The Exchanges

Q How do you think about where you place your chips in a firm like GMO that has a broad portfolio? And even within the unconstrained portion of it, there's a bunch of different products that you could invest in.

A I think of them more as an asset allocator. I think that's one area that they're really good at. They're less focused on the timing of when things will underperform and outperform and more on picking the right asset classes to own over longer periods of time. So that forces you, if you buy into that concept to give them a little bit more time to deliver rather than looking at them quarter to quarter, even year by year. We do use the global tactical asset allocation strategy I view it as a good way to get exposure to whatever they think is best within their universe of options. And then we also look at the resources strategy, which we think is a good place to be just in general looking forward.

AI assessment note: “We do use the global tactical asset allocation strategy”

Q This has been a very difficult period for value. How do you make sure you stand firm and get to the other side when year after year after year for a while now, the strategies have been underperforming?

A Yeah. I mean, that's part of having a diversified portfolio. By definition, You should own things that are not doing well, because if they're all doing well at the same time, you're probably going to go through a period where they're all doing poorly at the same time. So part of it is buying into that conceptual framework of if you're going to own things that are going to underperform for stretches, obviously you don't know when that's going to happen or when it's going to reverse. So that's number one. And the number two is really understanding what you own, what its role is in the portfolio, so that when that asset goes through its inevitable period of underperformance, rather than selling it at its lows, You're more apt to buy it at its lows, and that can accrue to better returns longer term.

AI assessment note: “part of it is buying into that conceptual framework... number two is really understanding”

Q Alex, why don't we start with your background and how you came to forming the business?

A Well, it goes back to the late nineties at the peak of the internet bubble. I came out of law school and went straight into the investment business, no intention to practice law. And I didn't realize we were at the top of the market. It's always tough starting your career with the market falling 50% in the first three years. But that teaches you certain aspects of the importance of protecting capital. So that was an early lesson. And so that's how it began. I started at Merrill Lynch as a financial advisor. And as you know, when you, when you arrive at a firm like that, they give you a phone and a computer and they say, go get clients. So I spent a couple of years trying to understand how to invest, how to manage client portfolios properly. And one early lesson was I discovered the importance of surrounding myself with the smartest people. And learning from them, learning their strengths and their weaknesses. And so I spent a lot of time trying to find the smartest investors out there. And, and I did that for 15 years at Merrill. And in 2014, it was time to leave and start our own firm. And Damien and I did that together.

AI assessment note: “in 2014, it was time to leave and start our own firm.”

Q So what was the initial impetus for starting your own firm?

A When I was at Merrill, I really didn't use much of what they offered. And the reason is because I viewed myself as an independent advisor. Clients hired me to give them the advice that I thought was best fit, and I divorced myself from where I was working in that perspective. And so I would look around the world in terms of the best research, and I found really good research outside of the firm, so I didn't really use their research. I found better custodians, so I didn't use them for custody. We used them for performance reporting and compliance, and that was about it. And so I was effectively an RIA Within a brokerage firm for a long time. And clients were asking me for many years, why are you even there? You're not really using for anything. And so I always think of what's best for the clients and Merrill gave me a lot of flexibility. I was able to do what I thought made sense for clients. And I did that as long as I could until I got to the point where I felt that clients needed more tools and I was able to provide while at a brokerage firm, there are some limits. And so it was at that point where I felt that it made the most sense for clients to leave. And effectively broaden our toolkits to give them good performance looking forward.

AI assessment note: “got to the point where I felt that clients needed more tools”

Q Can we take a step back? You mentioned that you're managing thirteen billion of 19 in the group. What was the progression from Alex and you bringing your business together and then joining it up with this sort of slightly broader group?

A Our goal has always been, at least for me since day one, is building better and better portfolios. When I look forward five years, I want to be smarter at investing and have better portfolios for clients. And better portfolios to us means attractive returns with less and less risk. You just want to keep reducing the risk over time by being more diversified. And so part of the reason Damien was a good fit for me is because for a long time, anytime I had an investment idea, I'd share it with my colleagues and everybody would say, great idea. I love it. And nobody would ever push back. And Damien was one of the few people who'd say, that's the worst idea I've ever heard for these three reasons. And usually two of the three are valid. So it was a really good relationship. And I felt that I was getting better by surrounding myself with him. And so I've been looking for more people like that. And David Ho, Mark Sear are two people that we partner with that I've known since my early days in Merrill. I've known them for 15 years. And we've been sharing investment ideas for a long time. We've been talking about working together for a long time. They're tremendously successful in their own business, and they have a very strong expertise in private assets, which is an area that we wanted more help with and more hands on deck for. And so that was a very natural fit for us to partner togeth…

AI assessment note: “we merged earlier this year, our two organizations”

Q to mind in this is you have a couple of different assets where the underlying economics don't look like there are significantly high future returns. So where treasuries are, where breakeven inflations are, where equities are priced, commodities harder to know. How do you think about the importance of active management versus just owning these instruments in an environment where the betas don't look like they're priced to deliver much?

A Well, the big problem is interest rates are at zero. So if you think about all these assets, they offer a risk premium above cash. So as an investor, you have a choice. You can hold cash, take no risk, and earn the interest rate. Or you can part with your cash, invest in assets, and earn a premium. And over time, assets give you four or five percent above cash or something in that ballpark over the long run. That may not be that different going forward. It's just that cash is lower. And so that's one of the challenges with just being a passive investor is you may get low returns for some time. So that moves you into the world of alpha and trying to achieve excess returns on top of cash. And then also private assets where there's other premium. I'm going to let Damien talk about alpha and how that can be complimentary to a beta portfolio.

AI assessment note: “that's one of the challenges with just being a passive investor is you may get low returns”

Q Have you found that what that right allocation is can vary quite a bit depending on the client, or is there a sweet spot that you've gravitated to for most of your clients?

A Yeah, it varies by client pretty significantly. And we actually were part psychologists, part asset allocators, because we have to look into the minds of our clients and how they will react during an adverse environment. A lot of what we do and the way we think is about how do people respond during the bad times? And the bad times aren't just the markets going down a lot. It's also relative. And I'm sure you're aware clients don't want to lose money and they want to make as much as everybody else on the upside. And they flip back and forth between those two objectives. And so you can't ignore that and say, oh, that's silly. It doesn't make sense. That's reality. So every client, they react differently to downturns. They react differently to relative underperformance. And so our job is to try to understand that. And we learn from our clients over time by how they react. So we take mental notes of how they did during certain environments and maybe move left or right on that spectrum.

AI assessment note: “Yeah, it varies by client pretty significantly.”

Q So Alex, across these three buckets, how do you generally think about allocating capital in that, in particular, if the public market has this Sort of balanced risk approach. The hedge funds clearly balance risk. And then in the privates, it can be a whole range of steady Eddie and more market sensitive or economic sensitive. So where do you come out across the three?

A Well, they all have different liquidity profiles, different fee profiles, tax profiles. So a lot of it has to do with what the preferences of the clients, what their familiarity is with those different areas. I'd say in general, all else being equal, We tend to have more on the public side because people are just more familiar with it. It's liquid. Liquidity in an environment like this is very valuable. So giving up liquidity, you have to get something that is truly remarkable because liquidity is so important in an environment that's constantly shifting. It gives you the ability to pivot as needed. But in a world where expected returns are very low on the public side, maybe you put less there. So those are kind of the levers that we're pulling across the three.

AI assessment note: “We tend to have more on the public side because people are just more familiar”

Q Let's turn to that. I mean, I guess the first question, just to clarify, in your public markets bucket, is this all the risk parity approach, or are you also layering in traditional public market active management?

A The way to think about this is there's theory and there's practice, and you can think of it along a spectrum. On one end, there is the theory of what's most efficient and the best for investors over the long run, which we think is risk parity. On the other end, you have what everybody else does. And somewhere along that spectrum is the right spot for every client, because the challenge with being a hundred percent risk parity is you have to ride through the ups and downs. And that can be challenging, even though the volatility might be less, you're always comparing yourselves to what everybody else is doing. And so risk parity relative to either all equities or 6040 could go through a couple of years of underperformance relative, and that can be hard to live through. And that can, as humans are built to succumb to their emotional pushes, they can change course along the way. And if you do that, then you don't get the benefits of that. So our job is to find the right location along that spectrum for every client, and that's actually the most practical solution.

AI assessment note: “somewhere along that spectrum is the right spot for every client”

Q Alex, what's the biggest mistake you've made and what did you learn from it?

A I'm a pretty conservative person just by nature. And I feel like in investing, being conservative pays off over the long run because it's all about surviving the trough. If you can survive the trough, you're going to make it over the long run. And you see so many investors just lose everything. But I'd say the mistake is it's also at the same time, it's important to take big risks. They're calculated risks, but it's important to take big risks. I was at Maryland for 15 years. I probably could have left five years earlier. That's a big risk to do something like that. So I'd say that's probably the biggest lesson is be conservative, but take calculated big risks when it's opportune.

AI assessment note: “I was at Maryland for 15 years. I probably could have left five years earlier.”

Q How did you figure out how you wanted to invest client capital?

A A big part of the way both Damon and I think is independently. We don't necessarily just follow the herd. And I think that's a big differentiator. And so if you just take a step back and forget everything you've learned about investing, and you think about ultimately you're trying to achieve an attractive return over the long run with as little risk as possible. And mathematically, the way to do that is to own a bunch of return streams that are different from one another, meaning they go up and down at different times. And the more reliable that differentiation, the better. And if you approach it from that perspective and That surprisingly leads you down a very different path from the way most people invest. And so we spend a lot of time looking for differentiated returns. To me, that's very obvious, but the challenge comes in that most people don't invest that way. So the portfolios end up looking quite different. So it's really just a, an understanding of the math behind building a portfolio and then approaching it from that angle.

AI assessment note: “mathematically, the way to do that is to own a bunch of return streams”

Q Now, one thing Jeremy will always talk about is climate risk, and he does a little bit in your conversation. How are you thinking about climate risk in your portfolios?

A It's a very interesting question because if you zoom out a little bit, and Jeremy's great at zooming out, probably among the best that I've talked to. If you do that, you realize that there are certain factors that might be much bigger than Market pricing and momentum and all those things. And climate change could easily be one of those things and the risks associated with that. So I think we're starting to see asset allocators factor that in to their strategies. It's not just something to do because you feel good about it, but it's something that might actually impact the bottom line of companies and asset classes. So it's becoming a bigger and bigger factor in our analysis.

AI assessment note: “it's something that might actually impact the bottom line of companies and asset classes.”

Q As we know, he's sort of on the value camp, bearish on pretty much the entire world right now. How do you think about incorporating that view more broadly into your portfolio beyond just whatever you're doing with GMO?

A Well, our goal is always to focus on diversification across low correlated return streams. And part of that is also looking at managers who can generate alpha over time, which is a unique return stream in its own. And I think their strategies fit well within that construct. They have a value bias, but they also have a more holistic perspective where the strategies that we're focused on, they can invest in just about any asset class. So they can avoid the areas that are expensive. They can really emphasize the areas that are cheap. And they're unconstrained, which gives them that opportunity to focus on those areas that they think are going to outperform over time. That fits in really well with other strategies that do something totally different from that.

AI assessment note: “I think their strategies fit well within that construct. They have a value bias”