The Exchanges

Q So you roll forward, and the clients that stay with you had a great experience from there. How did you get from there to Cambridge, which you mentioned?

A Yeah, so in O-one, after we started to get paid back for all our hard work on the value side of things, and the clients were whole, I started thinking, I really want to go and do something bigger. And I didn't know exactly what bigger meant, but I knew it meant bigger than running private client money and Fort Worth in Texas. And so a friend of mine and I had been talking and he suggested going back to grad school, get my MBA would be a good idea. And so I went back to University of Texas in O-one and got my master's in business. And from there, it was really interesting. I mean, I focused again on investments. I always knew I wanted to do some investments. I wasn't going to change that. Probably doing investment related things until I'm not here anymore. But I really had the good fortune Of meeting someone that changed my life. And it was, I did an internship at Teacher Retirement System of Texas. Worked there for my last year while I was in school. And there was a gentleman there, Jim Hilley, who was the CIO. He's now the Chief Investment Officer at TCU. And as it came to the end of my term there, and I was looking for my next role, he and I were talking, and he knew I didn't really want to work at Teacher Retirement System of Texas, didn't have really a lot of incentives and things I wanted. But we were talking about what I could do, and he said, David, what I think you shou…

AI assessment note: “he said, David, what I think you should do is go talk to Cambridge Associates.”

Q And what was your trajectory at Cambridge from when you started?

A So, from the day I started, it gave me a really global perspective, but from the day I started, I worked from clients from Geneva, Switzerland, to New York, to Texas. I worked with private clients, I worked with endowment and foundations, I worked with some of the most sophisticated family offices. So when I started, I was working on teams that were actually serving the clients. Over time, I started to see that there was a gap or a space where we could probably go out and build some business by combining What we do very well, which is manager selection, diversifying portfolios, investing across asset classes, including venture, private equity, equities, but also putting in place a risk management framework that was unique to pensions. So we had some pension business, but it wasn't a big business for us, and so I started to build that business, and leadership at the time came to me around late oh eight, early oh nine, and said, David, We've never had practices. Everyone works on everything, but we'd like you to focus on the pension business, and we'd like for you to start the first practice at Cambridge. It was informal, but it was the pension practice, and they said, tell us what resources you need, tell us what team members you need, and let's see what we can make out of that. If you flash forward to today, pensions are about 20% of our business, so we gained great traction, a…

AI assessment note: “we'd like for you to start the first practice at Cambridge”

Q How do you think about Cambridge's business through the lens of competition?

A It is really interesting. So on the endowment and foundation side, as I think probably most of our listeners know today, we have significant market share. In most cases, we're 50, 60% of the market. And the competitors we have there tend to be boutiques, tends to be the large pension shops that are trying to come in and build some endowment and foundation business. So a Mercer, Aon Towers. Or it's the CIOs that have spun out of the endowment or foundation offices and started their OCIO shops. There's your competition there. On the pension side, it truly is the big three and a few others. It's Aon Towers and Mercer. All these shops have their qualities and their good points. And then private client side is just very fragmented. No one has more than two percent of the market. It's boutiques, it's multifamily offices, it's banks. So it's really interesting that our business, the competition is really different everywhere. And what I've described is basically the US and Western Europe. If you go to Asia, the competitors kind of change a little bit as you get over there too. So very, very different.

AI assessment note: “our business, the competition is really different everywhere.”

Q So let's take a single manager that makes it through that process. What does the process look like from the manager's perspective?

A I ask managers that, but managers would be, they'd be best positioned to answer the question, but what it would probably feel like to them is, you know, we sit down, one of our senior investment people sits down and has a conversation with them about what they're doing. If we find that to be attractive, enter a more formal process. We'll be more discussions, asking for additional information. That's on the fundamental side, you know, understanding how they invest, where their edge is, what we can expect out of the portfolio. The second part of that is operational due diligence. Do they have the right infrastructure in place? Background checks. Understanding who they're partnering with as part of third party vendors. And that's kind of interesting because on our side, the fundamentals, we could think they're going in the right direction, but if the operational due diligence shows red flags, that's it. I mean, we'll walk away. Now we will give the manager feedback and say, we have issues with these things. We think you ought to fix them, and if they do, we'll give them another look, but if you don't have the right infrastructure in place, we're not going to invest money with you.

AI assessment note: “what it would probably feel like to them is, you know, we sit down”

Q And how many people are involved in those with any one given manager?

A There could be 10 people involved in those, 10 or 15 people. And everyone, I mean, we have an open platform, so this is really a great thing. If you want to be involved in that discussion, and you're on a senior member of the team, you can be involved in the discussion, because we are open, we're sharing our notes real time, we're sharing our meetings real time. And again, we think that's a benefit to have more people involved rather than less. I mean, the thing you have to guard against is stuff getting stuck, right? So we work really hard to make sure that stuff doesn't get stuck from process, that it's getting pushed forward. And the senior people that oversee the committees, that's really their job is to make sure stuff's moving forward, either moving forward and out or forward and into portfolios.

AI assessment note: “There could be 10 people involved in those, 10 or 15 people.”

Q As you look out over the next five or 10 years, what do you think are the next steps for Cambridge Associates?

A We're constantly going to be focused on making sure we have the right talent in place to generate great returns for our clients and to be great partners. So five, 10 years, that's not going to change. What I think will change is that our footprint in Asia will expand for multiple points. One, because there's just a lot of interesting investment ideas over there, and we already have a good team over there, but that should continue to expand as we continue to look for great ideas. Specifically in China, venture and growth equity, but also I think our business will expand in Asia. What's going on in the private wealth market in China today is that the entrepreneurs or the business owners are starting to think about what happens as they age or as the next generation comes into play. They're looking west. They're coming and visiting family offices in Western Europe, the US, and those family offices are saying, This is how we're structured. You should go talk to Cambridge associates too. So our business is really gaining some traction there as the private clients become more institutional, if you will, and start to put in place the infrastructure.

AI assessment note: “What I think will change is that our footprint in Asia will expand”

Q and more. In the AI era, asset and wealth management firms moving to Ridgeline gain a decided 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. How are you thinking about investment strategy for your clients today and how they should be positioning in these markets?

A The tough thing in these markets today is that we're 10 years into a bull run, 10 years into an economic expansion. You have pockets of assets that are richly valued. We think U.S. equities, sovereign debt. I mean, I just saw a figure, and I can't remember what it was, but it's trillions and trillions of dollars in debt that's paying negative yield. I mean, these are not normal times or normal valuations. So the things we're thinking about is, How are we going to generate the returns that our clients need to fulfill their mission or their pension obligations or for private clients to fulfill what they're trying to achieve when you have significant pockets of the market that are overvalued? The thing I would say is we continue to redirect more and more energy into the private parts of the market. And I'm not talking about late stage venture or large cap buyout, which tend to be more richly valued. We're still finding a tremendous amount of interesting things to do on the venture capital side of the thing, small and middle market buyout, higher returning infrastructure and real estate, and specifically in China. We're finding very interesting things to do on, on the early stage venture, both on the IT side and on the healthcare side. We're finding a lot of things to do. The last thing I would say there is, is we continue to evolve. So one of the things that I believe is you const…

AI assessment note: “we continue to redirect more and more energy into the private parts of the market.”

Q And what are you most excited about in the business?

A The thing I'm most excited about in the business is we make a difference in the world. We work with great clients. They're doing medical research or actually funding scholarships or paying pensions. And you know, when I came to Cambridge again, I go back to that, I told you how I ended up at Cambridge and what was attractive. So we get to make a difference in the world. We have a great investment platform. We have good colleagues. We're without conflict. And we recently did an internal study to see What makes Cambridge an attractive place to work other than just, you know, compensation packages and things like that, which are important. And it came back very strong on get to work with clients that are doing something really special in the world. Great colleagues and unconflicted. So the making a difference in the world is great. Also, again, I'm competitive. The fact that we're able to work with clients and generate significant value add Kind of fulfills that part of me, but it's really great that we get to do it with institutions and asset owners that are doing good stuff in the world.

AI assessment note: “The thing I'm most excited about in the business is we make a difference”

Q So you start running this pension practice, and again, you're now working with clients as their consultant or effectively their outsourced investment engine. Today you sit as a CEO. So what was that transition from investor to sort of the head of the business?

A The one point I come back around to on the pension thing is we focused on OCIO outsourcing. So that was where I thought we should focus the business because I thought that'd be the trend in the future, not just For E and F, but pensions. So circling around today, it's less being in the weeds of going out and finding ideas or managing portfolios. It's about thinking about the institution as a whole. So thinking about how are we going to deliver top notch returns and top notch service and partnership to our clients? What resources do we need? How do we need to be structured? Where are we doing well? Where can we do better? And if you think about, like, the metrics I look at today, it's still investment returns, and it's investment returns, I still work with a handful of clients, it's still the investment returns for those, but it's the investment returns for our clients in aggregate, understanding what's going well and what's not. And it's also partnership, so looking at our client retention. One of the things I'm proudest of is our client retention's 96, 97%. Invariably. We're doing a great job. Our average client's going to be with us 20, 25 years, and that's really meaningful to us, because we want to help these clients do good in the world. We have so many great institutions that are doing great stuff, or great families that are so philanthropic.

AI assessment note: “it's less being in the weeds of going out and finding ideas or managing portfolios.”

Q So just on that point, right, that Period of time, Julian Robertson folds up Tiger on the same pain threshold issue. What was it in the message that you delivered that resonated for the ones that you were able to keep?

A The message was really consistently explaining what we were doing, what I was trying to achieve, why we thought these stocks would work out, and people inherently understand that buying cheap assets is better than buying expensive assets. You have to remind them, The asset's cheap. Here's why it can stay cheap for a good while, and ultimately it comes down to confidence that I knew what I was doing. So a lot of that confidence is built over just relationships, trust, time. You talked about Julian melting down, and that's true, and I'll never forget the day that, my memory may be a little bit off on this, but again, I'm a big basketball fan, and my wife and I used to go out to Vegas to go to Sportsbook the first weekend of the NCAA tournament, just to watch all the games. It's a phenomenal event, really. And in 2000, they had the ticker going across the bottom of the screen, which kind of is reflective of the time that it was. And I'll never forget looking up and seeing the Russell 2000 value. Again, I don't know if my memory is correct, but positive and significantly positive. I think it was up two, three, four percent while the NASDAQ was down three, four percent. And I said, that's the end. That's the end of the bubble. And it ended up being pretty close within a week or two, probably the top of the NASDAQ and started a pretty tremendous value rally at that point.

AI assessment note: “The message was really consistently explaining what we were doing, what I was trying to achieve”

Q So there's 275 investment professionals, 6000 investment meetings. How does that form into a cohesive decision-making process?

A Right. So if you think about the investment professionals, the network's crucial because you got to look at a lot of ideas. We think about the 10,000 plus managers that are out there. There's a few percent that actually merit any of the capital of our clients and asset owners. So what we do is we go out and source the ideas and then we take them through a very consistent diligence process at Cambridge Associates. And then there's groups of senior people that form committees in our firm. That actually vet the ideas for quality of diligence and quality of idea. So every idea that we're putting capital in has gone through that process. Now, a lot of the ideas, because they don't merit capital, fall out of the process very early. And one of the important things of experience is pattern recognition. You can understand early in discussions whether the manager has an edge, whether they're putting the right team on the field, whether they have the right operations in place. The one thing I will say is that I'm very focused on And if you're in a talent business, I think you have to be focused on is making sure that our networks are as broad as possible. So one of the things we've done is we've brought in a head of diverse managers to make sure we're expanding our network to make sure that we're seeing all the best ideas, regardless of where they come from. That's on the manager side. We…

AI assessment note: “there's groups of senior people that form committees in our firm”

Q You talked earlier about the importance of innovation. Where are you trying to innovate on the investment process?

A The things we're constantly doing and one thing I believe in is to evaluate how you make decisions and how you bring people to the table. And it's not like AI or it's not like big data, which we have a lot of big data and we're constantly looking through that data to find edges and help us understand where managers can add value. But one of the things we've worked at is making sure that we understand the biases that are in decision-making processes, understand how to create an environment where we can hold each other accountable for our biases. And, you know, Daniel Kahneman, who really is one of my intellectual idols, and Kahneman and Tversky, I think were just brilliant, brilliant people. He makes a case often that by understanding we have biases, we can hold ourselves accountable, but that only gets you a little bit of the way there. You have to create an environment where you can hold each other accountable because you're going to have a lot better shot at seeing my biases or helping me see my biases than I am on my own. And just on that front, I mean, I think the work that is so powerful in grad school, we didn't have a class on behavioral finance, so I went to the head of the department and said, hey, I think this is missing. Let me design my own class and spend a semester as a class studying Kahneman and Tversky's work, and then I'll come back to you and help you underst…

AI assessment note: “making sure that we understand the biases that are in decision-making processes”