The Exchanges

Q What were some of the other important lessons you learned from those early work experiences?

A So for folks who know St. Louis, there's a custard stand, two of them, Ted Rue's frozen custard, which is kind of iconic, and I started working there right at the end of high school, actually, and it was hard work. They paid way above typical rates, and they expected to own you, including the hours, so people don't believe it through college. In the summer, we would typically work 50, 60 hours a week, and in the school year, because I went to school in town in Wash U, I would work quite a bit. Frozen custard sales fall off, but they'd sell Christmas trees In the winter, and so right when exams hit in the winter, it would be time to be out on the tree lot. So I worked tons of hours, but they paid really, really well, and it just paid a lot of bills. So certainly what did I learn? Hard work. Ted Drews is a person, so proprietor-owned. We'll talk maybe about NISA, an employee-owned, but maybe I didn't like it then because he could be hard. He'd come in and literally test the temperature of the hot fudge and were the bananas ripening too quickly, and he was a hard guy to work for, but his name was on The building, and it said something about employee-owned. I'd love to say I was smart enough, aha, you know, I figured that out, but something got ingrained in me in that employee ownership's a big deal on quality, and he was asked millions of times to franchise, and he never did. He t…

AI assessment note: “So certainly what did I learn? Hard work. Ted Drews is a person”

Q As you break down that four hundred billion today, how does it decompose in terms of the capabilities of the team?

A We often joke we only do things we understand, so we do very few things. I've kind of adapted that a little bit lately. We only do things we believe in, so we do very few things. Those are not the same, but they're related. So we're a pretty focused shop, even with over four hundred billion in AUM. Couple things. So key areas, risk controlled, fixed income, and truly risk controlled. We're stingy about using risk budgets. So fixed income that we believe delivers true alpha over benchmarks. That's what we did from day one. If we said we had a product on April Fool's Day, 94, that was it. And of course, we run against a lot of benchmarks, but predominantly U.S. investment grade fixed income. A big, big portion of our risk-controlled fixed income is for LDI clients, so liability-driven clients for corporate pension funds. So think of long zero-coupon treasury bonds, long corporate bonds, et cetera. We are a very large manager of U.S. treasuries. Our physical assets, over half of them are Boring old U.S. Treasuries, but they work. They get the job done on hedging, and they're great collateral. So we're a big LDI manager as part of that risk-controlled fixed income. The other main physical asset portfolios we run are equities. We're not as strong believers in active equity as we are in active fixed. So what we've done there for large institutions that pay taxes, we run equity produc…

AI assessment note: “key areas, risk controlled, fixed income... The other main physical asset portfolios we run are equities”

Q What do you have to believe to go at this the way you do it?

A We're believers more in market efficiency than not, but has to be somebody out there that pushes things to market efficiency. So maybe I'll take the fixed income side first. So I guess the academic term would be price discovery. With fixed income markets, it's a strictly over the counter market. There's no exchange that tells me what bond A is worth or bond B. And the other beautiful thing about the fixed income market is virtually every issuer has many, many issues. You can think of the U S treasury, Well, we have too many treasury issues right now, but whether it be AT&T or Verizon or Ford or whomever, they have lots of bonds outstanding, and they all trade at a little different spreads to treasury. Sometimes it makes sense, sometimes it doesn't. I think one of the secret sauce of this, if there is one, how we generate alpha, is the willingness to do the work to determine very micro relative value differences within bonds. A little bit of why is that bond trading a little cheap and spread to that when it's the same issuer? That's about as high an information ratio trade as you can get. It may be tiny in the alpha, but do enough of those, it's meaningful. We do other areas of how we enhance, but I think that's one area where you specifically in a strictly over-the-counter market, like the fixed income market, we can enhance. We do that in treasuries, of all things. We run an a…

AI assessment note: “We're believers more in market efficiency than not, but has to be somebody out there”

Q How have you thought about this challenge of the right pace of growth?

A We used to always use the term spigot. Open the spigot, close the spigot a little bit. I don't know that we always get that right, but what we knew, a big limiter on the growth of NISA is how many clients can we digest in a given year. If we have a little over four hundred billion in assets, we have just over 200 clients. So they tend to be pretty large, obviously. And it also, almost by inference, says we couldn't add 50 clients next year. That's an impossibility. The one way we have managed that is being careful about how we roll out adjacent products. So we have innovated, but at different times, particularly I'll say times after the financial crisis in the mid tens where people were de-risking and the phone was close as it could ever be to ringing off the hook. Make hay while the sun shines. Let's not be really dabbling in new things. Let's pull in some of the other opportunities and focus less on those right now. And then there's times where, and I think we're in a transitional moment now where there's partly because we've built such a great team, partly some of our clients are near the end of their glide path journey. So there's less de-risking to do. We've been able to have another little mini shot of innovation in the last several years now.

AI assessment note: “a big limiter on the growth of NISA is how many clients can we digest”

Q David, I want to make sure I get a chance to ask you a couple closing questions. What is your favorite hobby or activity outside of work and family?

A That is an easy one. It is woodworking. Always loved it. I started it before I had kids, and I had less disposable income. Then I had kids, and I literally stopped, and everything kind of rusted. And then Providence, maybe, as my kids got to the age where they didn't want me around as much, I started to rebuild my shop. I had a little more disposable income, so I have a pretty nice shop at this point. And Providence was basically built it all out right before Before COVID hit. So at this point, all the furniture in my office I've made. The last thing was I took delivery of a desk that was a unique build. I'm a huge St. Louis fan. All the wood I use is actually from St. Louis city trees that are downed that a company goes out and grabs them and rough mills them. And so I have this huge, a live edge slab. That's the top of my desk that I'm super excited about.

AI assessment note: “That is an easy one. It is woodworking. Always loved it.”

Q Why don't you take me all the way back to your first thinking about business?

A I grew up in South St. Louis City, and I guess my first business was a lawn mowing service. Started with my one elderly neighbor. I think I was either in sixth or seventh grade. I'm a Gen Xer, so to just cut somebody loose with a Pretty dangerous machine. And I wasn't a big kid. That lawnmower was bigger than me. So I started cutting lawns. I started cutting her lawn. I'm like, wow, there's a lot of money in a short amount of time. And so got flyers out. I'm going to say eighth grade where I really started to accumulate a client list. But these are South city lawns. You can picture them small. They all have usually like a five or six foot tall hill. But the funniest thing, I really had bad allergies. And so there'd be times I may have sneezed 30 times on a tiny lawn that took me 20 minutes to cut, and so occasionally I'd get tips, and I think it was just out of pity. So certainly learned a lot, printed up business cards and all those things, and learned a lot about business, certainly hard work. Expectation. My dad was great. He pointed out things like, hey, you know, I was still a kid, so sometimes I wouldn't cut Mrs. So-and-so's lawn today. It'll be tomorrow. He's like, you know, they're waiting for you. You better let them know. Manage expectations. They don't need a cut today. So there's just little things like that, but that was some of probably the earliest learning, and …

AI assessment note: “I guess my first business was a lawn mowing service.”

Q When you get that kind of launch pad, how did you think about leaving so quickly?

A Yeah, I knew I always wanted to get back to St. Louis. I hoped I was going to get back, but I really loved institutional asset management, and I love St. Louis dearly, but we're not a hotbed of institutional asset management. We have some great financial services firms, Edward Jones, at the time A.G. Edwards, but all retail. So I was beginning to lose a little bit of hope, but as things happened, my group was being poached to go over to Credit Suisse, and that got me thinking, and I was getting married in July of This is a time when my wife was graduating. She was still in St. Louis going to pharmacy school. And I was like, this is probably a time to look around. And I was like, but boy, St. Louis is going to be tough. I did decide my loyalty to Mike. I wasn't going to go to Credit Suisse. I just owed him that. But a great firm, certainly at the time. And so I reached back out to Phil at Wash U and said, is there anybody in St. Louis that I should talk to? And he said, one. And he said, Nyssa. And I'd forgotten, I'd actually taken a class with Bill Marshall, one of the founders, but it was like second semester, senior year. I was checked out. I wasn't thinking about a job. I already had a job offer. So he connected me with Bill and started talking and got interested. And I was like, this looks really fun. And the other thing that shows you rather be lucky than smart at the time…

AI assessment note: “I knew I always wanted to get back to St. Louis.”

Q When you think about that style in the equity markets, it calls to mind quantitative strategies. Because you're looking for those micro inefficiencies. How much of that is quantitative versus qualitative?

A That's a great question. Those micro inefficiencies at that level, I'd say are more quantitative than qualitative. There are going to be some qualitative overlays on things like this bond really doesn't trade that much. Maybe that's a little quantitative looking at liquidity. What is that worth? But that's going to be highly quantitative. There'll be other things that are less. There are times when we'll trade between issuers. So of course, now that's not certainly no arbitrage in that. The other beautiful thing about the bond market is People have to come back and issue them because they mature, or there's M&A. So you could be looking at two issuers, you know, Verizon and AT&T, and maybe our credit research folks have whatever views they have. They like Verizon and dislike AT&T or vice versa. But if one's coming to market, That deal has to clear that day, and so those are times where we may step in and be a liquidity provider to the street, take advantage of new issue concession, and maybe opposite our credit research views on the name for a little while, because it's just too good to pass up. So that has a lot of qualitativeness, because obviously if the view is that credit's very risky, we shouldn't play with fire. If the view is, no, it's fine, it's just not our favorite credit, then it's worth playing in the name a little bit as the new issue concession comes, and we kind …

AI assessment note: “Those micro inefficiencies at that level, I'd say are more quantitative than qualitative.”

Q Which two people have had the biggest impact on your professional life?

A So many have. I mentioned Phil sending me to JP Morgan, Mike actually hiring me. But professionally, one is super easy. Jess Yao, founding CEO of Nyssa. It was a true pleasure to apprentice under him. We're still close, close friends. I think when things go from Gen One to Gen Two in our industry, people don't even speak to each other, much less we have dinner. He still comes in and has lunch frequently. But professionally, just to see him at his craft, learn from him, Hopefully at times try and improve on things as well, try to be better, but he had a profound, profound impact. I think I've shown the gratitude, but I'm sure I haven't shown it enough. The other, it will sound gratuitous, is my wife. The reason being is she made a decision when our oldest was born, which is almost 21 years ago now, she made the hard decision that she wanted to stay home with the kids, and there's obviously a lot of different pathways, but that was undoubtedly her vocation and calling. She was great at it, I bring that up professionally is, boy, did it allow me to put my head down and work and know that Kate's got stuff covered, and it allowed me to do my thing and travel a lot and hustle and know she was there. I hope my kids would think I've been very present, particularly for the role I have. I'd like to think I have been, but I know as parents we were present because she was present, and, and…

AI assessment note: “one is super easy. Jess Yao... The other, it will sound gratuitous, is my wife.”

Q How about the philosophy that you bring to the overlay strategies?

A There's something where you better bring risk control there, because that is capital L leverage in a lot of cases. First, it's working with the client to make sure the derivative strategy makes sense. There's a lot of things pitched often by the dealer side, Wall Street side, that we don't really believe in, and we will go in and talk to clients, and we've frequently done this. We put some Surgeon General's warnings on things. We're like, here's where that doesn't work, and our clients are smart too, so they may want to proceed with various strategies, but we have certainly Talk clients out of strategies. So first is make sure the strategy is right, it's designed right, and it has the right gearing. We're very importantly, want to make sure we have the right amount of collateral. If you're leveraging something up, better make sure you have collateral and also what's your first source, second source, tertiary source, et cetera, of collateral. So those are huge upfront discussions. That's part of that strategic partnership of spending time. What are you trying to achieve with this? And is this the right instrument?

AI assessment note: “There's something where you better bring risk control there, because that is capital L leverage”

Q What are some examples of some of those successes?

A So I mentioned those completion engagements. So that's an area that's grown, depending on how you measure it, 25% a year for the last five plus years. I mean, in asset management, Maybe, but for things like private credit, you can't say that about anything. And that's clients looking to hire us to complete the hedge of their liability. And we've had huge growth in both the assets, number of clients, et cetera. It's been great. But with that comes scalability issues. One great micro battle that was done was scalability. How can we quickly scale this product better than we're doing it now? And some of the results that came back were just in a short amount of time Almost full revamps of systems, how we ingest data, the robustness of how we ingest data. It was incredible what the team did. They felt empowered and to have impact. That was a really fun example of a huge success.

AI assessment note: “I mentioned those completion engagements. So that's an area that's grown”

Q If you want to set a team off to go do a micro battle, tackle a project, what have you figured out of the rules of engagement that make that successful?

A Probably still learning on that. I think the one is a lot of freedom. The term servant leader gets used a lot these days, but one key element is not putting the most senior people in the micro battle, because even though I think we have intellectually humble senior folks can't help, but there's going to be deference to that view. Like, so I've never been a member of one, but even, even a group below me wouldn't be a member because the end of it, I can always get their views on things. That's not what I'm looking for. So a big element is making sure it's just a notch below. Not that there aren't senior people involved, but where it's individuals where there's no one in the room who's going to have immediately some sense of a proxy of a mandate. I think that's critically important. And then the other is just that reminder of best idea wins. And particularly in this arena, this is not winning arguments. It's not trying to get your view across. It is truly the best idea because you're going to have to come and Prove it to others if you want to implement that. And so a big reminder of that goes out always each time we launch one of those.

AI assessment note: “one key element is not putting the most senior people in the micro battle”

Q When you're trying to figure out one of those challenges, like what's the right cadence of growth, or how are you going to address a challenge for a client? What's the way you do that internally as an organization?

A Well, at the client level, it always starts with the client team, and we've always been great about then pulling in, well, who do we think could help solve this for the client internally? And also importantly, have a lot of conversations with the client. Make sure we understood it. A lot of looping. Is this what you really want or not? A term that comes from Bain that I adopted. There's this idea of the paradox of growth, that as an organization, you start, you're nimble, you're an insurgent, you're an entrepreneurial firm. I'd like to think we were all those things. We grow, we're having some success. Great. But as you grow, you get bigger, and as you get bigger, inherently, there's complexities, bureaucracy can creep in, and you can become sluggish and less nimble, and so the more you grow, the more it stifles growth, and it stifles innovation, and so one of the anecdotes that we've adopted is the idea of microbattles, and so what those are is when you identify an area where you say, huh, this could be interesting, or maybe it's a new product, or hey, we want to see if there's other ways to get alpha in this product, things we haven't tried before, and you pull a team, Like you gather across the firm, depending on what's needed. Client team, portfolio management strategies, it generally pulls from every area. Operations, often technology, I mean, the amount of data that goes …

AI assessment note: “one of the anecdotes that we've adopted is the idea of microbattles”

Q How do you think about protecting against that possibility?

A It comes down to asset allocation. I started going back to my JP Morgan description as working on asset allocation, not the active side. And I'm a fan of the old Brinson studies that are ancient now, but they're still right, which is asset allocation. And I say that as an active manager, it's going to dwarf what we can do for you. So the first thing is all things in moderation. There's no such thing as poison. It's the dose that kills you. So if you're an institutional investor, even though I'm concerned about private, and we were just talking to a client today, they're investing in private credit, but it's in a few percent. That's very reasonable. One positive is, from what I can tell, most of those assets are held in strong hands, and they're dispersed, as opposed to the banking sector. So the existence of private credit and its role, including even insurers honing it to an amount, makes a lot of sense, and it's spreading it out into strong hands, to where if there is, if I'm right, and that asset class was far, far too expensive, the pain gets spread around, which means we don't have There's massive economic repercussions as opposed to when the pain's focused. If it were focused in insurance, that would be terrible. If it's focused on banking, that would be terrible. So that is one great thing. There's been a great disintermediation there that I think is a positive of, quote…

AI assessment note: “It comes down to asset allocation. I started going back to my JP Morgan description”