The Exchanges

Q And do you have a bias towards the good ESG companies versus the getting better companies?

A I think the getting better is what we should be aiming for. I mean, the point is, isn't to reward the ones that already are good. A lot of the point of our granting dollars is to improve conditions, and so I think from a philosophical perspective as part of Hewlett Foundation, I'm more in the camp of let's provide good incentives for people to go down the path to improve their ESG ratings. What I try to convince the CEOs of portfolio companies is that You will have a lower cost of capital, and you will have a higher exit multiple. So the incentive structure should be aligned to doing the right thing, not because it's the right thing, but because you're going to make more money.

AI assessment note: “I think the getting better is what we should be aiming for.”

Q Why don't you walk me through how you came about writing this book?

A I wanted to share 37 years of experience in one handbook to provide how to do this in a practical sense for everyone involved in generating investment returns, especially those on the GP and the LP side that are doing this for compounding charitable assets. Because if this book can help improve returns by 20 basis points per year, The amount of additional wealth we can compound to then solve the challenges in the world is tremendous. So the book was a book that I wrote at the urging of the board, and really my investment committee chair, who felt that after years and years of being at the Hewlett Foundation, that there were a lot of things that other organizations could learn. And at the same time, I was teaching the class at Stanford that more or less follows the line of the book. And they're like, you already have most of the material done for your class. And you have all of this knowledge to share. Why not share it and sit down and write a book? So that's how it came about.

AI assessment note: “the book was a book that I wrote at the urging of the board”

Q What are some of those rules that you've told your team need to be unlearned or forgotten?

A This whole concept of the math works for any deal at any valuation because the cost of capital is near zero. I think that is probably the most pernicious thing that was learned by a generation of investors. The fact that you can invest internationally without ever thinking about FX risk and the cost of hedging and how that affects your expected return of an asset. The fact that illiquidity premium had been completely obliterated as more and more money poured into private markets. And how you need to demand an illiquidity premium to really be able to construct a healthy portfolio long-term. So those are just three to take as lessons that were great. They were fabulous. They made lots of money for the institutions that we all represent. I mean, it was a great time to really grow our endowments, and we were then able to do a lot of really good work. I mean, we doubled the grant budget of this organization really in the last six years. All of our institutions and the world was able to be a better place. It wasn't wasted, but for us to be good stewards of capital, I think we just have to unlearn some of those.

AI assessment note: “This whole concept of the math works for any deal at any valuation”

Q Before we take a step back, I want to dive in on one aspect of what you said about just the public equity side, which is for your first 10 years, you continue to do these meetings. What do you think the half-life of that information is from when you stopped doing those meetings?

A Okay, I still do them. I just spent two weeks in Asia doing these meetings. Like, I can't stop myself. I am a highly intellectually curious human. I do them with a different purpose. It's less, it's less about where is the economics of the world going, and more about understanding disruptive trends. So a lot of the focus of my meetings in the last two weeks was on The move to electronic money, monetary systems, so meeting with central bankers, meeting with, with banks, with insurance companies, with just, not just technology, we hear the technology part here in the Valley, but how does that actually get adopted? And what are the impediments to adoption? And at the same time, you have an existing success story in Alipay and WeChat Pay, and What is the ability of those systems to actually permeate Asia? So that's what I spent the last two weeks doing.

AI assessment note: “Okay, I still do them. I just spent two weeks in Asia doing these meetings.”

Q How do you turn that metaphor into an investment example?

A You can be leading an emerging market portfolio. You've hired your entire team. You're going to generate so much alpha from emerging market equities and debt. Okay. So that's your mountain that you've chosen to climb as a manager. And all of a sudden the landscape changes. So all of a sudden you realize that most emerging markets become correlated to China, that you can't actually diversify, that all of a sudden the political situation isn't going to let you, which there's always politics in emerging markets, but the way that you thought you had a skill set to get you up that summit is no longer going to serve you Because the environment has changed. So you have to reassess. You have to move back and be like, okay, if I want to keep doing what I'm doing, and I want my team, let's reassess what mountain we're climbing. It's a pragmatic view of, I'm not stopping the climb. I just need to reassess what mountain I'm climbing on the allocation side. If you have a committee that really believes that venture is going to generate X returns, and it's pushing you, But your access to the top venture managers is limited. You have to make sure that you're climbing the right mountain, that you've set the expectation correctly.

AI assessment note: “You can be leading an emerging market portfolio... So that's your mountain”

Q if we keep stretching this analogy further, any photos you see these days of Everest are just littered with people. And for sure, you want to be climbing your own mountain, but there are other organizations, other institutions that have very, very similar objectives and goals, even if they're not identical. How do you think about the benefits and drawbacks of other expeditions on the same mountain that you're climbing?

A It's a really important thing. So when you're on the mountain, not only are you watching the behavior of your GPs climbing the mountain, you're also watching other teams. There's a saying in technical mountain climbing about your responsibility and the ethics of your responsibility to help other teams. So if you see somebody climbing and they're going in a different direction that you heard from somebody else is going to cause trouble. It's your responsibility to help them and be like, no, you don't want to do that. If you're going up and they've got a person stuck, even though you're trying to make it to the next turn around the mountain, it's your ethical responsibility to help them out, and I am 100% in that camp. We are here to manage money on behalf of institutions that make the world a better place, whether it's educational, hospitals, even if it's a family office, eventually they're going to give it to charity, most probably. Our job is to compound charitable wealth. Why wouldn't we help other people on the mountain be safe and do it right? Part of writing this book, it's actually to help people make sure they can stay on the mountain. Because if they can generate 10, 20 basis points per year, more of alpha, think of how much more compounded wealth in the world and could do good in the world.

AI assessment note: “Why wouldn't we help other people on the mountain be safe and do it right?”

Q So from a CIO's perspective, what are some of the biggest challenges that you face as you're ascending the mountain?

A Well, I think one of the biggest things is that there is so much money trying to invest in this endowment model, yet there's only so much capital allocation within these firms, especially the top tier firms. And so in some ways, yes, we'd love to collaborate with our peers and we do so as much as possible, but we also know that we're involved in sort of hand to hand combat fighting for allocations. And in that point of view, then it's about what distinguishes Hewlett from other LPs to become that prized LP. And I think for us, we are a relationship-centric model. Everything is about our relationships with our GPs. How can we be good partners? How can we collaborate? And these are Hewlett principles. We're all about collaboration with partners, and we're all about having long-term vision. And so we like to be patient capital with long-term vision, brings in knowledge, brings something to that partnership. We're not just standing around saying, what have you done for me lately?

AI assessment note: “we're involved in sort of hand to hand combat fighting for allocations.”

Q Okay. So now we're in good shape. We understand what mountain we're on and we got to get going. What comes next?

A So then you have to figure out what are the skills needed to get a team up that mountain and get that objective. So as a board, when they hire the headhunter to find the person, it's like, this is the mountain we're climbing. Be very clear. It might be the return maximization one. It might be the risk adjusted one. It might be a, we just want to take things calmly. And there's different temperaments. And I think when the headhunters really start looking for people, they have to find the right CIO and then the right team. And sometimes the People get ahead of themselves. So they've hired a team and maybe you inherit a team, but you have to have the team that trusts the CIO and the CIO that trusts the team. And that has to be a very natural process because when you're facing tough times, if there is any distress on the team, it's going to really cause bad blood during the climb.

AI assessment note: “So then you have to figure out what are the skills needed to get a team”

Q building a portfolio, the team you might have in place could be different, maybe should be different from the ones who are maintaining a portfolio. So in that analogy, maybe the summit is a plateau. It's a high plateau. You want to stay on that plateau. How do you go about deciding when to change the composition of the team so that you can maintain that high level of performance?

A Somewhere I would say between third camp and the summit, you start seeing people fray. It's funny because in climbing, you think these are all proportional, base camp to first camp, first camp to second camp. Going from third camp where you've built your portfolio to the summit, you don't do it in two days, I guess is my point. And so you have time to watch how people behave on your team. And who is tiring? Who is starting to either burn out? Who is uninterested in managing relationships as opposed to new things? Who is just so busy with their life that they just can't give it? So you start noticing all of these things because you've built the portfolio. The pace slows a little bit. Yes, you have the re-underwriting case of the fun cycles, but for the most part, the pace slows down. At that moment is where you can really see who's comfortable in their shoes. So that's the moment at which you have honest conversations. For the most part, most people know that it's time, and I think this used to be really hard in the old days when we started in the business, or at least when I started in the business, where people stayed in their jobs for 20 years. People don't stay in their jobs that long. They want new adventures. They want new possibilities. Either you can offer them to them on the team, if you really believe they can do it. But for the most part, they'll be like, yeah, okay, …

AI assessment note: “At that moment is where you can really see who's comfortable in their shoes.”

Q Have you thought about public markets in China?

A From a relative valuation, they're the cheapest they've ever been. Part of the thesis in China was always about relative growth. Once you break that, do you then get a market similar to sort of Korea, where it's a market that is always cheap. It just goes through stages of relative cheapness to relative less cheap. And you can trade those markets super well. In the nineties, we used to do it all the time. And Those are the markets where you look at a trading range. The companies are doing fine. You can track the companies. They're still earning. So you can actually have a fairly high conviction in the valuations as being real, and then trade it what I call from knees to shoulders. So let's say if Korea was a four to eight times market, you trade four and a half or five to seven, and you just play that game. It's a different market, to be honest, than what we've expected in the last 15 years.

AI assessment note: “From a relative valuation, they're the cheapest they've ever been.”

Q Are there other ways that you've thought about liquidity management across a multi-manager portfolio outside of the traditional way of thinking about investing in and redeeming from managers and making commitments and getting distributions?

A The one thing that we all forget is that cash has a great deal of value, and the more illiquid your portfolio, the more value your cash port has. At least now you have a yield on your cash, which is a huge benefit now, but it has option value. Learning the lessons from a way. Many of us have credit lines in place to be able to fund the granting parts of the organizations, but you can't use credit lines to lean into a dislocation. For lots of tax reasons. If you think a dislocation is coming, you need to have cash to be able to even get a chance at that. And I just think it helps to bridge the cash flow because cash flows are episodic. We all solved these beautiful cash flow models, but we've all lived through periods where we get distributions well in excess of those models. And then we've lived through periods where you're just like, oh my God, where the hell am I going to get my next distribution? In organizations like a foundation that don't have incoming cash flows, That means that my cash flow for granting and expenses for next year, if I don't get anything from the private portfolio, it has to come out of the public portfolio. And so they're not sort of paying in their fair share of outflows. So you have to use cash as that sort of buffer to help bridge the cash flows, or you're going to distort your actual asset allocation much worse.

AI assessment note: “Many of us have credit lines in place to be able to fund”

Q Ok, that's the second. Are there other core values?

A So that's the second core value. The third one is this diversity of thought. It's wonderful when we have junior members of the team just asking, wait, do you actually have proof of what you just said? Like, is there data to prove what you just said? And it's great. Like, I want that diversity of thought, and I want that freedom. We spend a lot of time in team retreats and in just In social activities to engender that interpersonal trust, because that cannot exist without a huge amount of trust. One of the values is you got to trust people. You got to be thinking that people give people the benefit of the doubt. You have to think that everybody is rowing the same boat. We're all here to generate the money so that the Hewlett Foundation can do what it does. We are not the stars of the play. We are here as the little wheel on the corner. So that's our job.

AI assessment note: “The third one is this diversity of thought.”

Q Talk a bit about what it takes for a manager to get in your portfolio. So we know when you started, you had views based on people that were doing what you're doing, and you knew who you thought were good. How has that evolved over the last, you know, what, 1516 years?

A Well, it's evolved in the fact that now there's three awesome directors that are constantly looking, but even then, they have a very high hurdle rate, because for every manager that they want to bring into the portfolio, somebody else is leaving. I give them maybe a margin of one extra guy, but that's it. I am pretty merciless on this one. And so, The hurdle rate is extraordinarily high. I mean, really high for them. And then once they make it through them, then I come in. I would say it has to be somebody that has the ability to really see around corners. Because we are at a point in time that none of us have ever lived through, and a manager that has just had a great performance track record, and they just say, this is the way it's worked, it's always worked this way, and this is the way it's gonna keep working, is probably not the manager that's gonna stay in our portfolio. A manager that understands that they don't know how this is gonna work out, but they're gonna try to navigate it, but if they have a very Discipline process of thinking about it. That's a manager that's likely to make it into our portfolio.

AI assessment note: “Well, it's evolved in the fact that now there's three awesome directors”

Q As you're starting to assimilate that roster managers, how do you begin thinking about putting it together into that portfolio construction?

A Portfolio construction is my favorite part of this. Manager selection is great, but portfolio construction is really where it matters. And it really has to do with sizing positions in a way that if the manager does what you think they're going to do, and the opportunity set is as good as you think it's going to be, so let's say it all worked out perfectly, that it actually impacts and generates both beta and alpha for the portfolio. If you size it too small, Then even if it does your wildest dream, it's not gonna matter. If you size it too big, if you're wrong, and you will be wrong, No one gets them all right. It could actually cripple your ability to deliver to the institution that is counting on that money to do research, to give for developing world, whatever it is, you're going to be cramped on being able to provide that money. So portfolio construction is the art of trying to, in a three-dimensional way, Know how to size something while being able to say it's big enough to where if they do it right, it'll matter, but not too big to where if they underwhelm you, it won't hurt that much. And that's the art of portfolio construction.

AI assessment note: “it really has to do with sizing positions in a way that”

Q Does that art get attached to a mathematical science when it comes to sizing?

A You can do it mathematically. You can do the volatility and we model it and we can do all that. But there is a third dimension to that confidence in the probability of execution. We sit there and we're like, okay, in this three-pronged model where I'm thinking, okay, I have about seven different types of risks I'm managing at the same time, none of which could be observed. The only risk that can be observed is volatility, but I'm managing seven other ones, and we've tried to do it with vector math. You can't. That's what experience is, and that's the judgment and And again, I don't always get it right. There are times when I'm like, damn, I wish we would have been a little bit smaller here. Or, wow, I can't believe I didn't lean in when I should have. Doesn't always work.

AI assessment note: “we've tried to do it with vector math. You can't. That's what experience is”

Q But given the potential for a very different macroeconomic environment going forward for a number of years, how do you integrate that into your thinking about your portfolio?

A I think one thing that's super helpful is to try to forget the last 14 years and try to clear your mind of anything that you thought was a rule of investing in the last 14 years. Because what we're really doing is going back to a world that existed starting in sort of 1991, 1992, through up into the crisis. So it was more of a normalized economy. You had inflation. You had rates at four percent. You had mortgage rates at seven percent. Like the world didn't stop. No one like fell out of their chair. It was fine. We all lived fine. We all invested. We all made money in the nineties. We just have to forget the paradigm that we lived in the last 14 years is completely artificial. And I think once you erase that, you start taking it with a lot more call.

AI assessment note: “forget the last 14 years and try to clear your mind”

Q You mentioned at the onset that there's a bit of an art to putting together this secondary sale so that it's attractive and works for someone who's buying it. What are some of the features of what's worked for you in that regard?

A Usually if it's partnerships that a lot of people know, where people don't have to do an extraordinary amount of work in order to understand the assets. At the end of the day, yes, they're firms and they're funds, but they're a bunch of assets. So people need to be able to underwrite the assets and the easier you make it, the better it is. That doesn't mean that's all you sell. I mean, you can sell other things, but I would say we're in the fortunate position where we haven't had that many funds that don't stand up for themselves in a different situation with a new portfolio. I probably would have been the buyer of a lot of our portfolios that I sell. I just happen to have a very mature portfolio.

AI assessment note: “Usually if it's partnerships that a lot of people know, where people don't have to”

Q And what did that mean when you're on the equity side in terms of number of names?

A 30, most. 20 to 30 names. And so when I started getting my network of people, once I moved to the side, it was how many people Points of information do I need? Do I need 10 economists? No. I need two guys I can trust. I need three strategists that completely disagree with each other, and I need to have a couple of guys that really see everything in Japan, a couple of guys that see everything in the U.S., a couple of guys that see everything in Europe, and that is how that network was built, because what I realized was between the head of a Bank in Japan, and the trading house guy, you could more or less put together 80% of what was going on in that region. And now the same thing, I've done the same thing to develop it in China and in Singapore. The same thing would happen in Europe. In other words, you needed Southern Europe, you needed Northern Europe. And then as you got those people and those points of contact, you could see how the capital was flowing from the Northern part of Europe to the Southern part of Europe all during the early 2000. So you could then speak more intelligently to your managers. And the reality is, because I brought the concentration thing here, when we have an asset class, we only have roughly 10 to 12 managers per asset class. And so, each one of those managers, in and of themselves, for the most part, is a concentrated portfolio manager. So in effec…

AI assessment note: “30, most. 20 to 30 names.”

Q And how do you apply that love for that type of investment to a group of managers?

A It's the same thing. When I got into this job after managing money for 18 years, it was basically translating that skill set of stock picking and knowing whether a management team had the expertise to implement a strategy and had the vision. And it's exactly the same skills that I look for in a manager. In other words, it has to be somebody that really understands what they own and that they own companies. Yes, they own stocks. They need to trade the stocks, but they own companies in which they have to be capable of implementing the strategies. That's how I translate it. There are very few really consistently excellent stock pickers. There are very few consistently excellent bond investors, just like in venture and just like in buyout. The last 15 years have massively expanded the universe of funds and firms. That weren't excellent. Not everyone can be excellent, even though everybody shows up as top tier in presentation and pitch deck, so I don't understand, but not everybody is excellent, and you need to really find the excellent people that you trust, that their firm values are aligned with you. If their firm values aren't aligned, I mean, we're going to go through some tough times over the next Decade. You really need managers that you feel are properly aligned with you, that have a clear objective. Otherwise, it's really tough to navigate those conversations. Performance a…

AI assessment note: “it was basically translating that skill set of stock picking... to a manager”

Q you talked about, so opportunity set going away, significant personal change of the principles, um, drift from their style. Those are, maybe they're on the extremes, but you identify something is wrong or changed. The style piece feels a lot softer. It's not like they rang a bell and their value stocks are now back. How do you decide when you're on the mountain whether or not to change course?

A So I do this because we have a concentrated portfolio. I really don't know how people without a concentrated portfolio do this because I don't know where you would find the hours of the day. The amount of time that I spend sitting down with the managing partner and try to understand their frustrations, try to understand where they're questioning themselves, try to understand how they're thinking about changing something in order to fix this, the performance, let's call it. Trying to figure out why what they think should be working isn't working. And we will do a ton of analysis on their behalf to be like, okay, have you tried looking at it this way? Do you understand how much value you're losing by doing this? You thought you were doing a good thing, but do you understand how much this is costing you? And sometimes it takes eight months, nine months for us to really diagnose what is going on and how we can be helpful. At the end of the day, we want long-term partnerships. If they're just facing a rough patch, our job for ourselves as well as for our fellow LPs is to help them get back on their feet and feel like they can keep climbing.

AI assessment note: “takes eight months, nine months for us to really diagnose what is going on”

Q What did it feel like going from being a portfolio manager, a researcher of companies making decisions in the markets every day to coming on the super buy side where those decisions don't happen every day?

A So I think the biggest lesson was how to not backseat drive, because that is, I think the biggest risk to having this model of people from switching from being existing portfolio managers to our side. It's really hard. So for the first month, my mentor who hired me here, I didn't have a Bloomberg, Laurie Hoagland. I didn't have a Bloomberg because he's like, okay, I need you to just completely disconnect. This is a long-term game here. You're not doing the same thing you did always. My managers actually ended up being very nice, and I still, for the first, I would say, 10 years of being here, I still managed about 75 CEO, CFO visits a year. Of companies in the portfolio, or companies that were adjacent enough to the portfolio that would help me inform how to manage the portfolio. Because when I joined in 2004, we were going from the donor stock that had almost all been sold to a fully diversified portfolio. And we were making a lot of capital allocation decisions. And Getting just how things move from a strategic basis, I could talk with strategists, I could talk with economists, but really talking to CFOs on the ground and CEOs on the ground is really where you understand where the pressure points are in a system, and it actually helps you allocate capital better.

AI assessment note: “the biggest lesson was how to not backseat drive... It's really hard.”

Q I want to use the Mike Tyson analogy getting punched in the face, but since we're on a mountain, a gale force wind starts knocking you off course. How do you manage the portfolio to anticipate something that you can't anticipate?

A Whenever you're climbing a technical mountain, and this is through conversations with a lot of these guys I've learned, is you always have to be prepared to be knocked off the mountain. Like, you just cannot let your guard down. So everybody's clipped in. Everybody is following protocol. Everybody's following the process. There is no, hey, I just want to sleep in till 10 a.m. kind of thing. No, everybody is on plan because you let everybody else on the team down if you're not on plan and it can really hurt you. But to your point, I've managed through so many crises and I've managed teams through so many crises, both when I was managing money as well as on this side. The first thing you do when you see the gale force wind coming or you even feel it is you take shelter. You sit with your team and you're like, what is the plan? This is not a time where one guy goes off and says, oh, I think I've got this. No, you have to have a plan that everybody agrees on, or at least they may not agree, but they're willing to follow the leader because then it becomes a game of Being open to different ideas. How about if we go through this crevice? How about if we take shelter in this? You start having to adapt the plan on the spot. If you hired the right team, and you respect how each of them thinks, the more people that are contributing to adaptation, the higher the probability you will surviv…

AI assessment note: “You sit with your team and you're like, what is the plan?”