The Exchanges

Q So with such a high preponderance of the support of the budget coming from the trust pool, how, how does that impact the Your asset allocation structure. So it's one thing if you have a bunch of trustees who say, boy, the endowments are performing really well. Shouldn't we do that? But is there a different level of risk tolerance? Is there a different structure that makes sense?

A Our number one risk is liquidity. So when we are looking at risks, generally I've characterized it to the trustees as three big risks. The first is always permanent impairment of capital. You want to protect capital. But the real driver is liquidity. I'll come back to that in a second. And the third one is maintaining purchasing power. And I characterize that as a risk intentionally because trustees tend to focus on risk. And the first two, just not losing money and being liquid, you could satisfy that by just being in T-bills. So you got to characterize as a risk that you have to maintain purchasing power over time. So with that in there, the real driver of our asset allocation Is liquidity. Liquidity drives everything. So we create these series of stress tests because the whole place runs on what we have. So we spend five percent of the trailing three-year average assets. I think that's a reasonably common spending rate. But with that, we have to make sure we have the money there. So It's fairly predictable what we need to have. So we're looking at making sure that we always have adequate liquidity. And we define here a liquid asset as the ability to convert it to cash within a year with no loss in value. And the year is important because we know our monthly spending. I don't need next day, next month liquidity. I just need to know we can keep The lights on for the next year …

AI assessment note: “the real driver of our asset allocation Is liquidity. Liquidity drives everything.”

Q What did you come away with, other than perhaps a healthy respect for efficient markets?

A That I didn't want to be an engineer, but I did not want to be an engineer. I was done with the assembly plants. So I transferred to headquarters in Detroit, and I worked a series of finance jobs now, and, but it was controller's office, treasury, doing budgets, and Financial analysis type of work, which was good, but not exciting. And then I was thinking, what, what really excited me? You know, the advice we give kids, do what you really love, follow your passion. So I went and talked to HR and said, my passion was investing. So I want to transfer to the pension fund. And they said, no, no, you, you really don't want to do that, Jim. That's a black hole. You'll never get out. That's the end of your career. But I persisted and went there and just loved it. Spent a little over a decade. And sorry, that's a little run on story, but it's an important part. A very creative guy about 30 miles south in Toledo, Ohio named Ron Bowler had created the Harbor Mutual Funds out of the pension fund at Owens, Illinois. And Ron was stepping down. Friend told me about this opportunity. I went down and interviewed, And I took the job, and I was now doing the pension fund at Owens, Illinois, but more importantly, I was president of a mutual fund company. It was all sub-advised.

AI assessment note: “That I didn't want to be an engineer, but I did not want to be”

Q Yeah. Yeah. What information do you read that you get a lot out of that other people might not know about?

A Well, I think everybody knows about the ones. I don't think I do anything that's that unusual, but just to tick off a couple, I really like Cambridge's monthly market outlook, and the big attribute of that is that it cuts across every single asset class, and it is really hard, and there are very few publications that cut across everything, and they're looking through one institution's lens of Across everything and giving their view. So tracking that, and it, what might be more valuable is their cover page that just shows the trends and changes over time. So you can see relative as well as absolute positions. And I find that really helpful. I also always stop and read whenever Byron Wien publishes just because he's been around for so long. He's got such insight, such experience, such wit, Whatever he has to say, it's worth stopping what you're doing and reading it. The last one is Howard Marks, although I love teasing Howard that he's gotten to the stage in life where he quotes himself. He said his wife, Nancy, tells him the same thing, and I said, well, you need to listen to your wife, Howard.

AI assessment note: “I really like Cambridge's monthly market outlook, and the big attribute of that”

Q you have many more organizations that are large and therefore spin off many more potential of these newer opportunities. So if you have two or three groups who you know all of them because of some past relationship and they all have made money and they're all Telling you that same story. What are the two or three things underneath that really drive you towards one and not the other?

A If you were in the private markets, uh, then it's kind of the deal flow and it's understanding their specific deals. And one of the few areas where I think a reference call is really, really good is in the private markets where you can talk to the operating guy. Who was maybe part of a, a venture fund, part of a buyout fund and a PE fund bought them and talk to that operating guy and say, how helpful were they? Did these guys really move the needle or were they just providing capital and how helpful were they through every step of your growth? And people are really pretty candid in those conversations and And you're looking for that kind of a reference call of talking to the operating guys. The days of financial engineering, I think are kind of gone of just buying something, throw on a bunch of leverage on it. Hope the price goes way up and sell it out. Yeah, that's not going to make it today. So you really need great operating people. And if you can find a reference check that says this is a great operating institution. Yeah.

AI assessment note: “it's kind of the deal flow and it's understanding their specific deals”

Q So how do you underwrite these investments in a week or two?

A Generally, because we all have already got some Decent information about it. We knew about it before the co-investment came up. We know something about the manager. We will never know as much as a GP does. You just have to accept that about anything you underwrite. You do not know as much as a GP. So there needs to be a pretty strong alignment of interest. A knowledge that the GP is putting some of their own money in this, not just the fund money. And when we see that level of conviction with the GP, we will talk to some industry expert in that particular area. Away from that GP. Away from that GP. And that's the, probably the, the toughest due diligence level we go to is understanding that opportunity set and having some conviction from industry experts that, yeah, this This is a solid place. We know it's going to happen now, quickly, not something three years from now. So we can gain some conviction that this is a good time to do it.

AI assessment note: “Generally, because we all have already got some Decent information about it.”

Q Let's turn a little bit to decision making and decision making processes. So you, you started by saying you've been delegated a lot of authority from the board, which isn't always the case. How do you work with your board and your trustees?

A We have got an incredible group of trustees who are very experienced investors all across the board. We have people with backgrounds in private equity and public equity and distressed and venture capital that these are very smart investors and they bring their background and knowledge and they show up to meetings. They will want to be there in person, which just Makes the group dynamic so rich when people take time out of a busy schedule to come and be there in person and be, they want to be part of the conversation and share the debate and understand what they think we should be doing, and we will make presentations to them, but they are, they will always weigh in with the direction they want us to take. They really set the The tone, the philosophy, the risk profile, the overall big picture strategy that they want, and our job is to work with that and make proposals on asset allocation and particular implementation ideas, and then they give us the authority to go in and implement it. Uh, so the governance structure, I think what really helps the endowment and foundation world So much, and I think the statistics show the endowment and foundation world is the, really the top performing group among institutional investors. I think it can be really attributed to the governance structure, and a lot of that credit goes to the trustees who work in this space, and then the staff that …

AI assessment note: “They really set the The tone, the philosophy... our job is to work with that”

Q So now that you have the decision making authority, how do you make decisions with your team in actually implementing those final investment decisions?

A Well, at the end of the day, I probably have the majority of the vote on asset allocation, but I've really tried to push the majority of the vote on the managers down to the people in the different asset class. They're the specialists. I will never know as much as they do. I'm going to challenge them, push them, attend the meetings, do due diligence calls, sit in on it, but I want them to own it. In fact, I will occasionally intentionally not attend a meeting because if I'm there, I kind of suck the oxygen out of the room, and I want them to run the meeting. And it's important for them to own their space, own the decision, believe in the managers, and feel that this is their contribution and what they're doing. I have a veto, but I never want to use it. And I think you try to get that message across and I'll, I'll give an opinion and sometimes it's more strongly impressed than others, but they will listen to my opinion and, and not often that they will, they will challenge it strongly, but I, I really trust and believe in them. And they're a, they're a terrific group who put a lot of effort into what they're doing. They, uh, make a big commitment to this. They work very long, willing hours. They are all loving what they do. Uh, they travel around the world looking for the best people in their space. So, um, you want them to, to feel that ownership.

AI assessment note: “I've really tried to push the majority of the vote on the managers down”

Q weather's beautiful, yes, the office space is beautiful, but as opposed to say, A lot of endowments who have embedded graduating seniors and, and some of the universities have chosen to use that as a funnel for their staff and their future staff. There's no embedded potential investment employee base here. So how have you found the people that are on your team and how have you kept them here?

A It, it is pretty amazing, and part of it is it, we're not keeping them. So we don't have a jump. We had one person move from being an analyst to being a managing director, but that's not a normal process, and that may never happen again. So the analyst will eventually have to leave. There's not a step for them, and I try to tell them that really early on. This is not a lifetime job, We will promise you that the experience you get here is going to be quite exceptional. You will become a deep expert in a asset class. You will meet some of the leading managers around the world in that space. You will go to meetings in other asset classes and meet some of those leading managers, and you will travel around the world and Pursuing your asset class. You will learn about asset allocation. You will have a deep knowledge in one space and a broad knowledge about how a place like this runs. That's my commitment to you. And we ideally want an analyst for their second job after undergrad. We'd like them to have one other job for three or four years, similar to what they're doing. Take them for a second job, and then after their second job, they go off to business school. And we are committed with the quality of people we have. They will get into any one of the top business schools they want. We're sure they will. And after that, their opportunity should be a very rich one. The last couple of …

AI assessment note: “we're not keeping them. So we don't have a jump.”

Q How do you think about the level of diversification that That that creates? You say, okay, we've got our largest positions, five percent, and that manager, if they're concentrated, might have 20 names, and so the very largest position is, I don't know, one percent or less. Do you, do you worry about being over diversified?

A I absolutely worry about that, and if any of my trustees end up listening to this call, we had a discussion on manager concentration two investment committee meetings ago, and very strong pushback that we have way too many managers, and we all, we fully acknowledged it. We went in telling them that we knew this, and that we've been trying for some time to get bigger and bigger allocations to our higher conviction people. But anytime you look at the secondary markets to do a sale, what you're offered for these old stubs is such a large discount that it's not worth doing that. So we'll let this pretty meaningfully big number of small stubs stay in the portfolio and let it, let it run off. But I do think we're, we're over diversified. One of the hard areas, I'm going to direct this into the venture capital. Capital conversation, just because this was a big recent discussion at our investment committee meeting, the early practitioners of the endowment model, and we all know who they are. I won't name them out, but have had tremendous success in venture capital and venture capital was a big, big driver, particularly those that were in back in the nineties. And had big allocations to a space that did exceptionally well. And that continues to this day. The old line about venture is an access class, not an asset class. And the ability to get into those top tier funds is, is a challenge…

AI assessment note: “I absolutely worry about that, and if any of my trustees end up listening”

Q So let's dive into that from, from, from the beginning. You show up. It's not a blank sheet of paper, but it's a very simple approach to investing. What beliefs did you bring to the table and your trustees bring to the table that drove how you decided to allocate this pool of capital?

A Well, it's not going to be that different from the standard endowment model that many of our colleagues all know and use. It has a strong equity bias, and it has a strong private market bias. We think those are areas that earn Excess returns. It was building that network over time, building relationships over time, trying to find who are the, the top tier managers. I visited with many peers around the country who were very helpful and willing to, uh, share their thoughts and ideas. And the key to everything is people. So it was bringing in staff and, um, Our great recruiting advantage is the experience you had today showing up here at the Getty and walking around this campus. It's our best recruiting tool, and people like to be here. So we are able to bring in a really high quality group. If I could pull the organizational piece a little bit further, we're organized along asset class categories. So we have four managing directors. Each of them has an analyst, and then an assistant and myself. So the whole department is 10. We have no responsibilities for back office work. And we're along the lines of that silo or specialist. I hate that term silo, but it's used of asset class structure. And I know many lean toward more of a generalist structure. There are pros and cons of each. I think the pros of the asset class are that people really become deep experts in their space. They g…

AI assessment note: “It has a strong equity bias, and it has a strong private market bias.”

Q more to the co-investment program. How do you start with What you're looking for. So you've already said you only want to do it with your existing relationships who have co-invest. Are you separately underwriting deals, or are you just saying, well, these are going to be lower cost ways of getting more exposure to the, and we're just going to do all of the ones that fit that criteria?

A Haven't done all, but we do a pretty high percentage. When we are doing our due diligence, we bring up co-investing, and it can be a tiebreaker among managers that we really like. If you're doing a fund, you are sitting on Capital that is tied up to support an unfunded commitment. We have to sit on that liquidity that we talked about earlier, but a co-investment, the money goes out quick, it gets invested, and frequently comes back to you within a few years, as opposed to a seven to 10 year fund life. So we like the return profile, the timing, and And the experience we've had is they've been higher return opportunities as well, so we search for it during the due diligence process, let people know our appetite, Let the GPs know our size appetite and our speed, and a lot of times they need to move quickly to get a deal done. And if you've impressed upon them that you can make decisions in a week or two, that's a big wow, because a key driver on many of the co-investments is certainty of close.

AI assessment note: “Haven't done all, but we do a pretty high percentage.”

Q And what type of, is it structured credit?

A No, it would be more of those small mid-market credit opportunities that we were talking about before, more direct lending. We have the overweights that I mentioned in China, and the other big overweight is in energy. And what we like about energy, and still do, is the fundamentals are really, really good, but the attitudes, the news reports, the emotions are not good, and that's really kind of okay, because in the long term, fundamentals win, and if the atmospherics are just not that Good for a space that short-term volatility is fine. You can make money with that kind of volatility if the fundamentals are solid, and we think this is a space with some really solid, good fundamentals for some time. And so we have a pretty big overweight on in the energy space.

AI assessment note: “No, it would be more of those small mid-market credit opportunities”

Q So how do you go about finding managers in China?

A I'm trying to not name specific names, and they come from a variety of angles. Uh, some of them we met ourselves directly. Others came from network where a lot of us are in the same investments with the same managers, but we came about it in different ways. It is just working as many different ways of finding the opportunities as possible and asking as many different of your peers as you can. And we try to build those bridges to other institutions and ask the staff, be willing to give up your best idea to another institution. Give them your best idea and see if they give one back. If they don't give one back, you may not want to give them another one, but if they do, uh, you've got a great relationship going and you can share in these things. So We're not part of the Ivy League, so we are not competing with them. We try to be more like Switzerland than a competitor in the Ivy League schools rankings. So they can come to us and maybe fill up a really top tier fund with a nice, wonderful group of people from Los Angeles. So we'll look for any place we can find them. We're very comfortable doing new funds, first time funds, if they're there. The ideal, I think, Think is when you have the experienced managers who spin out of a fund that maybe got a little too big. And they talk to each other and say, God, remember how much fun this was back a decade ago when we were a third this si…

AI assessment note: “Some of them we met ourselves directly. Others came from network”

Q How do you size these individual positions relative to, say, either the size of investment you already have through the GP or the size of your commitment to that GP's fund?

A That's a really tough one that's Quite judgmental. You, the old line, you get it right, then get it big. But at the same time, how far out do you want to climb on a skinny branch? So there are a lot of different metaphors here that can pull you in both directions. The sizing decision is one of the toughest ones we have. So that's where we'll really internally have the, the bare bowl discussion where Well, why, if we do this, why shouldn't we just really go big on this? If you really believe it, well, why should we be putting more than X? We already have this much money in this space, and we will really push each other quite aggressively on the sizing decision, and we want people to have different opinions and intentionally push us hard on it and justify why you are feeling the size of that position is right.

AI assessment note: “we will really push each other quite aggressively on the sizing decision”

Q that decision process in this Latin American example was, hey, you can be opportunistic. And we've got someone who we think is skilled at being opportunistic. Then, you, inevitably you're gonna go through a period of time where they get it wrong. It was still a good process. Now you're not sure if it was a good decision. What's the process at that point in time to re-underwrite that decision?

A It's basically that. It's re-underwriting it, and what I have to constrain myself, I realize I'm, I do have biases, and both sides, myself and somebody who may have an opposite bias, we have to bring our Decision-making process back into the room, underwrite it, underwrite it with data, and minimize biases. And that's easier to say than do. We all have inherent biases, and you, you try not to overreact to those. And there are lots of little examples that, that we all have that we could give. I, I picked one, but there are a number of others. And I try to be mindful of my biases, but I'm sure there are times that my staff would tell you I, I am not. I have more biases than I'm willing to acknowledge, but we all, we all have to do that, and we have to push each other, and that's part of the, the bull bear, part of the, ah, all of the discussions you have is to, to challenge one another, and decisions only get better when we push each other.

AI assessment note: “bring our Decision-making process back into the room, underwrite it, underwrite it with data”

Q you take that example of that very successful one 30 30 fund, and a subset team that maybe covers two of the sectors spins out, off the top of your head, What are the key questions you would want to ask that team to see if they have the stuff to kind of replicate or maybe even do a little better because they'll be managing a small pool of capital?

A Wow. Well, I worked in the auto industry for a long time, and we had this feeling for a long time that the auto, the U.S. auto industry is going to come back. And year after year, it just kept shrinking. So the lesson I took from that is you don't want to be in that kind of an industry. If you can find the sectors, and there are, there are the ones out there. We see it in technology. We see it in biotech. We see spaces that have a tailwind. Something that is supported by demographics, by technology. You want the tailwind. And then if you have smart people operating in a tailwind, you have the makings of some real success and trying to find out what is their competitive advantage, size and speed normally play into that some way. Overall, we have a bias towards smaller. What I like about the Getty's size, I mean, all of us look for a competitive advantage, right? Whether we're an investment manager, or we're an institutional capital allocator. What is your competitive advantage? So as a seven billion dollar foundation, we have our size and our speed. Our size advantage is that we can do smaller funds and get a big enough allocation that it moves the needle. The much bigger funds can't do that. Yet we're still large enough to matter to a manager that we're not making tiny allocations. We still have a good enough name and a good enough size that they want us around. So I think our …

AI assessment note: “What I like about the Getty's size, I mean, all of us look for”