The Exchanges

Q So between you and Gene, it seems like this is becoming an increasingly well-worn path. Where did your investment career go from that initial seat?

A I was there for six years. I was told pretty clearly, you need to get your CFA and your MBA, and so I did. Got my CFA and then my MBA at night. I wasn't a portfolio manager, though, at Wellington, and I wanted to manage money, so I went to be an associate portfolio manager at Boston Advisors, which is a much smaller company, so I went from a big structured firm where everyone has a clearly defined role to a small firm where everyone wears a ton of hats and is just building things on the fly, so that was a great experience, but that's where I learned to trade. I learned how to build portfolios of stocks and bonds. I learned about quant models and how they work. It was a quant oriented strategy. That's where I began to understand how stocks and bonds play roles in portfolios and building them. But I also learned during my time there that I'm a long-term investor and the nature of that quant model and many quant models is to be shorter term in nature. That wasn't where I wanted to spend the rest of my time. So I joined MassPrim, the state pension fund in 2011 as an allocator.

AI assessment note: “So I joined MassPrim, the state pension fund in 2011 as an allocator.”

Q And do you find that each manager you review is subject to answers on your team of every single one of these questions before you're ready to make a decision?

A We don't ask the managers to answer every one of these questions. These 265 questions, data points that we calculate are guideposts for our diligence. Another reason that the framework makes a lot of sense is that our marketing colleagues on the asset manager side, on the GP side, they know what they're doing. They are really good at telling us what we want to hear. When I'm teaching the team how to invest, my position is that we should really be guiding this discussion and making sure that everything we want to have answered is answered. And another tool that we use is to ask why three times. So if they tell you a story about a stock, You dig a layer deeper and say, well, why is that? Then you can really get to the meat of what is actually happening and go beyond that prepared marketing response.

AI assessment note: “We don't ask the managers to answer every one of these questions.”

Q What have you seen in the venture capital world as analogs? These are new businesses that often have founder succession challenges.

A So this is a really interesting thread to pull on. Asset managers are not the only ones who are struggling with managing succession. There are so many similarities with founders of venture firms. And why do we all struggle with this? It's really because as we talked about, there's a great deal of personal identity wrapped up And really one sense of self, as well as just a passion for the company that they've built. So when we think about a couple of analogs, one would be comparing this succession analysis in the asset manager context to succession analysis in terms of founders of VC backed portfolio companies, so entrepreneurs. And then the other is looking at family-owned businesses. They're very, very similar issues, and we can certainly, I'm sure we've all seen the show Succession and seen how that plays out. But when we think about venture-backed companies, there's one study that found that about half of founders are replaced by VC firms who've invested in the company by the time they reach the third round of financing, and that's 75% of founders have been replaced by the time a company IPOs. So why are founders replaced? There's a couple of different reasons. They're different from the succession issues at GPs and at asset managers, but outside capital and minority investors on behalf of the venture capital firms means that there's pressure to scale and grow. As my coach, …

AI assessment note: “one would be comparing this succession analysis in the asset manager context to succession analysis”

Q When you get to this period where, let's say the economic side of the succession, maybe they've groomed the next generation, they're ready to take leadership, but there has to be some economic transaction. What are the different ways you've seen that flow through an organization?

A So there are lots of different ways that this can be constructed, but I think the most important thing to recognize is that there is going to be tension and that everyone is going to feel as though they're leaving something on the table. So there needs to be a price at which the founder will sell and at which the next generation will buy. And the challenge is that you're going to continue working together. This isn't like doing a deal with an outside organization. There can be real cultural damage done if it's not handled extremely carefully. Because the founder will likely feel that they're leaving something on the table and they might need to in order to provide an accessible ownership entry point for that next generation. So you really need a solid third party valuation provider that has lots of transparency so everyone can see what's going into that. And that's going to be what are the comps that you can look at that are available. Multiple valuation approaches, whether it's a DCF or transaction based comps or looking at those types of things. And then the other way that we've seen is that next gen buys the ownership directly from the founder with capital that they've accumulated in their personal wealth. Eight times out of 10, I would say they don't have enough money to do that. So the firm can provide a loan to the next gen to buy in. Or there could be an equity participa…

AI assessment note: “So the firm can provide a loan to the next gen to buy in.”

Q In the situations where managers are trying to keep some lid or some opacity in the information that's forthcoming, what's your sense of, let's just call it how efficient the market is for that information that eventually you're going to find out what the story is underneath the hood?

A I don't think that there's any real way to get this information if they don't share it with you, especially with the private market GPs. It's not going to be necessarily laid out in a Form ADV or anything like that, so I don't think there's a lot of transparency. I'll give an example of a firm that I think is, protects their intellectual property very well, and there's a reason for it, and it spills over into how they communicate Their succession and their ownership, but they're doing a great job of managing it. And so this firm is Arrow Street. They are a quantitative strategy that has a very, very definite edge in terms of how they manage their quant process, but they view it as IP and don't share every single bit of the model. I would say that they're similarly not as open about the ownership structure, but we have seen very, very thoughtful succession planning over the years. So owned by a number of partners, And this is an interesting story of one where there was some turnover in a senior position recently, and we said, hey, this is probably concerning. Let's see what's going on. When we look back at our framework from last year and the year before, they had been grooming all sorts of people to run this strategy and to be in a position of decision-making authority, which it's on the succession front in terms of managing portfolios, not necessarily ownership. And so they ha…

AI assessment note: “I don't think that there's any real way to get this information if they don't share”

Q How can we help you spread the word?

A Yes. Well, my call to action is to join the movement by embracing this idea of 30 Seconds of Bravery. It's to buy a kid a book or donate a book, and more information can be found on our website, which is ThirtySecondsofBravery.org, and to be brave yourself and share the knowledge that you have about the investment industry with that next generation or with people who don't know as much as you do. There are lots of ways to be brave. And to lift others up. Could be your time, talent, or treasure, but I really encourage you to get involved. My ultimate goal is to give the book away, so I've purchased 2500 books to give to non-profits and children who really need this education, and any profits that we make on book sales will be recycled into giving more books away.

AI assessment note: “buy a kid a book or donate a book, and more information can be found on our website”

Q So you've started to get a bunch of really interesting endorsers of this book. So how's that all happened?

A Well, it's been really heartening, because I've put this message out into the world without much of an agenda or a plan. It's been a bit of a leap of faith that if we put something like this into the universe, and by the way, the vision is that we want to inspire and teach children of all backgrounds how to invest and be brave, put that message into the world, asked a few people if they would support it, and they jumped in, right in with both feet. And so we have some amazing endorsers, including yours truly, Ted. We have a famous former poker player in Annie Duke. We have the professional sports community. So Alex Rodriguez and John Jones from the New England Patriots, and Kyle Arrington, who's a Super Bowl champ, and powerhouses, industry powerhouses like NASDAQ. So this has been really heartening.

AI assessment note: “asked a few people if they would support it, and they jumped in”

Q How can we help you spread the word?

A Yes. Well, my call to action is to join the movement by embracing this idea of 30 Seconds of Bravery. It's to buy a kid a book or donate a book, and more information can be found on our website, which is ThirtySecondsOfBravery.org, and to be brave yourself and share the knowledge that you have about the investment industry with that next generation or with people who don't know as much as you do. There are lots of ways to be brave. And to lift others up. Could be your time, talent, or treasure, but I really encourage you to get involved. My ultimate goal is to give the book away, so I've purchased 2500 books to give to non-profits and children who really need this education, and any profits that we make on book sales will be recycled into giving more books away.

AI assessment note: “It's to buy a kid a book or donate a book, and more information”

Q A lot of people aspire to be sitting in one of these endowment roles for their career. What was it that caused you to leave it and join NEPC?

A A couple of things. One is that there was a tremendous amount of travel, and we were going all over the place into China, and I had a very young family, little babies. It's a tough fit for me at that stage of life. The other is that I really like to build things and solve problems, and that portfolio was just awesome, and there wasn't much to fix. There wasn't a lot to build. It was really a well-oiled machine. I had been a client of NEPCs for six years during my time at Prim and stayed close with the folks here. And they asked me to consider joining the firm as a partner. They asked me to take a fresh perspective to our investment approach. I was just excited about that. I was excited about the idea of approaching something, leading some change, and building something, engaging lots of people. I like a challenge.

AI assessment note: “One is that there was a tremendous amount of travel, and we were going all over”

Q When you have these two quite different experiences, what did you take away as what resonated most for you across the two?

A When I came to NEPC, I basically brought over what I believe to be the strongest parts of both of those very different approaches and married them together into our current approach at NEPC. So I believe it's especially strong. At Prim, like I said, we were really data-driven. So we used quantitative tools regularly. We could look at all kinds of performance vectors. We could measure and make decisions based on valuations, and we traded on that. And we needed to be able to support that for FOIA reasons as well as others. Then going to Wellesley, we didn't have that data. And even if we did, what are you going to do with it? Like, so what? Even if you knew your exposure to Chinese venture to the 10th point, you can't really trade on it because it's illiquid unless you do a secondary sale. So we thought much more about succession planning at the GP, which we viewed as a really big risk in many portfolios. We talked a lot about alignment of incentives and making sure that when our managers were making money, we were also making money. And we talked a lot about business strategy and product proliferation and what the manager's edge is. So it was super qualitative. That was hard for me to get used to because I am kind of a data geek. It was so good to flex that muscle though and to be able to think creatively.

AI assessment note: “I basically brought over what I believe to be the strongest parts of both”

Q What were the key lessons you learned in how to present to a committee?

A Generally, in my experience, committees tend to be pretty sophisticated. They're going to ask a lot of detailed questions. They made me much smarter because they made sure that I knew what I was talking about. So you have to prepare. The other thing that I learned is that boards, in many cases, at least for a public pension, tend to be composed more of maybe retired state policemen or people who are not in the industry. And so learning to present at a different level is actually much harder when you're trying to make something relatable to all the different types. I also learned that committee dynamics are very fluid and sometimes imperfect, and that's not anything to do with prim. It's all committees that we're all subject to bias, and it has inspired me to do quite a bit of investment bias work. But it's very difficult for humans to think in terms of pair trades. The temptation to look at line item risk is huge. Even if you know that a long treasury position is in there to offset the meaningful equity risk in the rest of the portfolio, you still might want to talk about that 80% of the time if it's underperforming.

AI assessment note: “learning to present at a different level is actually much harder”

Q So let's turn to this third, this big category of grooming the next generation. What are the different steps along the way?

A At least five years before any planned event, we want to see that next generation being brought into the fold. And that's both from an economic standpoint, as well as from a running of the business, running of the firm. So people who have done one role their entire career, whether it's picking stocks or bonds or doing deals, might be very good at that. But running a firm is a completely different skill set. It requires coaching and training both from the outside and the inside. We want them to be brought into different processes. To be given that power and to be positioned in a role that has autonomy in the cloud. And then we want to see a program to reduce ownership, to bring that next generation into the fold. So in some cases we've said to managers who really just didn't know about the fact that they need to be thinking about succession, we've said we really need to engage with outside counsel and we'd like to see a management group. We're bringing in that next gen into the discussions that you're having about the partnership.

AI assessment note: “At least five years before any planned event, we want to see that next generation”

Q What are some of the stories of things you've heard in asset managers that from the outside someone would not imagine these types of things happening?

A There's one firm that I invested with in my prior life is a public market equity strategy, and performance was amazing. It attracted a lot of inflows. So a track record belt on friends and family money attracted institutional capital, and they really weren't set up at all for the institutional side of the business. But on the succession side, this was a firm that was founded by a gentleman who was in his sixties, And the talent was fantastic. They, people with huge ability to create value and add alpha. This founder's son came to work for the company, 24 years old, becomes the CIO. So he's directing all sorts of stuff and managing people who are 20 to 30 years his senior. Of course we saw turnover, we saw cultural issues, we saw redemptions, and turns out the positions they had were highly illiquid and the stock Performance was just because people were buying and bidding them up. So that was not a sustainable situation and sort of exactly what not to do when it comes to bringing in that next generation and just skipping over all the talent and naming your son.

AI assessment note: “This founder's son came to work for the company, 24 years old, becomes the CIO.”

Q And how about the CIO mindset? Something that you were trained on, how do you bring that into a larger organization?

A Several years ago, I was speaking with the CIO of an endowment here in town, and the CIO had stepped into the role from the outside, and the senior investment staff, they were all specialists. So they had a venture capital investor who spent all their time doing that, someone doing buyouts, another person doing real estate, on and on. And the CIO quickly found that when she had a question about the overall portfolio, the junior support analyst was actually one of the most valuable team members. He was the only one seeing the entire portfolio. He was doing reporting on it. He was monitoring overall performance, moving the cash levels, and rebalancing, and understood why things went into the portfolio. He was the MVP, and he's able to answer any question that the CIO had as to why an investment was in the portfolio and how it all fit together. This is the expectation I have for every single person on my team, and there are 45 people on the manager research team at NEPC, to think like a CIO. And that means evaluating, are we getting paid to lock up our capital? So that can be any number of exercises that we use, but we really need to be sure that we're getting paid. We're looking across the entire liquidity spectrum and we're deliberate about where we're putting our clients capital. So an example might be hedge fund strategy and a long only strategy or hedge fund strategy and a pr…

AI assessment note: “This is the expectation I have for every single person on my team”

Q What are your next initiatives on the research team at NEPC?

A DEI is really important to me personally. I have two little girls, Holland and London. They're eight and five. I have my own diverse career path, so we're really interested in improving diversity in our industry, whether it's through working with girls who invest, through underwriting and putting money with diverse managers across all stages. We're working hard on ESG and being able to reflect missions. Right now, we're actually integrating that investment framework into the private markets, so it's going to rhyme at the high level. But there are going to be very specific things that are applicable for each of the private market segments. That's been a really fun thing to engage people on. And then I think it's just team building. It's a really weird labor market and we're doing everything we can to keep our highest quality people.

AI assessment note: “we're really interested in improving diversity... working hard on ESG... team building”

Q And so when you came over here, how did you think about putting a framework on the issue of succession?

A Well, as you recall from when you kindly had me on your show a couple of years ago, we have a pretty rigorous investment framework here at NEPC. I believe that it marries the best of both worlds, that highly quantitative process that we use at the public pension fund, and the highly qualitative and subjective process and critical thinking that we use at the endowment. So that framework is very extensive, and it's upwards of 400 questions that I want each and every analyst to be able to answer. And so succession really falls into that culture and firm and organization category where we want to understand, is this going to be a going concern? And what kinds of questions can we train our analysts to ask to think about this?

AI assessment note: “succession really falls into that culture and firm and organization category”

Q How does the size of the firm factor into that question of age?

A That's a good point. I think what we're really looking at is, does the founder own 100% of the management company, or a meaningful majority, or have they been bringing people along, offering people opportunities to buy in, or maybe provide a loan for the next generation to become owners? Have they been reducing their ownership over time? If there's a large lump sum, whether it's a boutique firm or a huge organization, it's probably going to be tricky for that next gen to buy them out, which leads to Increased risk of a GP state coming in or an outside minority or majority investor, which necessarily changes the incentives and the way that the firm culture works and what they're striving to achieve.

AI assessment note: “whether it's a boutique firm or a huge organization, it's probably going to be tricky”

Q So when you think about alignment within NEPC, what gets rewarded for people on your team?

A We have a vision and mission statement that I set for my team. We're not like the asset management institutions that are going to measure our researchers on their outperformance of names that they pick because it's a long-term measurement cycle, especially with private markets. So when I'm working with the team, it's much more about culture and are we reflecting on our decisions on a regular basis? And is the content of our work coming to fruition? So we have a vision statement. We have a mission statement. We have five pillars that guide us. One is that CIO mindset. I'm looking for whether people are interacting and learning and talking to each other. I'm looking for a team culture. Super important. Our reputation is really important. And then accountability and efficiency. And we do measure our performance on a regular basis, but it can lead to some really scary and suboptimal decisions to trade in and out of managers if you're too short term.

AI assessment note: “it's much more about culture and are we reflecting on our decisions”

Q So how'd you come about the idea of writing a children's book?

A So I really shouldn't be successful in this industry. The odds were not in my favor. I came from a family that had generations long cycles of making ends meet and really a corroding threat of fear handed down for hundreds of years. We didn't have any ends. We didn't have any connections, very little in the way of financial education. I started my career as an administrative assistant at Wellington Management Company. I was a state school kid with a German degree. And so by all measures, That really wasn't setting me up for success in the investment industry, but here I am today, a partner overseeing over one and a half trillion dollars in capital, and I really believe that other children should have the opportunity to have this life-changing experience of learning about money and entering the investment industry. The turning point in my career was about 18 months into my career when I realized that the woman who I had admired named Jean Hines, who was a very Talented investor who commanded the room, who was young, who was super successful. She started as an administrative assistant as well. The light bulb went off. I believed that I could. I had tangible role model that I could follow, and I went and got education. So that's what this book is trying to do. I, um, taught my two daughters earlier last year how to invest. We did stock research together. They entered their own trad…

AI assessment note: “I saw that these children really are primed and hungry for this type of information”

Q When you break this framework down into these long lists of questions that fall into those categories, how does your team actually use that to aggregate to helping make decisions?

A Warren Buffett is quoted as saying that once you have ordinary intelligence, an IQ of a hundred or so, you can be a great investor. The thing that prevents people from being great investors is their emotions and falling victim to the greed cycle. We know that emotional decision making is not good for investing. I call it a hot state, making a decision from your emotional brain or your caveman brain. It exists to save you from the saber tooth tiger coming at you. Our brains are wired in a certain way to respond to perceived threats, but in many instances, we're actually not threatened, and using that emotional brain to make investment decisions leads to terrible outcomes. We see it all the time when people show their personal traded portfolios, where they get scared and sell at the bottom, and then they buy at the top. There are a lot of ways to overcome this hot state thinking and to make decisions from a cold state, and one is to use an investment checklist. We call ours the investment framework. So many benefits. One is that it's created in a cold state. So you create this list of criteria that you believe contains signal, not noise, and you're setting it when you're not emotional. That's one benefit. The other is it gives a lot of transparency in our team decision-making process. And when our team gets together and we're bringing an idea through, we all see this investment m…

AI assessment note: “when our team gets together... we're all looking at the same criteria and are able to challenge”