The Exchanges

Q How'd you decide to move on from there?

A There were some changes that were occurring at Target Corporation. The, uh, CEO, Ken Mackey, was essentially moved out of that role. I had an office not that far from Ken's on the same floor. He was, uh, moved out, and another gentleman came in as a CEO. The individual that I had reported to was asked to, uh, move out of the organization, and I had a pretty great relationship with him, even though he wasn't any longer involved on the investment side. And about the same time, I got a recruiting call, uh, that said, you know, we'd love to have you come to Washington to think about, uh, working for a firm there. I said, great. I'm from the Seattle, Washington area. They said, nope, wrong Washington. So this is Washington, D.C., And they said the firm is Howard Hughes Medical Institute. And I had never heard of Howard Hughes Medical Institute, but like Howard Hughes, it flies below the radar screen. And it turned out that it was a wonderful place. It was the second largest medical foundation in the world besides Burroughs Welcome. They were running everything internally at the time. It was about, I think at the time it was about 11,000,000,010 or eleven billion dollars. And the new CIO there was looking for me to come in to help Let him restructure that pool of capital to diversify it so that we had a combination of internal and external exposures, and then build out the hedge fund…

AI assessment note: “Sounds like a great call option to me, and so that's what happened.”

Q If you use 2008 as a case study, what actually happened if you, if you, just an aggregate of your aggregate assets and the movements of your clients?

A We saw a massive shift out of equities into stable value. You know, our stable value fund ranks number one For one, three, five, 10 years, and that goes back for a long period of time. So it's a, it's one of our flagship products. It has extremely low risk. If you, if you looked at the rest of our funds, we actually did really well relative to our peers, but really well, when you're down 20%, doesn't feel so, so great. So we saw a huge shift, and in fact, between oh eight and probably 20 11, we saw that About, uh, five billion dollars shift from equities into, uh, stable value, which doubled the size of our stable value fund.

AI assessment note: “About five billion dollars shift from equities into, uh, stable value”

Q What's the most challenging aspect of your life these days?

A I think probably, you know, our team is growing, and when I started, ah, at this firm, I think we had thirteen billion, and, uh, I think I had 12 people on my team. Total assets, AUM of the firm, including administrations, about fifty-five billion today. Uh, we're running, uh, more like thirty-six billion. We've tripled the size of the team that I have there, and we're still growing. And so, identifying talent, trying to get them acclimated, making sure that we are Retaining a lot of the, you know, knowledge that we've built over a long period of time. You know, the average tenure on my team is, you know, double digits, so we don't have a lot of turnover, but we have a lot of growth, and so that's always a challenge.

AI assessment note: “identifying talent, trying to get them acclimated, making sure that we are Retaining”

Q get in their own way. There's too much activity. And now you have this trade-off between Very experienced people who now probably have no concerns about financial wherewithal, so they're just in the game for the love of the game. They can invest more money alongside their clients, because they've sold a piece of the business, and you got, hey, 80% of their time. How did you see that deteriorate?

A It's, that's the subtle part of it. It doesn't happen in a quarter. It happens over a two or three year period of time, and all of a sudden, you look back and say, these guys used to have a margin in these types of environments of X, and it's now a fraction of that. Why? Well, in this particular case, one of them is spending a lot more time in his alma mater, where he wrote a check for ten million dollars to have a Soccer field named after him. Uh, another one is, uh, out, uh, uh, where he's a, one of three partners at a golf course. So he's probably not there, uh, Friday, Saturday. Those are the busy days. So he's probably there Tuesday through Thursday, and, uh, uh, but, but it's, uh, you know, this business, as you know, is so competitive that, yeah, there's a balance on, you know, getting in your own way, With really keeping your eye on the ball, and I think that, you know, the people that we think are really successful are just as hungry at age 60 as they were at age 40, and those are the guys that we like to align ourselves with.

AI assessment note: “It doesn't happen in a quarter. It happens over a two or three year period”

Q How did you learn about the business as a staff of one or starting with two?

A Boy, you know, sometimes you just get lucky, and this was one of those times I was very lucky because not only did I work for a gentleman who was very bright, a guy by the name of Jim Eckman. Jim was a CFA and was really Somewhat introverted, but a really quantitative and thoughtful individual. I had board an investment committee that was extremely progressive for a number of retailers who represented a number of the operating subsidiaries, including what remains today, which is Target Corporation. I think there were five people on that committee, four of them all were Baker scholars, and the other, ah, was, ah, in the first class of women To graduate from Stanford Business School. So those five people, you could talk to them about multi-period immunized bond portfolios, and even though they were retail executives, they pretty much picked up on it within three to five minutes. Very, very progressive, and I think they felt like they were going to give Jim and I enough latitude to kind of go as far as we could. The third leg of the stool is, you know, someone who you know, which was Brought in by the board to, ah, help kind of oversee some of what we were doing, which was a gentleman by the name of Dick Jensen, and Dick was running, ah, First Bank Systems, ah, trust area there, and was brought in by the Dayton family to help provide a professional, you know, an outside, uh, profe…

AI assessment note: “I learned so many things from Dick Over the years. So, so that combination”

Q How big was that total team of investment professionals?

A Gosh, you know, Ted, I would say that we probably had 20, 25 people, and those were the days where before you had so much electronic information, we had a dedicated librarian staff of three people just in this think tank library that would get you any research report, annual report, whatever you wanted. So, so there were lots of resources available that You know, I probably never would have dreamed of at, uh, Target Corporation. So that allowed you to not only have, uh, greater access to, you know, some other folks to talk things over with, but it also give, gave you the ability to, because we ran so much money internally, to develop certain strategies like hedging that you could do internally, you know, trading, uh, uh, futures and, and that type of thing, which obviously I was not set up to do, uh, at Dayton Hudson Corporation.

AI assessment note: “I would say that we probably had 20, 25 people”

Q How do you think about your manager selection process?

A I've changed the way we think about it At the vantage point funds versus when I was, say, at Target Corporation or when we were at, ah, Howard Hughes Medical. And the fact that there we looked at the portfolio in totality. Here, where we have essentially 33 different funds, and I think we have 59 mandates, ah, populated within those 33 funds, we think about it differently because each one of them have a style box in which they have to, ah, work within. So, when we think about portfolio construction, it's not whether or not I can blend large cap and small cap growth and value as much as really How are we going to get the most efficient combination of managers in a particular style box and stay within that style box over longer periods of time, which is maybe one of the more frustrating components of managing to a Morningstar protocol.

AI assessment note: “How are we going to get the most efficient combination of managers in a particular style box”

Q you have actual rate of return, but maybe that was, I don't know what it was at the time, six, seven, eight percent. The hospital is spending five percent. So yeah, there's a difference, but how much of the, what drove the difference in the investment profile came from the structure and how much came from kind of as you intimated a difference in the understanding of the governance board?

A I think it was a blend. I think that we were always on the hook and because you had corporate shareholders with the pension fund to make sure that you were trying to hit that actuarial assumption And to make sure that those liabilities were paid off at the lowest cost. The Howard Hughes Medical Institute, you didn't have that same kind of pressure. It's a, it's a private organization. Heck, the, you know, the neighbors around the neighborhood didn't even know what this place was, and so you really just reported into a, well, we had the investment committee, then you had a larger board, and, uh, They ran that in a much more closed-end fashion, so there wasn't the same kind of pressures, in my opinion, that you had to hit these liability payments every year. You knew you had to be fulfilling grants, but there was a pretty significant pool of assets there to do that.

AI assessment note: “I think it was a blend. I think that we were always on the hook”

Q What are the signposts of changes that have led you to want to exit manager relationships?

A There's the obvious ones that everyone here has, uh, seen, which is over longer periods of time, they're not living up to expectations, they're not, uh, performing in the environments that you thought they'd perform the way you thought they would perform, but I think that as I've gotten on on my career, some of the more subtle things that I look for, I was involved with a firm like this, where all of a sudden there's a buyout that occurs, Or maybe it's a gradual, ah, accumulation of wealth. But at some point, you can have, ah, a lot of guys in a firm that, you know, they still are pretty passionate. But they're passionate, you know, four days a week.

AI assessment note: “over longer periods of time, they're not living up to expectations”

Q So, well, let's talk about some of the constraints in that structure. What's your view on active versus passive?

A I used to have, uh, discussions with one or two of my board members that, uh, have a very strong focus on passive, and he said, well, you know, Wicker, you're an active guy, you know, you ran active strategies all throughout your career, you know, you focused on alpha, so I'm the passive guy, and I want to have this Argument with you on which is better, passive or active, and I, in the role that I play here, we offer both active and passive within our product lineups, and I think they both serve a purpose, and, you know, you can, you can get a lot of cheap exposure in certain asset categories, and I think that's probably really beneficiary, especially in an industry where cost containment is critical, but then there are areas where I believe active management can certainly add value on top of that.

AI assessment note: “we offer both active and passive within our product lineups, and I think they both”

Q How do you balance the internal-external dynamic in that you hire people internally, they're a little bit more embedded, What happens if your judgment tells you, eh, we could do a little bit better externally, net of fees, than what these guys are delivering for us?

A Yeah, I think that's always, that's always the dilemma, right, when you have both internal and external, uh, uh, management teams. In my, uh, experience here, we started out with, uh, folks running internal money off our balance sheet, and we watched these guys start this thing in, oh, six, oh, seven, and, you know, uh, about Two or three years ago, funded them with much larger components of money, uh, client money in our stable value fund. You know, it's been a very consistent ride, and so we think that, you know, they're very competitive, especially net of expenses, uh, to what you can do externally for fixed income managers, because that margin is much thinner, right? On the equity side, that's a harder call, right? We're running money more on a quant-oriented basis as opposed to The world I grew up in in fundamental analysis and bottom-up stock picking, and so factors are a bigger component of what we're doing there. And I guess the jury's still out. We've been fortunate over long periods of time to have identified some really great managers. The average tenure of an external manager for us is over eight years. We haven't had our internal program in place for eight years yet, so we'll have to come back and talk about that.

AI assessment note: “we think that, you know, they're very competitive, especially net of expenses”

Q What information do you read that you get a lot out of that others might not know about?

A I would say that, you know, as I told you earlier, I'd gotten a degree in journalism and communications, and so there's never been a newspaper I don't love, and so if you see my driveway on Saturday mornings, you know, it's littered with the Financial Times and the Wall Street Journal and Barron's and New York Times, so there's a lot of newspapers, and I think that, I clearly think that you can get a lot of information there, but That's pretty common information. I think the problem people have today, there's so much out there you got to find out and try to prioritize. And, uh, you know, so I'm always trying to keep something with me all the time because Sir John Templeton, I wrote, read a book of his once, and, uh, he said that time is so precious that you don't want to waste any, any moment that you can. And so always have something with you to read, you know, whether it's between appointments or on the train, Heck, I bring stuff to read at my kids' basketball game at halftime, and I would say, you know, when I'm trying to prioritize, some of the things that I think are most impressive, you know, are some of the things that the folks from Strategas write. Those guys are very, very thoughtful in what Jason Trenert and his team do. They give you a perspective that I don't think you see in traditional sell-side research, and I think I always try to balance that out with, you kno…

AI assessment note: “some of the things that the folks from Strategas write”

Q So what you're really talking about is controlling certain risks, and if that's the case, how do you think about doing that with an external manager as opposed to having an internal team? Where you can, day to day, monitor those risks and make sure that you're sort of staying within the, the sidelines of the football field.

A Yeah. So, it's a really good point that you raise, and I would say that you're right. With internal management, you do have the ability, if the risk team comes and says, you know, this factor is too heavily weighted, or you're light in this area, you, you can do things to change that. In the situation we find ourselves most of the time, however, you find yourself in a Period where you were relying on underlying sub-advisors to stay within those, ah, areas that you've designed for them. Now you provide them with enough latitude in their guidelines, and over a period of time you may have to be able to shift, but one of the frustrations I found with SEC guidelines was you have those guidelines and you are really tied to that. The, ah, FortiAC board will really hold your feet to the fire that you cannot violate some of these very narrow bands that they have. So, One of the things we've done, we've broadened the bands. I think our, our board has become more sophisticated over time to appreciate that you need greater flexibility, and so I applaud the support we've gotten from the organization in that regard, and I think that while we don't make wholesale changes, there are times where you have to tilt, ah, from one, ah, to another, and the beauty of the way we design these funds, they're multi-managed, so you'll have anywhere from two to four managers in any particular fund And so wh…

AI assessment note: “the beauty of the way we design these funds, they're multi-managed”

Q So when you have such a diverse array of people that you are helping, how do you think about setting investment objectives?

A So it's a little, you know, it's fairly simple, actually, and I think we could probably Thank the folks at Morningstar to a certain extent for that, Ted, because given the fact that we have such a wide number of participants, you know, it really is something that you need to be able to provide education in a straightforward manner for people of various degrees of sophistication when it comes to investments, and so when I came in back in We decided that one of the best ways to do that was not to think about funds relative to their Lipper universes, but to think about them in terms of Morningstar style boxes, in terms of a way to convey that, because for retail investors and Morningstar spent so much money on that education process, putting our product lineups within those style boxes seemed like the most efficient way to convey different types of strategies.

AI assessment note: “putting our product lineups within those style boxes seemed like the most efficient way”

Q And then on your side, as your financial planners work with your, the underlying employees, how do they plan out if the numbers don't add up?

A Well, the beauty in the public sector for, especially if you are a Mid-level or older employee or participant, um, in the public sector, many, ah, of these individuals also have a, ah, defined benefit plan. And so, what we have found when we've modeled out, ah, for our, ah, target date funds is that, um, for the mid to older components of the population, they have a pretty good safety net behind them. And so, it's only the younger, ah, generation, you know, Probably employees under the age of 25 or 30, for many of these, uh, municipalities are not going to have the benefit of that DB. Those are the ones that I think our financial planners have to spend more time educating, but the difference, I think, today versus, say, 15 years ago with the introduction of target dates, you know, even if a young participant has no clues of what they want to do, the target dates can provide a pretty good asset allocation, one-stop shop, not Different than the, you know, what I think, you know, risk-based models used to do.

AI assessment note: “Those are the ones that I think our financial planners have to spend more time educating”

Q So now you're at the cusp of, from a regulatory perspective, having the ability to broaden out 14 years later into something else, alternatives. What's the next step?

A We can't talk about that yet. So it's to be continued, but we have a lot of things that we're working on at the moment. There's little steps that you're taking. We're seeing things like, as I mentioned earlier, we're putting stable value back in as a bond substitute. We think this is a really great time to have stable value, whether it's in your target date funds or in other balanced portfolios. Only because as interest rates are rising, you don't have that impact of duration in stable value that you have in intermediate bonds. But we will be doing a few other things as well over the, the coming, ah, months that I think are going to help diversify the return sources that we have in our target data.

AI assessment note: “We can't talk about that yet. So it's to be continued”