The Exchanges

Q Why don't you take me back to how you first got interested in investing?

A So that goes way back. When I was five years old, my dad lost his job. And you don't really realize what's going on at that age. But when your parents start fighting, and it's not very fun to be around them, you start to take notice of what's going on and how it's impacting your life. So that was the first moment that I began to understand how important finances were in a family's life. Roll forward a couple years, my dad ended up working as an investor, and then we never really got to watch much TV in our lives, but every Friday night, he'd turn on over dinner, Wall Street Week with Lewis Rukeyser, and so all four of us, in fact, watched that with the family, and all four of us are in investing, so thanks to Lewis, RIP, for getting me interested in investing back in the mid-eighties.

AI assessment note: “thanks to Lewis, RIP, for getting me interested in investing back in the mid-eighties.”

Q That was an early OCIO. What was the difference in doing that from what you saw at the endowment?

A Clearly the clients. So that was number one. We started with two clients at Morgan Creek. They are great families and they were interested in replicating what the endowment successes had been in the tech rec era. Many of the endowments were invested heavily in hedge funds that shorted the tech rec in 2001. And that was very successful for many of them. And so a lot of families took notice and they said, gee, the endowments are doing something right. They got 99 right through their VC portfolios. They got O two right through their hedge fund portfolios. Maybe there's an all weather way to do this for the family market. And so those two families were on board for that. Having just two clients and having the network that we'd built at UNC, it was pretty great. What changes is when you add many more clients and then all of a sudden your day goes from 80% investing, 20% clients to 20% investing, 80% clients. And now you're in the asset management business.

AI assessment note: “Clearly the clients. So that was number one.”

Q So what were those early years like for you working in endowment right out of school?

A You were in the endowment world in this era. Yeah, it was a lot different than UNC was. Many endowments at that time were essentially where alumni went to retire after a successful career, and they put in some stocks and some bonds, and they didn't really do a whole lot, and so that profession was evolving massively at the time, in part the tech boom of the late nineties and venture capital, the wave that really crested in 99. So it was a very interesting experience and evolved very rapidly. When I got there in 99, there was a little bit of VC in the portfolio. There were a lot of growth stocks. 2001 happened thereafter. When I got there, I was the only junior person. I am from Texas. And so it will not surprise you to learn that they had a real estate and a natural resources portfolio that were orphans. And they were like, oh, you can just handle that. You're from Texas. You must know all about oil wells. Man, I'm from Dallas. I never seen an oil well in my life at that point, but I learned and the pendulum swings as it always does. And then all of a sudden towards the end of my career at UNC, those asset categories were really, really interesting.

AI assessment note: “When I got there, I was the only junior person.”

Q Within that relatively simple structure of Steve, Alice, and then you and your team and real assets and across the board, what was it about the decision-making process that seemed to work effectively?

A In Steve and Alice, and in the rest of the Willett team, you have smart, motivated, candid people. There was not a lot of wasted time. You knew very quickly where things stood in working with that team, and that is just the best way to be efficient, to empower people, ultimately. It doesn't mean that we always agreed, far from it, but you knew exactly what you needed to do to convince them, and over and over again, they were available, And candid. And those are the two most essential characteristics, in my view, for people who approve investments, is availability and candor. And I think the two of them have that in spades. So it made it very easy to get things done if you could get them convinced.

AI assessment note: “those are the two most essential characteristics, in my view... is availability and candor.”

Q You mentioned two things that tie into that point of motivation. One is people are highly motivated, and then you also mentioned that Steve and Alice had personal investments alongside, which isn't something you always see in this pool of capital. What created that high level of motivation for the people on the team and that alignment of interests?

A Empowerment is always the first and most important part of that. Each of the people running their particular portfolio felt like they owned it and was the face of Willett to their particular industry. So empowering your team in that way was a huge ingredient of all of this. And yes, the economic alignment. I always find it interesting that people view it as a conflict of interest for the investment team to invest alongside whoever's capital you're investing. Structured correctly, I think that should be essential. You want people to have more than just their psychological incomes at stake. We want them to have their actual incomes at stake. And there are some pitfalls that you got to be careful of and capacity issues and all of those things. So there are some issues to manage around that, but I think it does so much more good than bad over time when done correctly. It's why if I look at Willett, the turnover level is extraordinarily low. Between the empowerment and the alignment, I don't know that you could find many better places to work in this industry.

AI assessment note: “Empowerment is always the first and most important part of that.”

Q How do you think about the structure of investing from asset classes? And now sometimes you see factors and you had funds and then you've got funds and co-invest and direct deals. How did that all come together over the last couple of years?

A That was a big topic and remains a big topic of how you get it exactly right. You have a team that is highly asset class oriented, and yet we all know that factors cross those teams and no more so than when interest rates rose so dramatically in 2022 and everybody needed to take a serious look at credit in every asset class. We had a head of portfolio strategy really helped us think this through and In that director's meeting, we spent a lot of time talking about that and where we wanted the credit factor to show up, and the answer was everywhere. Anywhere we could find it where we're in first lien was our limit of risk on credit side at a 10% rate or more, we should talk about that. Willett has a wonderful issue of often too much capital, and so it was never so much that there were pigs at the trough and one was going to get bumped out. It was really, can we deploy enough capital against this theme? Credit was the biggest of all of those from a factor perspective that really changed. We had never bought credit before. It wasn't really in our mandate. Will is a high risk, high return investor, equity oriented, perpetual life, all those things. And so it didn't really make sense for a lot of years. Didn't want to build a new asset category because we didn't think it was a permanent allocation. So we needed to bring the asset class heads in across the board to address that factor…

AI assessment note: “we needed to bring the asset class heads in across the board to address that factor”

Q What were your biggest lessons from being in the CIO seat that maybe you hadn't experienced in your career up until that point?

A It's largely not an investment job. I think people kind of know that, but I'd take it maybe a degree further. There are many functions that make an investment organization work well, and they are all important. Some of them are important because if you step on that landmine, it blows everything up. Some of them are important because they actually directly create alpha for the portfolio, but all of them need to be managed and all of them, if you're running a great organization, have great people in them who want your feedback. So if you think about your day to day as a CIO, The investing piece should not be a majority of that. Managing your team, managing the other non-investment functions, thinking through strategy are really important pieces. AI is a great example of this. I was talking to a friend of mine who's an investment manager last night, and he was talking about embedding AI in his investment process has essentially removed the need for analysts. Just think about the evolution of your investment firm. If you can outsource to software, which by the way, costs him a thousand dollars a month, What you would pay a 125,000 dollars a year for, for at least one, and you probably have more than one. So as a leader of an investment organization, those are the topics you should be focused on. How do I support my team? How do I give them the tools? How do I make us more efficient…

AI assessment note: “It's largely not an investment job. I think people kind of know that”

Q So you're going through this process now. Elections coming up. We're going to release this before the election, so we won't know what's going to happen. And I'd love to walk through your decision tree. Let's say for whatever reason, you're running in a democratic slate against that. You don't win. What do you do next?

A I'd probably take a day or two off at first and assess. I think I can live with whatever result happens as long as I know two things the morning after. One is that I've worked my hardest to make it happen, and two is that I haven't compromised my principles. And I'm on track on both of those, so that's good. I will be in the investment business in some way, shape, or form. My wife and I talk about it, what can and will happen. I loved being in the family office market. And so I'd be interested in exploring that, but I'd be interested in other pools of capital as well. I just want to be an investor in the long run. I'm happy managing an investment organization, or I'm happy actually just being an investor. I'm fortunate enough where I have to manage my own investments already, so I'm kind of already doing it, and I'd love to figure out who to do it with going forward in this ad scenario.

AI assessment note: “I will be in the investment business in some way, shape, or form.”

Q What was it that made them available? You'd imagine this very large pool of capital. You got a team doing a bunch of different stuff. Their calendars probably get full. So what was the structure of the setup so that that worked?

A In the end, it comes down to interest. Both of them are investors to their core. Both of them sat in an open floor plan with everybody else. Both of them were making investments personally on many things. And that alignment of interest is really hard to replace. I think there are many people in the investment business broadly who are there to make some money and it's a fine way to do so. But then you run into those people who really just love this stuff. And when you work with them, you understand why they're successful. It's not because They're trying to make money. It's because they actually love it and everybody knows it and it resonates. So availability is just a byproduct of all of that. If you're talking to them about a way that they're going to do right by their client in a material way that will influence the portfolio, they got time for you. It may not be right now, but it'll be soon. And if it's not in person today, we'll do it by zoom tomorrow. It's a very effective organization at getting things done.

AI assessment note: “availability is just a byproduct of all of that.”

Q So in your back half of your time at Willett, Alice left, you became the co-CIO. What tweaks in the investment process did you evolve over those last five or six years?

A One of my colleagues at Morgan Creek did an amazing thing for us there by setting up an information system that allowed us to share, not quite in real time, but daily everything that everybody was doing in a way that was very user friendly. So I have never been above shamelessly stealing from people who have great ideas. And so I did that at Willett. The silo architecture where you have a strong lead in each asset category does have the downside of lack of collaboration across those silos. And so that was a big focus for Andrew and I, when we took over as co CIOs, I borrowed heavily from my former colleagues architecture and setting up those backstop was the engine, but we built our own front end to encourage people to share what was going on. Not that we were trying to second guess and we're just trying to keep them aware when you have investments that cross categories and one person is looking at over here and the other person is looking at it over there and they don't know that that's a real failure for your organization. So how do you still keep the empowerment of the asset categories while having some sense of cross silo fertilization across the different portfolios? We did a lot of that. We spent a lot of time trying to break those down, but not too far. We wanted to keep people empowered and the information systems are a real big part of that.

AI assessment note: “setting up those backstop was the engine, but we built our own front end”

Q Don't get a chance much on the podcast to talk about investment organizations that are really Not done well. Not a lot of people want to come and talk about that. I'd love to hear, as you looked at this, you said there are rational decisions about the pension for the state, and talk through what does bad investing look like?

A I don't want to impugn the investment professionals there. This is a strategy problem. This is not a tactics problem so much. There's two different things going on. One, there's basic confusion. When you are wealthy, which our state is, you can manage your investments very, very conservatively if you want. But what you see in history when people do that, they essentially lose their wealth because they are not keeping up. So in fact, a successful investment strategy is important to staying wealthy. And the state has never really figured that out. The belief, and we had a treasurer for a long time in a different era of interest rates, who is still a larger than life figure here, he essentially put the entirety of the pension fund in as many treasury bonds as he could. We needed to make seven percent, seven and a half percent, depending on the year, to make the math work, and back then you could do that in the treasury market. So there's this belief that, oh, we could just buy treasuries and we'll be fine. The problem is interest rates changed a little bit. And all of a sudden, in 20, 21, we're buying one percent treasuries against a six and a half percent of the time actuarial cost. That is just a good and slow way to go broke. And it's never really been understood for a lot of reasons. Pension math is complicated. Investments are not everyone's cup of tea. I get all of that, but…

AI assessment note: “buying one percent treasuries against a six and a half percent of the time actuarial cost”

Q of elections, how limited at times turnout is for particularly not the top of the ticket election. So how have you thought about winning where I know the polls are showing your head, even though the Democrat top of the ticket is well ahead. That can be super challenging. How do you take it from here to the finish line to try to make sure you get in the seat?

A It is a low information voter race. Most people do not show up at the ballot box knowing either of the treasurer candidates. They know the party affiliation, which drives the super majority of votes. That is what it is because that breaks evenly in this state, at least. And so what you're looking to do is those who are high information voters or persuadable voters just to get your name in front of them. Some people will do their homework and those who do their homework will look at me versus my opponent and say, wait, the job is managing investments and one of you has and one of you hasn't. Okay. That will be five percent of the vote maybe. And then I'm hoping another 10 or 15% of the vote will be people who are just aware. I enjoy a pretty material fundraising advantage to my opponent. A lot of that is people who I've worked with or have made money for over the years who just want to support. And that will allow me to get on TV with a pretty simple message of qualification. I don't want to run a vitriolic, hate-filled race. That is not interesting to me. What is interesting to me is trying to do it on its merits. And so that's what I've been doing, and that's what I'll do in advertising as well. Maybe I'm naive, but I really do think that'll work. I think that's what people actually want from a lot of their political races.

AI assessment note: “that will allow me to get on TV with a pretty simple message of qualification”

Q How did you find that it changes your mental intensity of different investments, right? You're investing with a manager, but there's an investment that you're co-investing with them and you only have a limited amount of time speaking with them.

A I think the best relationships are really hand in glove in that way though, where we all understand we're doing more than just this fund and just this deal. There's a longer term, hopefully multi-decade relationship that's going on here. So framed that way and not short term transaction oriented is really important to making sure that you get that balance exactly right. We would often do a deal alongside a manager before we'd invest in their fund, set up an economic structure, That allowed us the optionality to not go in the fund if we didn't like what we saw. So the economics would stand on their own and then they would fade away if we did go in the fund. So we had an incentive to come in the fund. That architecture ended up working really well for us, particularly with newer managers. So people raising their second fund or even their first where they needed money for the deal. They'd like us in the fund. We weren't sure we were ready to do that. That became pretty well-worn over the years and a lot of success for us. But it was part and parcel. The deal was a material piece of the fund. We were just talking about the deal initially, but with the hope that we'd come in the fund, and we were encouraged to do so economically, it worked for everybody over and over again.

AI assessment note: “framed that way and not short term transaction oriented is really important”

Q In the first half of your tenure at Willett, when you're just focused on real assets, what was the setup of how all the investing worked?

A It was as good as it gets. So internally focused, again, Mike had a blind trust initially. Mike also is a wonderful manager in that he very much believes the credo of hire great people, give them the tools that they need to succeed and get out of their way. So we would absolutely be accountable and we're So, so, so, so, so, so, so, so. You had some compliance and ODD issues that you had to work through every time just to make sure that Mike, given his profile, was associating with people who he wanted to be associated with. Usually not a problem, but good to double check. And then you got it done. And the scale was pretty large and got larger, which had a wonderful virtuous circle effect for us where people would bring us new deals because they realized that we were easy to work with. We were scale providers of capital. And we had a great team across all verticals.

AI assessment note: “hire great people, give them the tools that they need to succeed and get out”