The Exchanges

Q When you think about tackling that type of lens of looking at the pool, you have to think about measuring the risks and then deciding what choices you're going to make. When you got there, what were you looking at measuring to roll up and understand before you could even decide, are we taking the right types of risks?

A The first one is obvious. It's vol. So arrived there and figured out how to calculate vol. And as so often happens in a quantitative world, there was a rudimentary risk system up and running, but everyone said there's no data for private markets. So we're going to solve out the risk of public markets to the penny, but for private markets, ah, we're just going to wing that one. That might've been valid at the very beginning when private markets was four or Over time, Texas teachers, at our height, we were 42% private versus a 35% neutral, or down to about 38% private versus, still versus a 35% neutral now, and it really became tail wagging the dog, because there's more risk in private markets than there is in public markets, and if you're kind of winging the private part and solving the public to the penny, so we really had to think a lot about how to proxy risk and think very intelligently about how we were modeling that risk.

AI assessment note: “The first one is obvious. It's vol. So arrived there and figured out how”

Q How do you measure the success of those returns with that many different strategies?

A It really is just using the same benchmarks as what our larger portfolio uses. So private equity, it's got to beat the SSBEI for us. State Street Private Equity Index and real estate's got to beat the Odyssey and public equity, public benchmarks. So we can just measure the alpha, the regular old ways. Something else is we have identified what we think does not work. So for example, we don't allocate to venture capital in our emerging manager program. And there are a lot of emerging managers in venture capital. But we've not had success there. And if we want this program to be sustainable, we have to acknowledge where we can have edge and where we don't. And so we've just been very clear about that. And we've gotten larger in the asset classes where we've had more success. We've had more success in PE and real estate, and we've gotten actually smaller in areas where we have less success. So long only is smaller than when we started, for example, and hedge funds have been pretty steady.

AI assessment note: “It really is just using the same benchmarks as what our larger portfolio uses.”

Q What did you find that was different from being in that entrepreneurial seat than you might have imagined from the outside or viewing it as someone on Wall Street?

A This is very obvious, but you have to do everything. You're the, this is a cliche, maybe I'll say it anyway, chief cook and bottle washer. So you're getting the company incorporated and figuring out whether you need a lawyer or not to do that, but you want to spend that money because the money is yours. It's coming out of your pocket. In technology world, just making a lot of technological choices. So at the time I was had to choose between Ruby on Rails or Python. Python Django was the choice. And I spent a lot of time on that. I thought this is a really important decision. I don't want to get this wrong. And then I got it wrong because I chose Ruby and I'm sure Ruby's doing fine. I'm sure there's lots of web stuff out there built in that, but having moved on to financial services since, I mean, Python has certainly taken over everything that we do on the finance side, even at Texas teachers. I mean, kids show up and it's not necessarily just Excel anymore. It's Python programming.

AI assessment note: “This is very obvious, but you have to do everything.”

Q Well, let's dive into some of the advantages and challenges of size. What do you see as the competitive advantages?

A The competitive advantages are relationships. Most folks out there are going to pick up our phone when we call, and they're usually going to call us actually before we even call them. So we have access to nearly everything we would ever want to invest in. And that's an incredible resource. A, it gives you access to just interesting investments, but B, it just gives you educational access and market intelligence to everything out there. I mean, that's actually one of the biggest challenges we have is Just processing this massive flow of information and knowledge we get. From an employee perspective, it's one of the major links of the value proposition for our employees is this intellectual challenge of having the smartest investors in the world walk through our front door and want to spend time with us and want to talk to us. That's a real value. Some of the negatives of being large, it's hard for us to penetrate smaller markets and So venture capital, for example, can be difficult for us to ask because the gating item for venture capital is oftentimes not capital. We have lots and lots of capital, but if someone has a five hundred million dollar fund and we say we want two hundred million of it, they're going to say you can't have that much. And so that's a little bit of a limiter there.

AI assessment note: “The competitive advantages are relationships. Most folks out there are going to pick up our phone”

Q We touched a little bit on energy investing and climate change. I'm curious, living and working in a red state, how you think about the whole ESG lens on the portfolio?

A We are very much in that strict fiduciary mindset where we're not thinking about the climate lens in particular on the portfolio as a lens separate and distinct from just thinking about risk and return on a portfolio. One of the examples that folks always use when they think of climate risk is they'll always mention we were building a building on the beach in Miami and we realized we had to think about climate risk. And for me, that's not really a new risk. The catastrophic risk industry has been around for one of the original investment industries there are. I'm not an expert on it, but let's call it 500 years. People have been thinking about cat risk and that industry is very, very good at, and they build very good models to model that sort of thing. So that idea that you're putting this top down lens where you suddenly have a brilliant idea. Hey, everyone needs to think about climate change. It's like, no, no, we got this one. We're investing in an office building in Miami. We actually know to think about that. Another way it comes out is proxy voting. We use a proxy service, and proxy services, they really do try to reflect the consensus amongst all of the folks who subscribe to their service, and we have noticed over time we're much less activists at Texas Teachers. Like I said, we're a strict fiduciary, maximized value, and we noticed that there was more activism seeping …

AI assessment note: “We are very much in that strict fiduciary mindset where we're not thinking about the climate lens”

Q There we go. Well, why don't you take me back to coming out of school, how you first got involved in finance?

A Sure. I really started loving computers a lot. And so in high school, I was all in for computers. I joined the yearbook staff in I had no interest in the yearbook stuff, but I really wanted to get my hands on those computers. Got to college, majored in electrical and computer systems engineering, and at the end of that time, I thought, okay, I've learned how computers work, but now I really want to use them. Didn't necessarily want to design and build them. Also really wanted to come to New York too, so it was very destination focused. Got a job at Goldman Sachs. Goldman at the time was really interested in technologists. I shouldn't say really interested because they're actually much more interested now. I heard a statistic saying they have 12,000 developers now at Goldman, which is just an astronomical number if you think about that, but it was nascent days. So I got my first job at Goldman in the fixed income division.

AI assessment note: “So I got my first job at Goldman in the fixed income division.”

Q So when you finished that chapter and wanted to move back into finance, how did you find yourself fitting in to TRS?

A So the global financial crisis had just happened and large public funds, funds that had the resources said, wow, it sure would have been nice to have had a risk group in place through the global financial crisis. So they hired a few folks to start risk groups and Texas teachers was no different. And then everyone said, well, what does a risk group do exactly? And it had not been defined. And one of the reasons why it hadn't been defined is a good reason. It's a pension fund is not levered. So it's one of the only pools of capital on the planet that doesn't actually have balance sheet leverage. So you're talking about a public pension funds, endowments, and sovereign wealth funds. These are the unlevered pools of capital. Every other financial entity is levered. So a bank or an insurance company, They all use leverage and that's a tool that they can use, but that's why they need very sophisticated risk management at those places. But when you're not levered, you can weather nearly any storm. Combine that with having, we have a 26 year time horizon at Texas Teachers. You can really weather that storm. So it was thinking about risk in that context. What it shifts from is not so much catastrophic risk, not so much existential risk, Run on the bank type risks. It turns into more, how do you most efficiently use risk, most efficiently deploy it? And so that ultimately is how we added…

AI assessment note: “they hired a few folks to start risk groups and Texas teachers was no different.”

Q I'd love to dive into this stable value piece. So you mentioned hedge funds, you mentioned no credit. How have you thought about delivering that component of the portfolio?

A So there's two components of the stable value portfolio. One is U.S. Treasuries. Just holding U.S. Treasuries outright can be a diversifier, although there are times when it's not a diversifier. But probably the more interesting one there is our stable value hedge fund portfolio. So we have 11% of our portfolio in hedge funds, and that's in addition, by the way, to that 38% of private, so total alternatives is 49%, which again is quite high for a public pension, but quite low versus the endowment community. We have two hedge fund portfolios. One is stable value, which has zero beta. So zero market risk. It's in things like equity market neutral, the platforms, some macro funds, some CTAs, that sort of thing. And then we also have a separate portfolio that does have some beta in it. So equity long short, credit funds that have residual market sensitivity and risk. And so we measure that stable value hedge fund portfolio versus a cash-like benchmark plus a spread. Then we measure that directional portfolio versus a full beta long only equity benchmark. And so we overlay that portfolio with derivatives in order to achieve that full beta. But we feel like that's the fairest way to measure hedge funds because so often hedge funds get muddled. It's a complex thing to explain to a board, to explain to your members. But by having two separate portfolios, one of which Is easily measured…

AI assessment note: “So there's two components of the stable value portfolio. One is U.S. Treasuries.”

Q How have you organized your team both to winnow through that huge funnel and then to execute?

A So the standard verticals are obviously very important. So there's a private equity team and a real estate team and an infrastructure team on the private side. And then we have internal fundamentally managed public equity, internal quant equity, and then we have an external public equity group. They also do hedge funds as well. Then we have a risk team that Manages half of our risk portfolio externally and half internally. So just standard verticals. But one thing that we do really pride ourselves on is being able to consider an investment that doesn't fit exactly into a vertical. And that's really based on the idea that sometimes the most attractive, interesting investments are the ones that most of your peers said no to because they all said, well, is this a private equity deal or is this a credit deal or is this a real estate deal or is this an infrastructure deal? We don't know where it fits, so we're not going to do it. We work really hard to do that, to do those deals and figure out a way to make it fit in the portfolio. One of the ways we're able to do that is we have a group called our special opportunities group that that is a big part of their mandate is if someone goes to our private equity group and it doesn't fit in the portfolio for risk reasons or return reasons or any reason, they can pass it over to that group and that group can consider it.

AI assessment note: “the standard verticals are obviously very important... we have a group called our special opportunities group”

Q How did you see that progress into what became products that used computers over your time on the street?

A Well, that progression definitely predated me because liars poker, I mean, computers are what really did drive the MBS market and kind of started everyone down that path. But at the time, it very much was still a relationship business. I was in fixed income, but we dealt with the bankers a lot and the bankers, it was about the size of your Rolodex and it was literally the size of your Rolodex. They had these foot diameter Rolling Rolodexes and whoever had the most number of those on their desks was probably the most important, I guess. And that was really important in that old style relationship banking, but you started to see it. You started to see the technologists start to take over some of the more quantitatively driven products like derivatives, all of those sorts of things. And I haven't been connected with a place like Goldman in a long time or Lehman in a long time, but My understanding is, technologists are all over the trading floor now, and they're really on the ascents.

AI assessment note: “You started to see the technologists start to take over some of the more quantitatively driven products”

Q How have you thought about that bucket under the lens of climate change?

A We are very much of the mindset that oil and gas, it will be needed for a very long time, and that people have goals for climate change, and that people really want to invest in that transition. People want to invest in that solar. They want to invest in wind. We don't necessarily see it as our role to invest in that solar and wind. We will, but we'll only do it on a straight return, you know, maximized return, strict fiduciary basis. We'll do it if it's a good investment, but We find that others want to invest in that space. That space has become a little bit crowded. Investing in that space, there's some reliance on innovation there that does amp the risk up a little bit, which makes sense. These are new forms of energy, but somebody needs to invest in the existing forms, and the innovation available in the existing forms is there as well, and we're there to do that.

AI assessment note: “We don't necessarily see it as our role to invest in that solar and wind.”

Q How have you thought about the degree of leverage to put on the portfolio as a whole?

A Other financial institutions are much more levered than we are. So we're kind of in that stage where we just want to have some leverage. So we have four percent leverage. So we're at one point oh four levered. If you own your own home and you have an 80% mortgage on your home, you're levered four to one. And so That's kind of what we're doing. We're not at 400% leverage like someone buying a home. We're at one point oh four percent leverage. So from our perspective, we're at such a low level. It just makes sense to have a bit more at this point in time. And it's a journey because public pensions have been unlevered for a very long time. So we want to do it in a measured, slow way. But at this point, it probably stands that we could have a little bit more leverage even.

AI assessment note: “we just want to have some leverage. So we have four percent leverage.”

Q All right, let me turn that around then. What's the best advice you've ever received?

A I got this about 10 years ago, and it's when I realized that there's two kinds of people in the world. There's people who ask for permission and ask for forgiveness. And I thought long and hard about what kind I was, and I realized I'm a permission person. If I was left to myself working somewhere, I would be a cog in the machine, and I would just sit there and wait for somebody to come give me work, and then I would do the best I could to finish that work. It's realizing that in yourself and then challenging myself to go out and be more entrepreneurial and go out and think of things to do. And so the advice is if you're a permission person, break that mold, but also if you're a forgiveness person, break that mold too. If you're a forgiveness person, maybe ask for permission a little bit more too.

AI assessment note: “And so the advice is if you're a permission person, break that mold”

Q As you look back on your first couple of years in the CIO seat, what do you say are the different hallmarks of how you've made your mark on the plan?

A Absolutely, that inversion of pushing authority autonomy downward, that's been the core of it all. Focusing on people, focusing on development of them, that was a really big deal, especially in that 21 and 22 period. Also, this is a little more obscure, but thinking really hard about what it means to make a wise decision. So just going back to that first principle of we're in the wise decisions Business. The mechanics of decision making. Decision making is all about information. It's about having the right information. Make sure you don't just have the easy information. You actually go out and got the hard information as well, because you could end up with a very different decision. Thinking about structure of committees that make decisions. They tend to be conservative committees, so you want to think about making sure that you're not just Turning down too many investments because there's a vocal person on a committee. Just thinking about the mechanics of decision-making has been really important. And that really goes into the idea of continuous improvement and something that has been termed, I think AQR came up with this term, craftsmanship alpha, where you're just getting better and better and better at the processes that you have in place. You're minimizing trading costs. You have the best process. You're using your people wisely as well.

AI assessment note: “inversion of pushing authority autonomy downward, that's been the core of it all.”