The Exchanges

Q unusually benign environment for the last five years. And a degree of uncertainty, we don't know what's going to happen going forward. And now you're saying, oh, but we want to take a little bit more risk. How does that come together? Because everything you set up to that point, I would have said, well, maybe the portfolio you had in the past is the right one for going forward.

A Yeah. Well, I would agree, but if you look at what we are projecting forward, It's right around eight percent. We have an expected return of eight percent on a volatility of around five. That's how we model our overall portfolio. We've achieved eight percent on less than two percent volatility. So we're not conditioning the future on the past. What we're saying is, well, let's take a five percent risk budget, which is about half of what we think peers have, and let's move that to six or seven. We're not saying let's become Like an endowment, although we would consider that if the, if the board was willing to accept the type of potential adverse outcome, certainly. And people take a look at our portfolio and say, well, you're just all focused on alpha and you hate beta. No, we don't hate beta. We treat beta as we do every other risk in the portfolio as something. And we have an expectation for that risk. And we have a conviction In that risk. So if at some point equity media becomes highly, highly attractive as it was in March of oh nine, not without risk, but I'd like to think that we would have a lot more equity beta in the portfolio at that point. It just doesn't make sense based on what we are expecting going forward. And hey, we're moving assets into strategies that do have embedded equity beta. Why would you do that at this point? Well, We believe that sometimes those stra…

AI assessment note: “let's take a five percent risk budget... and let's move that to six or seven.”

Q So, the Ford's portfolio is very equity-centric, suffered in the crisis, and that was an impetus to change or to hold on?

A Well, Ford, to their credit, held on and still tell stories, again, about how tough it was in March of oh nine, just staring down into this abyss, and no one had any idea, and it was Much, much worse than anyone had expected, and there was a lot of confusion as to whether things were broken or survivable, right? And Lehman had happened, Bear had happened. The courage to hang tough and keep risk on in that situation was very, very hard, but they did it, which is remarkable, and credit to the board and credit to the investment team there at Ford, and And then what we did over the next five years was to shift that portfolio more toward an endowment like portfolio. We built out the investment team there. We shifted probably eight of the ten billion at that point into different strategies or different managers. It was a unbelievable transition, fun transition.

AI assessment note: “Well, Ford, to their credit, held on”

Q And so what was the first step after you left academia?

A So it was into management consulting. Yeah. I was fortunate to find someone who's actually been a mentor to me my whole career, Hamilton Helmer. So Hamilton was a, a Bain consultant. He actually worked with Bill Bain in the early days and I had moved out to the West coast to start his practice there in Silicon Valley doing strategy work for firms on the West coast. And he saw Some kind of potential in me and hired a kid. I always joke. I said, when Hamilton hired me, I didn't know the difference between revenue and profits, just money. But Hamilton saw some raw potential there and brought me out to join his strategy firm. And I learned about business and strategy with Bain level partner working close with them. Incredibly again, luck, incredibly fortunate.

AI assessment note: “So it was into management consulting. Yeah.”

Q Well, I'm presuming Jim didn't open up Renaissance Medallion for you to solve that problem, so how did you go about the strategy?

A So the strategy by and large was in place, and it was A hundred percent alternatives. That portfolio was in place, that strategy. It was 80% hedge funds and 20% private markets funds, mostly venture. And so the changes that we've made have been much more around the margin of the types of managers that we were seeking and the illiquidity profile of the fund. We've decided that we can afford to have more illiquidity in the portfolio. So we've slowly pushed that allocation out Toward 25, 30, and maybe even 35% in private markets with a very high focus on managing those cash flows and liquidity. At the same time, the hedge fund side, people say, how can you even get close to eight percent there? Well, we are targeting very high potential return hedge funds. High risk hedge funds. We're not looking for three percent fixed income substitute. We're looking for Even more than equities and even less equity beta and even more diversification. So we're searching far afield for great risk takers and great risk managers. And we believe if you find great risk takers and great risk managers, the returns will follow long term.

AI assessment note: “the changes that we've made have been much more around the margin”

Q So once you've got that orientation, both the observation and orientation, how have you then communicated with your managers?

A Delicately. A lot of our managers are in the midst of a VUCA situation themselves and are dealing with things and have precious little time to communicate. And so we've been conscientious to try not to draw too much of their time, but to really understand, first off, is there anything that we need to be aware of that is outside the bounds of expectations? And so time like this, you've seen some seize ups in the markets. You've seen spreads blowing out. You've seen situations where a time series has a step change in What was happening in the past, and I think obviously there have been some casualties. We've heard of some funds that are gone. So step one is be cognizant of people who are making life and death decisions about their business. But two, just be aware, be a resource, be a provider of help in any way, right? We're all in this together, and we need to be leaning on each other. We're fortunate through some luck and some planning to come in with a reasonable liquidity position, and so we're here to the ground to look for ways of putting that to work.

AI assessment note: “Delicately. A lot of our managers are in the midst of a VUCA situation”

Q As you get through this period of time, and as you said, there are certain things that you are diving into on research. From a process perspective, if we look back at this conversation, whatever it is, a month, six months out, what do you think is a successful process and what would constitute an unsuccessful process?

A It is all about the process. I think that's exactly right. I think an unsuccessful process would be one that doesn't acknowledge the speed at which the world has changed. And so, if you are not acting right now, I think then that should be construed as unsuccessful. Now acting, when I say acting, I mean establishing your position and your strategy and taking steps to acknowledge what has changed. I'm not saying making any decisions, but certainly taking this extremely seriously. And coming up with a plan given what has happened here would be critical. And so that varies for different types of organizations, but I think to be speedily getting to a point where you can both assess what has happened and forecast your best belief at what is coming and Make sure that you have a plan to deal with that in the short term. That would be successful to me. There's nothing in there that says standing still is the wrong action. Rebalancing might be the right action, but do it deliberately with an eye toward really as best you can quantifying the beliefs about the behavior of your portfolio in this new environment.

AI assessment note: “an unsuccessful process would be one that doesn't acknowledge the speed”

Q Is there anything that stood out about either someone who's approached you or sent you an email that struck you as a good way to communicate with you?

A It's that high EQ, very empathetic tone of, It is a highlight of what has changed. You know, this is what we thought. This is now what we think. This is what we recommend. I think those are the best types of communications. Concise, empathetic, and transparent. And so I know that's very general, but those are the types of things that we respect at a time like this. I mean, time is precious. And to the extent that someone can make efficient use of our time to tell us about something, we welcome it. And for me, again, I go back to my personal experience, and the most effective use of my time is typically reading things. I am appreciative of those offering conversations with portfolio managers. I have availed myself of some of those conversations, but by and large, In a time like this where things are rapidly changing and we're going to be required to communicate with our committees and asset owners, time is too precious to have a manager meeting.

AI assessment note: “It's that high EQ, very empathetic tone of, It is a highlight of what”

Q flavor to it that typically doesn't have a whole lot of market sensitivity and is quite different from a lot of other institutional portfolios. The opportunities that you're looking at and you mentioned are some form of go buy cheap assets. How do you think about integrating that type of investment in a portfolio that by and large has a lot less, call it beta, than some of your peers?

A The interesting thing about the portfolio is that it has had low beta in the past. It may not have low beta going forward. And again, this is not something that is designed to To be low beta. This is designed to make the most effective use of the capital that we have to find returns, and so if the best opportunities to find returns are attached to things that have a high variance, Or hide market beta. Then we will put capital there. And my instinct right now is the world has changed. Cash has dropped. 150 basis points. You have a complete one 80 from the trend that we were on in 2018. Folks have said, well, you know, the Fed dropped 50 basis points and then had a surprise hundred point drop on a Sunday, and the market still sold off as if that was a failure. I don't know if that was a failure. We may have saved the market at that point from going down even further or dropping even more precipitously. No one knows. We can't write that history, but it is what it is, and the market has now priced What the expectation is for the risk-free rate, and that's to be very, very low for the foreseeable future. And so institutions like ours that are depending on the endowment to support the operating budget are in a very difficult spot. If we could get to our spend rate without taking risk, we would certainly choose to do that. But we can't do that, and now it's up to us to figure out how …

AI assessment note: “this is not something that is designed to To be low beta.”

Q You've had these varied experiences going in, and you show up and you now have a mandate at the institute To be the chief investment officer. What did you come to believe about investing that led you to take the portfolio where you took it?

A One of the things I did at the Institute was to update the investment policy statement with a governance hat on. And so the beliefs actually didn't change, Ted. It's just a reapplication toward a different objective. So do you believe that Risk is rewarded with return over time. Sure. Do you believe that risk means a variance in outcomes? It actually is uncertain. Yes. So we're actually seeking uncertainty, and we are seeking uncertainty in different areas, so diversification, but uncertainty is risk, and so that's really, we're hunting for A lot of risk. There's a lot of different risks in the Institute's portfolio combined. They actually result in something that is much lower risk than I think what a lot of our, our peers have by design, by mandate. When I joined, I said, Jim, what's the objective for this portfolio? What are you trying to achieve? And Jim said, uh, We want to keep up with our peers. We compete for talent with top universities, and we want to pay our professors and attract talent here, right? That's sort of the key, this knowledge base. But if you can just keep up with the median peer, that'd be great. And then I kind of, I looked around, so you're asking me to be average? And he said, no, we want you to be median peer return average. But with half the risk. Half the risk budget. Yeah. So that was the key. I said, okay, I understand now. And so that mandate h…

AI assessment note: “the beliefs actually didn't change, Ted. It's just a reapplication toward a different objective.”

Q So what do you know now that you didn't then?

A How to create companies and all of the value creation potential that exists in that area and how it's done, right? I was a kid, uh, it's 20 years ago now, but I enjoyed consulting a lot. And I said, this has been so great here. Why don't I take a look at one of the branded shops? And I ended up going to BCG three years later and spent four years there. Being a generalist and just looking at all sorts of different industries, airlines, healthcare, energy, just a lot of fun. Consulting was wonderful. And along the way, I started to learn a little bit more about investing and seeing how value creation was rewarded by the markets. And I ended up after four years going back to join Hamilton at his firm, Strategy Capital. This was in the early We had a long short equity hedge fund. The memory for me is being in the boardroom at Netflix before Netflix was Netflix. It was really so early. They had a red envelope company and having that experience and seeing that company being built from the inside and being able to interact with management was eye opening for me.

AI assessment note: “How to create companies and all of the value creation potential that exists in that area”

Q When markets are moving so quickly, up and down, certainly in the equities, and probably bouncing around in some of the credit markets as well, how do you think about doing your due diligence in a sufficiently timely way to take advantage of some of these opportunities?

A It's very hard, and you are required to prioritize some of those things, and that's what's part of the additional uncertainty in this environment. When you're faced with that, there's this gut Reaction to, to kind of throw out things that don't make sense to you. Throw things out that you feel are useless and act. And I would suggest that that is a decision. Everything we do is a decision. So action or inaction are both decisions. Really, I'd say the rule of thumb was no matter what your project is, spend the first 10% of that project planning and thinking. So we don't know how long this project is going to be, but it probably requires us to just pause and say, you know, what is it that we're really seeing here? Is this a head fake? What do we really believe about what's coming? Have markets properly discounted the future or is there something else here? It's very funny. You've got data that doesn't make sense, right? You've got things that have had 10 standard deviation moves, and so you can either say to yourself, well, this is just junk, or this is where, you know, Lakshman Akutin came in from ECRI to say, the data may be bunk from a magnitude perspective, but it doesn't have to be totally useless from a trend perspective. So think about using what you have and salvaging what you have and what you know, and this is where you should trust your gut. Again, you should be orient…

AI assessment note: “spend the first 10% of that project planning and thinking”

Q We always start talking about people's backgrounds. So why don't you just walk through kind of how you got to the CIO seat?

A It's a strange path. That's for sure. I grew up in Florida and watched a lot of rocket launches and always felt close to, uh, Cape Canaveral and the space shuttle. I remember drawing pictures of the space shuttle when I was 1314 years old. I actually saw the first launch Really neat experience. So always had that desire, and so I pursued that in school. I studied aerospace engineering in undergrad, and then when I got out of undergraduate in 1991, the country was in recession, and I said, well, you know, why don't I just go for some more schooling, and pursued graduate studies. The theme in my life has been luck. I think it was lucky that there was a recession in 1991. It pushed me to go get some more schooling, I went to Princeton for graduate school, and at Princeton, it was a very, very different experience than undergrad. I did undergrad at University of Florida, and I always like, and I said, when I was at Florida, I had a calculator in my hand, and I was always solving problems. At Princeton, I threw the calculator out and exchanged it for a piece of chalk, and we did a lot of theory there, and the other thing that Princeton had was it had a school of political science, and I had a great advisor there who encouraged me to Branch out, and so I took classes in the poli-sci department there, got a minor in public policy, and that shifted me off of engineering and aerospace t…

AI assessment note: “It's a strange path. That's for sure. I grew up in Florida”

Q So is there a size that is your sweet spot for managers?

A Yeah. We have managers ranging from four hundred million dollar hedge fund to the tens of billions of dollars. And we've seen all the research as well, smaller managers, this, and it's, I don't disagree with any of that research, but by and large, we think that you can make money in lots of different ways. And if you're large and you're playing in an illiquid area or you're large and you're not able to pursue high quality deals, Then sure, you're not going to make a lot of money, but if you're large and you're playing in a very liquid area and you have an edge, or you're large and you're the only game in town who can take a deal down, then you're going to make some money, right? So it's all about edge, and yes, I see in general, by and large, smaller managers are making more money than larger managers.

AI assessment note: “We have managers ranging from four hundred million dollar hedge fund to the tens of billions”

Q I thought it would be interesting to really dive in. This is a pretty unique time for everyone and have a chat about how you in your seat are evolving what you're doing. So why don't we just start with, I guess, is this first transpired and you can no longer go to the office? How are you and your team communicating with each other?

A Let me just start out by saying it is an extraordinary situation, and it's unlike anything that we've seen, but that said, there are a lot of analogs that can be useful in a time like this, and I would borrow a couple acronyms from military parlance. VUCA, that's from the U.S. Army War College in Pennsylvania. It stands for volatile, uncertain, complex, and ambiguous situation. It's just the kind of thing that we're faced with now. A way of approaching that is with an OODA loop, and that's an acronym for Observe, Orient, Decide, and Act. It's from the Air Force, Colonel John Boyd. He designed it as a framework for pilots who were facing dogfights, and so you can use both of those as analogs for the kind of situation that we're faced in. And so it's hard. And what we have done, obviously, we're lucky enough to have in the past all had times that we worked outside the office, whether during travel or maintaining a link between our New York office and the Princeton office. And so we had a lot of practice using video conferencing and remote access. So there was a little bit of a hiccup as we all got oriented, but We're all in different geographic locations. We're all generally safe, and we're all generally productive.

AI assessment note: “we had a lot of practice using video conferencing and remote access”

Q So what parts of your normal routine would you say you've had to amend because of the inability to get together face to face?

A Well, I think we're doing everything that we were doing, but what's been layered on top of all of that is a requirement to really understand the changes in the environment. That's where I go to the OODA loop. And so the first thing that we did was we observed, and I think we're lucky enough, and I'll put in a plug for some of the folks that have been kind enough to keep us in the loop with an early warning types of systems like Mark Critzman at Wyndham, Ed Peters at First Quadrant, Bill Shadwick at Omega Analytics. These are all folks who provide indicators that tell us when things are changing, changing rapidly. And then it was all about the observation, reading, reading, reading, just the deluge of information that came in and triangulating to really understand what was going on and what was real data, what was not real data.

AI assessment note: “Well, I think we're doing everything that we were doing, but what's been layered”

Q Can you talk about some of the actions that you've taken as a result of one of two things? Either some of these risk metrics that are a little bit different or a difference in the expectations. So if you say the last five years, most of your hedge fund managers probably didn't meet those return expectations.

A So that's where it gets Complicated. And that's where you have to say, well, this is what we were expecting. This is what occurred. Would this person have been in this risk zone if what we actually had expected to occur had occurred, right? So again, focus on process, not outcome. The outcome has been very, very, very unusual in the last five years. Don't Think that that's representative of anyone's outcome. Understand why it happened, and what drove that, and use it as a clue to what might happen. That's what we're doing. And sometimes, look, in this portfolio, there are a lot of things that we classify as unknown risks, or idiosyncratic risk. We can extract equity beta, we can extract volatility as a risk factor, we can extract Rates and rate movements. We can extract oil. We can extract alternative betas as well. There's a lot of unknown risk, and so coming up with ways of addressing those, you know, that noise is part of the art of this portfolio and our job. Go back to 2004 and my time at Quantal with the university. The finance folks in very quantitative process. There's a book, um, by Grinold and Kahn, Active Portfolio Management, that talks about how Risk and return in active space are calibrated, and that's one of our first principles. Do we believe that these managers are skillful enough to convert, if they get the opportunity, to convert active risk into return? And …

AI assessment note: “focus on process, not outcome. The outcome has been very, very, very unusual”