The Exchanges

Q All right, Ash, I want to leave a little time for some closing questions, and we'll get you out of here. What's your favorite hobby or activity outside of work and family?

A Well, I don't have a single thing. I would say if I looked at where most of my time goes, it involves food and wine. I cook a lot. I have all my life. I collect wine. I love to entertain. My wife and I love to entertain, and I like to play with an idea for a themed dinner for a long time and put it together and figure out the execution and match the wines and get a nice group of folks together and do that. You can't live where we live and not do a little hunting and fishing. I also like live music and enjoy the fine arts, and with the university right in our backyard and all the trips I take to major cities, there's ample opportunity to indulge those tastes. And lastly, I have a motorcycle, and I love riding out in the country in the quiet of a weekend morning. Nothing better.

AI assessment note: “if I looked at where most of my time goes, it involves food and wine”

Q So what was that experience like for the first time shifting to the private sector?

A Pretty intense. Pretty darn intense. I was living in Connecticut, commuting into Manhattan. Our offices in those days were seven 87 Seventh Avenue, which from Grand Central, where we sit now, that's a hike. Even double timing it, about the best I could do was around 17 minutes. So if you got a 17 minute walk from the train, you're catching your normal morning train would be Six 50 in the morning, six 51, and best case you're gonna catch a 5:40 train home, more likely you're gonna catch something later, in which your base day was about a 12 or 13 hour day, base day, and three hours of that is tied up with a combination of walking and riding on the train, which means you're extremely well read, but, wow, it takes a lot out of your life.

AI assessment note: “Pretty intense. Pretty darn intense. I was living in Connecticut, commuting into Manhattan.”

Q So let's start with the team. You touched on when you left after years of toiling away and making great progress, you at the top were getting paid a 140,000 dollars a year. How do you start with building a team or keeping the people that you have in place when compensation clearly isn't the driver?

A Well, the first thing you do is you fix the compensation. The problem is in the public sector, that's sort of like saying, well, all you need to do is have peace in the Middle East. People have been trying that for a long time, and it's hard, which is why it doesn't exist. But in our situation, we had historically had less turnover than one would imagine, because a lot of people were in their jobs Not the way people are in jobs in New York or Los Angeles, where there are a million alternative employers right around the corner, and if you're unhappy at point A, you can cross the street and go to point B and take another job. If you're a portfolio manager in Tallahassee, Florida, there aren't a lot of other options than the SBA. So most people were there for some combination of having family there, enjoying the lifestyle, enjoying the reality that you could live in a very peaceful place, Travel to New York pretty regularly. Have New York come to you and the rest of the world come to you pretty regularly. The parade of talent we get in and out of our building is absolutely amazing and very refreshing. People were there for non-economic reasons. The problem is that's sort of like the line from the old Marilyn Monroe movie about relying on the kindness of strangers. It's just not a reliable way to run a railroad. When I got back, there was a lot of talk about dramatically increasing…

AI assessment note: “most people were there for some combination of having family there, enjoying the lifestyle”

Q What did the plan look like when you were first head of the board?

A Well, I became executive director for the first time in December of 1991. And back then, we had U.S. equities. We had a brand new infant-sized private equity program. It wasn't even really a private equity program yet, because we hadn't clarified the law about partnerships and whatnot. We had fixed income, and we had a real estate program. And the most advanced thing we had, I would say, was our real estate program. To this day is a unique model in that we manage about 60% of that book, or a little over half, in what we call our principal portfolio, which means we own the properties directly, and we manage them ourselves, and we often have them with not a great deal of leverage on them, so we have a terrific valuation cushion, and you know, if you think about Warren Buffett's stories about the best possible businesses, what's example number one? Owning the only toll bridge, Across a body of water that everybody needs to cross because the places on either side are important, and you get to set the price. So if you own a fabulous piece of real estate, why wouldn't you want to keep it forever? But if you're on a traditional partnership structure, partnerships have lives, which means there's a capital raising cycle, there's an investment period, there's a holding period, and there's a contemplated liquidation date that might have a year or two of extensions, but it's not infinite.

AI assessment note: “we had U.S. equities. We had a brand new infant-sized private equity program.”

Q Yeah. So what was the experience at Schroeder's like?

A It was good. It's a global company, and one of the lessons there was that cultures matter, and cultures are different in the UK and Europe work-wise than they are in the US, particularly New York. Just different work norms, different expectations, and you have, particularly in a company that at the time was, I think it was 220 years old, There were things that they had to deal with that we didn't, particularly in the tech area. They had a lot of legacy mainframe computer systems, so when the whole Y-IIK thing was around, that was a hair on fire issue in London, and they were asking us to do all kinds of things here, keep people in the office overnight and have supplies for a nuclear war, and it was, it was really something. It was over the top. So you learn things like that, and you also learn that there are layers in organizations, and One of the great lessons in life always is knowing what you don't know, and you might think you know an issue based on the inferences you've drawn from talking to your colleagues here in New York, but if the headquarters is 3000 miles away, and there are a lot of other players there that you're not talking to on a day-to-day basis, some of whom may be from families that have owned equity stakes in the firm for hundreds of years, There's a pretty good chance what you know is a thimble full of what there is to know, and your idea that you understa…

AI assessment note: “It was good. It's a global company, and one of the lessons there”

Q Let's dive into the investment side and start with Your thoughts on asset allocation?

A I guess our view is that what is practical and has been proven to work for us, I can't speak for others, over time has been to have a thoughtful allocation process that you revisit annually at a sort of a high level just to validate your asset class return assumptions and make sure it's still reasonable. Then about every three to five years do a much deeper dive on how you're approaching it. But what we found is setting an allocation that's a rational allocation to begin with, given your liabilities and your liquidity needs and your governance environment, and then sticking to it over time will work. What was tried in the eighties and to a degree in the nineties that failed miserably was the idea of making active judgments and jiggling around the tactical asset allocation as people now call it. Just a bad idea.

AI assessment note: “setting an allocation that's a rational allocation to begin with... and then sticking to it”

Q When you turn to these opportunistic strategies, you started by saying, okay, you want to be Tried and true to your asset allocation, but then you've got these opportunistic strategies that will flex. How do you go about that piece of the puzzle?

A Well, we are not in a position to do transactions directly other than our real estate area, and I don't think we ever will be. That's the province of the Canadian model, and you're just never going to see that here. But what we can do is partner with people who have deep and broad capability, and then if, and this sounds easier than it is, we don't have many of these things, but if you can create a structure through mutual agreement and a deep partnership that creates great alignment of risk and reward that's shared, you can do things that are highly unusual. And I think in times like this where assets broadly are highly appreciated, having investments where you really understand where the cash flows come from, what the quality of those counterparties is, why those cash flows should be resistant to broad market dislocation, That's golden.

AI assessment note: “what we can do is partner with people who have deep and broad capability”

Q I want to turn to your thoughts on private equity and hedge funds. Private equity is an important component and has been for a long time of what you're doing. How do you think about it in the context of portfolio, and how do you decide who you're going to partner with?

A Well, we've done an awful lot in the private equity space over the past five or 10 years to sort of refine the portfolio, and what I mean when I say that is rather than putting a whole lot of money with big US mega LBO-centric funds that have lots of products that cover the world, we think we've been smarter To really dig deeper and understand where the persistent ability to add value is in organizations, and how has their focus remained? How's their asset growth been? Have they just gotten geometrically bigger because they could, and proliferated products, or have they stayed focused? And we've sort of tried to Concentrate relationships with the best players, so if we were in three funds in a given space, now we're more likely to be in one, maybe two. We've also taken up more specialty relationships of various kinds, funds that distinguish themselves by a very strict focus, by capsized geography, industry, Region, things of that nature, or some cross-cut of those sorts of screens. We've also made an effort to be more international in our private equity through actually partnering with people who have a European focus, for example, or likewise Asia. Where that gets more problematic is when you get, particularly in Asia, where you're dealing with China, India, Southeast Asia, differences in law, differences in culture, a whole lot of things make that infinitely more complicated.…

AI assessment note: “rather than putting a whole lot of money with big US mega LBO-centric funds”

Q So where do you end up across the assets you invest in?

A We end up with a pretty heavy equity beta that we will always have. But As long as you are truly a long-term investor, and one of the powers of defined benefit plans is risk pooling, which means you're always investing as a perpetuity over a very long horizon. You're not constrained by the mortality curve of risk that individuals can tolerate. That's important, because over the long periods of time, equities by definition are going to be the higher returning asset class relative to fixed income. And then when you have What I would call equity-like risk assets, private equity, venture capital, etc., then those are complementary as well, and will tend to be a little more pro-cyclical in a lot of ways. And then we have another sleeve in which we put more opportunistic things that might be transient opportunities that come and go, so we wouldn't have a permanent allocation to those. High yield debt would be an example. There are times when high yield is compelling. There are times when not so much. So let's go there when the spreads are attractive and leave when they're not, and we'll get paid for renting our capital for that period of time. So that at the high level is the way we do things, and to the extent we can find ways to win on a relative basis by playing by a different set of rules, we'll take that opportunity every chance we get.

AI assessment note: “We end up with a pretty heavy equity beta that we will always have.”

Q So when you go through the global equity piece, You mentioned the sort of passive, passive plus, and factors. How do you decide how much should be internal and how much is external?

A Well, it's pretty easy. So that's not a complicated thing. What we do is we think, first of all, how much should be active and passive. We're really good at the passive part, and you can do that in scale for, if you look at the, what the compensation packages cost for our traders who execute this, even though we, I think we pay them in a, well, in a manner that, that they're happy and motivated, and it's reasonable and competitive, that compared to management fees on a similar amount of money, it's practically free, in which case you got a huge advantage, and then you do the active in the parts of the market where you're going to get paid For spending the money and taking the extra risk, which is generally going to be as you move out of the U.S. into non-U.S. equities, and the further afield you go into emerging markets and eventually into frontier markets, then the attractiveness of active versus passive becomes compellingly active.

AI assessment note: “compared to management fees on a similar amount of money, it's practically free”

Q With all the people on your team, particularly the people focused on external managers, how do you ultimately make your investment decisions?

A Well, most of them are made pretty much at the asset class level. We make broad decisions in terms of characteristics that we like, areas that we want to emphasize at a given point in time, and then the different asset classes all have depth. And existing manager basis, and we do annual work plans where we take the time at the asset class level to really think through what does our current pipeline look like vis-a-vis the portfolio today? How do we envision the portfolio evolving as we go through this pipeline over the next 12 months? What resources are we going to need? What capital flows are there? What are going to be the flows in and the flows out? We're a mature plant. So our private equity program is largely self-funding. Strategic is largely self-funding.

AI assessment note: “most of them are made pretty much at the asset class level.”

Q So what are those set of rules that are different how you're playing the game?

A So what do we have to offer? Well, first of all, we have scale in our favor. Secondly, we have the ability to manage money ourselves. We've got a lot of investment professionals. Our team is over 200 people. Investment professionals, 50 plus, and a lot of people with deep experience, and we are, we're running active and passive fixed income, and in equity investing, we do passive investing and factor investing. We're not saying we can necessarily say what the factors are, or what the mix of the factors ought to be in any given month. But we are really, really good at replicating indices dead accurately, and then through a combination of SEC lending and playing the names that the index providers signal in advance are going to be added to or taken out of the index, doing those two things will get you enough marginal revenue that you can beat the index pretty consistently in a passive fund. Well, that's kind of taste great less filling, isn't it? So, what we've figured out how to do, and I give our global equity team credit for this, it wasn't me, was buy from some of the factor investing firms. Instead of buying their services in a traditional asset management relationship, do the equivalent of buying the recipe. Don't buy the cake. Buy the recipe. Go bake the cake yourself. And you can bake as many cakes as you want from that recipe without paying any more money. That's powerful…

AI assessment note: “Instead of buying their services in a traditional asset management relationship, do the equivalent of buying the recipe.”

Q So as you went through, how did you get started in investing it?

A It was like so many things in life. It was indirect, but it wasn't without intention, and it wasn't without thought. So ever since I was a little kid, I was always interested in businesses and why people did things, and so you walk into something like a grocery store where there are hundreds of thousands of consumer choices, people follow consistent patterns with what they put in that basket. There's brand loyalty, there's product loyalty, There's all kinds of stratification about how people make consumption decisions, and that's true at every level of economic activity. That's always fascinated me. So, When I was in high school, I graduated from high school in 1972, so if you think about all of the giant conglomerates that were formed in those days, I was absolutely fascinated by the notion that people would do these add-on entities like AT&T or any number of the other big ones of the day that had all kinds of businesses that were seemingly unrelated but were represented to be highly synergistic and collectively additive each to the other. Well, we know history proved that wasn't quite the case, but nonetheless, it interested me and caused me to want to, at some point, have a career on Wall Street, and the original direction I was thinking in terms of going was studying business at the undergraduate level, and then coming to graduate school in New York, and probably going into…

AI assessment note: “caused me to want to, at some point, have a career on Wall Street”

Q Why did you decide to leave SBA the first time?

A Well, there was a great reason, and it is emblematic of the problem that Plagues public pension funds everywhere, which is there was a misalignment between the decision authority stakeholders, in this case trustees and legislature, and the beneficiaries and the staff of the state board. As reflected by the fact that I think I was there six years on the first tour of duty, In six years, we doubled the size of the fund. We had terrific investment results. We had a completely clean control environment, no issues there, and did a lot of pretty creative things, and we moved the fund in some new directions. One of the things I did was globalize the fund and go into emerging markets for the first time, which we did during the Mexican peso crisis. That was entertaining. And, ah, a lot of interesting things like that. So during that six year period, I think I had one change in my comp, and at the end of six years, and doubling one of the, what was then one of the biggest pension funds in the country, and still is, I think I was making a 140,000 dollars, and the direction that our governor was going, and he was well intended from a health policy standpoint, but Florida was the place where the tobacco litigation originated. The idea that tobacco companies knew they were selling a lethal product, and to the extent they sold it, And as a result, serious if not fatal diseases affected thousa…

AI assessment note: “there was a misalignment between the decision authority stakeholders... and the beneficiaries and the staff”

Q As you look at the program today, what are your kind of key initiatives to continue to evolve what you're doing on the investment side?

A I think we have a true learning culture. I think the team we have in place is an extraordinary team. We've turned over fully half of our top management over the 10 years plus that I've been back. Every one of our asset class heads is super solid and capable and young enough that they've got plenty of runway in front of them, and they've all built deep teams. And again, this fits into what I was saying earlier about compensation. If you're going to keep capable people who are young enough to go anywhere they want to go in the country, you got to give them a reason to feel valued and motivated. So we offer a work culture that's a very flat culture. They'll have direct access no matter how junior they are to everybody on the team up to and including me, and that's motivating because most big asset management firms Can't offer that. Second, we compensate people in reasonable ways, in positive ways, and third, because of our size, you can come to work for us, and on any given day, you might have, like recently, we've had Q Song Lee in to visit us. We've had David Solomon twice in the past couple of months, new CEO of Goldman Sachs. Larry Fink comes to see us. We've had People from all over the world make the trek to Tallahassee, because they're good relationships of ours, and, you know, we reciprocate and help them here whenever we can.

AI assessment note: “I think we have a true learning culture. I think the team we have in place”