The Wisdom Wall

“I think what we think is a best practice is to say, actually, 100% of your performance in your asset allocation is a function of your organizational capabilities.”

“I think there's a lot of investment professionals at these organizations that believe that if they reported it to the stakeholders, the stakeholders wouldn't let them pursue the strategy that they believe in their heart of hearts is needed to meet the obligation of the plan. So that the, we can't trust the stakeholders…”

“I often joke that the only way you get fired from a pension fund is you innovate, which means you've deviated from a peer group, and somebody says, huh, what are you up to? And then all of a sudden, you've got to justify it.”

“Most of these organizations have monopolies over the asset base, which means Stanford management company isn't going away. CalPERS isn't going away, but the people in those organizations can be fired. And so you as an employee of these organizations, and I'm not suggesting that people are doing this consciously, I'm…”

“A lot of the boards of directors think they're protecting their organization from failure by telling their teams they can't do first time funds, or they can't invest in hedge funds below a certain AUM, which is another way of saying you can only invest in funds that are really expensive. And have like demonstrated that…”

“The consulting businesses are based on scale. So if they go and do a diligence on a manager, A deep dive and really understand that manager. They want to use those reports many times because that's how they make the business work. That's how you get the margin doing like a deep dive on a new manager just doesn't make…”

“the reality is the ESG stuff is just pre-financial risk. I'm on the Future of Finance Council at the CFA, and it's actually Roger Irwin who instructed me on this. He's like, look, we should just be thinking about ESG as pre-financial risk. It will become financial if you give it enough time.”

“And rather than push financial literacy at them, which the research now shows does not work, we want to educate through doing.”

“I don't love that framing. I love thinking about how technology unlocks additional basis points of return. It gives permission to pension funds to spend more money. Especially on the initial setup cost of getting your data right.”

“oftentimes a pension fund will say, oh, we're really innovative. We're an amazing partner to our funds. They bring us a co-investment and we respond in 15 days. I have to remind them, what you've just described is speed and efficiency. It's the opposite of innovation. Because to be a good partner, you have to move…”

“If you only invest in fund three, you've decided you're going to overpay for managers because they don't need your money.”

“There's some neurodiversity throughout our industry, and we're trying to write a paper that says this is how you can see the same data set differently. That's the pathway to alpha.”

“You can get a PhD in economics. You can get a CFA or a CAIA designation and not necessarily truly understand how sovereign funds operate, how pension funds operate.”

“that sharp ratios are largely wrong. There's a bunch of reasons why the sharp ratios kind of distort our understanding of the risk we're taking, and it's not wrong in the sense that it's not a useful tool to use just to look, but as long-term investors, sharps don't work in negative return environments, like the math…”

“And without fail, that active-passive conversation inside a pension fund actually boils back to governance.”

“In fact, I'd say there's only a handful of ways to get fired in this industry, and one of them is innovation and looking different from your peers. The other is if you've been shown to do something that kind of Is seen as against the social mission of the fund you're representing.”

“And by the way, you cannot innovate without failure. The two are inextricably linked. It's like saying we want to be efficient and innovative at the same time. They're opposites. Innovation is failure and learning how to manage failure.”

“And when they look to the traditional private equity funds or infrastructure funds to see if there are exciting products there, they don't see any because the fee structures are too high for the underlying assets. They won't, those assets won't support a two and 20 structure. They just aren't built for that.”

“If you're going to go from a strategic asset allocation to a total portfolio approach, that's a shift in asset allocation. Can't do that in a vacuum. You're going to have to completely change your organization and how you're implementing it, and that's the part that we'll need to watch and see how people do.”

“The unit of work becomes knowledge work instead of deal work. The unit of work is different. It's not capital deployment. It's not bucket filling. It's something else moving you towards your objective, intelligent understanding of additionality in your portfolio.”

“Once you have these systems in place, you could pivot around beliefs, assumptions. It also allows you to be counter-cyclical very quickly. If markets move quickly, you're going to be able to buy low, and if you feel like things are inflated, you can sell high.”

“By the way, that's going to help you to recruit and retain human beings. It's hard to recruit and do a TPA. You recruit people into private equity jobs, real estate jobs, because we demand, especially at the senior levels, a certain level of expertise and networks That goes into being successful today.”

“If you're a big private equity infrastructure investor, you're probably a little nervous about the TPA push. It's hard to do TPA when you're making a 15 year commitment. You're planting seeds that are going to take a long time to grow. It's harder to move around that portfolio and add asset allocation alpha.”

“Very few pensions are going to copy a development fund that is delivering two percent return. But if there's a development fund like a Tomasek that is out there driving really high performance, then all of a sudden they could become a role model that gets copied.”

“the sign of a good partnership is you help drive a change in your partner's portfolio that you don't get paid for.”

“much of the innovation in pension funds is courage-based. Some leaders fed up, and they're willing to put their job on the line.”

“The classic one is a crisis, internal or external. The next classic one is a leader. That leadership change Leads to some new innovation and on and on and on.”

“The concept is you need to align your risk budget with your governance budget, which is to say you can't take on a ton of risk in your risk budget unless you have a board that has the time and capacity and skills to really understand the portfolio and to properly resource the team to go and live up to the expectations.”

“If you get your tech stack right, fundamentally transforms what you know about yourself. It's less about what you know about the world. It's great to use technology and chat GPT to go collect knowledge on the world, but ultimately I think the real unlock with technology will be to say, what do I own? What are the…”

“Right now, when you say, oh, I need 7.2%, which is a very generic destination, everybody's like, well, I need this amount of private equity, and I need that amount of hedge fund. But when you say, no, no, here's your confidence interval for the amount of cash you need to deliver in 2031, then you start actually having…”

“So when these big pension funds need technology, it's not like there's an army of startups out there that are trying to solve their problems. It's actually just the established players that are invited to participate in RFPs.”

“So the punchline to answer your question is we often need crises to drive change because these organizations are fairly conservative and slow moving and they are monopolistic. But interestingly, technology is going to reveal little mini crises inside these funds, which are opportunities to make change.”

“collaboration is often incredibly effective where organizations don't feel like they're really competing to deliver out performance is like these middle back office functions or thinking through like, how do we design a legal function? Those are parts that I've seen collaboration really inform one another and drive…”

“And so weirdly, we don't have great tools in the investment industry to think about the shape of recoveries. And so we have a lot of work through MPT on drawdowns, on value at risk, We do a lot of work on volatility and variance, but we don't think as much about the shape of recoveries.”

“You can diversify your portfolio according to submergence. You don't just have to diversify according to risk factors and volatility and things like that. You can say, well, this type of asset has this submergence profile, and that asset has this submergence profile, and we should diversify according to that to allow…”

“We found that if you can really kind of model out those cash flows that we were talking about, cash flows, liquidity, unfunded pacing commitments and all of that you can drive. In fact, there's a UK based pension fund that did this. You can drive these organizations to hold less cash and diversify their portfolios less…”

“How is like we've seen, and I've written about this, this like collaborative model of investment where Pension funds and endowments and sovereign funds will come together and collaborate. They'll pool resources. They will pool career risk. If I'm working with Ontario teachers and I'm CalPERS on an innovative project,…”

“all these organizations need boards of directors that can like hold the staff accountable, that understand derivatives contracts and how they're priced and what the tail risks are for certain different assets.”

“our thinking and our thinking remains that this is the next phase of behavioral finance. And what we think of as like the nudges of personal finance, we're going the next step. Which is to bring a bunch of extrinsic motivators, gains, variable rewards, into the toolkit to push positive financial behavior”

“if you could take the fees that were being paid to external managers and present them back to the board alongside the internal budgets that were being paid to staff, the inevitable question time and time again that came out of the mouths of the board members was, is there another way?”