The Exchanges

Q Yeah, what was your path? Before you got to Vanderbilt.

A So I graduated from the University of Chicago. I went to work for Citigroup in the investment management area. I then worked for a couple of different firms, and I was a quantitative analyst. I was a portfolio manager. I was a traditional stock analyst, and then the CIO of a small investment management firm here in New York that doesn't exist anymore. But after looking back on 10 years, I decided that I was really not a very good stock or bond picker, and I wasn't passionate about that. I was really more passionate about sort of broad macro themes, and after thinking about it a bit, I came to the conclusion that being a manager of managers in an asset allocator was probably a better use of my skills, and I don't know how I arrived at that, but in retrospect, it was the right decision.

AI assessment note: “I graduated from the University of Chicago. I went to work for Citigroup”

Q of their positions, just that, markets evolve. And on the one hand, it's really important to be invested with a manager who has great discipline. On the other hand, if the thing that they're disciplined about No longer works. You want them to evolve. So how do you decide which shift is, quote unquote, style drift that's a bad thing, and which is just an opportunistic evolution of a strategy?

A I think when you invest with a manager, what you're trying to do is identify the skill, the edge that they have. And so if they vary from that edge or skill, that's when you get worried. That same skill or edge can be applied in other sectors, perhaps, or in other cap sizes. So I'm not Too concerned about that. But I am concerned when they do something fundamentally different. And I'll give you a good example. We had at Vanderbilt, a fund that was a run by a guy who's really good tech stock picker. And all of a sudden, when we would meet with him, he started always talking about macro themes. And I think he was, he was an aspiring Paul Tudor Jones or something. And I realized this is not your core strength. And we exited.

AI assessment note: “if they vary from that edge or skill, that's when you get worried.”

Q And was it difficult to go from that decision to end up in a seat at your alma mater?

A No, it wasn't. I was actually head of the New York Alumni Association, so I stayed fairly close to my alma mater, and they approached me And said, why don't you come down here and manage our endowment? I said, you know, don't be silly. I'm a Wall Street guy. I'm a money manager. And the more I thought about it, the more I thought it was a better use of my skills. And also for family reasons, uh, it would probably be a better lifestyle for me and my family. And I don't think I had all of the insights that I had today with respect to that job, but it turned out to be a great job for me. We were pretty creative in some of the investment categories we did. And I really enjoyed that. I mean, I knew a fair amount about stocks and bonds, but I didn't know anything. About private equity and venture capital and all those things. It was a big learning curve for me.

AI assessment note: “No, it wasn't. I was actually head of the New York Alumni Association”

Q whatever it is. But over the last 10 years, as we all know, sixty-forty has been just fine, thank you very much. I don't know that many people who've earned the sixty-forty return, but you could look backwards and say, that worked. If you look out the next 10 years, how do you think about that battle between a multi-asset class diversified endowment model and just the simple low-cost, sixty-forty?

A Well, I think a lot of people have declared the death of the endowment model, and I think it's premature to declare its demise. We've been in an extraordinary period, and we all realize that, but people sort of forget about it when they're doing the kind of analytical work you talk about. You've had this nine-year Bull market and stocks and bonds. Very low volatility, so I don't think we should extrapolate that period going forward. In my little firm that I help operate now, we do a reasonably disciplined job of forecasting returns, and we use inputs from other firms like GMO and research affiliates. We have our own Black Litterman model, so we crunch a lot of numbers. And where we end up is sort of a ten-year expected return on equities of Five-ish, let's call it five and some change, a little more for international stocks. Bonds are sort of three-ish. So I think looking ahead, the simple sixty-forty portfolio is going to give you middle single-digit kind of returns. Endowment funds that have four and four and a half percent spending rates, that's just not going to do it. Now, when I throw out numbers like that, people look at me very skeptically today because we're in this roaring bull market, and I certainly am not smart enough to figure out how long that will go on. But anybody that does a disciplined job of trying to forecast longer term returns finds it pretty hard to get…

AI assessment note: “I think these other kinds of investments that were included in the endowment world will begin to matter again.”

Q 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. Can you touch a little bit on some of the differences in managing an endowment? And then presumably in the trust company, there's some taxable pools of capital. And how do you think about asset allocation differences, manager selection differences?

A Well, a couple of differences. First is time horizon, you know, endowments, at least in theory, are perpetual funds. So an old friend of mine who was a consultant at Cambridge Associates used to say that the time horizon for an endowment was really three years. And I said, where did you come up with that? He said, well, after one year of bad results, trustees get antsy, but they don't pull the trigger. After two years, they get really antsy and they begin to pull the trigger, but it takes them a year to do it. So I always thought that was sort of humorous, but at least in theory, the time horizon of an endowment is perpetual. Obviously with 75% of our clients being individuals and families, you have more limited time horizons. So that's one thing. The second thing is taxes, obviously. Liquidity is another issue. So there are significant differences. In our manager selection process, Um, particularly on the, uh, equity side, one of the things we do is pay attention to tax efficiency, and whether the, you know, a lot of managers, primarily those who, who deal with institutional portfolios, don't think about taxes, so we do try to find managers who will take it into account. If they're thinking about selling something, but holding it a short time would make it go long term, we would like it if they would think about those kinds of things. Another thing that you deal with, with ind…

AI assessment note: “In our manager selection process, particularly on the equity side, one of the things we do is pay attention to tax efficiency”

Q Let's talk a little bit about the manager selection process. You've been at this in different iterations and different seats within the same investment organizations for a long time. What are your favorite ways of discerning between two different managers?

A Well, first of all, I'd say my favorite way not to do it is by looking at track records and long believed that track records have virtually no predictive ability. And I, I think the New York Times a couple of weeks ago had an article about the Morningstar rating saying that they really don't have any efficacy in terms of predicting returns. So I never spent an awful lot of time looking at track record. The things I really spent time on is this an investment approach or philosophy that makes sense to me and I can understand and is well articulated. And that's not always the The case, which is interesting. And for that reason, I never was a fan of black box approaches of any sort, although some of them have been quite successful, but that was just not something we do. So the first thing is, does the basic investment approach make good sense? Second, is it applied on a disciplined basis, a repeatable basis? Because not only do you have to have an edge, but you have to have a repeatable edge. You have to have some sort of process or structure that makes it repeatable. Third, very interested in the people sitting across the table from the I heard an interview recently with Dave Swenson, and he said manager selection is about people, people, people, and I agree with him a hundred percent.

AI assessment note: “The things I really spent time on is this an investment approach or philosophy”

Q certain days you're meeting them. So maybe they slept really well. Maybe they took some pill that morning. And so their level of excitement and enthusiasm is very high in that moment. How do you get a sense of whether that's who they are as their disposition or it's just how they presented themselves to you in those few times that you happen to be face to face with them?

A Well, I think manager selection is a little bit like dating. I don't think you make the decision on the first try. So I, at least, uh, where we were able to, we would meet with people Over time and not pull the trigger right away. Occasionally, if there was a fund that was in tremendous demand and sort of one time you get in or you don't, you know, we, we would pull the trigger more quickly. But, uh, in general, it was a slow, get to know your process, talk to them over and over again, talk to a lot of people who know them, either existing clients or people in their former firms or whatever, and do as much of that kind of due diligence as you can. But again, in the end, it's a very subjective qualitative Sort of process, and I have no illusions about how often I'm going to get it right.

AI assessment note: “we would meet with people Over time and not pull the trigger right away”

Q everything will be fine. But the other things that give you a chance to earn higher returns than what we're projecting for stocks and bonds cost a lot more. How do you think about the balance of Accessing something that's different that you, you know, is seven percent enough when you know you're paying the fees? You don't know for sure what you're going to get on the other side.

A I think it goes back to the discussion we had before about an edge. I mean, you've got to be convinced that there's a pervasive, powerful, repeatable edge to be willing to pay those fees. I also think that fees will continue to come down in some of the non-traditional categories, but nevertheless, I think you, you, you really have to be convinced that there's enduring value added there, and you ought to be skeptical about it. You ought to be cynical about it. One thing I would say is, at least from the valuation work that we do, we think the international stocks are a good bit more attractive than U.S. stocks, so you can obviously do that on a relatively low cost basis as well. Maybe that's one way to tilt a portfolio that gives you a little more bang without getting into a high fee proposition.

AI assessment note: “you've got to be convinced that there's a pervasive, powerful, repeatable edge”

Q So what happens if you're an aspiring money manager and you're earlier in your career, you're in your early mid thirties, have had 10 years of great training, what do you do?

A I think you have to really look in the mirror and decide whether you have skill, you have an edge, and what it is, and then if you can identify it and have some confidence in it, you go and do that, however you do that. Otherwise, you've got to rethink your career, and it's not to say it's the end of the world, and that was exactly the decision I made. You know, look back on 10 years of picking stocks and bonds and said, you know, Bill, you're really not very good at this. But you're not stupid. You have some expertise in other areas. So how can you take advantage of that? So I think that's the decision everybody has to make.

AI assessment note: “decide whether you have skill, you have an edge, and what it is”

Q And to make that even more subtle, how do you think about skill of an allocator?

A It's an interesting question. I think if I really knew the answer, I would have had a better track record than I did. I think it's a couple of things. I think it's, you have to have some basic technical knowledge, you know, you have to understand projected returns and correlations and risk and all those kinds of things to structure a portfolio properly. You have to have the courage to do non-conventional things, difficult things, ugly things. So I think there's some of that. And then I think it's just a high degree of intellectual curiosity and networking to look around and see opportunities that are out there and be willing to take advantage of them. And I don't know how you particularly organize to do that effectively, but somehow we seem to do some of that.

AI assessment note: “you have to understand projected returns and correlations and risk and all those kinds of things”

Q And is there anything that you're seeing around the world that you are particularly excited about, either that you are having your portfolios and want other people to buy into so that it'll go up, or that you're sort of curious and doing research on that you think might be a really interesting opportunity?

A I don't think we've found the category yet, but we're investigating lots of them. Some of the ones I mentioned before and some other ones. So, no, we haven't found the holy grail yet. And one of the problems is that even if you do find something that's very interesting, you know, is it Investable in the sense of having the right kind of vehicle at the right cost and all those sorts of issues. So, no, as I said before, I don't see any overwhelmingly cheap assets today other than volatility, and I think, I think volatility is cheap, but I have no sense whatsoever as to when it may turn, and if you look at historical volatility, it can stay low for long periods of time. We might be in a low volatility regime for a long period, and obviously you can invest in volatility through ETFs, But they're not the greatest vehicles in the world because of the rolling of the futures contracts. If volatility stays constant, the price of the ETFs goes down. They're not wonderful vehicles, but nevertheless, you can do it. But that's the only cheap, cheap asset I see today.

AI assessment note: “I don't think we've found the category yet, but we're investigating lots of them.”

Q I want to talk a little bit about what's different today. So if you were the newly anointed CIO at, well, it won't be Vanderbilt, Andrews is doing a nice job there, but if you were the newly CIO, appointed CIO at a five or six billion dollar pool of capital, would you approach it the same way that you have, or would you do it differently and why?

A I guess I'm glad I'm not because I think it's a particularly difficult time. I think it's not often that you're happy about getting older, but I I'm sort of happy that that part of my career is over. I think it's an extraordinarily difficult time because if you buy my premise that returns are not going to be particularly exciting in the traditional asset classes, then you begin to look further afield. But the problem is in most of those other asset classes, there've been tremendous capital inflows. So You know, there was reasonable questions as to whether returns on private equity and real estate and some of these other strategies are going to be as attractive as they have been. If you're going to truly find value added, uncorrelated, we call them idiosyncratic return streams, I think you've got to look pretty far afield, and I'm not sure where they are. Personally, when I look around the world, I don't see any cheap assets today, with maybe the exception of volatility. You know, I don't have any sense or any skill at figuring out when volatility might pick up, but that's the only asset class I can find today, perhaps with the exception of MLPs, but, you know, most asset classes do not look cheap, and so if I'm an endowment fund, and to sustain the spending rate, got to earn seven, eight percent, six, seven, eight percent kind of return, I think that's going to be a pretty sign…

AI assessment note: “So if I were in the CIO See, I would be paying attention to costs.”

Q What are examples of fun stories that come up that either derail an investment process or educate someone with emotions to stay the course?

A It's interesting. We, we got a couple of calls on the morning after Trump's election. Saying, get me out, the world's coming to an end, and we said, we don't know what's going to happen, but we do know that knee-jerk sort of reactions are generally a bad idea, so let's sit tight. I actually saw one, one of these people just the other day, and he said, thank you so much for keeping me in the saddle. Of course, we had no insight as to what was going to actually happen, but, uh, so you, occasionally someone will remember that you were right, and thank you for it. Not, not all that often, but it's, but it's nice. You know, some of the more interesting things that we see, we work with a number of multi-generation families where we're working with sometimes three generations, and it's interesting to see the differences in approach and psychology and risk tolerance and patience and all those sorts of things across three generations. It's quite interesting.

AI assessment note: “We, we got a couple of calls on the morning after Trump's election.”

Q What teaching from your parents has most stayed with you through your life?

A Oh, that's a great question. It's interesting that I don't remember her name, but there's a woman who I think is at Yale who wrote a book about tiger moms, and later on she wrote another book about success in life, and one of the things she said was one of the clues to successful living is impulse control. And, you know, my parents taught me to be relatively disciplined and focused, have a sense of direction and goals, and the more I go through the life, the more I believe that's really important. I don't always, of course, always achieve them, and I, and I drift a bit here and there, but having a sense of purpose is important, and I particularly found that when I retired, quote, unquote, retired, although I flunked retirement and ended up going back to work fairly quickly, but it's very interesting when you wake up one day and you say, holy smokes, I don't have to go to work today. What am I going to do with myself? And you see some people that end up going to the country club and playing golf and spending the afternoon in the bar, and I don't think that's a, uh, Good prescription for longevity. So I think having some purpose, and it doesn't have to be work, it can be whatever it is, but having some purpose and goals and objectives is really important.

AI assessment note: “my parents taught me to be relatively disciplined and focused, have a sense of direction”