Nov 28, 2022 · 56m · capital-allocators
Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, host Ted Seides interviews Charles Van Vleet, Chief Investment Officer at Textron, who shares his unconventional, common-sense approach to corporate pension management. Van Vleet details how breaking down traditional asset class boundaries, avoiding rigid liability-driven investing dogmas, and enforcing strict manager discipline enable superior long-term portfolio performance.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 25.1% of the talking time here. How this is scored →
Ted as informed peer 4.2 Guest teaching 5.3 Guest disagreement 4.0 Ted pushing back 2.0
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 47:45 Charles slams UK pension consultants over gilt risk categorization
Charles forcefully ridicules UK pension consultants who classified gilts as risk-reducing right as they plunged 48%, demanding institutions abandon rigid misleading labels.
Hardest push from Ted ▶ 28:30 Ted challenges Charles's grievance on PE co-investmentsTed directly challenges Charles's assertion that non-participating LPs are subsidizing co-investors, asking why Textron does not simply participate pro-rata instead of complaining.
Biggest teaching moment ▶ 15:51 Charles explains the structural flaws of post-2006 pension LDICharles provides a comprehensive masterclass on how shortened accounting smoothing rules post-2006 pushed corporate pension plans into artificial liability matching and dangerous derivative leverage.
Ted holds their own ▶ 28:30 Ted demonstrates deep fluency in private equity LP economicsTed leverages his deep industry knowledge of private equity fund structuring to challenge Charles's argument on co-investment dilution and fee subsidization.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Career Origins Across Broker-Dealers, Buy-Side, and Plan Sponsors | 4 | 4 | 2 | 1 | Ted guides Charles through his multi-decade career across banking, trading Japanese government bonds, and buy-side fixed income. Charles reflects casually on market cycles, Volcker-era rates, and transitioning to the allocator chair. | |
| Financial Innovation, Infrastructure Realities, and Cognitive Diversity | 3 | 5 | 5 | 1 | Charles dismisses financial marketing labels, calling infrastructure merely real estate with distinct cash flows, and shares former CIO Robin Diamante's perspective on cognitive diversity. Ted keeps to brief navigational prompts. | |
| Transitioning to Textron and Redefining Traditional Asset Classes | 4 | 6 | 4 | 1 | Charles outlines his non-consensus framework that only two real asset classes exist: rates and equity, viewing all spread products as equity beta proxies. Ted probes how this philosophy informs portfolio architecture. | |
| Pension Regulation, Smoothing Rules, and the Pitfalls of LDI | 5 | 7 | 3 | 2 | Charles walks through the Pension Protection Act of 2006, explaining how shortened smoothing horizons pushed peers into flawed LDI and leverage traps while Textron stayed total-return focused. Ted asks sharp questions on CFO alignment. | |
| Strategic Asset Allocation and Portfolio Benchmark Implementation | 4 | 6 | 4 | 2 | Charles explains that public benchmarks and style boxes are primarily regulatory artifacts for EY auditors and GAAP accounting rather than true investment guides. Ted explores how correlation modeling translates into actual allocations. | |
| Public Equities: Consumer Staples, European Skepticism, and China A-Shares | 4 | 6 | 5 | 1 | Charles bluntly explains his preference for pricing power via consumer staples, writes off Europe as an economic museum, and advocates for domestic China A-shares. Ted asks concise questions about execution in China. | |
| Private Equity Dynamics and Skepticism Toward Direct Co-Investments | 6 | 5 | 6 | 6 | Charles criticizes PE co-investment models for diluting fund focus and subsidizing mega-LPs. Ted delivers a strong pushback, questioning why Charles does not simply take his pro-rata share rather than viewing it as a subsidy. | |
| Sponsor Message: Ridgeline Cloud-Native Investment Software | 1 | 2 | 2 | 1 | Contains a sponsor break followed by a brief transitional anecdote from Charles on counting pitch book pages before ESG appears. | |
| Direct Real Estate Execution and Single-B CLO Equity | 5 | 6 | 4 | 2 | Charles rejects hedge fund fee structures in favor of cheap positive-carry FX downside protection, while elaborating on direct thematic real estate and diversified CLO equity slices. Ted inquires about execution and time horizon. | |
| Managing Tactical Liquidity and Incubating Strategy 'Nickels' | 5 | 6 | 3 | 3 | Charles shares his method of holding small 'nickels' in niche strategies ready to scale into dollars during market dislocations, swapping cash treasuries for futures. Ted probes the tension between managing micro strategies versus core asset classes. | |
| Capitalizing on Motivated Sellers and Maintaining Style-Box Discipline | 5 | 5 | 4 | 3 | Charles uses a divided cafeteria plate analogy to demand absolute style box purity from specialist external managers. Ted asks how a siloed approach manages to identify cross-asset adjacencies. | |
| Corporate Pension Peer Pressures, UK Governance, and Minsky Risks | 5 | 7 | 7 | 2 | Charles sharply criticizes ESG packaging as an unnecessary fee surcharge, mocks UK pension boards for labeling collapsing gilts as risk-reducing, and warns of impending Minsky risks. Ted draws out his portfolio positioning. | |
| Portfolio Flexibility, Market Resilience, and Long-Term Optimism | 4 | 4 | 3 | 1 | Charles concludes on a bullish note regarding long-term technological progress like nuclear fusion and portfolio agility. Ted wraps up before moving to the closing questions. |
Statements from this episode (34)
Van Vleet: Rising Real Rates Break Crypto As T-Bills Yield 4%
“When you lift rates from a negative one and a half real to a positive one and a half real stuff just breaks because you would spend so many years with no volatility in rates that almost has broken the country of the UK. And now it's breaking the whole crypto b…”
Van Vleet: Japan Funded $45B Currency Intervention by Selling Treasuries
“Forty-five billion dollars in currency intervention. That money had to come from somewhere. It came from U.S. Treasuries.”
Van Vleet: Infrastructure investing is fundamentally just real estate
“It's real estate with some unique patterns, but it's really just, you got this asset. If you don't have a tenant for it, it's worth nothing, and so you get a cash flow off that, and you might get to increase your rent with inflation if it's a bridge, but we ju…”
Van Vleet: There Are Fundamentally Only Two Asset Classes: Rates And Equity
“I really only think there's two asset classes. There's rates, as in government rates, And there's equity. Then there's equity proxies called spreads.”
Van Vleet: Real estate is just a fixed income portfolio of tenant credits
“And I'd even go so far to say real estate really is just a spread product. It's a bond. It's a fixed income. The building itself is worth nothing if it doesn't have tenants. Real estate's really just a fixed income portfolio of credits and the credits are The …”
Van Vleet: Textron assigns an equity beta to every portfolio holding
“Everything we have in our portfolio, we assign an equity beta to it.”
Leveraged Derivatives Used For Growth Targets Caused The UK Pension Crisis
“The other common way, as we've experienced in the UK, where the UK, of course, has gone through a meltdown because they were using derivatives. They were leveraging. So they were only using 50% of their assets levered To be hedged, and the other 50% still rema…”
Overfunded Textron Pension Ignores LDI Strategies To Maintain Growth Focus
“So we're about a 116% funded and we still remain growth focused. We do not have an LDI focused plan.”
Textron Pension Holds 5% Levered Long US Dollar Position
“A really easy place to fall back that we have consistently is we just remain overweight U.S. Dollar. We have a standing long dollar with a short versus yen, Aussie, and Euro, and it's a positive carry. We do it unfunded, so it's levered. It's a five percent po…”
Van Vleet: Textron allocates 30% alts, 30% fixed income, 40% public equity
“We're in 30% alternatives, which is private equity, real estate, primarily. A couple of hedge funds, but mostly real estate, private equity. 30% fixed income and the balance in public equity, and that public equity is U.S. And international.”
Van Vleet: Public REITs and convertibles act as equity, not real estate or bonds
“Public REITs are not real estate. On any given day, it's equity. And convertible bonds, surprise, surprise, are not bonds. It's equity. And it's fine. You know, convert, convertible bond is a .8 S&P and a REIT is a .9 S&P and high yield is, we call it a .4 S&P…”
Van Vleet: Textron pension uses no investment consultants
“We don't have any consultants. I'm not a big believer in consultants.”
Textron Pension Maintains Dedicated Equity Allocation To Chocolate, Alcohol, And Tobacco
“For example, we've always had a dedicated allocation to my team's going to hate me when I hate to say this. I call it our cat stocks, chocolate, alcohol, tobacco.”
Van Vleet: Textron Maximally Underweights International Equities
“And then I have been as maximum underweight international as I could be as much as I felt comfortable.”
US Venture Capital Brain Drain Keeps European Public Markets Heavy In Banks
“Europe tends to be very, very heavy into banks, insurance companies, there's a couple of great pharmas. Now, part of the problem isn't they're making, part of the problem is that any technology upstart, it starts in Germany, or starts in Berlin, or starts in t…”
Van Vleet: Institutional Allocators Cannot Afford to Avoid China
“I think you can't afford not to be in China.”
Van Vleet: Textron Invests in China Strictly via Domestic A-Shares
“All in A shares. So we didn't want any H shares. We didn't want any red chips. We want as much as possible somebody who's reflecting the local economy. And so that's a lot of healthcare and fintech.”
Top Silicon Valley VCs Reject Corporate Pensions Due To Finite Fund Lifespans
“We have some growth in buyout mid-cap, and we just never went deep into venture, you know, seed or A round, partially because we just, you know, we're not interesting money to Sequoia and to Sand Hill Row, because Sand Hill Row says, you're not going to be her…”
Full-Fee LPs Subsidize Large Institutional Investors Taking Free Co-Investments
“Because of that, I'm not real thrilled when our GPs will raise five hundred million and then raise five hundred million worth of opportunity for direct co-invest. And my pushback on that is, well, so I'm really just subsidizing the other guy who's taking the c…”
Van Vleet: Large co-invest capacity drags mid-market GPs into unnatural deals
“So they're kind of forced into what is perhaps an unnatural part of their cap space because they, they'd love to spend the 500 in coinvest. And that coinvest that I'm subsidizing and is being a distraction to, and perhaps dragging that Five hundred million GP …”
Asset Managers Will Soon Need Separate Pitch Books For Pro- And Anti-ESG
“I said, I think someday, just like back in the eighties, you used to have to carry two business cards, one with a bug on it, union bug, and one without, and never get them mixed up. You're going to have two pitch books. You better not bring this pitch book to …”
Van Vleet: Long US dollar positions provide cheaper downside protection than hedge funds
“I just think it's an expensive downside. We talked about my best downside is, is structured long US dollar. That's actually a positive carry. It's not costing me one in 10 to get that downside capture. So I just, I can't get past the fees.”
Textron Pension holds 80% of real estate directly across 20 apartment buildings
“Mostly direct. We're 80% direct. So we own a portfolio of 20 garden style apartment buildings and data centers and a lot of industrial warehouse and cold storage.”
Van Vleet: US household formation outpaces housing production by 150,000 units annually
“The household formation running at a million units a year, we're only making 850,000 a year. So the shortage is there for a while.”
Van Vleet: Textron is buying single-B rated CLO equity slices
“The other place, Ted, I think is great. It's where you have such incredible diversity, and that's in, you know, single B rated CLO equity. So CLO equity, you know, where you gather 200 single B rated names and throw them in, and I buy the bottom slice, the equ…”
Van Vleet: Climate change makes property-casualty insurance underwriting impossible
“It just, I, I've come to recognize that, well, I think the insurance business, property casualty in particular, is just going to be impossible to judge how much premium you should charge, given the climate change issues.”
Textron pension replaces physical Treasuries with futures for liquidity
“So we have been actually just taking treasuries out of the market and replacing them with futures. Futures being more liquid than treasuries in one of these taper tantrums.”
Pre-Fund Niche Strategies With Nickels To Deploy Dollars Rapidly During Dislocations
“I just will have a lot of niche strategies that I leave a nickel in so I can push in a dollar later. So for example, I keep a nickel in Fallen Angels. I keep a nickel in these closed-in funds. I keep a nickel in BDCs because when you get a banana peel moment, …”
Van Vleet: $8B to $10B is the optimal pension fund size
“It's, a lot of it is because we're at a size of ten billion. I can do that. Again, I really feel for the people at CalPERS who you just can't move the needle, and I feel badly for the firms that are, you know, five hundred million to a billion, you're not goin…”
Van Vleet: Textron avoids multi-asset and macro funds to maintain style purity
“It's very, very important to me that managers stay in their box. And for that reason, we don't hire any multi-asset managers. We don't have any macro hedge funds.”
Van Vleet: Textron will not seed small boutiques for derivative strategies
“I'm not going to go to four guys in a shoe box and give them a mandate where they're using derivatives and prime broker. And no, I, you go to large firms, you give them a sharp knife and you trust them to use it.”
Wall Street Repackaged Basic Governance As ESG To Charge 40 Basis Points
“I'll tell you how it happens because we have a lot of Wall Street firms who have a conflict of interest. They can wrap it into this new bottle and slap on another 40 base points of fees for it.”
UK Pension Rules Mandating Consultants And Beneficiaries Fueled The LDI Meltdown
“The UK were required to have a consultant, and were required to have participant beneficiaries on the committee, which are two problems that also led to this little fiasco in the UK around their LBI programs. You have too many amateurs in the room, and so you …”
Yield To Maturity Is Horrible Math Due To Unrealistic Reinvestment Assumptions
“For investing, my biggest pet peeve is the word yield. I think anybody should spend half a minute looking at the math of how you calculate yield to maturity. It's bad math. It's horrible math. This idea that you're going to reinvest at the same rate. So of cou…”