The Exchanges

Q So that skew that you've found that you think works well with the portfolio, you said just five percent levered. What does the other hundred percent look like?

A We start with an asset allocation structure, and that's as set by the committee. We're in 30% alternatives, which is private equity, real estate, primarily. A couple of hedge funds, but mostly real estate, private equity. 30% fixed income and the balance in public equity, and that public equity is U.S. and international. And then the committee gives me very wide bands around that, and I Aggressively play within those bands. Let me give you an example. My, the, the committee has decided that we have a three percent allocation to high yield in the benchmark. Well, I look at that Ted and say, well, what the committee is telling me is that they are comfortable with non-investment grade securities and with somewhat okay liquidity. I don't have to put high yield in my high yield bucket. So what do I put in there? I put converts in there. I put BDCs in there. I put fallen angels there. You know, the benchmark is to me to suggest what kind of Risk expectations and liquidity expectations they have of the portfolio, just because it has that label. Well, I'll be honest, there's nothing in a public REIT that's real estate. Public REITs are not real estate. On any given day, it's equity. And convertible bonds, surprise, surprise, are not bonds. It's equity. And it's fine. You know, convert, convertible bond is a, is a .8 S&P and a REIT is a .9 S&P and high yield is, we call it a .4 S&P. Eve…

AI assessment note: “We're in 30% alternatives... 30% fixed income and the balance in public equity”

Q Well, why don't we go through a little bit of your background and path to the seed of Textron?

A Well, Ted, that'd be in 1979. I went to work for Mitsui Bank in San Francisco, selling certificates of deposit at 18%. These were in the early Volcker years. And then having worked at the Japanese bank, my first then true career was at Nomura Securities in Tokyo. I had spoken a bit of Japanese. I had some financial background. I went off to Tokyo for three years in a training program and Was a JGB trader in between Tokyo and New York trading JGBs, you know, they call it the widow maker, right? Because you're short of the four percent, short again, the three percent, short again, two percent. This is ridiculous and rates go to zero and you get fired. So, uh, with that trading background, I went then to the buy side of Brown Brothers Harriman down on Tenwall. And from there, a succession of other asset management firms, mostly with a fixed income focus, Alliance Capital, Putnam Investments, Credit Suisse Asset Management. At the end of Credit Suisse Asset Management, At the end of my, I had a handcuff period. I came over to the plan sponsor side in 2005, and that was with Robin Diamante, who was still there. And again, I owe her that opportunity to be invited to the buy side. So I've been on all three sides of the business. I call the broker dealer side, the asset management side, and the allocator side.

AI assessment note: “I came over to the plan sponsor side in 2005, and that was with Robin”

Q So if you take those three layers, how did you put that into a portfolio construct?

A Everything we have in our portfolio, we assign an equity beta to it. And I know it's all bad math. Like I said, we assign a .4 to high yield. Sometimes it trades like a .2, sometimes like a .8. I think I'm in the bad math ballpark with a .4. So everything in the portfolio will roll up. And I'm not saying anything brave here. I think probably if we had the, BlackRock, Aladdin system, or, you know, one of these, one of the bar systems, it would probably do the same kind of thing, but we assign a beta so that just because I have, you know, a bunch of money in high yield, I don't call it a bond. It's not a bond. It comes out on average right now about .6 S&P. So it means that I'm overweight that portion of the S&P or else I need to take out of my equity portfolio. And that's my philosophy and how that's very different to my peer group.

AI assessment note: “Everything we have in our portfolio, we assign an equity beta to it.”

Q And how about the broader question of how did you want to set out managing the capital at Textron?

A Well, you know, I thought, Ted, that we have all these artificial constructs. You know, we have one person doing private equity and another just a person doing public equity and go, well, that's ridiculous, so just equity. We've created these artificial constructs about what we call asset classes, and so I've tried to break away from that a little bit. I really only think there's two asset classes. There's rates, as in government rates, And there's equity. Then there's equity proxies called spreads. So high yield is just an equity proxy with a .4 and BDCs are an equity proxy with a 1.2 beta and spreads is just an equity proxy. And I'd even go so far to say real estate really is just a spread product. It's a bond. It's a fixed income. The building itself is worth nothing if it doesn't have tenants. Real estate's really just a fixed income portfolio of credits and the credits are The tenants and the building is your residual value, just like an investment grade bond.

AI assessment note: “I really only think there's two asset classes. There's rates... And there's equity.”

Q So the core of your portfolio, how have you tackled the public equity piece?

A Everything through external managers and your typical microcap to megacap and value to growth to benchmark agnostic to more benchmark aware to a couple of managers who are very focused. For example, we've always had a dedicated allocation to my team's going to hate me when I hate to say this. I call it our cat stocks, chocolate, alcohol, tobacco. Because I consume all three and I will pay any price. And so those are just good consumer staples that in an environment like this have perfect pricing power. So again, better that than to buy some lousy linkers or tips. And then I have been as maximum underweight international as I could be as much as I felt comfortable. Not to be harsh about this, but I, when I hear somebody once say it, they said, you know, we really have two economies and two markets, Ted, we have, you know, the U S here and we have China over here. And in between we have A museum. And if you, if you want, if you want a latte at the Louvre, it's a great place, but there's not a lot to buy there. I mean, there just really isn't. So Europe tends to be very, very heavy into banks, insurance companies, there's a couple of great pharmas. Now, part of the problem isn't, isn't they're making, part of the problem is that any technology upstart, it starts in Germany, or starts in Berlin, or starts in, um, the US steals it away. Same thing with Israel, same thing with, so, y…

AI assessment note: “Everything through external managers and your typical microcap to megacap”

Q And on the private side, what's your take on the environment today?

A Oh, I couldn't, couldn't be better. I think they're all running for opportunities, ways to get this into not only the four one K channel, but into the, into the private channel. And I challenge people sometimes to think about how they spend their money every day. You know, I woke up this morning and I bought a coffee and then I bought a paper and then I stopped at the local bagel shop and then. The wife sent me out to the local fish store. You know, I spend, gosh, probably easy, 40% of my money on private firms. Now, that might be a private firm, you know, one guy with a fish shop. It's a private firm. We've all forgotten how prominent a part private firms are in our life every day, and so it is, as you know, very well, Ted, it's exploding with opportunity now trying to figure out ways to get into the retail channel.

AI assessment note: “Oh, I couldn't, couldn't be better. I think they're all running for opportunities”

Q You mentioned some kind of correlations to the S&P. Is that how you take the construct of an asset allocation and turn it into whatever you want to find investments in?

A Yes. We don't have any consultants. I'm not a big believer in consultants. I've been doing this for 40 plus years. To be honest, it's, it's a, it's the back of an envelope and a pencil. I just need to be in the ballpark of what, what is how you're going to act like in a drawdown like this? It's acting just like you would have modeled. What is a BDC going to act like in a draw? It's just like it's modeled. What is a RE going to act like? You know, no surprise here by any of this. I don't like to spend a lot of time thinking about where stuff gets put in the portfolio, but here's why that's important, at least for corporate plan sponsors. The CFO asked me every year to come to him with a recommendation about what next year's Expected rate of return is. It's a corporate requirement for gap purposes that he has a EROA, and he's allowed them to accrue at that state of EROA, and at the end of the year, he'll do a cancel revise on that accrue. So when we take that, we're going to probably target seven and a quarter again this year. He's going to take that to our internal auditors, to E&Y, and E&Y is going to look to say, well, is that a realistic number? Frank, how do you back this up? And he's going, well, Charles has provided me with all these public benchmarks. And so we took fixed income and out of the equity risk premium, and we added an international premium, and we added a defa…

AI assessment note: “Yes. We don't have any consultants.”

Q 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. How do you handle these various challenges? There are the things that you believe and you would like to see say through your manager. And then there are opportunities where you either have to decide you're going to sign up or move on to the next one.

A Yeah. Just move on to the next one in that relationship and move on all very cordial and people have different focus. Uh, I can graduate KKR the other day. We don't, uh, well, we got a couple of small things for KKR. I'm making a practice to everybody who comes in. I count how many pages in the pitch book before The word ESG shows up, and I said, congratulations, you're the winner. It showed up on page one. And so we had a chat, and they said, well, they get a lot of pressure, particularly when they go to continental Europe. And I said, well, I'll make a forecast for you. I said, I think someday, just like back in the, back in the eighties, you used to have to carry two business cards, one with a bug on it, union bug, and one without, and never get them mixed up. You're going to have two pitch books. You better not bring this pitch book to Texas. I said, well, And I, so I think the union bug is a perfect example. That's where we're really at an interesting junction here around some of these issues.

AI assessment note: “Just move on to the next one in that relationship and move on all very cordial”

Q How do you balance the desire to have certain things that you believe in certain micro strategies with the other broad opportunity set that you're not investing in? You know, if you're in data centers and cold storage, there's a lot that you're not investing in almost kind of like active management versus the index across the portfolio. How do you bring that together?

A Well, my CFO correctly will chastise me correctly. Again, in all fairness, when he, when he'll point out that, look, you spend a lot of time, maybe you spend too much time on these little things, which are not going to move the needle and you should be spending more of your time on these big chunky things, your U S large cap, for example. And, um, it's a fair point there, but again, it's these, these small things which can grow into big, or these small things, which have a greater dispersion of opportunity around them. The dispersion of performance at large cap core is very, very tight compared to dispersion around private equity or hedge funds or real estate, you know, the dispersion, you're rewarded for spending time there. So, but I, I take your point. We, you know, we've tried things. For instance, we tried insurance link securities, ILS. It was mostly a portfolio of quota shares. It was, you know, labor plus eight or 900. And it just loads the first year, lose a little bit the second year, make a little the third year, and finally just pull a ripcord. It just, I, I've come to recognize that, well, I think the insurance business, property casualty in particular, is just going to be impossible to judge how much premium you should charge, given the climate change issues. You know, who, who would have thought, you know, wildfires from California, and so it's a real challenge, …

AI assessment note: “these small things, which have a greater dispersion of opportunity around them.”

Q What do you see of your peers in the corporate pension world and the ways that you think they do things well, and then alternatively, some of the things you think they could improve upon?

A Well, most of my peer group is kind of, is again, down this LDI path where they, you know, cash match your portfolio, your assets with your liabilities, and then you build this up to a 105% and you, as you know, it's called pension risk transfer. You give your, your liabilities and your assets Prudential. You know, we're just not in that, we're not in that school. Prudential invited me out a couple of years ago to speak at their, at the conference. I said, well, listen, I have a lot of respect for you as a firm, but as you know, I don't practice LDI, this pension risk transfer PRT thing. They said, well, that's exactly what we went to. So I got up and talked about how do we approach? Why do we feel this way? And why are we still absolutely return focused? But I kind of told this audience of 300 people Prudential. I said, but you know, things change. A new CFO might have a different opinion about this. If, if I ever transfer my assets to you, though, it's going to be a, it's going to be a staple deal. Well, I had 300 people going to say a staple deal. I go, yes. Stapled on the last page of the contract is my resume. You're taking my assets, you're taking me too. I don't understand a lot of my peer group is kind of down this path to kind of giving away their, their job. And again, it's not the CIO. It's often the CFO and has concerns about contribution volatility, balance sheet v…

AI assessment note: “most of my peer group is kind of, is again, down this LDI path”

Q From having that breadth of experience, what did you take from that, as you've seen over the years in the allocator side, when you first got to UT?

A Well, I'm taking this, I think, makes me think of a, there was a great line, Paul Volcker, somebody said, You know, Mr. Volker, all these amazing financial innovation that the United States has come up with from CLOs to CDOs to CDO Squares to knockout options to, what do you think was the most exciting, great financial development that you've experienced in your 40 year career? And he kind of scratched his head and he said, I don't know, the automatic cash machine? In other words, we just make stuff up. Similar product, just in a different package. Doesn't make it a bad package, but we really do I had somebody coming in yesterday pitching infrastructure, and I said, what is infrastructure? I really, I'm truly legitimate. I don't understand what this is. They said, well, it's an airport or bridge or a road. I said, well, oh, it's just real estate. They said, no, no, it's infrastructure. I said, well, it's real estate with some unique patterns, but it's really just, you got this asset. If you don't have a tenant for it, it's worth nothing, and so you get a cash flow off that, and you might get to increase your rent with inflation if it's a bridge, but we just make stuff up. It's just real estate.

AI assessment note: “In other words, we just make stuff up. Similar product, just in a different package.”

Q So when you came into the seat, how did you take the lessons you learned, both those types of leadership lessons from Robin, and then portfolio structure lessons, and start thinking about how you frame out the challenge of investing tax revenue?

A Well, Robin and I think very differently about the market, so there's nothing at all similar about that. I think I'm kind of a unique beast in, in SEBA that I came from a Wall Street background, and her fear about bringing in a Wall Street person, which is a legitimate fear, Is that they tend to be too transactional because as a PM of a bond portfolio at Putnam or Credit Suisse, or you're making hundreds of trades a year, you come to an allocator side, you're making three, three things because they're, they're much bigger and more expensive and moving around a larger amount of capital. So that was a concern of hers. And I had to be watchful of yes, my tendency to over trade over transact.

AI assessment note: “Robin and I think very differently about the market, so there's nothing at all similar”

Q When it comes to selecting managers, how do you go about figuring out who you want to partner with?

A My team's all very seasoned. We've all been around for a while, so we don't need a consultant to bring us three or four people. I advocate for my team to be out involved in the community. We have open doors to anybody and everybody who wants to come in and have coffee. I consider that to be my job is to invite and listen to smart people all day long. I'm surrounded by these brilliant people willing to come into my office coffee, but what's not to love about that. We're a good size. We're about ten billion in defined benefit assets. If I was one billion, I might not get attention. If I was a hundred billion, I have that diseconomy of scale. So I can still get involved in things like we've, we've been for years involved in a great strategy out of Richmond, Virginia that only buys closed in bond funds. So I call it closed in equity funds or bond funds. I call it my, um, provide liquidity to motivated sellers. That's a great area to be in. So you get motivated sellers in Closed-in funds. These are retail sellers. You get motivated sellers in BDCs. You get motivated sellers in GP-led secondaries and LP-led secondaries. So these are people who, for whatever reason, they have strong desire for liquidity. I'm more than glad to say, you know, I'll bridge that for you. And so we call it motivated seller portfolio. So in our motivated seller portfolio, we have these closed-in funds.

AI assessment note: “We have open doors to anybody and everybody who wants to come in and have coffee.”

Q And how different do you feel that posturing is today from how you were positioned even as far back as when you started at Textron?

A So I started back in, uh, in 2013, and so I was in the middle of this whole Pension Protection Act where a lot of people were pursuing LDI. We were increasingly an outlier that we were not. Uh, we had a, we were, had a lot more hedge funds at the time and had with mixed success. We were evolving and we continue to evolve. Certainly don't know the answer to, to all this, but I, I don't think that, uh, capitalism or return opportunities are, are, Are dead. It frustrates me so much for people to say, gee, all the, it's, it's gonna be low for longer returns. People are reading the wrong paper. You know, you need to, maybe you need to start to, to pick up a little bit more Silicon Valley reading, or biotech reading, or there's a lot of exciting things going out there to begin with. You know, nuclear fusion. You know, we might be just 20 years away. Talk about upsetting the apple cart. We, we might be just 20 years away from commercializing nuclear fusion. How exciting.

AI assessment note: “We were evolving and we continue to evolve. Certainly don't know the answer”