The Exchanges

Q What is on your docket in terms of research projects that you're working on?

A I got three or four papers I need to finish. The first one with my friends, Evan Greenfield of BCI and Dane Rook of Stanford with me. We're doing an ESG is awesome paper. So I love to go against the grain. I have to say I was one of the first original haters of ESG. Five years ago, because I was like, we're just talking about policies. We're not talking about facts. But now that everybody hates ESG, I feel this obligation back to it. We've done this project where we have revealed in three different transactions the economic and financial uplift from ESG. Nothing to do with society being awesome or governance being our priority or environment. It's about how ESG drives financial performance. So that's coming. I'm doing another paper with Joseph Saenz of Fremont, and you'll notice I'm doing more co-authoring with investors. I find I need that connection into the organization sometimes. It's been a really fun process to write more with the investors themselves. Joseph and I are passionate about neurodiversity as a superpower. If you're in the investment industry, It won't be a surprise that there's a lot of neurodiverse people. You maybe don't call them neurodiverse. You call them geniuses, or brilliant, or he's idiosyncratic, or boy, he's direct, or she's direct. Radical candor, whatever the culture is at Bridgewater these days. There's some neurodiversity throughout our industry…

AI assessment note: “I got three or four papers I need to finish. The first one with my friends”

Q What are some of those aspects that Erwin and others pointed out about how the governance best practices before we move on to culture and tech?

A So there's this great concept of a governance budget, which is similar to a risk budget. The concept is you need to align your risk budget with your governance budget, which is to say you can't take on a ton of risk in your risk budget unless you have a board that has the time and capacity and skills to really understand the portfolio and to properly resource the team to go and live up to the expectations. So you're aligning your governance budget, which is the skills, capacity, and time of the board to meet the private equity portfolio needs or the venture capital portfolio needs. That's the biggest component I think that emerges out of that research. And obviously that means taking stock of the people you have on the board. Are you operating on a quarterly basis or can you call meetings when you need to? These are all big issues. And then the technology piece is like, well, does the board have a dashboard? They can monitor target allocation, deviation from norms, things like that, so that they can then allow the staff to get on with investing.

AI assessment note: “there's this great concept of a governance budget, which is similar to a risk budget”

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

A Yeah, this is a good one. The two for me that I picked are Jagdeep Bashir and Elliot Donnelly. So Jagdeep, I think I met him in 2010 and he just didn't see me as an academic. I think he saw me as like something else. And so he gave me the confidence that my ideas weren't just ideas and that we could actually build stuff around them. And I became an advisor at AIMCO and we did cool projects. I have a couple of photos from back then where, like, the first time he flew me up to Edmonton, which, by the way, was where I was born, flew me up there. We had this whiteboard, and we, like, literally whiteboarded, I don't know, three or four, like, wild projects that we wanted to work on together, and we recently went back to that whiteboard, and we did them all. It's like this amazing thing that I was sitting here in academia thinking deep thoughts, and he was like, why don't you, like, do these deep thoughts? And so I'll, I'll be really grateful to him forever for breaking me out of that and giving me that confidence.

AI assessment note: “The two for me that I picked are Jagdeep Bashir and Elliot Donnelly.”

Q And how do they organize their teams and manage the money? Because the active passive debate is so pervasive in the U S and those are huge pools of money. So how, how did they go about, you know, organizing, presumably it's actively managed. They're internally managed, right?

A Yeah. So there, there is active management. Like if, if we take the case of Australian super and full disclosure, I am a consultant to Australian super, but the organization manages an internal public equities team. They manage an internal infrastructure team and internal real estate team. I think there's fixed income securities that are now coming online. They've set up an office in London. There's another global office that's going somewhere that I don't think is public yet. So they are building a professional team and the, what you're going to is Where do you choose active and where do you choose passive if you're building this internal fund? And the answer to that is where do you have an edge? And, and I think that is increasingly the question most pension funds are asking themselves is it's not like, how do we get access to the best managers? It's what is it that's unique about us that could facilitate privileged access either to assets or managers? So if I take the example of the University of California, Where again, full disclosure, I'm a senior advisor. We have this 10 campuses. We have five of the biggest hospitals in the world. We have three national labs. There's ten billion in R&D. It turns out that external managers are fascinated by this ecosystem. And so we can go out to external managers and say, listen, we'll partner with you, and we're going to add value in a…

AI assessment note: “the organization manages an internal public equities team. They manage an internal infrastructure team”

Q So what's the most interesting company you're involved with today?

A The most interesting company is the, is a company I started. So I started a company with Lindsay Holden called Long Game, and Long Game is about trying to help people save money who struggle to save money. We started this company about a year and a half, maybe two years ago, and I met Lindsay. She was the first hire at Formation Eight, which was a venture capital fund out in Silicon Valley. I'm friends with the, was The managing partners there, Joe Lonsdale and Joe introduced me to Lindsay and we hit it off and, and then she left F eight to go build an auction company that used this kind of behavioral trick to capture this GTLD space, which is the top level domains like dot ventures. And they did, I don't know what the exact number is, but it's five hundred million or a billion dollars in auctions on this platform that she started and she sold that. And she came to me at Stanford and said, listen, my next big project is to try to convert the money people are wasting playing the lottery and gambling into a savings account. And I was like, that'd be pretty cool if you could pull that off. And she said, well, there's a way it's called a prize link savings account. And the Congress just passed something called the American Savings and Promotion Act, Republican led law signed by Obama that legalizes prize link savings in America. And I was like, my goodness. So not only do you have …

AI assessment note: “I started a company with Lindsay Holden called Long Game”

Q What life lesson have you learned that you wish you knew a lot earlier in your life?

A How hard, I mean, how hard kids are. So if I, if I had known, I don't, I don't know what I might've done differently, but I have two kids that are amazing kids, you know, seven year old boy and a five year old girl. And my wife and I both work. So both of us are kind of on, uh, you know, she runs like a data science team at a public company. So it's not like I Trump her and in many ways she trumps me. And so it's this constant negotiation and challenge. And I think I would have just loved to have known that, um, This insane part of your life is coming, and you should sleep in, and you should go to the movies, and you should probably get ready for, you know, do, do a couple of volunteer gigs, travel the world a bit more, do those things, because getting married doesn't change your life. I didn't find, I mean, I, I started dating Courtney when I was 20, she was 18, we were at Princeton, we lived together for 13 years, and then We had children. It was like, this is a totally new world. It was totally new. Everything changes once the children come. And, and it, it doesn't help that like my kids are extremely stubborn and I don't know where they get it, but, um, you know, it's, uh, that's what it's something I might've liked to have been told.

AI assessment note: “How hard, I mean, how hard kids are.”

Q And is there, is there a specific example you could think of where Jadip and his team brought some resources to bear that probably nobody else could have?

A I mean, we're constantly tapping the energy labs for insight. Massive Energy laboratories within the UC ecosystem to be able to assess and understand opportunities and deal flow. We are tapping the medical science communities for understanding, you know, the future of gene editing and things like that. But even beyond like those, let's call that research and due diligence and understanding the market. We partnered with Bo Capital, which is in effect the, the entity that is UC Ventures. And that's a guy named Vivek Ranadive that's running that. We partnered with them, and we brought the deal flow that is privileged to the University of California to the partnership. And so the idea was specifically to say, listen, everybody's chasing the top venture funds. They're hat in hand walking Sand Hill Road. Like, we have all these companies that are coming out of our ecosystem that are being funded by those Sand Hill investors. So we could anchor a new fund and take the rights that we have to participate in those deals And endow this new venture fund with those rights and immediately put that venture fund on the map as a key player in the valley. And so that was what we did.

AI assessment note: “We partnered with Bo Capital, which is in effect the, the entity that is UC Ventures.”

Q What life lesson have you learned that you wish you knew a lot earlier in your life?

A How hard, I mean, how hard kids are. So if I, if I had known, I don't, I don't know what I might've done differently, but I have two kids that are amazing kids, you know, seven year old boy and a five year old girl. And my wife and I both work. So both of us are kind of on, uh, you know, she runs like a data science team at a public company. So it's not like I Trump her and in many ways she trumps me. And so it's this constant negotiation and challenge. And I think I would have just loved to have known that, um, This insane part of your life is coming, and you should sleep in, and you should go to the movies, and you should probably get ready for, you know, do, do a couple of volunteer gigs, travel the world a bit more, do those things, because getting married doesn't change your life. I didn't find, I mean, I, I started dating Courtney when I was 20, she was 18, we were at Princeton, we lived together for 13 years, and then We had children. It was like, this is a totally new world. It was totally new. Everything changes once the children come. And, and it, it doesn't help that like my kids are extremely stubborn and I don't know where they get it, but, um, you know, it's, uh, that's what it's something I might've liked to have been told.

AI assessment note: “How hard, I mean, how hard kids are.”

Q And how does it work? What's a prize-linked savings account?

A Yeah, so a prize-linked savings account is basically the more money you save, the more chances you get to win a prize. And the art here isn't never, ever, ever touching the principle. The principle is sacrosanct. You know, we just don't ever play with the principle. And so what we do is we partnered with Blue Ridge Bank in Virginia. They pay our account holders, I think it's 10 basis points for their savings account, which at the time was more than the national average, and I think it is around that national average now. And they pay us a little bit of money, and when we take that money they pay us and turn it into prizes. And there's a few prizes. One prize is like every week we do a million dollar drawing, and we ensure that prize. You have a one in two hundred and forty million chance of winning, which, by the way, is better than the state lottery. But the idea is very simple, that if your numbers hit, your life will forever be changed through random luck. And that, as we learned from prospect theory and the amazing work of Kahneman and Tversky, is Critical for low income people who see the lottery as literally their only path to wealth. We've done all these focus groups. It is, it's astounding. You talk to these focus groups and you say, okay, I want you all to picture yourselves as millionaires. Picture it. You have the house, you have the car. All right. Got it. Now, how …

AI assessment note: “a prize-linked savings account is basically the more money you save, the more chances”

Q Let's kick it off with this continued focus you have on the largest asset owners of the world. Why do you think that's so important to do?

A They have quietly become the most important organizations in the world, and I don't put a caveat on that one. They are the cornerstone of our modern social welfare state. They are integrated into so much policymaking from Saudi Arabia to United States to Australia. As banks have been regulated out of risk taking, they have become the capital in capitalism. I continue to be focused on these asset owner investors. I talked to so many students that still do not know what Pension funds do and sovereign funds do. There's a whole ecosystem of young people that we need to drag along this journey, which is why what you do is so important because a lot of people do listen to your podcast and they'll show up asking me about asset owners because they wanted to learn about investing. I wish more people knew about this industry that we're passionate about.

AI assessment note: “They have quietly become the most important organizations in the world”

Q Let's kick it off with this continued focus you have on the largest asset owners of the world. Why do you think that's so important to do?

A They have quietly become the most important organizations in the world, and I don't put a caveat on that one. They are the cornerstone of our modern social welfare state. They are integrated into so much policymaking from Saudi Arabia to United States to Australia. As banks have been regulated out of risk taking, they have become the capital in capitalism. I continue to be focused on these asset owner investors. I talked to so many students that still do not know what Pension funds do and sovereign funds do. There's a whole ecosystem of young people that we need to drag along this journey, which is why what you do is so important because a lot of people do listen to your podcast and they'll show up asking me about asset owners because they wanted to learn about investing. I wish more people knew about this industry that we're passionate about.

AI assessment note: “They have quietly become the most important organizations in the world”

Q So how do you think about something like Yale, which everyone likes to point to, with a new chief investment officer laying your framework for Yale's identity and how that applies to the enablers?

A If we take the Yale case, it's a fun one, obviously, because they invested very early and heavily in all the alternatives. Part of me thinks the technologized model is going to empower them to be even better at the Yale model. Why? Because you're just going to have much more confidence in how your GPs draw and return capital. So like right now, when we think about The traditional tools we use for predicting how a mid-market buyout fund in Europe draws capital and returns capital. A lot of that is putting the finger in the air and hoping for the best and looking at historical means or turning to the manager and asking them for guidance. But this can be much better. Like, we can do this with data. We can go and pull custodial data and look at the And start to say, okay, biotech in North America, series B and C fund. How did those organizations draw capital and return capital? And let's actually shock those assumptions with some past crises to see how they affect it. With that type of analysis, if you're a chief investment officer of an endowment like Yale, you're just going to be able to make bigger commitments to managers, hold less cash, And drive higher performance. That's the hope, right? That's the unlock that technology should deliver by helping you understand in more granular detail what you own. The people, the process, I think those things don't need to change that much …

AI assessment note: “Part of me thinks the technologized model is going to empower them to be even better”

Q I know you've been involved with Capital Constellations, one of the larger collaborative efforts. Within that trajectory, what are some of the things that have made that work more effectively than some of the other collaboration attempts you've seen?

A That's a super special one in that the capital that comes around the platform makes the platform more valuable. The bigger and the more sophisticated the LPs are around that table, The higher quality of the table. They're in the business of anchoring or incubating GPs and owning some of the GP, and they get fabulous GPs to work with them because the platform is big. The world's best investors, general partners, they still feel distressed when they are starting their business. They're not distressed because of anything to do with their investment strategy. They are distressed because it is hard to build businesses, and so Capital Constellation, with that amazing network of limited partners and asset owners that own that platform, can come together and, in effect, de-risk to remove that distress from some of those amazing GPs. So that's partly what's so effective. You can show up at Capital Constellation, and you can really get enough capital To get to business and really start investing and building your own track record. So I think that's partly where that has been so effective. It's also hard to build that kind of unique capability around anchoring and owning and managing GP stakes. Kind of liken a little bit to like what you see in development funds like NIIF in India. There's been another really successful collaboration With certain Canadian pension plans, investing with NII…

AI assessment note: “can come together and, in effect, de-risk to remove that distress”

Q How do you think about the difference between if you were mapping GPS coordinates in a location? That's factual data. When you start thinking about that for an investment portfolio, it's not, right? We don't know what the future is. We don't know what markets are going to do better. How might that GPS look

A So this goes to, what is the time horizon? Are you a long-term investor? Are you short-term investor? Are you navigating from your house to the burger joint? By the way, you still get rerouted sometimes when you're navigating to the burger joint, because Google realizes something about where it's telling you to go. Their market assumptions have changed, and so they reroute you. So as investors, what do we have? Well, we have our portfolio, and we have our destination. But our destination If I'm honest, it's often defined as, oh, we need this expected return target. It's actually not the destination. That's an intermediate target to get to the destination, and actuaries somewhere out there have told us you have to get 7.2%. At some point, we're going to have to pay somebody cash. We got to give the money back. So in theory, we could model those cash outflows with different sensitivities, different inflation components, et cetera. And then once you know where you need your cash in the future and what you have today as a portfolio, that's when people like me at Stanford and Adapar elsewhere get really excited about the optimizations we can run. By the way, we're not all going to the same place. That's the beauty of the technology here. It becomes mass customization. Right now, when you say, oh, I need 7.2%, which is a very generic destination, everybody's like, well, I need this a…

AI assessment note: “once you know where you need your cash in the future and what you have today”

Q To some degree, we think of a lot of these as variations of the same theme. How have you gone about trying to articulate what this identity means?

A It's kind of like saying, what are the irreducible components that every one of these asset owners, in effect, use to generate their performance to meet their return? So if you're setting up a sovereign fund or you're setting up a pension fund, ultimately you're saying, I'm going to set some cash aside, I'm going to use financial markets, and I'm going to get my cash back at some future date to pay some obligation. That, in effect, I just gave you a definition of the capital component. It's the first input. The capital component comes with encumbrances. You might have short-term liabilities you need to pay. You might have sustainability requirements. Oh, I have a net zero commitment that I need to meet by 20 50, which is very common. Understanding that capital is actually the first part of thinking about your production function. So we, in this paper on identities, we talk about capital as a part of the production function. But then there's three additional pieces that go with that capital. There's your people, your process, and your information. People are the obvious one. In this industry, we tend to over-index on people. We think that if we can get the right people in the right seat, we can deliver the performance. And that kind of boils down to things like track records, experience at firms, PhDs, All these different things kind of flow into our people. The process is how w…

AI assessment note: “what are the irreducible components that every one of these asset owners, in effect, use”

Q What's an example of an organization that's done that effectively?

A I'm going to mention APG again, because they have this innovation engine where they pilot things, or maybe it was PGGM. It's either PGGM or APG, but these Dutch are very process driven. So they built process around experimenting with their technology, and they would do pilots, and then the good pilots would graduate into full projects. So that type of experimentation is really valuable. I can think of a sovereign fund in the Middle East. I'm not quite sure how much I was supposed to know. So I'm going to leave them as anonymous, but they have this whole business process automation focus where they're going in and looking at small tasks and seeing, can we automate them with technology? And they have a separate team that goes in and assesses them, builds the technology around it. And the core team is in effect facilitating innovation that's happening around them. So they can continue to do their day job. So this concept of like business as usual tends to be very Pervasive from Australia to Abu Dhabi to Sweden. You have this business as usual function. You need somebody to come in whose job it is to do the innovation. So that's what we saw a couple of times in that Middle Eastern fund. I think the mergers that you're seeing in Australia are a natural driver of innovation. You're bringing these big teams together, smushing them and seeing what are the best practices that emerged.

AI assessment note: “I'm going to mention APG again, because they have this innovation engine”

Q of, say, one of these institutions, and in an ideal world, that institution is now transparent, and they are reporting everything you want. What are the set of reports? So you've mentioned things about costs and fees. You've mentioned things about effectively risk factors and positions. What is it that you're trying to get at as a starting point to say, okay, we're now transparent, and we can do more?

A I'd love to open that conversation up in like a In the Biden paper, we talk about setting up a presidential commission to define what these things are. I have the ones I want. I want everybody to know how much it costs to produce return. I want to know what it costs to move the money, hold the money, and manage the money. Those are different types of costs and different functions, and we can get to the bottom of all of it. So for the professional institutional investors of the world, you don't get to Tell your stakeholders you got free trading because you're on Robinhood. You have to take the next step and get in, understand what like the market impact is and all these different things of your strategy. The other one I would go for is climate risk. Climate risk is one of these long horizon risks where it's like existential in some cases for portfolios. If you own huge amounts of real estate in Florida or in New Orleans, you should be reporting that. And all I'm looking for is the reporting. If you want to justify that climate change isn't real because that's your belief, go for it. But the reality is until we report this stuff, People can kind of sweep it under the carpet. The other one I think is useful just right now, especially given everything that's happened in the U.S. over the last two years is diversity and inclusion. Let's just get data on how we are doing as a pension…

AI assessment note: “I have the ones I want. I want everybody to know how much it costs”

Q What have you seen in some of the ones I know were your favorites in terms of how they manage capital, say Australian super and New Zealand super? How are they tackling these issues?

A New Zealand super is one of the most thoughtful climate investors in the world. They've truly integrated it into their decision-making and they live and breathe that kind of long-term moniker. They're really trying to look out into the distance and understanding how they should be tilting their portfolio to be sustainable. And in fact, I think in the last year they reached out because they've relaunched their entire climate project. And so what that tells me is there's no end state. It's like the way we build technology in Silicon Valley. We don't put out a piece of technology and call it done and like wash our hands and walk away. The best investors that are thinking about climate are continually renewing their commitment to Understanding the consequences of climate and thinking about how they integrate that into their portfolios. And I can tell you that New Zealand super, despite the fact that you can look in their annual report and you'll learn more about climate investing than anywhere else probably available. They're still back to the drawing board, trying to figure that out. I've got huge respect for that. Australian super and the Australians in general, they're just the future of pensions in the world. They're competing for members. And they're competing to survive because the regulator after the Royal commission was like, we don't need this many super funds. So in a wor…

AI assessment note: “New Zealand super is one of the most thoughtful climate investors in the world.”

Q So for those people who are probably not inclined to go read the transcript of what you said in public, what was the worst or most surprising thing that you found that you've already said in public?

A Yeah, the performance wasn't what I actually expected it to be. After meeting with them, I was actually quite impressed with their portfolio construction and the way they thought about investing. And when we got done with all of the analysis on a risk adjusted basis, It was much worse than I thought. And then there was a sense for me that this was a governance challenge and that because the board struggled to understand the complexity of the portfolio that was being built by the team, that the team could get ahead of the board in terms of its investing. And so it's not surprising, but it's like all these organizations need boards of directors that can like hold the staff accountable, that understand derivatives contracts and how they're priced and what the tail risks are for certain different assets. It didn't jump out at me in that context that there was a bunch of people on the board that had that knowledge and skill to hold them accountable. And this project didn't start out as a governance project. It started out as a question Should they go passive or should they keep being active? And the project ended quite clearly as a project on governance.

AI assessment note: “when we got done with all of the analysis on a risk adjusted basis, It was much worse”

Q And are those the, what we think of as the big pension plans?

A Oh, yeah. Oh, sorry. Yeah. So the Crown Corpse, it's a, it's like a legal structure that has allowed the Canadian model to exist, because it's quasi private. So the boards of directors of these public entities can set comp in such a way that they can recruit And retain very high quality people. And the reason they do that is they've done this massive analysis of the fees and costs paid to external managers. And they've decided, well, listen, what if we did this ourselves and stomached the political damage of paying public employees, seven million dollars a year? I mean, we're okay paying football coaches, seven million dollars a year in this country. That are public. But we're not okay paying a chief investment officer that much. That's a sacrilege.

AI assessment note: “Oh, yeah. Oh, sorry. Yeah. So the Crown Corpse, it's a, it's like a legal structure”

Q All right. Now we have a whole bunch of stuff to cover, some new, some painfully continuing, but why don't we just start with this overview of why is it that you continue to spend your time thinking about and working with these asset giants?

A Oof. That's the question I ask myself just about every morning. It's hard. These are organizations that, as you know, because you've been running this remarkable podcast for four or five years now, and congratulations on it, by the way, Ted. I feel like you've become an input into all of the work I do. You're not just an output anymore. So you're creating data and information and knowledge that is really valuable. So, so why am I doing this? I really truly do believe, Ted, that these are the most important organizations on the earth, and that's full stop. I don't even have a caveat around that or a constraint. They're the foundation of the modern social welfare state. So if you take public pension funds, corporate pension funds, even foundations and endowments, they all exist to solve some social problem or facilitate some kind of critical Social activity, you know, funding old age retirement, keeping nation states solvent during financial crises, things like that. And at the same time, when you've got this, these organizations that have such profound importance for the modern social welfare state, they're also the foundation, what I often call the base of capitalism. They are the organizations putting the capital in capitalism. With a 120 trillion dollars, their capital flows out into the hedge funds, the mutual funds, the private equity funds, the venture funds. It's the endo…

AI assessment note: “I really truly do believe, Ted, that these are the most important organizations on the earth”

Q You mentioned that governance has been a big driver, a big constraint. Maybe it will, maybe it won't remain that way. What are your thoughts on the future?

A The other two components, culture and technology, they're almost in tension with each other. So the boards of directors, the culture of the organization and the technology, you can think about how each of those would empower those production inputs in different ways. So culture, maybe it's a knowledge sharing organization where people push information around that allows people to make smarter, faster decisions through a bureaucratic process. That's culture. But technology, Is all about really moving information at scale, streamlining processes, and pushing and empowering people to do things that they hadn't done prior. And there's a part of this industry, frankly, that I think is a little nervous about what technology can do to their organizations. And I think that stems from this thing I've noticed, which is I don't see a lot of technologists sitting on boards of directors of pension funds or sovereign funds or endowments. You see lots of ex-finance professionals. You see lots of representative people coming out of the constituencies, teachers, firemen, public employees, et cetera. You don't see people that have built data businesses or analytics engines to improve decision making. So governance tends to view the technology component as kind of like an operational toolkit rather than what I think it is, which is a potential enhancement For returns. If you get your tech stack r…

AI assessment note: “governance tends to view the technology component as kind of like an operational toolkit”

Q as you said, and you found they have these different goals, you know, a lot of times we think of, okay, down in a foundation, we understand it's a school, it's a foundation for a long time, a pension funds funding retirement. What are those different goals? And maybe the ones that kind of surprise you of what it really is compared to what you might think on the surface.

A Sometimes you'll see goals that have inherent contradictions in them, which I always chuckle at, which is like, we exist to preserve capital and grow capital at the same time. That's my favorite one. When I see that written into a mission statement, you're like, exactly how are you going to go ahead and do that? But they do, you know, that's there and they build portfolios that they think justify that. I think many will have soft statements of why they exist. We exist to meet a pension promise. We exist to bolster a university. We exist to ensure this foundation is producing cutting edge research. It's the translation of those goals. Into something mathematical that is often missing. So we are in the business of taking capital, putting it to work in financial markets with the hope of pulling it out of financial markets at some point to do something with it. That's what all these asset owners are doing. What are we doing with it? What is that mathematical liability that we're planning for? In the case of public pension funds, yes, like you'll have actuaries come along and do a pretty rigorous Examination of the liabilities. They'll tell you what your asset allocation strategy would be, but then it gets complicated because the assumptions underpinning those asset allocation strategies begin to feel contrived. If you just put more money in hedge funds, then you have a chance at me…

AI assessment note: “Sometimes you'll see goals that have inherent contradictions in them, which I always chuckle at”

Q 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. Something like New Mexico, where it's been around for a long time, there's a lot more money coming in as fresh capital to put to work. How are they thinking about that objective of driving high performance?

A In the case of New Mexico, it is about understanding their comparative advantages, which is obviously the state. Santa Fe is a beautiful place, so you're gonna be able to recruit amazing people to go live there. They have recently done an upgrade to the compensation. You can go and make a life in Santa Fe working for a spectacular organization that's mission-driven, so that's part of it, is recruiting the right team. They have an opportunity to leapfrog in technology, which is another way of saying maybe the technology wasn't very good. Until recently, but maybe it's actually to your benefit to be entering the AI age with a clean slate, but also a thoughtful approach to asset allocation that has delivered good performance. So the team is pretty solid. The neat thing about the moment is defining the organization for the future is in the hands of whoever the next CIO is. Part of the reason why I'm being cagey is I don't want to close doors for whoever's next. I want to make sure that whoever comes in can look at it with fresh eyes, because that's probably one of the coolest jobs available. If you get the right person, they might have a totally different perspective than me on what the opportunity set is, and that would be great.

AI assessment note: “it is about understanding their comparative advantages, which is obviously the state.”

Q So when all the default settings say, just stay with inertia, how do you go about making change?

A I've spent so much time over the last four years thinking about innovation and like, how do we help pension funds innovate? Well, we've begun to learn why there's underperformance, there's excessive fees, there's unwanted or unintended risks that are getting baked into these portfolios. So let's just set to the side that we probably want these organizations to change. And if you're unhappy with capitalism, then like, to some extent, you're unhappy with the incentives these investors are setting for the entire system. And so they should change. So the why's there, let's set that to the side and say that's not too debatable. What are they going to do? There's a lot of stuff that they can do. They can seed new managers. Like I know you've had a bunch of people on from Capital Constellation. What a remarkably innovative platform that is. They're putting GPs in business and participating in like the means of return production. What a fascinating example of like innovation and asset owner world You can change your organization like we've seen in Canada and Australia. The challenge is how and when. How is like we've seen, and I've written about this, this like collaborative model of investment where Pension funds and endowments and sovereign funds will come together and collaborate. They'll pool resources. They will pool career risk. If I'm working with Ontario teachers and I'm CalPER…

AI assessment note: “How is like we've seen... this like collaborative model of investment... pool career risk”

Q So, when you're working with, you know, it doesn't matter, California, Australia, how do you think about fees these days? You know, you talked about alignment, and everyone's talking about it, but what can people actually do?

A People are so sick of me talking about fees, but this is my chance, right, to tell people why the hell I'm on the soapbox. So, I spent 10 years trying to figure out how do we change the behavior of the big asset owners? And why did I want to do that? Well, first and foremost, I think the financial services industry is capturing too much value. It's distorting incentives. We have this increasingly short horizon of investment, despite the fact that we have a hundred trillion dollars in long-term capital. We have an asset management industry and financial services industry that's capturing about 40% of all after tax corporate profit in America. It's egregious. Even the research shows us that we may now have a 10 X fold increase in trading activity from the 19 sixties, but our financial services industry is less efficient today than it was a hundred years ago. The unit cost of intermediation is higher today than it was a hundred years ago in the era of steel, automobiles, Railroad. And another research paper shows that as your financial services industry gets bloated, your productivity and growth begin to wane because that industry becomes a tax. Well, we're at 40% of corporate profits. Like, it's time for us to realize that the financial services industry is almost dominating the real economy, and it's meant to be the other way around. The financial services industry is meant to b…

AI assessment note: “this is my chance, right, to tell people why the hell I'm on the soapbox.”

Q I want to circle back to this thought of your pivot to technology. Everyone's talking about AI. What have you seen in different use cases of AI tools for the asset owner community?

A A lot of asset owners are thinking in terms of automation. What FTE can we automate? It's a natural place to start because you think about artificial intelligence as replacing human intelligence. I don't love that framing. I love thinking about how technology unlocks additional basis points of return. It gives permission to pension funds to spend more money. Especially on the initial setup cost of getting your data right. There's a big piece here, which is technology enables two things for every investor. One is speed. Get to where you're going faster. And the other is insight. For 4000 years, I would argue, most of the tech innovation that went into our industry was speed. You can go back to the Babylonians and look at cuneiform tablets, and you can literally see Regressions being done on these cuneiform tablets around the depth and flow of the Euphrates River and commodity prices. We're still on tablets today. It's just they're digital. That tells me most of that tech advancement has been about speed. But in 2016, we had AlphaGo. We had the beginning of this AI moment. That AlphaGo case study, you see this moment where inhuman intelligence revealed itself. For the first time, for most of us, the machine did a move that had never been trained on before. It was an inhuman move, move number 37. In fact, all the humans in the room thought the move was a mistake. The move ended up…

AI assessment note: “A lot of asset owners are thinking in terms of automation... I don't love that framing.”