The Exchanges

Q In addition to some of the things we talked about, industrial assets, a little bit of infrastructure, defense, what are some of your favorite themes in the portfolio today?

A Another sector we love is senior housing. We've been very active in that. It goes all back to structural drivers. We know the eighty-plus age cohorts growing at nearly five percent a year while the overall population is dead flat. It's not only where all the growth is, it's where all the wealth is, too. There are a lot of them with a lot of money. That translates to a lot of demand and need for senior housing. That's a space we've been focused on because of the demand side, coupled with a dramatic drop-off in supply. Another one is net lease. Net lease is a lease structure in which the tenant pays the rent and all the expenses. It's the type of real estate where you, as the asset owner, have the most predictability of cash flow, the most downside protection between long-term contractual cash flow tied to credit tenants, tantamount to a credit investment, but you also have the hard asset ownership. The benefits of that real estate ownership that give you the inflation hedging, the appreciation potential, the ability to play these long-term mega trends for individual investors, tax efficiency. That's been a very big focus for us as well.

AI assessment note: “Another sector we love is senior housing. We've been very active in that.”

Q You mentioned that when you first started investing, there was already a platform here, Morgan Stanley, we'll say, 26 years ago. How is that real estate part of what you've been involved with for so long, evolved over the years?

A When I started, Morgan Stanley was one of the first amongst the largest real estate private equity businesses. We've seen the space institutionalized pretty dramatically. If I think back to 2000, the real estate private equity business was largely opportunistic closed on funds and U.S. pension fund capital. We've seen over time a diversification of the types of investing. More core, open-ended, or different strategies. We've seen a diversification of the investor base. It's super global today. Our business was a leader in a few regards there. We were one of the first to say, we want to serve our investors more holistically. We were one of the first entrants from the opportunistic space into the core space. Fundamentally, we're in the client service business. We first and foremost focus on what role should real estate play in investors' portfolios? What is most important to them? Ultimately, having strategies that serve their purposes, having core and opportunistic, having a few core plus strategies, being global in what we do has given us much better perspective. It's enabled us to have better judgment across the strategies and attract extraordinary talent as well.

AI assessment note: “We've seen over time a diversification of the types of investing.”

Q Why don't you take me back to the start of your career? Walk me through the core steps that lead you to where you are today.

A I did not set out to become an investor. I thought I was gonna go into public policy. My parents moved to Washington, D.C. when I was in high school. I was fascinated by policy and government. My whole college career was internships on Capitol Hill, political science major. The fall of my senior year, I got a call from Goldman Sachs. They had an open slot in their San Francisco office for the following fall. Did I want to come interview? I remember sitting there on the phone thinking, I've never taken a class in finance, but why not? I had a good appreciation for the role that markets play in the global economy. As somebody interested in policy, that was important. I crammed for the interview. I talked to all of my friends who had done banking internships or sales and trading internships the summer before. Long story short, I got the job. I graduated in 2008 into the financial crisis with a job at Goldman Sachs. I don't think anything has shaped how I think about portfolio management or how I manage stakeholders Or how I manage my career quite like starting out in the middle of a financial crisis. I learned a lot in the two years I spent at Goldman.

AI assessment note: “I graduated in 2008 into the financial crisis with a job at Goldman Sachs.”

Q decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at Ridgeline.ai. And now, back to the show. In some of the areas you're diving into, venture, private equity, notoriously competitive for the best managers. How do you position NYU, you being new in this seat for a long-standing institution, as a desirable LP?

A Two pieces. The institution and then the team. On the institution side, NYU positions itself. It's the largest private university in the U.S. We have 60,000 students, 700,000 living alumni. Most of the GPs and managers that we talk to have a family member who went to NYU. We're treated at NYU Langone Medical Center. The reach of the university is massive. That's appealing for a lot of our partners, especially when you combine that with the specific role of the endowment, which is to provide accessibility to that institution through financial aid. That's a compelling motivator for our managers. That's great in theory. Then there's the reality of the day-to-day. That's where the team comes into play. Our team leans in to building active partnerships with our managers. That can look like helping secure a room for a recruiting event that they're doing at NYU, or debating what the appropriate pricing model is for a product that we're not even invested in. We want to be the partner of choice because Managers find it valuable to have conversations with us. One of the best compliments I got from a manager was they said, when something's up, we like to call you first, because we know that you'll answer the phone in a timely manner. By the time we hang up, we'll be well prepared for all of the client calls to come. That's the type of value add that we want to be able to provide to our pa…

AI assessment note: “Two pieces. The institution and then the team.”

Q Which two people have had the biggest impact on your professional life?

A The first one I have to go with is my parents. I'll treat them as one because they act like a unit. When I was 16, right around this time where I decided that I was going to go into policy and politics, they sat me down and they said, great, you also need to understand how a stock works. They bought me books. I didn't have much of an interest in the markets at that time. They were adamant that understanding investing was an important life skill. The second person is Will Fox, who was the managing partner in the US at Partners Capital when I joined after Goldman. Will taught me a lot of what I know about managing portfolios and investing. Also running a business. When I went to Will and said, I want to understand how partners works as a business, he gave me that opportunity to understand how the finances worked. He both gave me a lot of confidence to keep doing what I was doing. Pushed me really hard to be better. Never minced words on what needed work. That shaped both my time at Mellon and then at NYU. To the extent that when I initially started interviewing at NYU, one of my first calls was to Will to get his thoughts and hash through what it might look like.

AI assessment note: “The first one I have to go with is my parents... The second person is Will Fox”

Q What did you find when you got there?

A The endowment has been around for a while, although it's much younger than most of our peers. When I got there, the university leadership gave me a mandate to change how the portfolio was being run. While the pool of capital at six and a half billion dollars was sizable, it's relatively small compared to the scale of NYU. Up until 2010, it was a sub two billion dollar pool of capital. A lot of that growth had come several years before I got there. The university leadership was ready to look to the next level, which required more growth from the endowment. The portfolio as it stood at that point was more conservatively positioned. All of the investment decisions were run through the investment committee. The portfolio was all flavors of Bottom-up, fundamental, mostly U.S.-based corporate securities. Mostly equity, some credit. Because of the conservative mandate that preceded me, there was a big focus on managing volatility. When I came in with this mandate that was growth-oriented, we had to rethink that construct across the board. Everything from the governance structure to how we thought about asset allocation to the types of investment managers that made up the portfolio, the team to underwrite all of that. It was all a blank sheet of paper.

AI assessment note: “The portfolio as it stood at that point was more conservatively positioned.”

Q When it comes to asset allocation and portfolio construction, how have you set up that framework to get at your growth objectives?

A We've walked a little bit of the middle ground between a more traditional asset allocation and a total portfolio approach. At the core of our asset allocation, we've tried to hone in on what are the different types of assets and the different roles that we want our assets to play in the portfolio. Grouping those together, which is where the somewhat of an asset allocation framework comes into play, But then creating a list of criteria for every single investment in the portfolio on how it fits into that bucket. What that's meant for us is we have an equity part of the portfolio, which has a private equity component and a public equity component. We have a liquidity and cash component to the portfolio, and we have absolute return and opportunistic. We have a small allocation to real assets, Although I would say that is a heavily debated topic of whether that deserves its own allocation. The idea stems from my view, my team generally shares this, that the most reliable source of return over the long term is equity market exposure. If we are going to generate a return that is going to fulfill the university's objectives of spend plus preserving purchasing power, Anything we invest in needs to be competing with that long term equity market return. There are lots of reasons to move away from equity market returns. We've got to be really clear on what those reasons are for each part …

AI assessment note: “We've walked a little bit of the middle ground between a more traditional asset allocation”

Q What are some of the areas you've leaned into that are a little different from your peers?

A One is on the hedge fund side, where when I was at the Mellon Foundation, we were relatively early to underwriting hedge fund strategies that are more trading oriented, that run higher levels of leverage, where you don't have necessarily a single persistent source of return. It's much more down to technology or manager skill or Or some insight into the data. We've leaned in heavily there. That absolute return and opportunistic bucket that I described, almost all of that right now is in those strategies. We're able to do that because we've built a team that has a lot of expertise in those strategies. We can underwrite the different types of risks effectively. The other thing we've done that's different Is a function of the structure of the portfolio at NYU, where we have liquidity. When I got to NYU, less than 15% of the endowment was in private assets. Our team has the view that there is still a lot of value to be had over the long term in private markets. Maybe not every private market. We want to be more discerning there. But we have the ability, and we have been growing that portfolio Substantially over the last few years when many of our peers have been pulling back their allocations.

AI assessment note: “growing that portfolio Substantially over the last few years when many of our peers have been pulling back”

Q With these two sides of the need starting GFC on the lending side, and this capital that needs to find a home with this type of strategy, how did you think about what you wanted to put together in the asset management business?

A We came from a restructuring background. What we wanted to do was to make sure that we embedded the learnings of what goes wrong in credit, not just around the credit risk of your loans, but also around the structures that you're investing in, the structure risk, some of the other pitfalls that can happen through lending, so you put yourself in a good position if something inevitably does go wrong. The other thing that we saw Through the restructuring business was the importance of empowered process, good team structuring, good portfolio management, not just good credit selection. We spent a lot of time designing the infrastructure around the business as to how we were going to approach the market. The other thing that we thought was important was that if we were right on the thesis that you were going to see a significant amount of capital move off bank balance sheets or in a world where bankruptcy We're going to partner with institutions to provide capital. It's going to be a large space. It's not going to be a couple of trillion dollars. It's going to be tens of trillions of dollars. Your problem was not going to be AUM gathering. Your problem was going to be sourcing good quality loans and the ability to produce those loans through cycles. That's why we went down a path of proprietary origination. Everyone says they have proprietary origination, and what people often mean b…

AI assessment note: “That's why we went down a path of proprietary origination.”

Q Where did that academic path take you through school?

A My undergrad was in political science, sub-discipline called comparative politics, where you're studying how different political systems evolve and trying to draw conclusions from that. Look at a dozen countries that have transitioned from dictatorship to democracy and say, hey, can we observe any patterns? Which turned out to be unknowingly good training for what we do as investors, because you're looking at different businesses, understanding them in a deep manner, developing pattern recognition. I didn't know that at the time. After undergrad, I had a couple crappy jobs in finance just to pay the bills. One was with a newsletter, one in a brokerage firm, both parts of our industry that are focused on making money off of clients and making money for clients. It didn't really sit well with me, so I went back to graduate school to get a PhD in poli-sci. I discovered there are no jobs for PhDs in poli-sci. Which they don't tell you if you apply. At that point, I was in Chicago. I'd met the woman who is now my wife and didn't want to leave. Morningstar was here. They had a reputation for being on the investor's side, which sat well with me, being willing to take a chance on liberal arts dudes like me. I wound up in Morningstar around the time when they were starting up coverage of individual equities.

AI assessment note: “My undergrad was in political science... I went back to graduate school to get a PhD”

Q How have you thought about managerial style as a lens at looking in the success of someone running one of these businesses?

A There's a subset of managers who are in the trust me category. As an investor, you're betting on the person as much as you are betting on the business. You're betting this person's second act. They've had a successful business, they've sold it, now they're starting another one. Because this person is, quote unquote, a moneymaker, you're willing to maybe overlook some related party stuff or some excessive compensation, and that's totally reasonable. That is a style of manager that History has shown can create a lot of value for shareholders. It is not a style of manager we tend to gravitate towards. That's just personal choice. It's a chocolate versus vanilla thing. I don't think they're good or bad. I do think they have greater risk of left-tail outcomes, of not listening or taking the company down a path that destroys value and not changing course when things are observably not going well. Especially in a concentrated portfolio, we have to think about that left tail risk differently than if we ran 50 stocks. If you run 50 stocks, okay, fine. I'll take a three percent bet on somebody who might be the most amazing manager of all time, but there's a little, some of that left tail risk. 12 stocks, it's a little harder. It hurts.

AI assessment note: “It is not a style of manager we tend to gravitate towards.”

Q When you had a universe of 1700 companies you're following to get to 12, what filters have you used to narrow that lens?

A To be clear, we had to cover the waterfront at Morningstar. That 1700 included utilities and oil and gas and life insurance and auto parts and auto OEMs, which are all not good businesses. Those are easy ones that just throw out. Step A is, is the industry structurally attractive or not? This is one of the hard truths that early investors have to learn is that some industries are tough. You got to respect the managers who are in them and got to respect the CEOs who try to make money there. Making money as an airline is hard. Making money as an auto parts company or a life insurance company or an oil and gas, you're a price taker. Huge parts of your future are not under your control. You can invest in these businesses and do well with them if you develop pattern recognition and understand that world. They're not conducive to creating moats. Those are areas that we largely ignore. The second is, can we understand it? We are global. Historically, about 30, 40% of our portfolio has been outside the U.S., but we're a bunch of folks raised in the U.S. and in Chicago. There's smart investors in Sao Paulo who are going to understand a local drugstore chain a lot better than we are. You have to not get over your skis in thinking you can understand things on the ground better than somebody who's lived in that culture all their lives. We definitely avoid stories where the moat is based on…

AI assessment note: “Step A is, is the industry structurally attractive or not?”

Q What was that initial rubric that you built?

A We had data back to the sixties and looked at every company that had done more than 15% returns on capital for more than 15 years. Totally arbitrary numbers. The idea was, instead of theorizing, let's just get the data. Let's get the companies that have done this and generated sustainably high returns on capital and see if we can observe patterns. Most of the companies that had done that could be sourced to some kind of a intangible asset, like a brand or a patent or a government approval. High customer switching costs, like you see with databases, network effects, or scale advantages, cost advantages. Most of them fit in one of those buckets, and it was like, well, that's what the data says. Let's use that framework going forward.

AI assessment note: “looked at every company that had done more than 15% returns on capital”

Q Are there other important quantitative metrics beyond the original ROIC that you look at when you're trying to figure out if a company has a good moat?

A No, I find it's best to stay away from that because you go down the route of, oh, it should have high margins. What about a distributor? Distributors are often beautiful businesses. They have relatively low margins, but they don't have a lot of capital employed, but they're great companies. So, okay, we can't use profit margins. It really comes down to free cashflow. Okay, fine. But what if they're reinvesting? What if they're putting capital back into high return projects that have a high NPV? Free cashflow may not be the best metric. Obviously, if a company has gone a decade with cruddy financial metrics, there's probably nothing much there. But the point is that the bulk of it is qualitative. Understanding what kind of price the company can take, if it has pricing power, or whether, in some examples, there's what the nomad guys called scale economies shared, where the benefit is not taking price, but passing scale benefits along to customers. Costco is One of the canonical examples, Medline, which recently came public as another great example of passing on scale benefits to customers. They're even saying, oh gee, moats are all about pricing power. Well, no, they often are. It's squishy, and that's why the qualitative angle is more useful than a quantitative metric.

AI assessment note: “No, I find it's best to stay away from that”

Q How do you think about the power of brands when it comes to moats?

A That's a lot of early investors, certainly mine, initial introduction to what is a moat from Buffett's letters a long time ago. I'm talking about the inevitables with Gillette and Coke and whatnot. I've historically invested less in consumer-facing businesses because I don't have a good feel for what a good brand is, but it's useful to kind of distinguish brands in terms of the classic Coke or Gillette, lowering your search costs. You go to the shelf and you see the label, it's what you want, and you don't have to spend a whole bunch of time thinking, what do I want? You just grab it. The consumer can decide to defect with no cost to you. If you say, I would rather try President's Choice Cola than Coke, You can do that, and if you don't like it, you go back. Big deal. If you think about a luxury brand, that's more consensual. I'm not wearing a Rolex because it tells time better. It's because I want people to know I have money. I'm signaling something, but that signal value is only useful if everybody else agrees that a Rolex has signal value. If I decide one day to say I'm going to wear some no-name watch that nobody's ever heard of that cost a 100,000 dollars because I want to signal my wealth, If nobody's ever heard of it, I don't achieve that. We all have to agree. If I defect, there's a cost to me. If I defect out of that luxury positioning ecosystem, the cost is nobody get…

AI assessment note: “useful to kind of distinguish brands in terms of the classic Coke or Gillette”

Q I'd love to double click on hedge funds. What do you think today about the role of hedge funds that you said at least once were 40% of what you're doing and how you're participating in that space?

A Hedge funds are no longer 40%, but they're still meaningful. Today, our target allocation across our long, short, and absolute return portfolio is 27% in aggregate. We're a believer. They have been a very important part of our portfolio, not only for meeting that return objective that I mentioned, they do so while maintaining our liquidity, also helping us to manage volatility. When you're spending five percent of the portfolio every year, All three of those mandates do matter. Something that gets lost when people talk about returns. If the goal of this endowment was to just put it in a drawer and not spend from it for 10 years, you might do something differently than if you knew you had to draw five percent from it every year. In that context, hedge funds make a lot of sense. They've obviously gone through many different cycles and periods where they've done better or worse. This is where Williams is fortunate in that we've had these longstanding relationships. We have the confidence to see through cycles. We have some amazing manager names that have done well for the portfolio.

AI assessment note: “Today, our target allocation across our long, short, and absolute return portfolio is 27%”

Q What's one thing most people don't know about you that you find interesting?

A I said I love basketball. I was so fortunate in high school. I played with two future NBA players and actually played on the fourth ranked team in the country where we got to play against all sorts of people that played in the NBA over the last decade or two. It was this amazing experience because it was one of these times where not only was it so fun and my big passion, but I learned about teamwork and leading and Then also how to take a back seat, and the experience of being a part of something great. I still look back on that, and I'm so lucky and fortunate to be a part of that experience. There's one more I should probably say. It was fun talking about my professional accomplishments, but actually I'm far from the most successful person in my house. My wife is an amazing author, Christina Alger. She's written four best-selling books, and they are phenomenal. If you're going to start with one, I would start with The Banker's Wife, but What really makes all of this possible is her and her support. She's really the most talented in the family.

AI assessment note: “I played with two future NBA players and actually played on the fourth ranked team”

Q When it comes to taking the ideas, having your partners go and work with the companies, how do you think about being on the ground in the company alongside the executive team that already exists?

A Part of the design upfront is making sure that everybody, both at the company and then our partners, Have a clear eyed view for how that relationship works. The amount of time that an ethos partner spending at the company is bespoken situation specific. If it's helping somebody redesign a pricing strategy, that's a different amount of time than if it's somebody helping a company figure out how are we going to completely change your debt structure from A SOFR plus six, 25 unit tranche deal that we're paying 10 and a half on into a securitized asset backed loan that we're going to pay a fixed 6.8% and save fifty million dollars a year. That's a complicated thing where you have to completely redesign the legal structure of the company and create bankruptcy remote subsidiaries, backup servicer agreements, go meet with the rating agencies. That's almost a full-time effort. That is something that we did for this company, Identity Digital, where we had three of our partners working a lot of their time just trying to execute that one thing, as opposed to another situation where they might just be meeting monthly to talk about how to change the channel strategy a little bit differently, each situation specific. There's an alchemy to the relationship that is unbelievably subtle and important. If you show up as an ethos partner to a company, are you ethos? Are you the company? Are you goi…

AI assessment note: “the relationship that the ethos partner has with their counterpart at the company is a sacrosanct cone of silence”

Q Thank you. It probably makes sense to start with a little bit of a background on each of your seats and how the stock side platform fits into that. Derek, why don't you kick it off?

A Here at the state of Wisconsin, we run about half of our assets internally and then half of our assets externally. I head up the team where we allocate capital to external managers in the public space. We're trying to find managers where we can't manage those assets with either the team or the strategy or the region of the world internally. A lot more of the hedge fund strategies, a lot more of the emerging markets. How Dockside comes into the whole fray is It's a platform for us to be able to be a lot more dynamic about our allocations, to be able to target our risk a lot better, access managers that we might not have been able to access through a traditional GP relationship.

AI assessment note: “How Dockside comes into the whole fray is It's a platform for us”

Q How have you systematized and organized the 70 people underneath that leadership?

A It's no different than a lot of firms, where we have an investment team. Jordan helps oversee that. We have a number of deal quarterbacks on the investment team who report into us and have a VP. Those are principal and partner level, and they have a VP, a senior associate, and often an associate on deal teams. They then report into me and Matt, who are the investment committee. Will oversees our CFO and our back office activities. We have a business development five person team that's done an incredible job helping source opportunities and give me and Matt leverage where we used to have to do every first meeting. Now with a business development team, every first meeting with founders and our business development team is able to not only handle the first call, but actually handle the first meeting and then help decide whether Matt and I should Fly out and spend time in person with the founders, which is a big part of our program. So investment team, business development team, and then all the back office activities of the firm.

AI assessment note: “we have an investment team... Will oversees our CFO... We have a business development five person team”

Q I want to ask you about capital allocation. You're buying businesses, there's a financing component. What do you see as the most important levers of capital allocation in the success of one of these businesses?

A It's two things. One is, what is the pipeline and opportunity set for inorganic growth? We are actively avoiding categories where the bolt-ons are trading outside of our price range. There are categories today that people are having success rolling up, whether they be Resi HVAC or pest control, or in a prior cycle, perhaps VET, where the platforms trade at big prices, but the bolt-ons also trade at big prices. You have relatively small bolt-ons trading at maybe eight to 11 times cash flow. For us, that is fundamentally less interesting than similar end markets where the platforms are trading at 12 to 15 times, but the bolt-ons, because of micro market risk or just lack of private equity heat, are trading at, let's call it, five to eight times. To us, those are more interesting opportunities. A lot of the time we spend in diligence on a category and on the initial purchase within that category is spent on building out the pipeline so we can think about within how much confidence interval range do we have that we can get the next 3040, fifty million to work at an unlevered low to mid teens return, and then with a dollop of leverage once the business is ready for it, now without even getting into organic growth, you're up into the high teens or low twenties. The second capital allocation decision that is critical to us is where are the pockets of technology implementation and inve…

AI assessment note: “It's two things. One is, what is the pipeline and opportunity set for inorganic growth?”

Q How do you decide when a business is ready to take on some leverage?

A It's a combination of two things. One is, what is the depth of the G&A line? Do we have a CFO, a controller, a head of treasury and cash management? Are all of the warning lights that we touched on earlier in place so that we're able to spot things in real time if something isn't coming to fruition in a way that we underwrote it? So that's the people side of it. And to a size and scale, we have found that the credit markets are far deeper Cheaper, more flexible, less covenant-laden, and friendlier to consolidations that are, let's say, 15 to twenty million of EBITDA in size and scope versus something that's five. What does that mean in terms of practical timing for us? That's usually 12 to 18 months after we invest in a business. We've typically deployed the preponderance of the equity we've allocated to that roll-up. The team is fully formed. We have all the warning lights in place. And it's at a size and a scale where we can then go to the market and get a number of term sheets and create real competitive tension around that financing.

AI assessment note: “It's a combination of two things. One is, what is the depth of the G&A line?”

Q Which two people have had the biggest impact on your professional lives?

A For me, I would say number one is my wife, Annabelle. She's allowed me to spend the time, effort, and energy traveling around the world with Alex the last 13 years doing the things we need to do to build the firm, and she's picked both of us up off the ground from the lows over the last 13 years. But equally as important, she actually suggested that Alex and I worked together while we were in business school, so GSP is Very much her brainchild. Her and Alex have actually known each other for longer than I've known either one of them. They went from preschool through college together. We both give her and Alex's wife, who's also named Alex, a ton of credit for helping us in the early days of figuring out our partnership. Two is Royce Yudkoff, who we mentioned earlier, who's our HBS professor for me, and I'm sure Alex agrees, has been our most impactful An important mentor and thought partner over the last 13 years. Even to this day, almost 15 years later, whenever we have a serious problem, our first phone call is to Royce, and just an unbelievably thoughtful, smart, humble individual who we owe a lot to.

AI assessment note: “number one is my wife, Annabelle... Two is Royce Yudkoff”

Q Irrespective of the benchmark you used, for a long time we've had shrinking number of public companies, particularly in the U.S. How do you think about what that means for the future?

A I'm not sure we know quite yet what it means for the future. The shrinking number of companies from a peak in the U.S., six, 7000 securities, about the time we graduated business school, down to about 4000 U.S. companies is just a fact. When you go and you dig into it, you discover what we lost was a lot of really small companies, a lot of micro cap securities, a lot of small cap companies, and for long-term returns, it's not clear you lost much. We are seeing companies stay private longer, which does mean there may be less return in the public space. It's hard to know. There's SpaceX and others sitting out there waiting to come public. I would love to have had them in my index fund. Back when they were a hundred billion dollar company before whatever trillion is, I still believe the best place for companies to grow their business is the US public markets. There's no place that trades as well. There's no place that has as much liquidity. There's no better place to raise capital. What I don't know is whether this staying private for longer is a permanent phenomenon or not. Let's find a way to get some high quality private assets into retail investors hands over time.

AI assessment note: “which does mean there may be less return in the public space.”

Q With that money that's gone into some of the successful large private companies, should they go public? And there's some noise that some of the bigger ones will this year. How do you think about integrating that into your index products?

A The minute a company comes public, it belongs in an index fund. We've had that belief for a long time. You might need a few days for it to get trading and figure out price discovery. Our best indexes add those securities in day three or day five. That's the best practice. Why should they not be an investor's portfolio from there? They should be float adjusted. Most companies come public, only bring five to 10% of the company public. We only want to buy five to 10% on the day of the IPO. Many years ago, Yahoo came public with a small float. Indexers bought a lot of it, and the price went up. The demand was greater than the supply. Gus Sutter and Mike Buick, people long before me on this desk, pushed really hard for all of our indexes to be floated, just in which they are today. That reflects what's available in the marketplace, and therefore, an indexer doesn't oversize the amount of Shares brought to the market, but get them in there quickly, have it be part of the investment return.

AI assessment note: “The minute a company comes public, it belongs in an index fund.”

Q I'd love to ask you about the business of Vanguard, some of the decisions along the way. You weren't the first mover into the ETF space, now one of the biggest. How did that decision process play out in your organization?

A All of that, Ted, started before I got to the investment side of Vanguard. We did launch ETFs after I was at Vanguard two years. At that point, I was working the four and K operations. It had nothing to do with the original couple of ETFs we brought to the market. The history goes back to Jack Bogle talked to the American Stock Exchange about the spy product, and he said, what are you crazy? Trading intraday is the worst thing for investors. In the early days, Jack Bogle was highly opposed to this. Forward probably a decade or so, Gus Sauter came to Jack Brennan and said, we should offer these. Gus pitched it to Jack Brennan and said, this is an alternative distribution vehicle. Intraday trading is not what we're about. It does open the aperture of getting our products to more people, making indexing better. Jack Brennan threw him out of the office the first time, Gus was tenacious and went back in and said, you really should. This is a way for us to take our business from being just a direct place where we sold mutual funds to putting it out there on a brokerage platform that today advisors can use it. It's widened the use of index funds. Jack Bogle still hated him. He would still talk to him. I got an earful on a number of occasions from Jack as to why would you give someone the ability to trade interday? No one ever needs it. They need to buy it once today, sell it again in …

AI assessment note: “Gus pitched it to Jack Brennan and said, this is an alternative distribution vehicle.”

Q Why don't we start with your background and path to joining Vanguard a quarter century ago?

A It's been a heck of a 25 years since I joined right out of business school. I grew up in a small town in Delaware. My parents didn't go to college. My mom took a job at the University of Delaware as a secretary so that I could get free tuition to the University of Delaware. I got exposed to some folks who were looking at other schools. I was fortunate enough to get into the University of Pennsylvania, but it was a little bit too pricey for my parents. I looked and remembered that I really enjoyed My dad's story's from the Navy. I put the two things together, a chance to go to Penn with a Navy ROTC scholarship, which paid the Penn tuition and got me to go to a great school where I studied engineering, and then I owed the Navy. Five years of service, which I turned into six and a half on a submarine out of Grodden, Connecticut. That was a fantastic experience where I got to see a little bit of the world. I got to see some great leaders and learn about leadership. From there, I went to business school at HBS and Where I met you for the first time. Part of the reason I went to business school because I didn't know what I wanted to do. I tried a summer in consulting, and it turned out that I like doing things a lot more than giving advice on how to do things. I went back to school second year looking for a place to work that had a great mission, a great value set, and was Philadelph…

AI assessment note: “It's been a heck of a 25 years since I joined right out of business school.”

Q As you look at the equity index business today, what's the range of products and asset size across it?

A We have about eight and a half trillion of index fund assets. That would include our fixed income index assets, which a colleague of mine runs on behalf of investors along with the active fixed income space. That's one big business for us. Within equities, we have two teams that run assets today. One is the team that reports to me, the global equity team. We run about five trillion dollars of assets. They range from total stock market broad exposures to global broad exposures to value and growth exposures and country exposures. We're running Australian and UK. There's a wide range of outcomes along with running target date suites. Over on the other side, our SE team, or strategic equity team, they're running size and value growth sector funds for U.S. investors. They're close to what you would see in Morningstar, nine box type things, along with sectors, maybe some unique sectors like dividends, country exposures for non-U.S. investors.

AI assessment note: “We run about five trillion dollars of assets. They range from total stock market”

Q When you start out that portfolio and you're looking at the world, there are probably some similarities, differences. Competitive advantages you wanted to lean into. Walk me through the design of this and how you've implemented it. What's similar from other pools and what's different?

A What's similar is we have equity-centric portfolio. Just like any other endowment, we need to generate a five percent plus real return. You can't do that any other way than investing in equities. We use primarily outside managers. Those two key tenants are pretty similar. What's different are a couple of things. One is we are resource constrained. It's been a team of mainly five investors since day one. When there's just five of you, you can't do everything. You have to make a choice about things to leave out. Because you're leaving out a lot, you really have to be focused on picking the right things to lean into. Our portfolio probably looks a little bit different in that there's a lot of things that we've decided to not spend our time on. Because we believed we'd be better spent spending time elsewhere. Things like private credit, China, Latin America, Africa. We decided to keep focused on other areas of opportunity. The other real difference in our portfolios that's significant is we have less illiquidity risk. We only have about 20 to 25% of our portfolio in private assets. Some of that is a structural constraint that we have, which is that most of the assets that we manage are actually not true endowment assets. They're balance sheet assets. There's not a statutory constraint. Elroy Demson is a researcher. He wrote a paper a few years back. One of the things he looked at w…

AI assessment note: “What's similar is we have equity-centric portfolio... What's different are a couple of things.”

Q It feels like today there's either a lot of simmering or a lot of burning across a lot of areas, private equity, private credits, and emerging markets, U.S., Where are you thinking about diving in to do research?

A Some of it is in our own kitchen. India right now is going through a very difficult period. It's got a double whammy now of being in the crosshairs of AI because of IT services and the huge part of their economy that that sector represents. It's got the risk that it's facing from the Iran war, where it's so dependent on Middle Eastern oil, gas, and fertilizer. That's a place where we're spending a lot of time to underwrite what we have, to be ready as dislocations there might increase. We have been positioning our credit portfolio to better take advantage of dislocations. We've done a fair amount of work to be well positioned for what's happening in private credit. We recently reconfigured that part of the portfolio, added a new manager. We have capacity to add there. That's where there'll be tons of interesting opportunities. There will be indiscriminate selling in private credit. There's good reasons why many of those companies will be sold, but there'll be many reasons where it's just liquidity that's driving prices down. We're excited about opportunities coming from there.

AI assessment note: “That's a place where we're spending a lot of time to underwrite what we have”