilities, I say, oh, that's

15:40

not important. I will replicate the

15:42

duration value of that with thirty year

15:44

security. So under duration, a yield curve

15:46

mismatch, that's what in common way. The other common

15:48

way, as we've experienced in UK where the

15:50

UK, of course, has gone through

15:51

a meltdown because they were reducing

15:54

derivatives. They were leveraging. So they were only using

15:56

fifty percent of their assets levered

15:58

to be hedged and the other fifty

15:59

percent still remaining at growth assets.

16:02

So when you've tackled this at Textron,

16:04

you've got to generate returns to

16:06

help support this liability over time.

16:08

How does it work with how

16:10

you create your investment program

16:12

in

16:12

alignment with the company. All

16:14

CIOs take the marketing order from the

16:17

CFO. So the CFO, he

16:19

or she, we'll give them marching orders about

16:21

it. I am concerned about balance

16:23

sheet volatility and worry about contribution

16:25

volatility and worry about PBGC premiums,

16:27

variable premiums, So it's a

16:29

CFO that really is giving the marching orders to

16:31

the CIO. The CFO at

16:33

Textron Frank Connor, I think

16:35

has been he's brilliant in

16:37

markets and brilliant in foresight and

16:39

his instructions to me are pretty

16:41

simple. If you get me good returns seven

16:43

percent seven point five percent every year, all problems

16:46

go away. The fund will be fully funded. The

16:48

contribution volatility drops off. The balance sheet

16:50

volatility drops off. And in fact, that's

16:52

been the path we pursued. So we're

16:54

about a one hundred and six fifteen percent

16:56

funded and we still remain growth

16:58

focused. We do not have an LDI

17:00

focused plan. When Frank said

17:02

to you seven and a half percent

17:04

every year, Is he talking about

17:06

year in, year out? Or is he talking about

17:08

smoothing over some period of time? He's

17:10

talking about smoothing you know, last year, we we

17:12

exceeded by three times, and this will

17:14

will underperform three times. And so, yes,

17:16

it's over an average. I think the

17:18

holy grail quest is what gives you a hundred

17:20

and ten up and only ninety

17:22

down? Not many things have queue like that.

17:24

It's going to be something that has kind of an optionality to it. So what

17:26

things give you S and P

17:28

like upside, but none of the downside

17:31

call options to do that on the S and P? Pretty expensive.

17:34

So you say, okay, what is the least

17:36

expensive thing I can buy? They'll

17:38

give me some type of skew in that pattern

17:40

of return, a really easy place to fall back

17:42

that we have consistently -- we just remain

17:44

overweight U. S. dollar. We have

17:46

extending long dollar with short

17:49

versus yen, aussie and

17:51

euro, and it's a positive carry. We'd

17:53

do it unfunded, so it's levered.

17:55

a

17:55

five percent position. And it pays off handsomely

17:57

times like this because the dollar is still

17:59

a

17:59

risk off currency in

18:02

this exactly what's happening here yet again. So I'm looking for things

18:04

that are inexpensive that give me that kind

18:06

of skew upside versus downside

18:09

capture. So that skew that

18:11

you've found that you think works well with the

18:13

portfolio, you said just five percent levered. What

18:15

does the other hundred percent

18:17

look like? start with a NASA allocation Allocators that's as

18:19

set by the committee. We're in thirty percent

18:21

alternatives, which is private equity real estate

18:23

primarily, a couple of hedge funds, but mostly

18:25

real estate private equity. Thirty percent

18:27

fixed income and the balance in public

18:29

equity. Now public equity is US and

18:31

international. And then the committee gives me

18:33

very wide bands around that.

18:35

And I aggressively play play within those bands. Let

18:37

me give you an example by the the committee

18:39

has decided that we have a three percent

18:41

allocation to high yield in the

18:43

benchmark. Well, I look at that Ted and say, well,

18:45

what the committee is telling you is that they are

18:47

comfortable with non investment

18:49

grade securities. And somewhat

18:51

okay liquidity. I don't have to put high

18:53

yield in my high yield bucket. So what do I

18:55

put in there? I put converts in there. I put

18:57

BDCs in there. I put fallen angels there.

19:00

You know, The benchmark is to

19:02

me to suggest what kind

19:04

of risk expectations and

19:06

liquidity expectations they have in the

19:08

portfolio just because it has that label Well, to

19:10

be honest, there's nothing in a

19:12

public REIT that's real estate. Public

19:14

REITs are not real estate. On any given

19:16

day, it's equity. And convertible

19:19

bonds Surprise, surprise. I'm not bonds. It's

19:21

equity. It is fine. You know,

19:23

convertible bond is a is a point eight S and

19:25

P, and a REIT is a

19:27

point nine S and P and high yield is we call it a point

19:29

four S and P. Everything is going to have

19:31

an S and P beta to it, but

19:34

just

19:34

because it's labeled that way. I don't care what it's labeled.

19:36

I care what it acts like.

19:37

What does it look like? So our CLO

19:40

equity, I call it A2X

19:42

Russell three thousand. It has that kind of volatility.

19:44

You mentioned some kind of correlations

19:46

to the S and P. Is that how you

19:48

take the construct of an asset allocation and

19:50

turn it into whatever you wanna

19:52

find investments in? Yes. We don't have any

19:55

consultants. I'm not a big believer in consultants.

19:57

I've been doing this for forty plus

19:59

years. To be honest, it's

20:01

it's a back of an envelope and a

20:03

pencil. I just need to be in the ballpark of

20:05

what what is how you're gonna act like in a

20:07

draw down like this. It's acting just like you would

20:09

have modeled. What is a BBC gonna act

20:11

like then? It's just like it's my what is a

20:13

reconnect like? Do you know no surprise

20:15

here by any of those? I don't like to spend a lot

20:17

of time thinking about where stuff

20:19

put in the portfolio. But here's why that's important, at

20:21

least for corporate plan sponsors.

20:23

The CFO asked me every year to come to

20:25

him with a recommendation about what next

20:28

year's expect a rate return is. It's a

20:30

corporate requirement for

20:32

GAAP purposes that he

20:34

has AER0A and he's allowed

20:36

them to crew at that stated

20:38

airway. And at the end of the year, he'll do a

20:40

cancel revise on that crew.

20:42

So when we take that, we're

20:44

gonna probably target seven and a quarter

20:46

again this year. He's going to take that to

20:48

our internal auditors to E and Y. E and

20:50

Y is going to say, well, is that a realistic number?

20:52

Frank had to get back this up and he's going, well,

20:55

Charles has provided me with all these

20:57

public benchmarks. And so we

20:59

took fix income and added the equity risk

21:01

premium, and we added an international premium,

21:03

and we added a a default

21:05

assumption. And so here's how we think that

21:07

this is a realistic number. So

21:09

Frank doesn't care about that. I don't care about benchmarks.

21:11

EY does because it goes into

21:13

the GAAP accounting. I know it

21:16

drives the average asset manager

21:18

crazy when we scratch our head and say, I don't

21:20

know where I'm gonna put this, convertible bonds, where do

21:22

I put it? CLO equity, where do

21:24

I put I know they hate their conversation. The only reason it's

21:26

important is because of a gap requirement

21:28

for this era of

21:30

your portfolio, how have you

21:32

tackled the public equity piece?

21:34

Everything's for external managers. And

21:36

your typical microcap to mega

21:38

cap and value to growth

21:41

too benchmark agnostic to more, benchmark

21:43

aware, to a couple of managers

21:45

who are very focused for example. We've

21:47

always had a dedicated allocation

21:49

to my team's gonna hate me when I hate to say this. I

21:51

call it our cat stocks, chocolate apple

21:54

tobacco because I

21:56

consume all three and I will pay any

21:58

price. And so those are just good consumer staples that in an

22:00

environment like this have perfect pricing

22:02

power. So again, better that than to

22:04

buy some lousy linkers or tips.

22:06

then I have been as maximum underweight

22:08

international as I could be, as much as

22:10

I felt comfortable. Not to be harsh about this, but I

22:12

wanna hear somebody once said, they said, you know, we

22:14

really gonna have two economists in two

22:17

markets, Ted. We have, you know, the US

22:19

here, and we

22:19

have China over here.

22:22

And in between, we have a

22:24

museum. if

22:25

you want a if you want a lot to

22:27

get to move, it's a great place, but there's

22:29

not a lot to buy there. I mean,

22:31

it just really isn't. So Europe tends

22:33

to be very, very heavy

22:35

into banks, insurance companies. There's a couple

22:37

of great farmers. Now part of the problem

22:39

isn't isn't there making. Part of the problem any

22:42

technology upstart. It starts in Germany or

22:44

starts in Berlin or starts in

22:46

the US deals it away. Same thing with

22:48

Israel, same thing with so you when

22:50

they're looking for you know, c capital,

22:53

they're looking for round b, around c a

22:55

capital. Some in Silicon Valley says, great

22:57

idea. I got a hundred million for you, but you have to

22:59

move the company and the team to

23:01

California. So it isn't that

23:03

Europe's not capable since the US

23:05

will steal those Industry and time

23:07

again, but we have very little in

23:09

Europe. We have a stake in the ground in

23:11

China. I think you you can't afford not to

23:13

be in China. Somebody said me the other day. They

23:15

said, Charles, it's immoral to buy China. It's

23:17

immoral. What about the use

23:19

for us, capitalists. But anyway, I

23:22

think we are all best

23:24

served to educate and get up to

23:26

learning curve in China as quickly as

23:27

we can. And

23:28

how have you in China? All

23:30

in A

23:30

shares. So we didn't want to eat shares. We

23:32

didn't want to red chips. We want as

23:34

much as possible somebody who's reflecting

23:36

the local economy. And so that's a lot

23:38

of healthcare and fintech. These

23:41

areas of China is is

23:43

way behind So it's not the Alabama's

23:45

in the Tencent. It is going to be more

23:47

domestic focused than it has been

23:49

rough. I mean, the currency loans have been rough over the

23:51

last year. On the fixed income side,

23:53

you've touched a little bit around some of the edges.

23:55

You talk about converts. Could be

23:57

part fixed income. There's an aspect of REITs that

23:59

are fixed income. What is

24:01

your fixed income allocation comprised

24:03

of? We really only talk about

24:05

two kinds of fixed income. We have

24:07

rates, and then we have SPREADs.

24:09

My favorite Spread product, as I said before,

24:11

is leverage Single B, very

24:13

little IG, and my favorite rate is

24:15

gonna be US treasuries because, again, I'm not

24:18

completely without thought to my

24:20

liabilities, but that will

24:22

speak more closely to my liabilities, US

24:24

treasuries. How about the private markets?

24:26

Private equity venture capital? We have some

24:28

growth in buyout mid cap

24:30

and We just never went deep into

24:34

venture, you know, seed or a

24:36

round, partially because we just you know, we're

24:38

not interesting money to

24:40

Sequoia and to San Hill

24:42

row. because San Hill row says, they're not in

24:44

long run. As I like to remind my team,

24:46

I said, I was chatting with the actuary the

24:48

other day and was reminded that in the

24:50

year twenty ninety two, we're

24:52

out of a job. I mean, one way or

24:53

another, guys. This is, you know, that's that's when the

24:56

last participant dies. And so,

24:58

you know, Sand Hill Rowan knows that as

25:00

well. Like, corporate money just is not

25:02

necessarily sustainable, particularly those down

25:04

in LDI Path that can give the money back

25:06

to Prudential. So

25:08

I'm not gonna necessarily get into the best

25:10

venture, and so we had never pursued that.

25:12

And

25:12

on the private side, what's your

25:15

take on the environment today?

25:17

Oh,

25:17

I be better. I think they're

25:20

all running for opportunities,

25:21

ways to get this into, not only

25:23

the 401 channel, but into the into

25:25

the private channel, and I challenge people sometimes

25:28

to think about how they spend their

25:30

money every day. You know, I woke up this morning

25:32

and I bought coffee and then I bought a

25:34

paper and I stopped at local bagel

25:36

shop, and then the wife

25:38

sent me out to the local fish store. You know, I

25:40

spend, gosh, probably

25:42

easy forty percent of my money.

25:44

I'm private firms. Now that might be a private

25:46

firm, you know, one guy with a fish shop,

25:48

but it's a private firm. We've all

25:50

forgotten how prominent apart

25:52

private firms are in our life every day.

25:54

And so it is, as you know, very

25:56

well Ted. It's exploding with opportunity now trying to

25:58

figure out ways to get it into the retail channel.

26:01

And how do you triage that

26:03

concept that, well, the result is private business

26:05

out there. Therefore, we should be investing in

26:07

this into practice. we will go

26:09

into a mid cap buyout firms. We

26:12

do not do any comb vest. I'm simply not large

26:14

enough for that. I don't have the expertise.

26:16

Because of that, I'm not

26:18

real thrilled when our GPs will raise

26:20

five hundred million dollars and then raise five hundred

26:22

million dollars worth of opportunity for direct

26:25

co Investment my pushback

26:28

on that is, well, so I'm really just

26:30

subsidizing the other guy who's taking the

26:32

coinvest life. You know? He doesn't care so much

26:34

about the twenty million dollars invested. He's he

26:36

Charles about the five hundred million dollars worth of access

26:38

in co invest. So the firm

26:40

has become his sourcing agent, and

26:42

I'm subsidizing the whole thing. I think there is a

26:44

little bit of rub between medium

26:47

to small guys like myself and the large

26:50

state plants. for large state plans like co

26:52

invest, large state plans can cut their own

26:54

conditions, large state plans are gonna push back more

26:56

on ESG things that is less

26:58

important to me that they have a

27:00

different set of stakeholders than I do. They have

27:02

different conditions. They wanna bring it. So I spent a lot

27:04

of time looking at who are

27:05

my fellow LPs. We are in a partnership

27:07

together after all. a lot more attention needs to

27:09

be paid to that. Curious

27:11

how you reconcile

27:14

the

27:14

theory that these other

27:17

LPs who are doing this co free riding on your

27:19

capital with the reality that that's

27:21

happening. And so

27:23

should you consider figuring out

27:26

how you participate pro rata, so there is

27:28

no free writing going on. Well,

27:30

probably best not to name my friends. Let's say I'm

27:32

going to a a mid cap buyout

27:34

fund raising five hundred million with five hundred million with

27:36

the co invest. So they're gonna go

27:38

hunting for a billion dollar

27:40

kind of opportunities. So

27:44

they're kind of forced into what is perhaps

27:46

an unnatural part of

27:48

their cap space because

27:50

they'd they'd love to spend the five hundred in in

27:52

co that

27:54

coinvested I'm subsidizing and has been a

27:56

distraction to it and perhaps dragging that

27:58

five hundred million GP into a

27:59

territory that I'm comfortable with. So we spend a

28:02

lot of time talking to them about, is this

28:04

forcing you into hunting grounds

28:06

that is outside your comfort zone? And

28:08

of course, dog was handled. No. No. We we

28:10

got this handled. But those are the kind of challenges I

28:12

think that is is still

28:14

going on. How do

28:15

you handle these various challenges?

28:17

There are the things that you

28:19

believe and you would like to see,

28:21

say, through your manager. And then there are opportunities

28:23

where you either have to decide you're

28:25

gonna sign up or move on to the next one.

28:27

Yeah.

28:27

Just move on to the next one. In their relationship and

28:30

move on. They're all very cordial

28:32

and people have different focus.

28:34

I congratulate KKR the other day. We don't

28:37

But we got a couple small things for KKR. I'm

28:39

making a practice tent. Everybody comes in. I I

28:41

count how many pages in the pitch

28:43

book before the word ESG shows up,

28:45

and I said, congratulations here. The winner showed up

28:47

on page one. And so we had a chat, and they

28:49

said, well, they get a lot of pressure, particularly when they go

28:51

to Continental Europe. And I said, well, I'll make

28:53

a forecast for you. I said I think

28:55

someday just like back in the back in the eighties,

28:57

he used to have to carry two business

28:59

cards, one with a bug on it, bug,

29:01

and one without and never get them mixed

29:03

up, you're gonna have two

29:05

pitch books. You better not bring this pitch

29:07

book to Texas. And

29:09

I I think the Union Bug is a perfect

29:11

example. That's where we're really

29:13

at an interesting junction

29:15

here around some of these issues.

29:17

Have you thought about hedge funds? We have very few

29:20

hedge funds. I've read through your book, I'm

29:22

familiar with your background, and if I'm

29:24

looking to prove my one ten

29:26

up side, my nitty downside. That's where a lot of people say, well, that's

29:28

where hedge funds can help you, particularly

29:30

on that downside. I just think

29:32

it's an expensive downside.

29:34

We talked about my best

29:37

downside is structured long US dollar.

29:39

That's actually a positive carry. It's not costing

29:41

me one in ten to get that downside

29:43

capture. So I I just

29:45

I can't get I can't get past the fees. An area that

29:47

we had a lot of and we're leaning into

29:49

in this environment is is real

29:52

estate. and which specifically, I think

29:54

there's just a structural mismatch.

29:56

I think data centers,

29:59

cold storage, That's a structural mismatch.

30:01

Multifamily, single family housing.

30:03

We've been underbuilding for a decade.

30:05

It's a structural mismatch. So we

30:07

continue to lead into those

30:09

sectors. So

30:09

let's dive into that real estate piece. How have you

30:11

gone about implementing? Mostly

30:13

direct.

30:13

We're eighty percent direct, so

30:16

we on a portfolio of twenty

30:19

garden style apartment buildings and data

30:21

centers and a lot of industrial

30:23

warehouse and cold storage for the other

30:25

twenty percent we have funds. And those funds tend to be

30:27

pretty focused where we have some private REITs,

30:29

again, that are focused on cold storage

30:32

and data center or private reset will focus on

30:34

value added multifamily coming to buy

30:36

up a B grade and fix up

30:38

to B plus not an a, just a b plus

30:40

because you don't want to compete with new product. These are

30:43

areas I think in spite of what's going on

30:45

here right now with a little bit of softness

30:47

in rents, The shortage is there. Unless

30:49

household formation, household

30:51

promotion slows down when people have less kids.

30:53

We have less immigration. People stay

30:55

in bad. Marriage is longer. And

30:57

those things happen around recessions. And so we will see a slowing

31:00

of household formation

31:02

running at one million units a

31:04

year. We're only making eight

31:06

hundred and fifty So the the shortage is there for

31:08

a while. When you

31:10

started taking on these kind of

31:12

ideas in the direct real estate portfolio,

31:15

What's your team like to implement on

31:17

that? Well, I have a

31:18

Keith Watson on the team's pretty much

31:21

focused full time on alternatives and

31:23

real estate's a big part of it. In fact,

31:25

he and I are off to San Francisco tonight. We're gonna

31:27

tour some properties out there that are already

31:29

in the portfolio, but we make it happy to

31:32

what a real estate guy is called, like, walk walk the tar beach.

31:34

You have to go and see the product. And

31:36

how does that so you have one person

31:38

managing, say, ten percent of your assets

31:40

in real estate. We source to a firm

31:42

called Stockbridge Advisors. We outsource

31:44

lease underwriting, maintenance. Is

31:46

it time to repay the parking lot? Is it to do

31:48

we have was the TI the tenant improvement

31:51

budget for the new industrial tenant. So those

31:53

are easy things to to outsource to

31:55

to a good expert. I mean, you

31:57

decide you're gonna do this Differently.

32:00

It sounds like you're coming at it with some

32:02

key themes and you're just pursuing a

32:04

select number of opportunities. How do you get

32:06

to those thesis?

32:08

Well,

32:08

so we have people come pictures buildings or stock bridge of

32:10

pictures buildings time to buy or sell. I'm a big

32:13

advocate. You find people who you trust

32:15

and you you know, they they earn that

32:17

trust to keep the trust and you you're willing

32:19

to work with them. We have advisors come in with

32:21

advice about what

32:23

what sectors of the economy or the country, and this is all

32:25

US based. You know, real estate's one of those places

32:27

where you can still have, I think, a

32:29

lot of idiosyncratic opportunity.

32:32

There is no such thing as one real estate market.

32:34

Now the market in Richmond, Virginia is very

32:36

different than Duluth. And so the two

32:38

places I like going here right now

32:41

are where get this idiosyncratic opportunity in real

32:43

estate. The other place Ted, I think, is great, which

32:45

is where you have such

32:47

incredible diversity. And

32:49

that's in you

32:51

know, single b rated CLO equity. So

32:53

CLO equity, you know, we had gathered two hundred

32:55

single b rated names and throw them

32:57

in and I I buy the bottom

32:59

slice, the equity slice. So just

33:01

the opposite real estate, it's I

33:03

just take such a broad portfolio of

33:06

single B rated loans and throw it into

33:08

a CLO structure. levered ten

33:10

times where I don't have

33:12

any idiosyncratic risk because

33:14

it is so well diversified. Those

33:16

are two great areas for us right now

33:18

that we lean into. How do

33:19

you think about the duration of

33:22

what

33:22

that opportunity needs to be for

33:24

it to command your time and attention in the

33:26

portfolio? good point. because there's a lot of bid

33:28

offer involved, you know, set up time and

33:30

disposal time. So, yes, I think I

33:32

think these things would be done with the three to five ish

33:34

horizon and for real estate and for CLO equity.

33:36

That's not a six month trade. That's a three to five

33:38

year opportunity. How do you

33:40

balance the desire to

33:43

have certain things that you believe in, certain

33:45

micro strategies with the

33:47

other broad opportunity set

33:49

that you're not investing if

33:53

you're in data centers and code storage. There's a lot that you're not

33:55

investing in, almost kind of like active

33:57

management versus the index across

33:59

the portfolio.

33:59

how do you bring that

34:02

together? Well, my CFO correctly

34:04

will chastise me correctly again on all fairness.

34:06

When he when he'll point out, look, you spend a lot

34:08

time, maybe you're spending too much time in these little things, but you're not move the needle,

34:10

and you should be spending more your time

34:12

on. These big chunky things, your

34:15

US large cap for example. And

34:17

it's a fair point there. But again, it sees these small things which can

34:20

grow into big or these small things which

34:22

have a greater dispersion of

34:24

opportunity around

34:26

them. the dispersion of performance and large cap core is very,

34:28

very tight compared to dispersion around

34:30

private equity or hedge funds or real

34:32

estate, you know, the dispersion

34:35

you're rewarded for spending time there. So but

34:37

I I take the part. We you know, we've tried

34:39

things, for instance, we tried

34:42

insurance links clearly's ILS. It was mostly portfolio of quota

34:44

shares. It was LIBOR

34:46

plus eight hundred just

34:49

lose the first year, lose a little bit the second year, make a

34:51

little the third year, and finally just pull a grip

34:54

chord. It it just that I I've

34:56

come to recognize that Well, I think the

34:58

insurance business property casualty in

35:00

particular is just gonna be

35:02

impossible to judge how much premium

35:04

you should charge given the climate

35:06

change issues. Who who would have thought? You know,

35:08

wildfires from California.

35:10

So it's a real challenge I

35:12

feel for those underwriters. So there's there's

35:14

places we've we've tried cut my losses move on. I have

35:17

very little memory for the book

35:19

cost on things. I've actually spent no time thinking

35:21

about it. Just pull the RipCord and

35:24

move on. What

35:24

are some of those other experiments you've run? Internal security is

35:26

probably at

35:27

the top of that list. We've been in

35:29

and out some some success

35:32

in converts. or back in at this time against one of those things, I asymmetric

35:34

reward around it. We've tried

35:36

some quant strategies, you know, back tested quant

35:38

strategies, boy, you only you only make

35:41

that mistake once. you know, buying a back test and and you think,

35:43

well, I got smart I got a smart quants in the room. They'll never

35:45

let this go too far astray. So

35:48

you'll you'll learn those lessons

35:50

the

35:52

hard way. How

35:52

do you create the flexibility

35:54

in your asset pool so

35:56

that if there's an opportunity that

35:58

you think is new and staying,

36:01

you can find the resources to deploy to it. I think there's an environment

36:03

building up

36:03

here. There's something clearly going on the

36:05

US treasury market. lack

36:07

of liquidity. We're getting gapping, price

36:10

gap that we haven't experienced

36:12

before. Some of this has to do with like

36:14

what happened in the UK. You need to

36:16

sell it can sell for a

36:18

margin call, you're gonna sell U. S. treasures. What's

36:20

happening in Japan? Japan just did another twenty five

36:22

billion worth of intervention. the second twenty

36:24

five billion in order to raise capital for that.

36:26

They're selling US treasury.

36:28

So we have something going in the US treasury

36:30

market where could we get another one of these taper

36:32

tantrums? So we have

36:34

been actually just taking treasuries out of the market and replacing with

36:36

futures. And futures being more liquid than

36:38

treasuries in one of these taper

36:40

tantrums. There's an opportunity cost to get rid of

36:42

treasuries and buy. futures. There's

36:44

a twenty five to fifty basis

36:46

point mismatch. Futures being expensive

36:48

relative to cash, which is quite common. So it's

36:50

costing me twenty

36:52

five basis points to fifty basis points to sit with futures. But I have

36:54

that now that if we get

36:56

one of these Benbena field moments in

36:58

treasures or in the

37:00

equity market, I have cash on hand. So some of this is just thinking ahead of time

37:02

about work and I find cash. And the other is, Ted,

37:04

really important. I just

37:06

will have a

37:08

lot of niche strategies

37:10

that I leave a nickel in so I

37:12

can push in a dollar later. So

37:14

for example, I keep a nickel in fallen angels.

37:16

I keep a nickel in in these close

37:18

in funds, so keep a nickel and BDCs. because when

37:20

when you get a panacea moment, you

37:23

just can't move fast enough to

37:25

get the legal docs and get the IMA and get

37:27

the signature to get the bank account set up.

37:29

And some of these things, you only have a two week

37:31

window. So you need to keep incubating these

37:34

small things along with

37:36

liquidity, ready for those moments.

37:38

How broad is that set

37:40

of nickels that you have? Yeah.

37:42

There's easy six different strategies whether we, you know, we will run it up

37:44

to one dollars like we did in March of

37:46

April of twenty, and then we ran it back down to a

37:48

nickel in twenty twenty one. And so we continue

37:50

to sit

37:52

with those. think this often, you know, kind of a

37:54

overlooked part of the

37:56

strategy. You need to have the structure

37:58

set

38:00

up. Is

38:00

there a different character of those managers

38:02

that you're comfortable taking from

38:04

a nickel to a dollar and back to a nickel?

38:06

III warn them, so they they

38:09

have to be aware of it. They're glad for nickel.

38:12

They're happy with the dollar, but they'll they'll take any

38:14

of it in between. Do they tend

38:16

to be larger managers that

38:18

moving around doesn't

38:19

affect them very much? These are mostly kind

38:21

of a small niche

38:24

managers. be honest. We tend to be a little bit tactical than And

38:26

it isn't that we're a smarter, insightful.

38:28

It's a lot of it is because

38:32

we're we're at a size of ten billion. I can do that. Again, I really

38:34

feel for the people at Calpers

38:36

who just can't move the needle. And I

38:38

feel badly for the for the firms

38:40

that are you know, five

38:42

hundred million to a billion,

38:44

you're not going to have enough staff focus on

38:46

it. So, you know, eight to ten, I

38:48

just feel lucky as a great

38:50

sweet spot. When it comes to selecting managers, how do you

38:52

go about figuring out who you wanna partner

38:54

with? My team's all very seasoned. We've all

38:56

been around for a while, so we don't need a

38:58

consultant to

39:00

bring us three or four people. I advocate for my team to be

39:02

out involved in a community. We have

39:04

open doors to anybody and everybody who wants to come

39:06

in and

39:08

have coffee I consider that to be my job, just to invite and listen to

39:10

smart people all day long. I'm surrounded by these

39:12

brilliant people building to come to my office. Coffee.

39:14

But what's not to love about that? We're a

39:16

good size. were about ten

39:18

billion in defined benefit

39:20

assets. If I was one billion, I might not get

39:22

attention. If I was a hundred billion

39:24

at that dichotomy of

39:26

scale. So I can still get

39:28

involved in things like we've we've been for years

39:30

involved in a great strategy out of Richmond,

39:32

Virginia that only buys closed in bond

39:34

funds. So I call it close to an equity

39:36

funds or bond fund. I call it my

39:38

provide liquidity to motivate sellers.

39:40

That's a great area to be

39:42

in. So you get motivated sellers in

39:45

closed end funds. These are

39:47

retail sellers. You get motivated sellers

39:49

in BDCs. You get motivated and

39:51

GP led secondaries and LP led second.

39:53

So these are people who, for

39:55

whatever reason, they have strong desire for

39:57

liquidity. I'm more than gladstone say, you know,

39:59

I'll bridge that for you. Industry we

40:01

call a motivated seller portfolio. So when a motivated seller portfolio, we have these closed

40:04

end funds. To what extent as

40:06

you walk

40:06

through these strategies, are you

40:10

focused on the strategy or the manager pursuing it.

40:12

A lot on the strategy. I

40:14

have

40:14

the credence at how my desk years

40:18

ago by a good friend, Clare. it's

40:20

one of those military plates that we

40:23

you know, the the the corn separated from

40:25

the peas, separated from the mashed

40:27

potatoes, from the meatloaf, you know, with the little dividers. That's

40:29

the way I think about my portfolio. I do

40:31

not want to hire somebody to manage my corn or

40:33

to discover the next day they mix it up with

40:35

mashed potato. In other words, I don't

40:37

want my equity manager saying, gee, I

40:40

didn't like equity, so we built up a ten

40:42

percent position in cash. That's

40:44

my job. I don't like my fixed income

40:46

guys saying, Well, I know that you

40:48

hired me the managing portfolio of US mortgage

40:50

bonds, but there's this great thing going on with Danish

40:52

mortgage bonds. You're mixing your meat loaf with

40:54

your potatoes. I

40:56

so I very, very important to me that

40:58

managers stay in the box. And for that reason, we

41:00

don't hire any multi asset managers.

41:02

We don't have any macro hedge funds.

41:05

because I'd go to bed on Tuesday thinking I got

41:07

a portfolio of this many peas and corn

41:09

and mashed potatoes to only discover. No, I

41:12

got suck attached the next morning.

41:14

I haven't I don't know where I am. When you populate your

41:16

portfolio

41:16

with a bunch of specialists, how do you

41:18

go about finding the interest

41:21

staying either adjacencies or the things that you

41:23

said earlier that fall through the cracks when

41:25

the people that you have outside are really

41:27

just looking at their own

41:29

thing. a couple of great

41:30

long time

41:31

relationships where they will they will come to

41:33

us with ideas and say, gee, we're looking at this.

41:35

We think you'd be interested in seed capital

41:37

or we'll reverse inquiry back to

41:40

them. I'm not gonna go to four guys in a

41:42

shoe box and give them a

41:44

mandate where they're using derivatives and prime broker. And,

41:46

you know, I you go to large firms, you give

41:48

them a sharp knife, and you trust them to use it. I have no problems seed

41:50

capital, something at Wellington

41:53

or seed capital. or it's a

41:56

roomful of adults who can handle a sharp

41:58

knife. How have you approached

42:00

thinking about ESG? I think it's probably okay to

42:02

Pensions. we're invested in rock capital, work capital, invest

42:04

in a lot in franchises and one of

42:06

the franchises they apparently invested in is RB's

42:08

fast food chain. RB's serves

42:11

chicken sandwiches and pizza, was

42:13

not happy with the way Arby's slaughters their

42:16

chickens. So Peter got a hold of the

42:18

list of who are the LPs. And I was one

42:20

of the many LPs that overnight

42:22

started getting Vleet of emails from Peter. As an investor this

42:24

fund, you are enabling, you

42:26

know, humanity to cruelty to animal behavior.

42:28

And and so there's emails

42:32

off to my chairman. My chairman's calling me in the middle

42:34

of the night saying, what are you doing down there?

42:36

And so this is where activism

42:40

can flow back to even an LP. These

42:42

are some of the ESG pressures that

42:44

are still, it will flow back through

42:48

private company formation as well. Much of it, Ted.

42:50

It's old wine and a new Of course,

42:52

I've always been concerned about

42:55

shareholder proxy access. I've always been

42:57

concerned about board tenure. I've always been

42:59

concerned about litigation and

43:02

rules around child labor laws and around civil

43:04

rights and around OSHA standards and

43:06

have always been concerned

43:08

around if I buy

43:10

a building is it sitting one foot above high meat in

43:12

Miami? How is that something new?

43:14

We've always been concerned about

43:16

environmental issues for building to Miami.

43:20

and companies that have poor voter access, proxy

43:22

access, and companies which have poor

43:25

board tenure rules. always

43:28

been interested. So how did those suddenly get wrapped up to something new called ESG? I'll

43:30

tell you how it happens because we have a

43:32

lot of Wall Street firms who have a conflict of

43:34

interest. They can wrap it into this new bottle

43:37

and slap on another forty basis points of fees for it. I've

43:39

not seen they're they're bad people or evil people.

43:41

It's just it's just human nature. If I

43:43

can take this old stuff and wrap it in a

43:45

new ribbon and charge forty four. I'll

43:47

do it. What do you

43:49

see of your peers in the

43:51

corporate pension world in in the ways that you

43:53

think they do things well? And

43:55

then alternatively, some of the things you think they

43:57

could improve upon? Well, most of

43:58

my peer group is

43:59

is, again, down this LDI path

44:02

where they your cache match your portfolio

44:04

of assets with your liabilities, and then

44:06

you build this up to a hundred and five percent

44:08

and you, as you know, it's called

44:10

pension risk transfer. You'd give

44:12

your your liabilities and your assets

44:14

credential. You know, we're just not in that we're not

44:16

in that school. Prudential invited me out a

44:18

couple of years ago to to speak

44:20

at their at the conference, I said, well, listen, I have a lot of respect for user firm. But as

44:22

you know, I don't practice LDI

44:24

in this pension risk transfer PRT thing.

44:26

They said, well, that's exactly where we went to. So I got up

44:28

and talked about do we approach? Why do

44:30

we feel this way? And why are we still absolutely

44:32

return focused? But I kind of told this audience that three

44:34

hundred people were potential. I said, but, you know,

44:36

things change. a new CFO might

44:38

have a different opinion about this.

44:40

If if I ever transfer my assets to you

44:42

though, it's gonna be a it's gonna be

44:43

a staple deal. Well, I had three and a people, I'm gonna

44:45

say a staple deal. Yes. Staple

44:48

than the last page of the contract is my

44:50

resume. You're taking my assets, you're taking me

44:52

too. I don't understand a lot of my

44:54

peer group. It's kind of down this

44:56

path and kind of giving away their

44:58

job. And again, it's not the CIO.

45:00

It's often the CFO

45:02

and has concerns about contribution

45:03

volatility, balance sheet volatility, says this is not

45:05

my core competency. I make widgets for a living.

45:08

Why am I also running this hedge fund

45:10

over here called the Pensions? fully

45:12

respect all those. but my my

45:14

privilege is very deeply down that

45:16

path. I mean, chair and trustee

45:18

of of three UK plants,

45:20

the UK were required to have

45:22

a consultant and we're required to have participant beneficiaries

45:24

on the committee, which are two

45:26

problems that also led to this little

45:28

fiasco in the UK around their

45:30

LDI programs. you you have many

45:32

amateurs in the room. And so you

45:34

can't move fast enough in these committees. But but

45:36

the consultant there was always they'd

45:38

always take this my portfolio and they divided into

45:41

risk seeking and risk reducing. So

45:43

last time I was there, I

45:45

said, risk reducing. You have you

45:47

have guilt on your risk Gilts are down forty eight

45:49

percent year to date. This was, you know, two weeks

45:51

ago. How do you call that

45:53

risk reducing? They said,

45:55

well, in a your

45:56

liabilities are also down. I said, no. No. No. That's not how we invest. We're investing for

45:58

total return. I said, you know, we

45:59

I just really wanna scrap those

46:01

words, you

46:04

know, guilts

46:04

or just gilts, to call them risk enhancing,

46:06

risk reducing is you're setting things up

46:08

wrongly. I want my board to

46:11

to look at the holistic of just wearing

46:13

the cap structure do you want to

46:15

participate, and let's not put labels on it.

46:17

Do you have a group of peers that

46:19

you frequently share ideas with? Yes. So

46:21

I think there's a group called CEVA Committee for

46:23

the investment of employee benefit assets. There's a

46:26

hundred and five of us and we meet

46:28

four times a year. I have a

46:30

lot of respect for my peer group in those

46:32

meetings. We mostly talk

46:34

about governance,

46:36

accounting, regulatory, attracting and

46:38

retaining talent, we don't

46:40

talk so much about investing because everybody's

46:42

often a different investment path. And I think that's

46:44

I think the endowment foundations equally

46:46

spends a lot on governance and accounting and perhaps a little

46:48

bit more investing as well. What are

46:50

you most concerned

46:51

about in the investment

46:53

environment going forward? if

46:55

I you've read your hymen Minsky. This

46:57

we are we are

47:00

potentially, you know, coming up to

47:02

Minsky moments man, you know, remember Minsky talked about three things. There was there was hedging

47:04

speculation and then then ponzi. And then

47:06

after that was the Minsky moment. The

47:08

mark is became so used to

47:10

having no rate volatility and

47:12

no real rate risk. Right?

47:14

Real rates were negative. That you began to get

47:16

used to it. So they built up leverage in the UK, they

47:18

built up leverage Japan,

47:20

as we take away this

47:22

low rates and no rate

47:24

volatility, stuff's gonna break. And we're seeing that now.

47:27

You know, I grew up in California, Ted Wear.

47:29

You know, California has, you

47:31

know, hundreds of earthquakes every year,

47:33

a dozen which maybe you could

47:35

feel on different parts. And I

47:38

always remember growing up saying lots of

47:40

little earthquakes is a good thing because that

47:42

that means you're not it's not storing

47:44

up that energy for one big thing. We kind of

47:46

didn't get any earthquakes for the last

47:48

many years, most certainly

47:50

since post

47:52

COVID. because we just got used to this. Rates are low and there's no volatility,

47:54

so we can take on this leverage. So I am I

47:56

think there's a risk out there, and I think

47:59

somebody's gonna break because of the dollar. You

48:01

know, I simply can't import food. I

48:03

can import fertilizer. I

48:05

can import energy. because I just don't have access

48:07

to dollars. And so therefore, I'm gonna begin to sell my dollar

48:10

reserves. This is a problem.

48:12

Something is going to break

48:14

out there. So with

48:15

that belief and never

48:18

really knowing exactly what it's gonna

48:20

be, how do you think

48:21

about positioning your portfolio? Just

48:23

have liquidity available like I said,

48:26

having selling my treasuries for

48:28

futures at this

48:29

time, building in things I

48:31

think

48:31

that are asymmetrical and risk,

48:33

building and having all these little

48:35

nickels invested so I can push in a

48:38

dollar. Making sure that the

48:40

team will travel quite a bit.

48:42

Everybody walks away with the knowledge curious how much

48:44

money we need to move to

48:46

increase our equity allocation by two percent

48:48

or to decrease our bond allocation by

48:50

three years. So just have those in

48:52

the back of the envelope so that we're not wasting a

48:54

lot of time on getting together on the

48:56

phone. Everybody knows in this kind of

48:58

event, here's here's the kind of capital we need

49:00

to move. And

49:00

how different do you feel that posturing is today from how

49:03

you were positioned even as far back as when

49:05

you started a text run?

49:08

So

49:08

I started back in two thousand thirteen, and so I was in the middle of

49:11

this whole Protection Act, where a lot

49:13

of people were pursuing LDI we

49:16

were increasingly an outlier that we were not. We

49:18

had a - we were - had a

49:20

lot more hedge funds at the time and had

49:24

mixed success we were evolving and

49:26

we continue to evolve. Certainly don't

49:28

know the answer to all this,

49:30

but I don't think that

49:32

capitalism or return opportunities

49:35

are dead. frustrates me so much for people to

49:37

say, gee, all the is is gonna be

49:39

low for longer returns. People are

49:41

reading the wrong paper. You know, you need to

49:44

maybe you need to start to pick

49:46

up a little bit more Silicon Valley reading

49:48

or biotech reading or there's a

49:50

lot of exciting things going out there to

49:52

begin with, you know, nuclear fusion. You know, we

49:54

might be just twenty years away,

49:56

talk about upsetting the apple cart.

49:58

We we might be just twenty years away from

49:59

commercializing nuclear fusion.

50:02

How exciting? Charles, I wanna make sure I ask you a couple of fun closing questions

50:04

before I let you go. What's your favorite hobby or

50:06

activity outside of work and family?

50:08

I'm an

50:09

I'm carpenter. Actually, I make furniture and

50:11

so far still good. I still got

50:13

ten fingers. Hey, where did that come from?

50:15

Well, my father was always a

50:17

craftsman, so I have this beautiful

50:19

dedicated workshop full of, you know, table sales and band sales and, you know, all day long,

50:21

we're making spreadsheets worth which whatever

50:24

you think they worth today, they're worth nothing

50:26

tomorrow is

50:28

So it's nice to make a chair that I made twenty years ago

50:30

and still there. What's your

50:32

biggest pet peeve?

50:35

For investing, my biggest pet peeve is

50:37

the word yield. I

50:40

think anybody should spend half a minute looking

50:42

at the math of how you calculate

50:44

yield to maturity. it's bad

50:46

math, it's horrible math, this idea that you're going

50:48

to reinvest at the same rate. So, of course,

50:50

I pay attention to income returns, and I pay

50:52

attention to capital gain returns, but the word yield

50:54

is just really bad math, so I I don't

50:56

use that word. Biggest personal

50:58

pet peeves. Well, I think

50:58

I'd be remiss. I'm I'm sure

51:00

we're all very fresh

51:02

traded about how we tend to box people. I do it myself. We tend to

51:04

box people into political or

51:06

economic constructs instead of being a

51:08

little bit better. Listen, right now, a

51:11

constant struggle for me and for all of us.

51:13

So that's I think a lesson for all of us

51:15

to think about. Which two people have had

51:18

the biggest impact on your

51:20

professional life? Bill Gagni, nineteen seventy

51:22

nine, Gagni started in he was

51:24

my professional rabbi in

51:26

banking and asset management. I was portfolio

51:28

manager for

51:30

twenty five years after that. And then in two thousand Robin

51:32

DeMante, who allowed me to

51:34

be the rabbi coming over to the

51:37

allocator

51:37

side as a corporate plan sponsor

51:39

Robin is now still CIO of

51:41

Raytheon Technologies. What type of investment do

51:43

you gravitate to like a moth

51:45

to the flame? real

51:46

estate, because I, you know, you can you can touch it, you can taste

51:48

it, and it's extremely idiosyncratic. Again,

51:51

there is no ubiquitous

51:53

single market. So it's I

51:55

found an exciting space. How about your

51:57

biggest blind spots? Goodness.

51:58

My my wife of

52:01

thirty three years would

52:03

say That's my husband, often wrong,

52:05

but never in

52:08

doubt. And she's

52:10

right. I my strong

52:12

opinions and enthusiasm times can

52:14

be I think blinding to the conversation

52:16

and that's that's not always healthy. How do you

52:18

work with that within the construct of your team?

52:20

Well, I I try to

52:23

be the last to speak. Right? That's

52:25

that's you wrote about that in your

52:27

book, of course, the importance of of

52:29

leadership is to allow others to speak first. What

52:31

teaching from your parents

52:32

has most stayed with you? Oh, goodness.

52:35

My my

52:35

my father was a HVAC

52:37

mechanic. My mother was

52:40

a nurse. and they both have this just

52:42

incredible can do anything, can't fix

52:44

anything, can take on a

52:46

new project take on a different

52:48

skill set that didn't have before, we can

52:50

figure this out. Just jump in and start

52:52

figuring it out. Alright, Charles. Last one, what

52:54

life lesson have you learned that you wish you knew a

52:56

lot earlier in life? I made a

52:58

couple of bad moves in my in my

53:00

career. I've probably I've probably had

53:02

seven eight jobs. I've been fired from two

53:04

of them or laid off

53:06

same thing. feels, oh, it all feels horrible. But in my

53:08

young years, my thirties, I really should have

53:10

stuck by a couple of, you know, in the

53:12

business with

53:14

my rabbi. somebody who would have guided me and protected me from

53:16

the, particularly it was in the investment banking

53:18

world. This tends to be much more cutthroat.

53:20

So I

53:22

really encourage thirty year olds. If you find somebody's good rabbi,

53:24

stay with it. Don't get attracted

53:26

away by the higher payer, the

53:28

better work life balance you

53:31

know, working with the right person is the most critical thing.

53:33

Charles, thanks so much for sharing your insights.

53:35

Great. We are good luck tests. Thanks

53:37

for listening to the

53:40

show. It's like what you heard, hop on our website at capital

53:42

allocators dot com where you can access

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53:51

a good one see you next time.