The Exchanges

Q So your path at Goldman, what part of the bank did you end up working in and spending your time?

A Well, I ended up working in just about every division of Goldman Sachs. The only one I didn't work in was research, and I actually had kind of an unusual career. I was involved in actually helping to set up businesses. So in my career at Goldman Sachs, I worked on four major new business initiatives over the 18 years that I was there. I worked first in investment banking and capital markets, growing a private capital markets business. I was involved in when Goldman Sachs began to truly expand outside of the United States and really began to ramp up its trading businesses. They brought John Thane in to run the finance business. They brought David Vineyard in. They brought myself in and a handful of others to help augment the control and treasury businesses of Goldman Sachs. And so I spent a number of years in that side of the business. I was actually asked In 1996 to consider whether Goldman Sachs should set up an online discount broker. Which we ultimately included was a bad idea, which I guess maybe today they're, they're re-examining, but we'll, we'll see about that. But certainly in 1996, it didn't seem like a very good idea to me anyway. And then I was very fortunate to be asked to help build a Goldman Sachs asset management in 1996 and have spent the rest of my career in the asset management business. But when I think about my skill set, Actually, first of all, I think of …

AI assessment note: “I ended up working in just about every division of Goldman Sachs.”

Q So what happened in between the retirement and the formation of generation? How did that all play out?

A Well, as I mentioned earlier, I was very committed to Goldman Sachs and its business principles and culture, and I was one of the partners who voted to stay private. in 1999, actually originally in 1998. But Goldman Sachs went public in 1999. And I thought it was going to be close. And I obviously was quite wrong about that. I was concerned that the culture of the firm was going to change and that it would evolve. And I probably was going to change anyway. I probably was very naive in retrospect. But at that point, I had a sense that my career at Goldman Sachs was going to be limited. Going forward. So I, I was in a fortunate position to be running the asset management business, actually co-heading the business at the time. I felt I had a very clear commitment to our clients, my colleagues, and I said, well, I'm just going to do the best I can for five years or so. And as we got to the 2003 period, I realized that it was probably time for me to go do something different. But along those ways, going back to the early story of my summer Associate experience. We had begun to talk about sustainability at Goldman Sachs Asset Management. This was at the time of some of the terrible corporate crises, Enron, WorldCom, etc. In governance, corporate governance became really quite important. Hank Paulson at the time was quite interested in it. We began to think about that, and actually on…

AI assessment note: “as we got to the 2003 period, I realized that it was probably time”

Q To go from the 125 or so on the focus list to the 40 to 50 in the portfolio, How does that decision get made?

A Ultimately, that's the decision for Mark and Miguel. Mark and Miguel cannot buy something unless it's on the focus list, and the focus list is voted on by the entire global equity team. We wouldn't necessarily call it, it has to be unanimous, but we clearly tried to ensure that the votes are equally based, if you will, so we actually have a rock, paper, scissors system of Voting so that everybody votes at the same time, and we're very focused on biases and ensuring that we give everybody a voice in how we're thinking about investing, but ultimately, while we're very team driven, ultimately, Mark and Miguel have the X on their heads to deliver strong investment results, and they have done so.

AI assessment note: “Ultimately, that's the decision for Mark and Miguel.”

Q Why don't we just start with your background, really, at the beginning of the business?

A Well, I grew up in Michigan in Brazil, and I have to confess, when I was growing up, I never thought I would be in finance or investing. My mom was a teacher, and most of the role models I had growing up were either teachers or coaches, and I went to a small school in upstate New York called Hamilton College with the idea of being a teacher. Or a coach, or actually, ironically, a forest ranger was the other thing I was interested in. And in my sophomore year at Hamilton, they discontinued the education department, and so I had to look around to find a different degree, and I chose child psychology because that was the closest thing to education that I could find, and in hindsight, child psychology was a perfect degree to manage investment bankers and investment managers, so it turned out just fine, and I Got towards graduation and didn't have a job. I had applied to the Peace Corps and I'd been rejected. I applied to the University of Michigan to get my doctorate in psychology, and I'd been rejected. And my dad said, you know, you've got to get a job. You've got to do something. And he said, you should apply to banks. This was in, uh, early 1981, spring of 1981. He said, they might hire people like you, whatever that meant. And I applied to, uh, 70 banks in the United States. And was rejected by 69 of them, but ultimately got one job at Bankers Trust Company in New York to go i…

AI assessment note: “ultimately got one job at Bankers Trust Company in New York to go into finance”

Q At the end of the day, as you said, it really does come down to this business performance, and you've certainly been doing that. So let's talk a little bit about how you've gone about it, and particularly in the global equity product. So let's just start with the investment process, and where do you end up generating your ideas from?

A When you started our firm, we, of course, had a clean sheet of paper, and we were able to invest anywhere. And as I mentioned in the beginning, we spent really two years Learning to work together and actually doing the work. And so what we, we said to ourselves is, okay, let's first understand what is the context of business? What are the drivers of change? We began to think about the sustainability challenges that we've talked about ranging from climate change to pandemics to challenges of inequality, poverty, and did a lot of work around those broader issues and continue to do a lot of work around those sorts of issues on a sort of a Macro basis. And then we said, okay, given our thinking around the drivers of change, what are the types of companies? What are the types of industries that we want to own, given a drive to a more sustainable form of capitalism, sustainable economies? And so we began to do a series of what we call industry roadmaps, where we would do deep dive analyses of different industries to try to figure out whether they would be long term robust industries as we evolved to a net zero economy. And we developed a series of hypotheses about industries. And then from that point, we said, okay, we like technology, although we look at technology in many different ways or certain types of healthcare businesses. Let's then drill into what are the best businesses in…

AI assessment note: “we began to do a series of what we call industry roadmaps”

Q And do you have a particular preference for businesses that you feel are already doing a good job on these metrics compared to those that may not have historically, but clearly are improving?

A As I mentioned earlier, Generation wanted to be a boutique. We are a focus firm. We basically do global equity, Asia equity, Growth equity and long-term equity. So we determined that we would assess quality, and we wanted to be a high-quality manager. So we will invest in high-quality businesses, high-quality management teams. We know very well that another approach could be to find companies that are less good and work to make them better, or find businesses and management teams that are in transition, value-oriented. If you will, to use that analogy. And we concluded that that's a good idea. And we know some firms who are doing it and they're doing it actually quite well, but that's not us. We are trying to buy great businesses and great management teams with a margin of safety, which I know you would say, well, I've heard that about a thousand million times, but that's what we're really trying to do. And we're leave the other strategies for those who can do it better than we can.

AI assessment note: “we will invest in high-quality businesses... but that's not us.”

Q And what was that genesis of the philosophy that you created a generation?

A Well, it was a two-year journey. The truth is we started talking about it in September, October of, and we took third-party money in October of, and along the way, we spent many hours, the seven founders, and then there, ultimately there were 16 of us who, who established the firm. Interestingly, a third of the 12 or 16 people came from sustainability backgrounds And the other two thirds came from traditional investing backgrounds. And we felt that this would be the right mix to develop the insights that we thought were going to be important to manage capital as we went forward. And we had a philosophy that really a framework that we've, we've kept to from the very beginning. We've obviously developed it, continue to learn from it, but the philosophy is based on three premises. The first long-term investing is best practice. Secondly, that sustainability is a current and future driver of economies. Again, sustainability broadly defined to include issues like climate, the environment, biodiversity, health, poverty, social justice, water challenges, et cetera, et cetera. And then thirdly, environmental and social governance factors were tools integrated into a traditional investment process to help us understand the quality of the business and the quality of management. What a company does and how a company does it. And we've always felt that this investment framework, and this i…

AI assessment note: “Well, it was a two-year journey... the philosophy is based on three premises.”

Q I'm really curious to ask within your portfolio over the years, is there an example of a company that you've owned? Maybe it's on the focus as you've owned for a long time that most people on the outside wouldn't Instinctively think, oh, that's something that, you know, the pioneer and sustainable investing firm would own.

A One firm that people, I think, don't know very well, actually, is a firm called Henry Schein. And Henry Schein is a distributor of healthcare, dentistry, and veterinarian products to dentists, to doctors, to vets. And they're run by an extraordinary management team who is Committed to the long term, committed to culture, committed to values, committed to community. And frankly, how they behaved and demonstrated their, the strength of their business model and their conviction during this crisis has been extraordinary. And so people say, well, what is a distributor? How is that a sustainable business? What's green about that? Well, it's actually a really well-run business that runs itself for the long-term that takes multiple stakeholder views into how they operate. And I'll tell you, we've looked at many companies in our portfolio have reacted extraordinarily well With great responsibility, great integrity throughout this crisis, and that's true for our private portfolio, too. We haven't talked much about our private portfolios, but we have been very actively engaged with both our public and private companies over the course of the last couple of months to ensure that they will operate with the same integrity and responsibility and commitment to sustainability that they always have, and we're pleased to say they are.

AI assessment note: “One firm that people, I think, don't know very well, actually, is a firm called Henry Schein.”

Q What is your team and the sort of suite of activities that you have a generation look like today, now, 15 years later?

A It's interesting, as I was thinking about the opportunity to speak with you today, I realized First, most folks think about Generation as a firm that was established to promote sustainability and ESG, and we're known as a sustainable asset management firm, a green firm, etc. And I think we have been helpful and important in helping to mainstream sustainability. And I think our critical insight was that if you integrated sustainability and ESG into a rigorous investment process, you could develop differentiated insights. And that that was an investment framework, particularly coupled with a long-term orientation to deliver superior risk adjusted results. But we also tried to do three other things when we founded the firm in 2004 that I think are quite relevant to a lot of the subjects that you talk about on your podcast. The first is we wanted to build a really interesting firm and having had the opportunity to run a pretty big asset management firm. We kind of knew what we wanted to be, and so we were very deliberate to develop a focused boutique partnership. We wanted to be mission-driven. The culture was important. We are a research-driven firm. Everybody on the investment side does research, including Mark and Miguel as the co-chief investment officers, and we believe very strongly in high-conviction concentrated portfolios. We also wanted to take a new approach to clients. …

AI assessment note: “we were very deliberate to develop a focused boutique partnership”

Q What's the balance in your research process between studying these sustainable factors and maybe more traditional financial and business assessment outside of those factors?

A When I talk about drivers of change and sustainability, people often will then think we're sort of a top-down manager, and we truly are not. We believe that sustainability is a driver of economies, and we have to understand that. But we're bottoms up stock pickers. And so if you sit in on our investment meetings that Mark and Miguel run, they're basically as you would see in any bottoms up stock picking organization. It's about understanding how businesses operate, how management teams are operating. We just have a larger list of things that we think are relevant to the success of business that we're integrating and reviewing in our assessment of those businesses. And incidentally, to get on our focus list, it takes months. And our approach to investing has always been, let's really understand businesses really, really well. Let's invest in a small number that we think are attractively priced, but let's be ready to buy others when market prices change. And so if it's on our focus list and we don't own it, we're covering it as if we own it because we think we'll get the opportunity to do so.

AI assessment note: “We just have a larger list of things that we think are relevant”

Q How do you broaden your impact beyond the substantial capital, but in the scheme of things, small impact you can have with your own capital? I know you've mentioned some of these organizations you're involved with, but how do you collaborate with other investors to make this movement and transition happen in an expedient way?

A It's a critical question that we've been wrestling with as an organization over the last couple of years, and our clients, our stakeholders, and most importantly, our employees and partners will insist that Generation do more than just manage assets well for our clients. That's one of the reasons why we hired a head of communications. That's one of the reasons why we've hired Ed. We want to do more in terms of Of communicating and working and sharing the lessons we've learned over the last five to 10 years. We also have allocated an additional five percent of our profits this past year to develop other impact strategies. We will collaborate with anybody, whether it be on natural climate solutions, whether it be on climate first oriented investments, investments that are, that are sort of catalytic, if you will. We are going to look to leverage our experiences Over the next five years to hopefully help make a difference, and it's, as I said in the very beginning, Generation is an investment firm through and through. We want to deliver outstanding investment results, but we're also a mission-driven firm, and the mission to address the challenges of climate as well as poverty and inequality are so critical now, and the opportunity to help make a difference, and capital can make a difference. We're all in on this, Ted. We are all in on this.

AI assessment note: “We will collaborate with anybody, whether it be on natural climate solutions”

Q Are there certain sectors that you've found meet those criteria far more than others?

A Oftentimes, people have thought, well, sustainable investors, generation, all you're doing, you're excluding industries, and you're negative screening, and we've never done that. We've always actually been positively defining what are the types of businesses we want to own, and that is a huge advantage that we have relative to a number of organizations. We're concentrated. I know many people think concentrated is 20 to 25 stocks. We're sort of 40 to 50 stocks, and I can go into why we think that that's a better approach, but in any event, we're concentrated. We don't have to own anything. We can own what we want. We're bottoms up stock pickers, and so we're trying to find businesses that we think will be robust and resilient over a period of time. Now, there are industries that will add no value to or that we think are not particularly robust over time. So, for example, we have not owned energy businesses for a decade. We've not owned hydrocarbon businesses because we don't think they're priced properly. They haven't really priced the fact of climate change, and we think they have a significant stranded asset risk, and so we just don't think that that's, we have some views on whether it's an ethically a good idea, But our decision to not invest in hydrocarbons was purely economic. We think they're not great businesses. Now, the businesses that we have enjoyed investing in are h…

AI assessment note: “the businesses that we have enjoyed investing in are healthcare businesses... Same for technology”