Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have a really interesting guest.
Speaker 1: You've probably never heard of him before, and I suspect
Speaker 1: you will be hearing a lot more from him and
Speaker 1: his fellows in the future. His name is Matthew Wetherley
Speaker 1: White and he runs the cap Rock Group. Uh. He's
Speaker 1: kind of come to my attention because he specializes in
Speaker 1: impact investing, which is we we began the process of
Speaker 1: socially responsible investing as a thing some decades ago that
Speaker 1: morphed were evolved into e s g. Environmental sustainable governance
Speaker 1: or environmental social governance, and now what he describes as
Speaker 1: impact investing. He defines in conversation really intelligent asset manager
Speaker 1: located in of all places, Boise, idaho um, running about
Speaker 1: three billion dollars, growing tremendously fast in the space that
Speaker 1: that he focuses on. This very much is the wave
Speaker 1: of the future. This is something that at one point
Speaker 1: in time was a teeny tiny niche as he explains it, Uh,
Speaker 1: all the money that exists that's investable is primarily owned
Speaker 1: by one group of people, and it is destined to
Speaker 1: be inherited by a different group of people. Who are
Speaker 1: the folks that are really driving h E, s G
Speaker 1: and environmental social governance issues in the investing world. Well,
Speaker 1: they're they're women and their millennials. By the way, who's
Speaker 1: going to inherit all this money? Well, it's likely to
Speaker 1: be women and millennials. So you can expect this form
Speaker 1: of investing to become increasingly popular over the next uh
Speaker 1: a few decades, and his firm is in the vanguard
Speaker 1: of this. I thought the conversation with quite fascinating. I
Speaker 1: pushed back, as I know many of you who are
Speaker 1: listening would have wanted me to to have some of
Speaker 1: the things he said about active and passive and models
Speaker 1: and what have you. But all told, I thought this
Speaker 1: was a fascinating conversation. He's a really really interesting guy.
Speaker 1: With no further ado. My conversation with Matthew weatherly White
Speaker 1: of the cap Rock Group. This is Masters in Business
Speaker 1: with Barry Ridholts on Bloomberg Radio. My guest this week
Speaker 1: is Matthew weatherly White, co founder of the cap Rock
Speaker 1: Group of Impact Investing, and we'll get into specifically what
Speaker 1: that is. Born in Manhattan, a bit of a Globe
Speaker 1: Trotter before you settled in Boise, Idaho. Graduate of Dartmouth
Speaker 1: College class of eighty one, you co founded cap Rock
Speaker 1: in oh five after an eighteen year stint at Smith Barney,
Speaker 1: and you have been called the most fascinating investor people
Speaker 1: have never heard of. Matthew weatherly White. Welcome to Bloomberg. Yeah,
Speaker 1: thanks very it's great to be here. And obviously you
Speaker 1: heard of me. So it's not that no one's heard
Speaker 1: of me, but I'm putting you on the list of
Speaker 1: people who have heard of me. So I read I
Speaker 1: read a really interesting article about you, and Kiki had
Speaker 1: reached out to me, and I said, oh, I know
Speaker 1: who he is. I read this about him, and really
Speaker 1: maybe she had previously sent me the link to it.
Speaker 1: Normally I never look at anything that comes from pr people.
Speaker 1: But when when someone sends me something and I say, oh,
Speaker 1: I know who that person is, tell me more. So.
Speaker 1: So let's let's describe why you're such a atypical finance guy.
Speaker 1: So you play the bag pipes. You wrote an opera
Speaker 1: in sixth grade. You've published poetry. You've competed internationally in
Speaker 1: five different sports. You hold a world record in rowing
Speaker 1: no longer hold. Oh it's it has been surpassed. I
Speaker 1: think it might actually have been the shortest world record
Speaker 1: holding tenure in the history of any competitive sport. I
Speaker 1: set the world record in the heats of an event
Speaker 1: that was then eclipse in the finals. So yeah, I
Speaker 1: hold the distinction, but not for much time. So I
Speaker 1: left out the fact that you are an accomplished chef.
Speaker 1: You worked as a chef for a while. Oh and
Speaker 1: by the way, you manage a three billion dollar investment funds.
Speaker 1: So not the typical Wall Street definitely not. So so
Speaker 1: let's let's talk a little bit about, um, what you do.
Speaker 1: I want to begin with a quote that I read
Speaker 1: of yours, where you had said capital markets are the
Speaker 1: most powerful optimization vehicle on the planet. Explain that. Yeah, so, um,
Speaker 1: I like to think of capital flows as being driven
Speaker 1: by gravity. Capital flows to its most efficient utilization. But
Speaker 1: that implies a set of assumptions that aren't always explicit
Speaker 1: in the statement. And but that, I mean, what is
Speaker 1: it that capital is optimizing for? Um? And usually it's
Speaker 1: for for returns? Right the old joke, Um, I think
Speaker 1: it was the former chairman of City Group. Capital goes
Speaker 1: to where it's treated best and stays where it's most appreciated. Yeah,
Speaker 1: And I think that's actually true. And that's why capitalism,
Speaker 1: as both a sort of financial organizing structure and as
Speaker 1: a cultural underpinning is so fascinating because it is it
Speaker 1: is unarguable that capital flows where it is treated best
Speaker 1: and stays where it's most appreciated. Right. It's very difficult,
Speaker 1: if not impossible, to impose an artificial set of objectives
Speaker 1: that will violate that fundamental premise. And so the question
Speaker 1: that that I like to ask myself is not is
Speaker 1: capitalism good? Is capitalism evil? Is capitalism intrinsically beneficial or
Speaker 1: intrinsically destructive? And I'm thinking about Picatis book capital for example. Um,
Speaker 1: I think that's not actually the right question. The question
Speaker 1: is to what end do we seek to optimize? And
Speaker 1: the question that I kind of keep coming back to
Speaker 1: repeat that towards what end do we seek to optimize? Yeah,
Speaker 1: And I think it's it's easy to go back to
Speaker 1: that statement of the business of business is business and
Speaker 1: the highest end of business is not you know those
Speaker 1: And I don't like to say it that way, but
Speaker 1: you're right. And the reason I say that is that
Speaker 1: UM as an example, I think that the science around
Speaker 1: climate change is crystallizing, and regardless of what one believes
Speaker 1: relative demands relationship to the climate, we recognize that the
Speaker 1: climate is shifting, and we recognize it on some level.
Speaker 1: The increased concentration of greenhouse gases and carbon is part
Speaker 1: of that, right and so and the more we know that,
Speaker 1: the less defensible the position that we shouldn't care about
Speaker 1: it becomes. Um. As an example, I like to use,
Speaker 1: you know, the pricing of coal, and it's an easy
Speaker 1: target right now because of what's happened over the last
Speaker 1: couple of years in the coal industry, right, so you
Speaker 1: have more people working in solar in America today. So
Speaker 1: so it's a soft target, but nevertheless it's it's illustrative
Speaker 1: if you are the CFO of an aluminium company and
Speaker 1: the CEO comes to you and says, look, we need
Speaker 1: to find another one percent net operating margin. Go find it.
Speaker 1: You're gonna look at your inputs, right and your single
Speaker 1: largest input in aluminium smelting process is energy, and so
Speaker 1: you're gonna look for the cheapest energy. And today the
Speaker 1: cheapest energy has been coal. That's why a lot of
Speaker 1: the aluminium smelters are in Appalachia now. Isn't that changing though?
Speaker 1: Aren't we seeing natural gas start to become more and
Speaker 1: more clost effective versus coal, Yes, we are, and that's
Speaker 1: part of the dynamics around the collapse of price and
Speaker 1: the rate of bankruptcy filings among coal coal mining companies. UM.
Speaker 1: But where I was going was a little bit different,
Speaker 1: and that is that the price of coal to date
Speaker 1: does not price in the externalities. And I'm not saying
Speaker 1: climate change, just what comes out of your smoke stock, acid, rain,
Speaker 1: everything else. Everybody everybody, And we know this right so
Speaker 1: we know it's it's it's it's It's not debatable that
Speaker 1: the Burningham coal imposes a cost on society, primarily in
Speaker 1: environmental and healthcare costs, and those costs are not reflected
Speaker 1: in the price of the commodity, so that the consumer
Speaker 1: of the commodity is not actually bearing the cost of
Speaker 1: consuming it. And I think that is a kind of
Speaker 1: a thing, that's a kind of dynamic that is shifting
Speaker 1: right now in the capital markets. UM. And that's why
Speaker 1: when you think about optimization right now, the capital markets
Speaker 1: are moving away from coal for a whole bunch of reasons,
Speaker 1: some of which are regulatory, right, right. You also had
Speaker 1: people blame regulation too much. You also had a huge
Speaker 1: m and a spree at the peak of coal price,
Speaker 1: way too much leverage. These companies who a lot of
Speaker 1: people are blaming regulation for killing these companies just were
Speaker 1: poorly managed a lot of bed. So we're going to
Speaker 1: continue talking about this because I find this fascinating. I'm
Speaker 1: Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio.
Speaker 1: My guest this week is Matthew weatherly White. Did I
Speaker 1: pronounce that correctly? He did? Yeah, channeling your inner Englishman
Speaker 1: and you'll get it. Of the cap Rock Group who
Speaker 1: specializes in impact investing, So let's talk about the phrases
Speaker 1: that that people have are probably more familiar with green investing,
Speaker 1: Socially responsive investing better known as s r I, Environmental
Speaker 1: societal and governance e s G, and of course what
Speaker 1: you do impact investing. How do each of these relate
Speaker 1: to what you do and how do they differ? And
Speaker 1: will you laid it out quite well, perhaps unintentionally, from
Speaker 1: a chronological perspective, sr I became e s G became impact. Um,
Speaker 1: think about it pretty simplistically as s r I investing
Speaker 1: was primarily about not owning companies that were perceived to
Speaker 1: be doing something bad in the world. Gun companies, not
Speaker 1: military companies, not vice and to backup companies, and a
Speaker 1: lot of energy companies were thrown under that rubrical so
Speaker 1: sometimes more more recently probably um so, s r I
Speaker 1: really sort of had its um it's it's coming of
Speaker 1: age moment in the seventies and eighties where a lot
Speaker 1: of activists were turning to the capital markets and saying
Speaker 1: we should be investing companies that do a better job
Speaker 1: and we should not be investing in companies that aren't.
Speaker 1: But that that was really in the seventies and eighties,
Speaker 1: that was a tiny slice. It was. It was a
Speaker 1: rounding error in the capital markets, and and in some
Speaker 1: regards s r I tightly defined is still kind of
Speaker 1: a rounding here in the capital markets because it's based
Speaker 1: on exclusionary sometimes inclusionary screens. E s G was really
Speaker 1: the evolution of that environmental social slash sustainable and governance,
Speaker 1: and that really came of age in the mid nineties
Speaker 1: when the European government said that large pension plans had
Speaker 1: to incorporate E s G analysis in their stock picking
Speaker 1: UM came from Europe, not the United States. Now, it
Speaker 1: was really started in Europe. UM ubs did a lot
Speaker 1: of really cool work around that early on. And yes,
Speaker 1: she's a little bit of a different idea. One of
Speaker 1: the one of the core tenants of E s G
Speaker 1: s it's around misk risk mitigation, Understanding the risks related
Speaker 1: to poor governance, understanding the risks related to climate exposure
Speaker 1: or lack of sustainability issues, and then embedding that risk
Speaker 1: mitigation into your discounting models to determine future castles for
Speaker 1: a company, and making your stock selection accordingly. UM and
Speaker 1: so E s G in my mind, is really a
Speaker 1: little bit of a sort of a professionalization, as it were,
Speaker 1: of the s R I. Yeah, and then the E
Speaker 1: s G movement sort of became, you know, relatively mainstream. UM.
Speaker 1: I say relatively only because there's still a lot of
Speaker 1: asset managers that don't do that. UM, what percentage of
Speaker 1: the total investible assets would you roughly guess plus or
Speaker 1: mind as E s G is running now depends on
Speaker 1: who you talk to and how deep you believe the
Speaker 1: E s G methodology has penetrated the organization give me
Speaker 1: a range, I would say somewhere between five and thirty five.
Speaker 1: Al Right, okay, so the low end was what I
Speaker 1: was expecting you to say. Thirty five is an enormous
Speaker 1: self one out of three dollars has some s G relationship. Yeah. See,
Speaker 1: that's where it gets really kind of slippery, because um,
Speaker 1: E s G disclosure is being driven culturally at this
Speaker 1: point rather than legislatively or regulatory. You know, the there's
Speaker 1: no there's no government mandate you must do E s G.
Speaker 1: It's sort of not not a self actualized said of
Speaker 1: understandings that the finance community has kind of reached on
Speaker 1: its own. Yes. And the reason I drew that distinction
Speaker 1: between sort of cultural applications of vs G versus the
Speaker 1: regulatory applications of E s G is that that determines
Speaker 1: how deep it penetrates an organization. I think that saying
Speaker 1: at this point that an asset manager is simply ignoring
Speaker 1: all environment on social consequences when making an investment decision,
Speaker 1: I think that's that's that's a that's an inappropriate assessment
Speaker 1: of investment methodology. I mean even even even a firm
Speaker 1: that would be like intentionally antagonistic towards the concept of
Speaker 1: responsible investing might incorporate some kind of climate risk modeling
Speaker 1: in the way that they think about doing their analysis
Speaker 1: of oil and gas EPP exactly the whole run of
Speaker 1: things where where there's some potential exposure and if you
Speaker 1: don't think about it, you're adding risk to your model, exactly.
Speaker 1: And that's why I think that the number could be
Speaker 1: even higher than thirty, because when we talk to asset managers,
Speaker 1: and we talked to a lot of asset managers, it
Speaker 1: continues to surprise me how many of them say, yeah,
Speaker 1: you know, we're starting to contemplate that we're starting to
Speaker 1: integrate that into our underwriting, for example, for fixed income
Speaker 1: UM we're starting to integrate that into our analytic models
Speaker 1: around future discount of cash flows. You know, it's like
Speaker 1: that that that approach is no longer antagonistic to the
Speaker 1: notion of investing for finance return. Now how deep it
Speaker 1: goes and it's only there's only one firm that I'm
Speaker 1: aware of that does absolute sharp sharp thinking around the
Speaker 1: materiality of h G risks, and that's UM. Al Gore
Speaker 1: and David Blood's from Generation Asset Management, and they're they're
Speaker 1: really a private equity, venture funds, no long only equity,
Speaker 1: long only equity, long only equity really ten billion? They
Speaker 1: capped their fund at ten billion. They probably got eleven
Speaker 1: or so. Now, Um, is it? You're talking private venture
Speaker 1: or publicly traded company, long only public equity. Really? Yeah,
Speaker 1: that's fascinating, that's fascinating. They do have a private debt fund,
Speaker 1: and I believe they do have a small private equity fund,
Speaker 1: but the core, their core competence is long only global
Speaker 1: private capital ten billion. If you want to really move
Speaker 1: the neodle, it's an open question. I've had. I've had
Speaker 1: that conversation with them, and I think they capped a
Speaker 1: ten billion when they started the firm because they didn't
Speaker 1: want to have asked growth be the primary driver for
Speaker 1: their business decisions. Um, but I don't know what's interesting? Yeah,
Speaker 1: I don't know. Really really quite fascinating. Yeah, and their
Speaker 1: performance here's what gets really interesting. Five basis points compounded
Speaker 1: over the index. Really, Yes, when did they launch ten
Speaker 1: years eleven years ago? Oh? So they launched right into
Speaker 1: the right into the mess, right into the mess. And
Speaker 1: what's beautiful about that is that it both allows an
Speaker 1: observer to discount their performance by saying, yeah, well, you know,
Speaker 1: they didn't have an exposure to carbon and they didn't
Speaker 1: have exposure to predatory landing because that's not their model.
Speaker 1: But that's the whole point. Oh, you know you're cheating
Speaker 1: because you're not exposed to all this bad stuff. Well,
Speaker 1: by definition, isn't that what you're hoping to? That's the
Speaker 1: whole point And what is baffling to me. And I
Speaker 1: think this get this gets to the cognitive biases embedded
Speaker 1: in Wall Street and the city of London. Why are
Speaker 1: there no copycats? Why aren't I mean think about you
Speaker 1: have the e t F she that focuses on governance
Speaker 1: issues where companies with a decent exposure of women represented
Speaker 1: in yes, senior management, in the board. I wouldn't say
Speaker 1: that's a direct cop copycat, but hey, black Rock put
Speaker 1: out an e t F that says, yeah, this is
Speaker 1: our our corporate governan CTF that's certainly inspired by it's
Speaker 1: got to be along the same lines. See, I would
Speaker 1: suggest that that's a market share capture strategy more than
Speaker 1: necessarily in investment methodology. And I'm maybe cynical here, um,
Speaker 1: but I would suggest I would pose it that gender
Speaker 1: diversification in the c suite is an important reflection of
Speaker 1: the culture of a company, and it may parentheses or
Speaker 1: may not in parentheses not be immaterial, may not be immaterial.
Speaker 1: My guest this week is Matthew weatherly White of the
Speaker 1: cap Rock Group. UH. He is Dartmouth class of eighty six.
Speaker 1: He spent twelve years working in the trenches at Smith Barney.
Speaker 1: Let's talk a little bit about Smith Barney before we
Speaker 1: get back to impact investing in and E s g Um.
Speaker 1: You don't strike me as a bulge bracket, big firm
Speaker 1: sort of brokerage guy. How did how did that come about?
Speaker 1: Part of it was timing. I joined Smith Barney immediately
Speaker 1: following the Shearson merger. So Sheerson Sheerson Smith Barney when
Speaker 1: I joined them, so it was pre Travelers Group, PRECD group.
Speaker 1: Sandy While wasn't even there. I remember on the NASDAC
Speaker 1: level three Sebashi was Smith Barney. Uh Shearson was was
Speaker 1: there for digit code on on the on the trading desk. Yes,
Speaker 1: it was much smaller firm then. I think they had
Speaker 1: about seven hundred brokers across the country and he had
Speaker 1: a small office in Boise, which is where I joined them.
Speaker 1: Um and not long thereafter, Sandy while went on his
Speaker 1: acquisition spree, and by the time I left, I think
Speaker 1: they had ten thousand brokers and it was a relatively
Speaker 1: small division of City Group at the time. So when
Speaker 1: I joined them, it wasn't really a bulge bracket firm
Speaker 1: and it became one. And that that that that journey
Speaker 1: was really just heartening for me. I just sort of
Speaker 1: personally and and you know, part of it was my
Speaker 1: naive te when I entered the business. UM. But I
Speaker 1: remember when I went back to training, my first training session,
Speaker 1: and in my imagination, training was going to be learning
Speaker 1: how to be an investor and an teach us how
Speaker 1: did the markets? What is modern portfolio theory? And it
Speaker 1: was a month and they had us in this hotel
Speaker 1: in Hartford, UM for a month and it was cold
Speaker 1: calling and scripting, was all sales. And I remember leaving
Speaker 1: at the end of that month thinking, Wow, this is
Speaker 1: really not what I had expected. UM, But I figured, well,
Speaker 1: I signed up for this, I'm gonna kind of plug
Speaker 1: plug my way through it. And I got through the
Speaker 1: first six months and then qualified for the next level
Speaker 1: of training and went back to next level of training things.
Speaker 1: This is where this is where investor you were. You
Speaker 1: were an army grunt and now um, all right, now
Speaker 1: I'm an officers training school. Now I'm a lieutenant. Um
Speaker 1: more sales. Yeah yeah, And uh, I realized that as
Speaker 1: much as I am fascinated by and compelled by capital markets,
Speaker 1: capital formation and aggregation, etcetera, I just didn't really like
Speaker 1: the job. Well it's a sales job. It's not. It's
Speaker 1: not an intellectual pursuit. It's a sales which has its
Speaker 1: own intellectual aspect, but it's not the same as capital formation, correct,
Speaker 1: And it was. It was a great experience for me
Speaker 1: just to really be in the belly of that beast
Speaker 1: for for so many years. And along the way, I
Speaker 1: was tapped to join the leadership development program, which was
Speaker 1: really about uh, finding guys that was in the firm
Speaker 1: that we're gonna move on to management. Um. And so
Speaker 1: I got a two year crash course in big bald
Speaker 1: bracket broker dealer management. And at the end of it,
Speaker 1: I was I stepped off that train and I said,
Speaker 1: not only do I not want to be a manager,
Speaker 1: I don't even want to stay here. And it took
Speaker 1: me about five years to figure out how to exit
Speaker 1: in a way that worked for me. So when you
Speaker 1: were at Smith Barney, did you try to say, hey,
Speaker 1: here's an idea. So previously we um also a Smith
Speaker 1: Barney alum was was it Smith Barney? Was is Rick
Speaker 1: Ferry who turned around and said, hey, I have a
Speaker 1: great idea, let's do low cost indexing and pitched them
Speaker 1: on it. They said no. When it took him a
Speaker 1: year or two before he said all right, I'm gonna
Speaker 1: go do this on my own. Did you try to
Speaker 1: move the dial there with hey, we could do something
Speaker 1: interesting here and the clients will love it. I can't
Speaker 1: believe you asked that question. We did not prep for this, Um. Yes,
Speaker 1: I did. Actually wrote a white paper to senior management
Speaker 1: where I said, look, there's these embedded conflict conflicts of
Speaker 1: interest in this business model where you've got four primary
Speaker 1: revenue streams, all riding on the backs of one or
Speaker 1: two consumer basis, and those embedded conflicts of interests are
Speaker 1: going to be revealed at some point, and here's one
Speaker 1: way to strip that conflict. And I I suggested an
Speaker 1: asset based account rather than a commission bay ssed account.
Speaker 1: They called it Asset one and it became the fastest
Speaker 1: growing account structure at Smith Barney. Nine months or so
Speaker 1: into that pilot project, they terminated it because not not
Speaker 1: because it was they were pulling money away from more
Speaker 1: productive brokerage accounts. No, it was because the brokers were
Speaker 1: using asset one as an excuse to get paid on
Speaker 1: an account without doing anything. So what they realized was
Speaker 1: that brokers were converting commission based accounts to fee based
Speaker 1: accounts so they could basically ignore the client and still
Speaker 1: get paid. Huh, that's fascinating. Yeah, it was really it
Speaker 1: was a really interesting and you know, somewhat cynical view
Speaker 1: into the mindset of the company. Couldn't you really impose
Speaker 1: a set of conditions that if you're gonna run an
Speaker 1: asset fee based thing, you're required to. If here's a
Speaker 1: financial plan, here's a quotally update, he's an annual review,
Speaker 1: you can impose exactly what they did. That's exactly what
Speaker 1: they did in the broker force sort of rejected it,
Speaker 1: and so let's work. It's actual it's actual labor. Yes,
Speaker 1: the account die. Huh, that's that's amazing. I'm Barry rid Hults.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
Speaker 1: guest today is Matthew weatherly White, who specializes in impact
Speaker 1: investing and is the co founder of the cap Rock Group.
Speaker 1: So let's let's talk about running a business that specializes
Speaker 1: in in what you do. First question, I know your background.
Speaker 1: I know you've been all around the world. You were
Speaker 1: born in Manhattan. Where did you go from From New
Speaker 1: York Tuna as one does, um, and then France and
Speaker 1: then England and then Colorado, which is where I think
Speaker 1: of as my home. And I went back east to
Speaker 1: go to Andover and in Dartmouth, and then I lived
Speaker 1: in Australia for a while, and then I moved to Idaho. Um.
Speaker 1: Which so that's a natural progression that all roads leads
Speaker 1: to boys. We've heard that, although I'm told that that
Speaker 1: parts of Idaho are just big sky, spectacular country fishing, skiing,
Speaker 1: mountain hiking, if you like doing anything in the outdoors.
Speaker 1: Idaho is Colorado was like when I was a kid,
Speaker 1: really just not as developed as Colorado has become. It's
Speaker 1: a remarkable state. And I'm not getting paid by the
Speaker 1: Ido Teamber of Commerce for this endorsement, but I chose
Speaker 1: to live there. Um. It's been a it's been a
Speaker 1: Hindrance in many ways professionally, but not a big financial community.
Speaker 1: In Boise, it's the other center of the financial world.
Speaker 1: It's the beating heart of the London, New York, Tokyo. Boise.
Speaker 1: Absolutely it rolls off the tongue. But but for an outdoorsement,
Speaker 1: it's a fantastic place. Yeah. Yeah. So, so let's talk
Speaker 1: about running this business to begin with. So you're an
Speaker 1: investment firm. When clients come to you, is it all right,
Speaker 1: here's what we're gonna do with your investments. And by
Speaker 1: the way, we'll put this much into impact. Is it
Speaker 1: a what what drives that process and that decision? Yes,
Speaker 1: that's probably a much deeper conversation than than the format
Speaker 1: of the show we were all right, um so first
Speaker 1: of all, um, you know, we have grown from a
Speaker 1: relatively modest beginning. We had about four hundred million dollars
Speaker 1: in assets under management in two thousand and eight. We
Speaker 1: launched in two thousand and five and spent three years
Speaker 1: basically building systems and capacity, started started marketing in two
Speaker 1: thousand and eight and went from roughly four hundred million
Speaker 1: to three billion now so ten years, ten x almost
Speaker 1: in eight years. Yeah. So it's been gratifying growth um
Speaker 1: and I think we can attribute that to a couple
Speaker 1: of things. I mentioned a moment ago that you know,
Speaker 1: being based in Boys has been hindrance. It cuts both ways.
Speaker 1: We have had some families say to us they intentionally
Speaker 1: want to work with us because we're not from New York.
Speaker 1: They think that that leads to the capacity for independent thought,
Speaker 1: which I think is accurate. And we also have had
Speaker 1: some perspective clients who have said no to us because
Speaker 1: we're not from a financial center and they think that
Speaker 1: we're not going to be able to tap into sort
Speaker 1: of the sharpest and best thinking. So that geography cuts
Speaker 1: both ways. I think broadly it's been more of hindrance
Speaker 1: than help. However, the way that we've chosen to structure
Speaker 1: our business is based on a question that the six
Speaker 1: founding partners asked ourselves, if we were to hire a
Speaker 1: firm to manage our own capital, what would that firm
Speaker 1: look like? And we spent three years answering that question,
Speaker 1: using a combination of partner capital and of residual business
Speaker 1: that we lifted at Smith Barney for operating revenue to
Speaker 1: basically build the answer to that question. And one of
Speaker 1: the things we did right away was rejected notional model portfolios.
Speaker 1: And as soon as you as soon as you sort
Speaker 1: of go through that intellectual process of understanding why a
Speaker 1: model portfolios exist, i e. To optimize for the profitability
Speaker 1: of the asset management firm, not necessarily to drive for
Speaker 1: best solutions for your clients, then you realize you can't
Speaker 1: use model portfolios. So let me let me push back
Speaker 1: on that a little please, because I know half the
Speaker 1: audience is pushing back. Oh, absolutely, this is a really
Speaker 1: this is a uh, confrontational almost stance. Um. So the
Speaker 1: counter argument is, look, people looking for appreciation relative to
Speaker 1: the risk they're assuming, and depending on their personal risk
Speaker 1: tolerances and depending on what their financial goals are, they
Speaker 1: want either a lot of risk or a moderate amount
Speaker 1: of risk, or a small amount of risk conventionally known
Speaker 1: as conservative, moderate, and aggressive. Uh. We get compensated for
Speaker 1: the risk we assume in the capital markets up to
Speaker 1: a point. There's the efficient frontier and a point where
Speaker 1: you are optimizing how much risk you're taking relative to
Speaker 1: your expected returns. And everybody, while theoretically being a unique
Speaker 1: individual and we're all butterflies, the reality is most of
Speaker 1: us have some similar financial goals, be it saving for
Speaker 1: college graduation, buying a home, generational wealth transfer, go through
Speaker 1: all the usual things, and most people more or less
Speaker 1: full into I am very risk averse, I'm moderately risk averse.
Speaker 1: I'm not risk averse at all. And so the various
Speaker 1: portfolios we could tell people were creating a unique perspective
Speaker 1: for them, but really they all end, they all fall
Speaker 1: into the three buckets. Fair fair bit of pushback, which
Speaker 1: I assume you've heard before. Yeah, absolutely, that that's a
Speaker 1: logical and defensible position. However, well, our experience is that
Speaker 1: that's not actually true. And here's why. Um First, we
Speaker 1: don't think that investors can articulate their risk tolerance in
Speaker 1: a way that is reasonable, and there risk tolerance shifts
Speaker 1: with market performance. In two thousand and seven, everybody had
Speaker 1: high risk tolerance. In two thousand and nine, nobody had
Speaker 1: high risk tolerance. And you can't flip portfolios, risk structure,
Speaker 1: risk bucketing effectively to matt to the viscis tudes of
Speaker 1: the market. But let me push back right on on that.
Speaker 1: Right here, it's not that their risk tolerance has has changed,
Speaker 1: it's that the headlines have changed and suddenly they're scared,
Speaker 1: and their behavior and they're cognitive issues. The fact that
Speaker 1: they're fearful and they're expressing that in a way they
Speaker 1: think is restolerance. Really they're just saying, what's going on,
Speaker 1: I'm nervous, And it's the advisor's job to say, look,
Speaker 1: we had this conversation, here are your financial goals. This
Speaker 1: too shall pass, but you can either change every six
Speaker 1: months or you could ride this out for again, totally agree.
Speaker 1: The problem is if you're basing your assessment on what
Speaker 1: the client has told you at that moment, at that moment,
Speaker 1: then you use automatically enter this really strange world where
Speaker 1: you're not really sure what you should doing. But but
Speaker 1: but that's one of the words they're what they're telling you.
Speaker 1: The risk assessment is is only a function of what
Speaker 1: just happened, not the next ten years, frequently and the
Speaker 1: and that's part of it. But the bigger part is
Speaker 1: when we go through this pretty brain cramping exercise of
Speaker 1: doing lifetime discount of cash flow modeling, and when you
Speaker 1: do that and you um derive from that process a
Speaker 1: present value calculation on your future anticipate paid it in
Speaker 1: known liabilities, and you compare that present value calculation against
Speaker 1: the assets that they have, you can derive a target
Speaker 1: after tax inflation rate of return. This is a big exercise,
Speaker 1: but by doing that, you can then say to the client, Okay,
Speaker 1: given the assumptions are in this model, and here they are,
Speaker 1: here's our discount rate, and here's our rate of inflation
Speaker 1: that we expect, and here's how old your kids are.
Speaker 1: And you know it's it's a pretty logical exercise. You
Speaker 1: can then say, we believe that you are after tax
Speaker 1: inflation target rate of return is one and a quarter percent,
Speaker 1: so you have a lot of wealth and a relatively
Speaker 1: low burn rate. That's a modest rate of return. That
Speaker 1: opens up a really interesting conversation because from that a
Speaker 1: client can say, oh, you mean I don't have to
Speaker 1: hardly take any risk, and I can have an enormous
Speaker 1: sense of confidence that I've inoculated myself against the future
Speaker 1: uncertainties of the market. Or somebody might say, oh wow,
Speaker 1: I can swing for the fences because I can lock
Speaker 1: down that one in a quarter percent with fort of
Speaker 1: my portfolio and give sixty percent of my portfolio a
Speaker 1: really high risk profile, even though they might not consider
Speaker 1: them elves high risk but as soon as you unlock
Speaker 1: that conversation, it suddenly becomes grounded in this like in this,
Speaker 1: in this sort of hyper real relationship between the money
Speaker 1: that they have and how they want to live their life,
Speaker 1: rather than its abstract well, what's your risk tolerant? Mr. Investor?
Speaker 1: You know, they don't they don't know. When you ask
Speaker 1: people that they don't know. They obviously don't. They don't
Speaker 1: know you have to. And yet that is the that
Speaker 1: is the fundamental assumption that almost all of these risks,
Speaker 1: that all these model portfolios are based on what's your
Speaker 1: risk tolerance? Mr. Investor. You talk to a real estate
Speaker 1: developer and you'll say, I'm really conservative. All I want
Speaker 1: is and you'll talk to over ten years, not over
Speaker 1: ten years, not compounded annually, because if you're or, you
Speaker 1: can talk to somebody else and says, I'm super aggressive,
Speaker 1: I want to get like eight percent. Well that is
Speaker 1: as it is these days. It is these days. Yeah,
Speaker 1: but I definitely understand the point. The thing that I
Speaker 1: find fascinating and I wonder if you could talk to
Speaker 1: this is there are people who, in the early part
Speaker 1: of their career are, uh, go go go acquire, acquire,
Speaker 1: take embrace risks and suddenly they find themselves with a
Speaker 1: huge pile of money and getting them out of that
Speaker 1: former risk embracing headspace sometimes could be a challenge because hey,
Speaker 1: Mr Jones, you have a hundred million dollars, you don't
Speaker 1: have to keep swinging for the fences. You can throttle
Speaker 1: back and take less less risk. And that's where that
Speaker 1: lifetime just kind of cash amo really helps. And it's
Speaker 1: super detailed. I mean it can take us six months
Speaker 1: sometimes to build that totally out, and it's an iterative
Speaker 1: process and all the assumptions get tweaked and revisited. But
Speaker 1: once you take somebody through that process, the conversation shifts,
Speaker 1: and I want to get back to one of the
Speaker 1: questions you asked, impact funds versus Yeah, so we are
Speaker 1: not an impact investing firm. We are an investment firm
Speaker 1: that has an interest for it. And I would argue
Speaker 1: and expertise in impact investing, it's not the same thing.
Speaker 1: There are a handful of firms that are exclusively impact
Speaker 1: investment firms. We don't do that for two reasons. One,
Speaker 1: we think that you cannot simply throw a switch and
Speaker 1: just convert to impact overnight. So by definition, all of
Speaker 1: our clients, even those who are passionate about impact investing,
Speaker 1: have some conventional investments in their portfolio, so we wouldn't
Speaker 1: be able to manage the whole balance sheet. Um and
Speaker 1: the second pieces. We think that at some point in
Speaker 1: the future the term impact investing is going to lose
Speaker 1: its meaning, and we don't want a self pigeonhole into
Speaker 1: the future. We've been speaking with Matthew weatherly White of
Speaker 1: the cap Rock Group. If you enjoy this conversation, be
Speaker 1: sure and stick around for the podcast aftrus where we
Speaker 1: keep the digital tape rolling and chat for another hour
Speaker 1: or so. Be sure and check out, By the way,
Speaker 1: where can people find your work, your research, your writings,
Speaker 1: your white papers. Yeah, so the best place is our
Speaker 1: blog site, which is www I three impact dot com.
Speaker 1: That's integrated Impact Investing impact dot com I and the
Speaker 1: numeral three Impact Investing dot com just I three impact
Speaker 1: dot com. And then my Twitter feed is uh at
Speaker 1: I three impact I three Impact. Be sure and check
Speaker 1: out my daily column on Bloomberg View dot com. Follow
Speaker 1: me on Twitter at rit Halts. I'm Barry rit Halts.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. Welcome
Speaker 1: to the podcast. I do this every time. I don't
Speaker 1: know why I'm talking with Matthew Weatherley White. It's it's
Speaker 1: a different segment. So I feel open and free and
Speaker 1: not I don't have to worry about the time. Matthew,
Speaker 1: thank you so much for doing this. This has really
Speaker 1: been quite quite interesting. Yeah, I love your questions very
Speaker 1: It's great to sit with somebody who knows the fancom
Speaker 1: markets as well as you do. And for those of
Speaker 1: you who obviously everybody's listening to this everybody. Barry just
Speaker 1: did this like I'm embracing the world gesture And if
Speaker 1: anybody's seen an Cutty's ted talk about how body language
Speaker 1: informs like that's I just saw like her deal right there. Really,
Speaker 1: I don't know how I what how that came about.
Speaker 1: I just spread my arm. And the first time I
Speaker 1: did it was like, you have to understand, I'm not
Speaker 1: a professional radio person. I have no training, I have
Speaker 1: no background. This whole project was a skunk works exercise
Speaker 1: here at Bloomberg and it was kind of snuck in
Speaker 1: the back door. They were like, yeah, go ahead, kid,
Speaker 1: go do that. And the next thing you know, it
Speaker 1: became the most popular podcast at Bloomberg and they've been
Speaker 1: nothing but supportive, encouraging. But it was how did this
Speaker 1: come about so early? I was trying to signal in
Speaker 1: the first few podcasts this is a different segment, and
Speaker 1: it was just welcome to the podcast, because in my
Speaker 1: ear I hear the engineer saying halfway two minutes, one minute,
Speaker 1: thirty seconds, and I'm so when you see me sort
Speaker 1: of hurrying you along, it's because I'm trying to make
Speaker 1: the the guy who has to cut up my messy
Speaker 1: conversation into precisely seven and a half eight and a
Speaker 1: half six and segments. And now this is open ended,
Speaker 1: so it's freeing. I don't have to, uh, but you
Speaker 1: of the first person who's ever commented on it. So
Speaker 1: I have a ba jillion or maybe twenty questions that
Speaker 1: I didn't get to, and uh, I wanted to push
Speaker 1: back on what you said, because I know there are
Speaker 1: people who are going to push back on that. Listen,
Speaker 1: models or how most of I shouldn't say most on
Speaker 1: the i A side, on the investment advisory side, the
Speaker 1: academic studies show that very often passive beats active and
Speaker 1: models beat the sort of sector rotation, chin stroking I
Speaker 1: think now energy is going to be good and we rotate,
Speaker 1: or energy is gonna be bad and we rotate out
Speaker 1: of energy. So the idea of models being more passive
Speaker 1: and less, less costly, less turnover, less taxes in the
Speaker 1: long only it's an improvement from what came before totally
Speaker 1: and in the long only equity world, which we would
Speaker 1: we would consider not only an asset class, but a
Speaker 1: subasset class um that's lonely. Yeah, of course, that's exactly right.
Speaker 1: It's exactly right, like active management. Really it there are
Speaker 1: people who who outperform, like Generation, who I mentioned on
Speaker 1: the call before, and we do. We do have exposure
Speaker 1: to some actively managed long only public equity, but it's
Speaker 1: typically people that have high conviction, low low demonstrated correlation
Speaker 1: of the broad markets. Most of our long only equity
Speaker 1: is managed for beta right, and it's we we do
Speaker 1: tax matches essentially a model. It's a model, and that's why.
Speaker 1: And I wanted to get to that in the official interview,
Speaker 1: but I felt you hustling me along, and so I didn't.
Speaker 1: You shouldn't feel that way. You should. You should always
Speaker 1: so media advice, Always get your answer out because they'll
Speaker 1: years ago big digression this is this shouldn't be about me,
Speaker 1: this should be about you. But I did Nightline and
Speaker 1: it was long after the glory days of the first
Speaker 1: direct Warren, and so I gave them an answer and
Speaker 1: I could tell. So here's the way they they shoot
Speaker 1: these things to tape. There's a storyline that their writers
Speaker 1: and their legitimate writers think they're telling the media story,
Speaker 1: and they write this out, and they go out to
Speaker 1: the universe of possible pundits and they find people who
Speaker 1: will say different things relative to that storyline, and they
Speaker 1: sort of assemble this jigsaw puzzle. And when it works,
Speaker 1: it's great. And when their storyline is wrong or off
Speaker 1: or diverging from reality, it's not so great. So and
Speaker 1: the way they the little trick that they do is
Speaker 1: if you give you them an answer that they don't
Speaker 1: like or it doesn't fit into their prefab storyline, um,
Speaker 1: they'll ask you the same question slightly differently, and they'll
Speaker 1: do it twenty times until you finally say what they want.
Speaker 1: But I I've been doing this long enough that I
Speaker 1: know the game, And so they asked me a question,
Speaker 1: how much is two plus two four? Let us ask
Speaker 1: you this differently? How much is two plus two in
Speaker 1: the universe where it's four, you can ask me a
Speaker 1: different way. So the third or fourth question was asked,
Speaker 1: an answered, move on to the next question. And they're
Speaker 1: not used to I'm the guest, I'm not the director,
Speaker 1: but I know what the what they're pulling, and I'm
Speaker 1: not gonna say something and I'll believe. And I really
Speaker 1: deeply think that anybody who goes in the media should
Speaker 1: always say what they believe and not just respond in
Speaker 1: a way that they think the Uh. So you should,
Speaker 1: I I apologize if I meant you felt hurried along.
Speaker 1: I wasn't my intention. You should always say, hey, part
Speaker 1: of what we do is this, and part of what
Speaker 1: we do is that. And so that was my bad.
Speaker 1: But I felt obligated to push back because I could
Speaker 1: hear a million listeners saying, hey, this model. Uh pushed back.
Speaker 1: There's a ton of interesting Yeah. And I think the
Speaker 1: other the other place where it makes a ton of
Speaker 1: sense is in the endowment model. Because the endowment model,
Speaker 1: where you have clear, consistent, long term cash flows, you
Speaker 1: can discount that with an enormous amount of certainty, and
Speaker 1: you can build optimized models. They are going to be
Speaker 1: in place for decades. They don't have a specific funding
Speaker 1: that you'd beyond. They don't require flexibility, don't have to
Speaker 1: worry about providing increased liquidity. They don't have to know
Speaker 1: whether or not your client is going to have a kid,
Speaker 1: or want to build a second home, or want to invent.
Speaker 1: It's like all the liquidity factors that you have to
Speaker 1: think about with individual clients that directly inform the construction,
Speaker 1: viability and durability of a long term portfolio allocation. That's
Speaker 1: not an issue. And so model portfolios work really well
Speaker 1: in that endowment model. And people like Katie Hall at
Speaker 1: Hall Capital have taken the endowment model. And she's the
Speaker 1: CIO at Princeton, founder of Laurel Capital Management, wicked smart,
Speaker 1: super cool woman. She founded Hall Capital um. She's got
Speaker 1: twenty five billion, maybe more than that a U m
Speaker 1: um And the whole thing is endowment model. That's it
Speaker 1: just running a model and looking thinking long term and
Speaker 1: not not worrying about capital calls or hey, we're gonna
Speaker 1: have to take time out of this. And she's in
Speaker 1: a great job with that, I think, and there are
Speaker 1: firms that have done that with really high i Q
Speaker 1: solutions around model portfolios. But they have a wickedly smart
Speaker 1: investment committee. They do a lot of work with you know,
Speaker 1: controlling steak and direct companies, lots of alternative um, private
Speaker 1: assets and real asset investments. They don't do a whole
Speaker 1: ton of sort of convention along only public equity investing.
Speaker 1: And so the model portfolio looks more like Swinson's portfolio
Speaker 1: Yale than it would for somebody who has, you know,
Speaker 1: ten million dollars. So now what do you do? That's
Speaker 1: raised an interesting question close to the Swinson model was
Speaker 1: such a home run when it was a unique model,
Speaker 1: and the past ten twenty years, even though Yale has
Speaker 1: done well, when you look at all the Swinson imitators,
Speaker 1: they've stunk to join up. Yeah, I mean, imitation is
Speaker 1: always hard in the capital markets, right, I mean, you
Speaker 1: chase performance because somebody found an opportunity for alpha and
Speaker 1: you arbitrage away the alpha b capital flows. I mean,
Speaker 1: that's how the capital markets work. And that's one of
Speaker 1: the things that I find so interesting right now out
Speaker 1: E s G materiality because there's not very many firms
Speaker 1: I mentioned generation asset management. There's not very many firms
Speaker 1: who are doing E s G with an eye towards
Speaker 1: materiality rather than E. S G with an eye towards
Speaker 1: let's say responsibility. Look unpacked. The two of those sore.
Speaker 1: The eye towards materiality means they think it's topical and
Speaker 1: interesting or they think it's it's material to the operations
Speaker 1: of the business. So so Coca Cola the largest consumer
Speaker 1: of water, largest corporate consumer of water worldwide, right, so
Speaker 1: Coca Coca Cola needs to be thinking about how they
Speaker 1: manage that resource everywhere in the world, all the time.
Speaker 1: It is material to the operations. Makes sense. Conversely, I
Speaker 1: would suggest cautiously that gender diversification the C suite at
Speaker 1: Co Coca Cola might be relevant to how they think
Speaker 1: about their consumer base. It might be relevant to the
Speaker 1: conversations that go on about strategic direct to the company.
Speaker 1: It might not be material to the net operating profitability
Speaker 1: of the company. Flip that look at Mabeline, for example,
Speaker 1: water is not a material factor for them, but it
Speaker 1: might be that having a diverse gender base in the
Speaker 1: C suite Mabeling is actually central to their operation viability
Speaker 1: because their consumer base is going to be buying products
Speaker 1: that are designed by the C suite team, right, and
Speaker 1: so buy women for women? Yeah, And I don't. I don't.
Speaker 1: I don't want to imply that only women can make
Speaker 1: good marketing decisions for women. That's a reductionist exercise that
Speaker 1: I think breaks down with relatively shallow scrutiny. But I
Speaker 1: think that having a a homogenized management perspective in a
Speaker 1: company that selling consumer products doesn't make any sense, and
Speaker 1: it might be material. And so from a reporting perspective,
Speaker 1: from an investment perspective, if you are looking at Coca
Speaker 1: Cola and they're not paying attention to their water exposure,
Speaker 1: that's a material right. Conversely, if you're paying attention to
Speaker 1: Coca Cola because they great gender diversification at the C suite,
Speaker 1: that might not be material to the profitability of the company.
Speaker 1: And so what's happened in the s R I E.
Speaker 1: S G Impacts sort of translation is that a lot
Speaker 1: of the early practitioners who really built the discipline were
Speaker 1: and they say this with an enormous amount of respect
Speaker 1: and affection, um were activists. You know, they were saying
Speaker 1: doubt about that. They were saying the capital markets need
Speaker 1: to be a more just system. Remember, a lot of
Speaker 1: this goes back to the diversification of South Africa in
Speaker 1: the seventies. I mean you could you could trace S R, I,
Speaker 1: E s G and impact too handful of Yale. However
Speaker 1: it was mostly I VS. Where the agitation to our endowments,
Speaker 1: which even back then were enormous, are investing in a
Speaker 1: system that supports apartheid. How can we support that that success.
Speaker 1: We've got a whole run of subsequent uh subsequent thing. Yes,
Speaker 1: And I am in no way saying that that is
Speaker 1: an ineffective or irrest onsible or corrosive force in the
Speaker 1: capital markets right. However, it's evolved. It's evolved a lot.
Speaker 1: And I don't think that even a a committed E.
Speaker 1: S G practitioner would look at divestment of investments in
Speaker 1: South Africa and say that was the exclusive cause of
Speaker 1: the collapse of the apartheid regime, nor that it led
Speaker 1: to some influence on performance, because that what happened was
Speaker 1: I mean cynically, there was an asset transfer, you know,
Speaker 1: into the hands of people who are willing to do
Speaker 1: antities are willing to do business in South Africa and
Speaker 1: at a discount. People forget that when when you sell
Speaker 1: your South African investments. The thought of the trade right,
Speaker 1: it's and it's the old joke about cash on the sidelines. Well,
Speaker 1: how is that cash on the sidelines? I sold my stock,
Speaker 1: someone bought the stock. What we did was transferably. And
Speaker 1: that's where I have a real, real um, a quiet
Speaker 1: but sincere objection to the notion that s RI E
Speaker 1: s G investing will transform corporate behavior. It draws at tension.
Speaker 1: I think the diversification, the the diversifying away from South Africa.
Speaker 1: It created a whole lot of awareness and a whole
Speaker 1: lot of media coverage. How much it actually influenced the
Speaker 1: government in South Africa. Really, it's a tough correlation. So
Speaker 1: so let me bring you back to the issue about
Speaker 1: diversification and governance and looking at companies that have more
Speaker 1: women represented on the board in c suite. So there
Speaker 1: was a study that just came out. There was a
Speaker 1: Bloomberg article not too long ago that talked about and
Speaker 1: they didn't make the causation argument. They only brought up
Speaker 1: the correlation, which was, in general, on average, firms that
Speaker 1: have more women represented on the board and in the
Speaker 1: c suite tend to outperform firms that don't. So The
Speaker 1: question I'm gonna ask you is are these firms better
Speaker 1: managed and because they've been managed, they have a more
Speaker 1: diverse corporate governance, or do women at the higher levels
Speaker 1: of corporate governance not suffering from what my trader friends
Speaker 1: call testosterone poisoning, helped make better decisions and and make
Speaker 1: a more intelligent long term strategy. I think that's a
Speaker 1: loaded question, a super loaded question. I think it's a
Speaker 1: yes and yes, and that we don't know. Okay, that's
Speaker 1: that's a fair answer, because it could go either way.
Speaker 1: We really don't know. Sometimes it's here, sometimes it's not.
Speaker 1: But ultimately nobody has been able to demonstrate it one
Speaker 1: way or another. Well, I think that the demonstration is
Speaker 1: UM is coming. Um. There are a handful of really interesting,
Speaker 1: super focused research institutes that are focusing on this issue.
Speaker 1: Criterion in Stude is one that I think is doing
Speaker 1: some really cool work. UM. And I was just I
Speaker 1: was just musing. The first time I read about this
Speaker 1: out performance due to gender diversification in the C suite
Speaker 1: was the Lord Davy's report to the House of Lords UM,
Speaker 1: probably going back ten years ago. I was gonna say,
Speaker 1: that's not a recent report. YEA as I think it's
Speaker 1: about ten years ago, and he's he's they've they've done
Speaker 1: follow up reports to that, and it's long and forgot
Speaker 1: that I'm not going to remember these act numbers, so
Speaker 1: I'll just I'll just claim that I'm making this up,
Speaker 1: but it'll give you a sense of the numbers. But
Speaker 1: they looked at they did a twenty five year regression
Speaker 1: analysis of companies in the foot see that had more
Speaker 1: than I think it was ten or fifteen percent of
Speaker 1: their C suite were women, and the our performance was shocking.
Speaker 1: It was like it was like company. It was like
Speaker 1: it was like one of those eyeball rollers. It's like, yes,
Speaker 1: somebody blew their math right. But even if you discount
Speaker 1: that by right, it was still it was still a
Speaker 1: huge difference. And so I started asking myself what could
Speaker 1: account for that? Right? I mean, really, by having ten
Speaker 1: of the C level be a woman, is that going
Speaker 1: to really make that much difference in the operations of
Speaker 1: the company. And you know, one thought that came to
Speaker 1: mind was if you had risen to that level as
Speaker 1: a woman, you had to be extraordinary, and so perhaps
Speaker 1: the influence that you would have over the strategic direction
Speaker 1: of the company would be outsized effectively because if you
Speaker 1: made it there, you were exceptional. Okay, maybe that's part
Speaker 1: of it, but I think when you look at some
Speaker 1: of the research is being done around behavioral science and
Speaker 1: group science and group i Q, it becomes suddenly more
Speaker 1: clear that gender diversification is actually about making better decisions.
Speaker 1: You're not dealing with the homogeneous decision making group less,
Speaker 1: group think less. Everybody was in marsh depth and generally speaking,
Speaker 1: probably a hipper savvier approach to buy that company, um
Speaker 1: to their entire worldview of investment. Pretty square women. No, No,
Speaker 1: I don't mean the women, the company itself. The company
Speaker 1: itself that is engaging in that means they're fairly cunning edge,
Speaker 1: They're up to speed on all the latest management things.
Speaker 1: They know what works, they know what doesn't. And if
Speaker 1: they're that self enlightened, yeah, you gotta think that, Hey,
Speaker 1: these guys have already checked off all these guys have
Speaker 1: already checked off all the other I use that as
Speaker 1: a gender new phrase, but I know it's not interpreted
Speaker 1: that way. UM. I could say hey, guys to a
Speaker 1: group of men or women and it shouldn't make any different.
Speaker 1: But they've checked off all their other boxes. And if
Speaker 1: you're up to okay, let's make you know. When we
Speaker 1: look at the prediction markets, when their uniform they don't
Speaker 1: do that well. And when you have a prediction market
Speaker 1: where you have a diverse group of traders, both in
Speaker 1: terms of geographic location, politics, economic strata, you get much
Speaker 1: better outcomes because you don't have you know, whenever, what's
Speaker 1: the line when everybody's thinking like, nobody's thinking so so
Speaker 1: I I'm inclined to think that smarter companies making better
Speaker 1: decisions will tend to have this box checked off. And
Speaker 1: so it's really an interesting is it which came first,
Speaker 1: the really good company or the diversification. It almost doesn't matter,
Speaker 1: you know, it's a of into the to the final performance.
Speaker 1: But it's interesting to think about what's driving that. Yeah,
Speaker 1: And I would take even one step further and say,
Speaker 1: for those companies it's it's explicitly not a box checking exercise.
Speaker 1: That's right. I think it's a really important point to
Speaker 1: make that for these companies is not about what we
Speaker 1: have to have women, but instead, let's make sure that
Speaker 1: we get the best people. And frequently they're not looking
Speaker 1: for gender, they're looking for the best people and build
Speaker 1: in a lack of homogeneous thought that will give us
Speaker 1: our process should give us a better outcome if we
Speaker 1: make the process better. And here's one way to make them.
Speaker 1: And it's hard. I mean, we're we're you know, our
Speaker 1: company was founded by six middle aged white guys, right, um,
Speaker 1: And I think our natural instinct is to hire in
Speaker 1: our image. It's a comfortable hiring decision. It's certainly your
Speaker 1: network of your networking to look like yourself. And so
Speaker 1: to make that decision to hire somebody who is really
Speaker 1: different from you, they have to it's harder to do.
Speaker 1: There has to be a level of intentionality in there
Speaker 1: that is not commonly reflect did in corporate America. And
Speaker 1: I think that's the obstacle that we face, this um
Speaker 1: cognitive bias for hiring in our likeness. And it's it's
Speaker 1: as simple as you do an interview with somebody and
Speaker 1: you know he played lacrosse at Duke whatever, and you
Speaker 1: had a brother that played lacrosse at U n C.
Speaker 1: And so you think of him as a really good guy, right,
Speaker 1: And that that that that commonality becomes self reinforcing and
Speaker 1: your hiring practices and so you do have to bring
Speaker 1: a level of intentionality to sort of dismantle that, and
Speaker 1: it's not easy to do. And so I think your
Speaker 1: point earlier about companies that are more enlightened. It's a
Speaker 1: bit of a loaded phrase, but more enlightened companies they're
Speaker 1: going to do that naturally because they recognize that strength
Speaker 1: comes from a diverse view disagreement in the C suite
Speaker 1: leads to better decision making. But you have to do
Speaker 1: that intentionally because it's hard. No, it's definitely, it's definitely
Speaker 1: not easy. I know, I don't have you for for forever.
Speaker 1: There's a runic questions I want to get that I miss. No,
Speaker 1: not at all. This is really I find the stuff
Speaker 1: to be absolutely um fascinating. So so let's talk a
Speaker 1: little bit about your investment process, not so much for
Speaker 1: the passive beta portion of it, but for the active
Speaker 1: impact portion. How do you decide what what? First of all,
Speaker 1: what do you're buying. You're buying stocks, you're buying mutual funds,
Speaker 1: you're buying ETFs. What what's the vehicle of choice? Yeah, so,
Speaker 1: in the public equity markets and public fixing income markets,
Speaker 1: we use separately managed to counts with specialty managers that
Speaker 1: focus on those markets. So it's mostly unhedged long only equity.
Speaker 1: In our fixed income allocations, mostly relatively short duration, very
Speaker 1: high credit quality. We don't like taking intest rate risk.
Speaker 1: We don't want to take a ton of credit risk
Speaker 1: with our fixing come portfolios because we think they serve
Speaker 1: the roles boust in the portfolio. It's a pool of aquidity,
Speaker 1: a little bit of income. It's not where we want
Speaker 1: to take a lot of that investment grade. That's pretty
Speaker 1: much pretty much a lot of meetings. So let's go
Speaker 1: back to the equity side, um individual stocks, So we
Speaker 1: don't pick individual stocks. Were not pick the pickers of
Speaker 1: individual stocks. Yeah, and what we look for is either
Speaker 1: as I said earlier, demonstrated capacity around data with a
Speaker 1: tax managed overlay, or proven low correlation to the rood
Speaker 1: equity markets with a defensible investment thesis that we think
Speaker 1: can play out over time. That's a relatively small part
Speaker 1: of our overall public equity exposure. But right now, I mean,
Speaker 1: so I don't know if this is a disclosure or not,
Speaker 1: but I'm gonna, I'm gonna, I'm gonna run the risk here.
Speaker 1: So um I said, we don't use model portfolios, So
Speaker 1: The way that um we sort of get around that
Speaker 1: in terms of talking about it is that we aggregate
Speaker 1: our twenty largest clients and we consolid all their portfolios
Speaker 1: in a sort of a hypothetical exercise around what our
Speaker 1: exposure across the firm is. And right now, we are
Speaker 1: skeptical about the public fixing come markets and we think
Speaker 1: it's it's basically in an environment of return free risk
Speaker 1: um and so so our public fixing commallocations right now
Speaker 1: are primarily for liquidity. And so we're sitting at about
Speaker 1: across that turn of the largest clients. Our public equity
Speaker 1: exposure has been steadily coming down over the last year
Speaker 1: and a half and we're down in the mid teens
Speaker 1: right now for that as well. So we've got about
Speaker 1: of our assets in the public markets, which leads about
Speaker 1: se in the private alternatives and real assets market, which
Speaker 1: is really real you're talking real estate or something real estate,
Speaker 1: it's real estate, timber, um agg um commodities that that
Speaker 1: are all tied to a specific property. Yeah, we don't
Speaker 1: do a lot of futures. So it's not it's the timber,
Speaker 1: you're it's the land that the timber is harvested from,
Speaker 1: not so much the timber itself. Yeah. Um. And so
Speaker 1: that alone is a pretty unconventional approach. Rantham has been
Speaker 1: pounding the table on timber for what fifteen years now. Yeah.
Speaker 1: And you know the thing about timber which is interesting
Speaker 1: is that the yields from timber are basically dependent upon
Speaker 1: the rate of growth of the trees. And maybe you
Speaker 1: get maybe you get a little bit of a little
Speaker 1: in the land value if you're in the middle of
Speaker 1: a construction boom um. But you know, basically, over the
Speaker 1: long haul, you're gonna get rate of timber growth. So
Speaker 1: in Canada, as the planet warms up, that's actually good
Speaker 1: for the yield. It could be. Yeah, I mean it
Speaker 1: has My mom, who's a who's a wonderful golfer, likes
Speaker 1: to say every put makes somebody happy. He's got to
Speaker 1: look around and see who's smiling, and you know you're
Speaker 1: gonna laugh. But I spoke not long ago with a
Speaker 1: fund that is raising capital to acquire farmland in Siberia. Uh.
Speaker 1: There was just an article about the Northern Passage, which
Speaker 1: has always been a dream, is now open and cruise
Speaker 1: ships are going through the Northern Passage this summer. That
Speaker 1: a hundred years ago was frozen solid. You couldn't get
Speaker 1: from from Newfoundland to Russia that way. Um. And now
Speaker 1: apparently there's a fairly clear passage for three months of
Speaker 1: the year that that used to be frozen solid all
Speaker 1: year round and that's no longer the case. And you
Speaker 1: look north of the Crimea, for example, and if you
Speaker 1: can extend the growing season by just a couple of
Speaker 1: weeks on either end spring and fall, suddenly an enormous
Speaker 1: amount of that land becomes arible. That is a huge
Speaker 1: wind for holders of arable farmland in northern climbs. There's
Speaker 1: a wonderful book called Windfall. I don't know if you
Speaker 1: mean you've read it, and um, the the author's uh
Speaker 1: is escaping me at the moment, but I'll find it.
Speaker 1: And the book basically tracked a whole bunch of um
Speaker 1: uh here it is. Wow, that was really impressive. Um.
Speaker 1: Windfall by Mackenzie Funk. How did I forget Mackenzie Funk's name.
Speaker 1: That's a great name. So anyway, he he tracks all
Speaker 1: these Deutsche Bank goman sacks, all these private funds that
Speaker 1: they had set up and following the money and seeing
Speaker 1: where people were investing based on expected climate change. Now
Speaker 1: in the United States, one of the two major political
Speaker 1: parties doesn't believe in in climate change, but they're pretty
Speaker 1: much the only major party around the world that is
Speaker 1: doesn't doesn't accept the science of climate change. Windfall doesn't
Speaker 1: even talk about climate change. It says the world is changing.
Speaker 1: Where are people putting their money to make a bed
Speaker 1: on it? And they find some in what you just
Speaker 1: reference farmland. There are now funds that are accumulating farmland
Speaker 1: that they expect will be arable or more arable years
Speaker 1: from now. Monsanto developing a salt resistant grain of rice,
Speaker 1: and you could grow you know, when you have salt
Speaker 1: come in on some of these marshes, you no longer
Speaker 1: can grow food there. You're so there are there are
Speaker 1: winners and losers. According to the book, what's dry is
Speaker 1: gonna get dryer, what's wet, it's going to get wetter,
Speaker 1: and parts of the world are going to be underwater.
Speaker 1: If you're a real estate investor and you're thinking about
Speaker 1: making investments into the coastline of Florida, I would imagine
Speaker 1: that you're view of global warming would be material. It
Speaker 1: would be material. And now it gets right to what
Speaker 1: I was saying earlier about capitalism being a fantastic optimization mechanism,
Speaker 1: the fact that people are thinking about that it's going
Speaker 1: to drive capital in that direction, and it may they
Speaker 1: may be right, they may be wrong, But it's a
Speaker 1: capital allocation decision based on however you're discounting the risks
Speaker 1: around climate change or the opportunities around climate change. Do
Speaker 1: we have do we have any really well understood way
Speaker 1: to actually figure out what what the appropriate discounting mechanism
Speaker 1: mechanism is for or it's really just a rational guest
Speaker 1: and it's it's a lot of I mean, you can
Speaker 1: look at all the climate modeling and yeah, you know,
Speaker 1: maybe there's some guiding you know, sort of guiding factors
Speaker 1: in those, but I think of them more like guardrails
Speaker 1: rather than train tracks. Right. The climate models are subject
Speaker 1: to revision, their subject to an enormous amount of variability,
Speaker 1: particularly on a year to year basis um and so directionally,
Speaker 1: I think they're pretty clear um and so directionally, if
Speaker 1: you're aggregating capital to acquire a potential future arable land,
Speaker 1: I'd be pretty diversified in my geographic FOOTPRINTE. But yeah,
Speaker 1: you know what's gonna happen in the next ten years.
Speaker 1: And how do you discount that value? That's a challenge. Yeah,
Speaker 1: so let me get to some of my favorite questions.
Speaker 1: I asked all of my guests because I know they're
Speaker 1: gonna come for you for TV and and momentarily. Um,
Speaker 1: so you talked about your background. You went right into
Speaker 1: finance right at a at a college. No, I did not, actually,
Speaker 1: so let's let's go over that. I No, I didn't
Speaker 1: join Smith Barney. Stuff was thirty So, uh, what did
Speaker 1: you do for the decade between college and Smith Barney.
Speaker 1: I was adventuring. I was writing, I was skiing, I
Speaker 1: was bike racing. I was a private chef. I worked
Speaker 1: at the Sun Valley Athletic Club. I mean, it was
Speaker 1: just cobbling together a life. They'll let me have as
Speaker 1: much adventure as I possibly could. And it sounds like
Speaker 1: you put in a good ten years of Uh Where
Speaker 1: were you in Australia? So I lived in Melbourne. After
Speaker 1: the World Championships of Rowing, I got invited by a
Speaker 1: couple of ASSI buddies that I met there to come
Speaker 1: and row with them. They really are serious when they party.
Speaker 1: I can't keep up with those guys even in my
Speaker 1: youth I could not keep So the best party is
Speaker 1: I joined Mercantile Rowing Club in Melbourne, which was sponsored
Speaker 1: by Carlton United Brewery, makers of Fosters. So Fosters so
Speaker 1: on our team, on our team Jerseys, we had the
Speaker 1: Foster's logo and it was it was that you couldn't
Speaker 1: make it up. So after every race the Fosters struck
Speaker 1: could show up with kegs and on you know Boathouse
Speaker 1: Row and Melbourne, right along right below Princess Bridge, on
Speaker 1: on the on the on the era um all the
Speaker 1: boat crews would come to Mercantile after the race because
Speaker 1: that's was that sounds uh And by the way, nothing
Speaker 1: like a solid workout and then tapping a keg that
Speaker 1: sounds interesting. So at third do you say, okay, no,
Speaker 1: I need to get serious. You joined Smith Barney, not
Speaker 1: just at Smith Barney but across your career. Who do
Speaker 1: you think of as your mentors? So when I was
Speaker 1: living in catch um Um, there were two guys that
Speaker 1: were really my mentors. One um catch them catch him, Idaho,
Speaker 1: which is where Sun Valleys located. Um one was was
Speaker 1: a retired pretty young guy who was a bond trader,
Speaker 1: at Solomon UM and he had made enough money to
Speaker 1: punch out relatively young, lived a very modest life and
Speaker 1: catch him but had a lot of adventures UM and
Speaker 1: he and I spent a lot of time in the
Speaker 1: mountains and he just got me super inspired. He was
Speaker 1: a crusty, salty I mean, you knew the solid guys
Speaker 1: from the ages, right, Yeah, not pgrated, not PD rated
Speaker 1: at all, and he was just this oddly inspiring guy
Speaker 1: like I just I just really liked hanging out with him,
Speaker 1: and his worldview was was really compelling. And then this
Speaker 1: other guy by the name of Tom Campion, quite older
Speaker 1: than me, but he had gone to and over in Dartmouth,
Speaker 1: super educated in his had a parallel background, very much so,
Speaker 1: and he was a bike racer and we sort of
Speaker 1: ended up going along bark rides together and his family
Speaker 1: had a multi hundred million dollar private foundation that he
Speaker 1: was running. And so I had these two different, completely
Speaker 1: different views of the capital markets. And I'd go out
Speaker 1: and climb mountains with Martin Adams and I'd go out
Speaker 1: and ride bikes with Tom Campion, and between the two
Speaker 1: of them, I just got completely fascinated by it. And
Speaker 1: so when UM Tom turned to me after working with
Speaker 1: him for about two years, he said, you need to
Speaker 1: leave catch him, because you don't leave now, you're never
Speaker 1: gonna leave. Um. He basically kicked me out to catch
Speaker 1: him become a scheme bomb and that's up. And I
Speaker 1: was super piste for a few months, and then I
Speaker 1: was really grateful because I realized he was right. And
Speaker 1: he set me up with a couple of interviews at
Speaker 1: Merrill Lynch and UH and Smith Barney and Prudential UM
Speaker 1: in Boise, and that's sort of how I started there.
Speaker 1: So the Merrill Lynch training program, I recall your your
Speaker 1: Smith Barney story, so I know someone who used to
Speaker 1: run that and it was one of the few on
Speaker 1: the street where they actually went through here's what capital
Speaker 1: markets are and here's how you converse fight bo It
Speaker 1: was so the first half what they actually educated people,
Speaker 1: and then the sales side came up and they felt
Speaker 1: that made them better salespeople because they understood it better.
Speaker 1: But they were the only ones I've ever heard that
Speaker 1: integrated what what you were looking for and didn't get it.
Speaker 1: And we had a little bit of that, but it's
Speaker 1: all product pitches, right. We'd have the head of theory.
Speaker 1: It was, let me explain why this fond is so good? Totally. Yeah, No,
Speaker 1: I I've witnessed enough of that. UM. So you mentioned, uh,
Speaker 1: the mentors. What's talking about investors? What investors influenced your
Speaker 1: approach to investing? You mentioned David Swainson at Yale? Who
Speaker 1: else has influenced you? You're gonna laugh at this, but
Speaker 1: everybody says Warren Buffett, So I won't laugh at anything. Well,
Speaker 1: I could probably get to warm Bufett, but at a
Speaker 1: really cool story about Warren Buffett, which I'll get you
Speaker 1: in a second. UM. I think that anybody who was
Speaker 1: thinking about entering the couple markets for a career needs
Speaker 1: to read Reminiscences of a Stock Operator, a classic like
Speaker 1: UM And there's a new annotated version of it that's beautiful,
Speaker 1: that's updated and annotated that a friend UM did. But
Speaker 1: I'll get I'll get the addition. Name of that UM.
Speaker 1: I think the two um um money Master's books. I
Speaker 1: think they were called by John Traine. I think it was, yeah,
Speaker 1: John Traine, and he basically interviewed guys who had built
Speaker 1: long term, really attractive rates of return in the in
Speaker 1: the public equity markets, and then basically published those interviews.
Speaker 1: And then you know, I got with an odd to
Speaker 1: Warren Buffettum, so, my grandmother's best friend, she's she's English.
Speaker 1: Her best friend was really good friends with Charlie Munger,
Speaker 1: and I was visiting them when not to dinner with them.
Speaker 1: And I was young, and it happened to be with
Speaker 1: this older guy who was involved in investing, and um
Speaker 1: I asked him. I said, so, if you were a
Speaker 1: young man thinking about getting in investing, what would you do?
Speaker 1: And he says, I would call this number. He wrote
Speaker 1: down this number. He call his number and asked the
Speaker 1: guy who answers to send you the bound copies of
Speaker 1: the chairman's reports for his company. And I did know
Speaker 1: anything about Berkshire Hathway. I've never heard of Warren Buffett.
Speaker 1: No idea. So I called the number and it's Warren
Speaker 1: Buffett's number. He answers the phone himself. He did not
Speaker 1: he was his assistant, but it was his office. It
Speaker 1: was like the direct line. And I say, yeah, I
Speaker 1: met this guy at dinner. His name is Charlie Munger,
Speaker 1: and he told me to call this number and asked
Speaker 1: for the bound copies. And it was like a combination
Speaker 1: of silence and laughter on the phone. So you have
Speaker 1: no idea who Munger was? You know who you're calling us?
Speaker 1: No idea. So this is like nineteen eighties, seven or
Speaker 1: eighty eight probably, so my Warren Buffet stories. I'm in
Speaker 1: grad school. I'm working with this guy named Lawrence Cunningham,
Speaker 1: all right, he's a year ahead of me, is one
Speaker 1: of the editors of the Lore Review. And he decides
Speaker 1: to take all of the annual letters from Warren Buffett
Speaker 1: and bound them in a book and published him. He's
Speaker 1: the first guy to do it. I got that. I
Speaker 1: think I went to school with him, and at the
Speaker 1: time I had I had. So I'm in law school.
Speaker 1: I have no idea who Warren Buffett is. I have
Speaker 1: no idea any of this stuff. And I'm like, Lawrence,
Speaker 1: you're you're going to be a lawyer. He's now a
Speaker 1: law professor. What are you doing? Well? He specialized in
Speaker 1: in corporate governance and things along those lines. And who
Speaker 1: better an example of the right way to run a
Speaker 1: company that they warn't Buffett, by the way, Reminiscence of
Speaker 1: a Stock Operator by Edwin lefev John Markham Markman has
Speaker 1: done uh. The updated version, and it's it's a beautiful book.
Speaker 1: If anyone wants to read that book, I think it's
Speaker 1: as a light. So we're talking about books now we've
Speaker 1: kind of viewed into that. What what other books, uh
Speaker 1: do you find? Um are interesting? Worthwhile? Finance? Nonfinance, fiction, nonfiction?
Speaker 1: So if you measure it by the books that I've
Speaker 1: given away the most in my life, that's an interesting question.
Speaker 1: But let's let's hear that that uh too come to
Speaker 1: mind immediately? Um me Amato Musashi's Book of Five Rings
Speaker 1: or Go Ring No Show, which was the Book of
Speaker 1: Five Rings and Book of Five Rings. It's it's just
Speaker 1: for the Japanese version of the Art of War, um
Speaker 1: because they don't love the Chinese version. They well, it's
Speaker 1: it's a different it's a different approach because you know,
Speaker 1: I'm Sun Zoo wrote really about strategy as applied to
Speaker 1: military maneuvers, and Musashi really writes about strategy as a
Speaker 1: as applied to one's life and everything is a metaphor.
Speaker 1: So it's a it's a very zen book. I love
Speaker 1: it and considered a classic treatise on military strategy, much
Speaker 1: like sun sus Art of War. Don't there we go Um,
Speaker 1: either you know it really well or you just read that.
Speaker 1: I just read that outstanding, quick quick, quick Google. I
Speaker 1: don't know the book at all. That's the first time
Speaker 1: I'm hearing of it. I know Sun Sue and everybody does,
Speaker 1: and I got it, used to get it. So I
Speaker 1: started as a trader, and every year someone would give
Speaker 1: me Sun Sus Art of War for Traders. Sure, so
Speaker 1: it's sat on my desk and then someone would bar
Speaker 1: throw it and I'm like, I finally get rid of that.
Speaker 1: Else it was like the book that was gone on
Speaker 1: my shoes? What was the other book? You? You've given
Speaker 1: away a lot of Marcus Relius his meditation? Um was it?
Speaker 1: I have to remember who just referenced that book and
Speaker 1: a previous show. It might have been Charlie Ellis or
Speaker 1: it might have been Burton. I have to go back
Speaker 1: and find but not so as a former philosophy major
Speaker 1: that that book has originally applied math and physics senior year.
Speaker 1: A little bit of a switch. But um, that book
Speaker 1: is fantastic, Tindal, because you could pick it up, read
Speaker 1: it for as long as you want, and put it
Speaker 1: down and start right where you left off. And it's like, oh,
Speaker 1: I'm right back into this. That's really interesting that you, uh,
Speaker 1: you like that anything else, non fiction or non or finance.
Speaker 1: Was everything you've mentioned other than reminiscence of the Buffet book. Um.
Speaker 1: I guess we have to consider fine, it's a master's
Speaker 1: class in investing, is the way I think about that.
Speaker 1: You know, the collection of his letters. Um. When you
Speaker 1: ask bibliophile what his favorite books are, you run the
Speaker 1: risk of paralysis, right, because there's so many. There is
Speaker 1: no favorite. It's many. Yeah. But one of the things
Speaker 1: that I like to think of his whether or not
Speaker 1: when I've read a book, if I wish I had
Speaker 1: written it. Oh, that's interesting, you know. And there's not
Speaker 1: that many books that I've read that. Even as I'm
Speaker 1: reading it, I'm thinking, oh, damn, I wish I had
Speaker 1: written that. And Anthony Doers All the Light You Cannot
Speaker 1: See comes to mind on that one. And Anthony Dors
Speaker 1: is a Tony Doors, a boisey guy, So I've got
Speaker 1: a little bit of a bias there. Um. But that
Speaker 1: book is just lyrical and beautiful and heartbreaking. Um. All
Speaker 1: the Light you Cannot See, All the Light you Cannot
Speaker 1: See fiction. Um. And then in the non fiction world.
Speaker 1: I mean, I'm always I'm always reading. I'm halfway through
Speaker 1: Sapiens right now that all the light we cannot see,
Speaker 1: all the light we cannot see. Um, Sapiens is really interesting,
Speaker 1: really interesting. Halfway through I'm really enjoying the badass librarians
Speaker 1: of timbucktwo, which you gotta check out. I've heard that. Um,
Speaker 1: I'm it's probably third of the way or quart of
Speaker 1: the way into Um. The hard thing about hard things
Speaker 1: Horowitz is book. Um. Yeah, I mean, this is just
Speaker 1: just and those are just the ones that I'm just
Speaker 1: reading recently. Yeah, the funny thing about Sapiens. So I
Speaker 1: read a book I really enjoyed called Last Ape Standing
Speaker 1: about who are we know of twenty nine human Like, yeah, primates,
Speaker 1: We're the last ape standing. And I referred the book
Speaker 1: to a friend and he liked it so much. It's
Speaker 1: gotta go fishing with. That's the next thing I know.
Speaker 1: Sapiens shows up on my doorstep. So when I'm interviewing
Speaker 1: Danny Kahneman a few weeks ago, I asked him the
Speaker 1: book question and he comes out and says, the best
Speaker 1: book I've read in the past five years of Sapiens.
Speaker 1: So now I have this book sitting on my night
Speaker 1: table that I literally just started. I went home and
Speaker 1: I just started plowing. If Danny Conneman said this is
Speaker 1: the best book you read in the last five years,
Speaker 1: that said, how do you not? And it's really quite fascinating,
Speaker 1: it is. I've been enjoying it. Um all right, So
Speaker 1: you reviewed a lot of the shifts you've seen in
Speaker 1: the world of UH S R, I, E S G impacting.
Speaker 1: So we know how that's transition. What sort of shifts
Speaker 1: do you see in that space over the next let's
Speaker 1: call it ten years. I think the biggest shift is
Speaker 1: the professionalization of impact investing, and we have moved out
Speaker 1: of what I like to call the anecdotal evidence collection phase,
Speaker 1: where there's a bunch of interesting people are doing pretty
Speaker 1: cool things and we've got, you know, exits like Tom's
Speaker 1: and Warby Parker and uh you know grouped An's acquisition
Speaker 1: of Happy Family Food. There's a there's a bunch of
Speaker 1: those sort of anecdotal evidence phase that you can run
Speaker 1: a business and exited at an attractive valuation that has
Speaker 1: a clear environmental or social mission embedded in the operations
Speaker 1: of the company. Tom's Toothpaste and all the no. I
Speaker 1: was thinking the um, yeah, who buy Tom's. Um, it
Speaker 1: wasn't Clorox. It was something like that. It was a
Speaker 1: big company. Yeah, big company, Claroxbot Bees, I remember which. Well,
Speaker 1: I was thinking actually of Tom's, the shoe company. But yeah,
Speaker 1: Tom's the toothpaste as well. You know, Tom's the shoe
Speaker 1: company with the one that invented the buy one, give
Speaker 1: one model. So for every pair of tom Shoes that
Speaker 1: a customer buys, Tom's gives a pair of shoes to
Speaker 1: a kid in in a frontier emerging market that needs
Speaker 1: a pair of shoes. Um. And and that by one
Speaker 1: give one model has become much more common over the
Speaker 1: last few years due to the success of Tom's. That's
Speaker 1: really fascinating. Barb warby Parker is another example of that
Speaker 1: by one give one model. Um. So, I think, I
Speaker 1: think the professionalization of impact as we move out of
Speaker 1: the antecdote evidence phase and move into the thesis validation
Speaker 1: phase before we move into the ubiquitous presence phase, right,
Speaker 1: um And I think that is starting to happen because
Speaker 1: you've got firms like Bank Capital raising an impact fund.
Speaker 1: You've got Blackstone hiring Deborah and black Rock excuse me,
Speaker 1: hiring Deborah win Shell and in the organ chart, you know,
Speaker 1: you know, Debora is former executive director of the Robin
Speaker 1: Hood Foundation. Super smart tutor, very data driven, understands sort
Speaker 1: of this world really well. In the organ chart, what's interesting,
Speaker 1: and she reports directly to the CEO. She doesn't report
Speaker 1: like the head of structured products. So that's a pretty
Speaker 1: clear statement. And when you think about the letter that
Speaker 1: he wrote to this last year. Last year, guys just
Speaker 1: stopped drinking around with stock by backs and do some
Speaker 1: R and D and some capital spending exactly. And that's
Speaker 1: the largest ascent manager in the world. Yeah, it's them
Speaker 1: in Vanguard are one and two. So so I think
Speaker 1: that when you know, when you have firms like Goldman
Speaker 1: acquiring Imprint Capital, black Rock hiring Debora win Shell and
Speaker 1: really elevating the role of their impact team in the
Speaker 1: company Bank Capital rolling out a fund and having hundred
Speaker 1: and fifty internal people apply to work on it. Um,
Speaker 1: I think that's a serious commitment of time and serious
Speaker 1: commitment or you know, even um what's his name, Vincent Mai,
Speaker 1: the former chairman and CEO of a e A he
Speaker 1: launched as a fund. Craney Mere Capital based here in
Speaker 1: New York to focus on private equity and light stage
Speaker 1: private equity investing in firms that have sustainability components to
Speaker 1: their business model. I mean, it's like it's just happening
Speaker 1: at a pretty quiet level. I was on the call
Speaker 1: on a phone yesterday with a woman from the World
Speaker 1: Economic Forum, and she was really interesting adjective to describe
Speaker 1: the conversations that she's having clandestine. She said that she
Speaker 1: is having this conversation with sovereign wealth funds, large pension plans,
Speaker 1: institutional pools of capital all over the world who are
Speaker 1: fascinated by and compelled by this notion of impact investing,
Speaker 1: but they don't want to go public with all down there,
Speaker 1: and they're talking with asset managers trying to figure out
Speaker 1: how to talk about it, how to integrate. I think
Speaker 1: it's just one of those subtle and pervasive conversations that
Speaker 1: nobody's really admitting to yet because it doesn't fit with
Speaker 1: the self schema that we as investors hold for ourselves.
Speaker 1: You're a philosopher, you know what, you know what that
Speaker 1: means um and as a result, and this is a
Speaker 1: kind of this is such a tangent, but I think
Speaker 1: it's a it's a relevant tangent to keep going. I
Speaker 1: think that because there is this cognitive bias against that
Speaker 1: valuations are more attractive. You're not getting a ton of
Speaker 1: money chasing these deals. And I talked to impact that
Speaker 1: makes a lot of sense. Possibly it's a it's a
Speaker 1: thesis that I have see see my um my view
Speaker 1: of self schemas that everybody creates three six degree worldview
Speaker 1: And the question, the most important question investors need to
Speaker 1: ask themselves is how far has my subjective worldview deviated
Speaker 1: from objective reality? And for most investors it's an enormous deviation,
Speaker 1: and for for some people it's close here off there.
Speaker 1: You know, I picture am I picture like when you
Speaker 1: go into the old imaxes that were the circular or
Speaker 1: planetariums and they're composed of all these octagonal shape path
Speaker 1: how many of those panels actually are are hitting reality?
Speaker 1: And so you could create this three and sixty degree view. Uh.
Speaker 1: We learn a lot about about cognent of issues as
Speaker 1: as brains deteriorate or have have trauma involved, and so
Speaker 1: where different parts are off, Like we all have a
Speaker 1: blind spot behind us, but most of us have a
Speaker 1: blind spot in front of us, were wholly unaware of
Speaker 1: where you're two. Uh, And that's just a fascinating metaphor.
Speaker 1: So the idea that these giant sovereign wealth funds are
Speaker 1: embarrassed to publicly explore this space, that means that it's
Speaker 1: really early days. It's really it's really early days. And
Speaker 1: I think that when you have a firm like Generation
Speaker 1: Asset Management who is demonstrating repeatedly durable, persistent alpha right
Speaker 1: in the market that in theory shouldn't really offer that
Speaker 1: you know, is ten years sufficiently long sample. Maybe not,
Speaker 1: Maybe they're gonna blow up, but you still have the
Speaker 1: argument that is compelling and maybe it's a narrative and
Speaker 1: we all love stories. Is that nobody has embraced this
Speaker 1: yet fully. Look that my own so full disclosure, we
Speaker 1: run an asset management shop, and we run models, and
Speaker 1: we have clients occasionally ask us, what are you guys
Speaker 1: doing s g wise? What are you doing socially responsible wise?
Speaker 1: And and not even twenty or ten years, a year
Speaker 1: or two ago, we really couldn't construct something. We're not
Speaker 1: thinking what we were doing, and and the glib answer
Speaker 1: was tell you what, let it make more money. And
Speaker 1: then you'll have more money to to donate to your
Speaker 1: favorite charity and and that should be your e s G.
Speaker 1: But between the way things have changed in construction, constructing, ETFs,
Speaker 1: mutual funds, the availability of items as the costs of
Speaker 1: execution of compressed So we will eventually be able to
Speaker 1: say to clients, yes, we could give you nearly idea.
Speaker 1: It's not identical to the poor model, but we could
Speaker 1: give you an e s G compliant model that is very,
Speaker 1: very similar to our main portfolios. So instead of five
Speaker 1: thousand holdings, it's thirty. Instead of hundred countries, it's eighty countries.
Speaker 1: But it's so close you couldn't even be anywhere near that.
Speaker 1: Forget twenty five years ago, you couldn't even come close
Speaker 1: to that. And now it's just a function of technology
Speaker 1: that's available at a cost that wasn't two years ago.
Speaker 1: It's astonishing. So I don't want to talk. I want
Speaker 1: to ask you questions. When you guys were spending three
Speaker 1: years and I know I failed miserably at that. Today,
Speaker 1: when you guys were spending three years building out all
Speaker 1: of the infrastructure to this, I assume some of it
Speaker 1: is legal accounting, clients, administration, pay roll. But what was
Speaker 1: the process like building out the mechanisms, the process to
Speaker 1: put the portfolios in place for all clients. Are just
Speaker 1: for impact peace with the impact piece, Yes, so we're
Speaker 1: we're what we call finance first impact investors, and by
Speaker 1: that we simply mean that any investment needs to be viable,
Speaker 1: like it needs to be a good investment. First. We're
Speaker 1: not going to make an investment just because it has
Speaker 1: a sexy environmental story. So we start with our totally
Speaker 1: conventional diligence and determine whether or not this is likely
Speaker 1: to return the capital they say they're going to return
Speaker 1: right um. And then maybe a little bit in parallel,
Speaker 1: but we also focus on the intentionality around the impact strategy,
Speaker 1: either an environmental peace or you know, more of a
Speaker 1: social piece. And the social piece can be something like
Speaker 1: affordable housing, which is not particularly revolutionary now, but there's
Speaker 1: some really interesting cognitive biases around Section eight housing for
Speaker 1: an example, UM, which are just simply wrong, um and
Speaker 1: are demonstrably wrong. And so if you're thinking about affordable
Speaker 1: housing with a Section eight component that actually can be
Speaker 1: a performance enhancer rather than a drag on performance UM
Speaker 1: or environmental piece of it, you know, you might be
Speaker 1: looking at alternative renewable project finance, right, so project finance,
Speaker 1: there's no technology risk. Your counterparties are typically investment grade utilities,
Speaker 1: sometimes with very long power purchase agreements, and you're underwriting
Speaker 1: that based on the variability of the power rather than
Speaker 1: on the credit worthiness of the counterparty. And yet despite
Speaker 1: the fact that the sun shines pretty consistently and you
Speaker 1: can look at long term patterns, um you're seeing you know,
Speaker 1: even three or four years ago, uh, you know, double
Speaker 1: digit returns being backed by a public trade utility with
Speaker 1: a three handle under debt, and that asymmetry made no
Speaker 1: sense to us. And now you're seeing that cost of
Speaker 1: capital for the project finance being driven down by the
Speaker 1: amount of capital flowing into the space. And we're even
Speaker 1: now starting to see these you know, pretty high capex
Speaker 1: projects without power power purchase agreements backing them up, which
Speaker 1: three years ago would have been unheard of. And that's
Speaker 1: just shows you how far the capital markets have evolved
Speaker 1: changed totally. They're just underwriting these like conventional it's a
Speaker 1: conventional energy source. So they're they're yelling at me because
Speaker 1: you're they're they're coming to take you away to TV.
Speaker 1: So I'm gonna jump to my last two questions before
Speaker 1: uh uh and it takes thirty seconds to get ready
Speaker 1: for makeup and what have you. But what advice would
Speaker 1: you give to a millennial or someone just starting out
Speaker 1: their career in finance? I would say, develop an awareness
Speaker 1: of impact investing and expertise. You can be fluent in
Speaker 1: the language. Go to Wall Street and get your investment
Speaker 1: chops down cold, and then find a relatively small shop
Speaker 1: that is focusing on impact investing because in my mind
Speaker 1: that's the future, because right now there's a talent hole
Speaker 1: in impact investing that's really quite fascinating. Final question, what
Speaker 1: is it that you know about E s G Or
Speaker 1: impact investing today that you wish you knew when you started?
Speaker 1: However many years ago that was I wish that I knew?
Speaker 1: This is the question, by the way, that stumps people.
Speaker 1: What do you know today that? What would I tell
Speaker 1: myself ten years going back in time? What would you
Speaker 1: whisper in your own ear? Be more bold? Really? Yeah?
Speaker 1: No risk aversion here? Why does that not surprise me
Speaker 1: coming from you? It's not about the risk aversion with
Speaker 1: the capital allocation. I mean, I think you know whatever
Speaker 1: investment discipline you have in place to invest responsibly and
Speaker 1: well not from an riarty perspectively, just invest capital responsibly.
Speaker 1: You don't want to drop that, right, You don't want
Speaker 1: to just start swinging for the fences from an investment,
Speaker 1: but you mean be more bold in in your pro too,
Speaker 1: launching a business, embracing a different approach. Not hey, just
Speaker 1: let's leverage let's leverage up on these three x et s.
Speaker 1: I just think about how cautiously we talked about impact investing,
Speaker 1: and how hesitant we were to even let many of
Speaker 1: our clients know we were doing it, because we were
Speaker 1: afraid that our embedded client base would find that we were,
Speaker 1: you know, wandering off into the weeds building out our
Speaker 1: capacity impact investing where was. What we've discovered is that
Speaker 1: every one of our clients. That's probably a dramatic statement. Um.
Speaker 1: What has surprised us is how many of our clients
Speaker 1: that we perceived to be conventional investors have expressed an
Speaker 1: enormous amount of interest in impact investing. Not necessarily Hey
Speaker 1: I'm all in flip my portfolio, but I like this,
Speaker 1: I like the concept. Tell me more, tell me more,
Speaker 1: and you I've been getting a fair amount of press
Speaker 1: recently for the work that we're doing, and people read
Speaker 1: that and it gets passed around and suddenly they want
Speaker 1: to know about it. And I think that had I
Speaker 1: known there was gonna be this level of interest ten
Speaker 1: years ago, we would have been more demonstrative at the
Speaker 1: time instead of sort of hiding it. Yeah, that's what
Speaker 1: I would say to myself. Matthew Weatherley White, Uh, thank
Speaker 1: you so much for being so generous with your time.
Speaker 1: This is really been quite fascinating and really very interesting,
Speaker 1: and I'm glad you made the time to see us.
Speaker 1: I hope this has been too painful, Verry, this is
Speaker 1: been an absolute pleasure. Thank you for inviting me onto
Speaker 1: your show. Well, well my pleasure for those of you
Speaker 1: who are listening. I would be remiss if I did
Speaker 1: not think the team that puts this together, Reggie's our
Speaker 1: recording engineer Charlie Volmer, our producer Taylor Riggs, or booker
Speaker 1: Michael bat Nick is the head of research and does
Speaker 1: a yeoman job helping me come up with really interesting questions.
Speaker 1: If you have enjoyed this conversation, be suan look Up
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Speaker 1: you will see any of the other one hundred or
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Speaker 1: right to us at m i B podcast. That's Masters
Speaker 1: in Business m i B podcast at Bloomberg dot net.
Speaker 1: I'm Barry Ridalts. You've been listening to Masters in Business
Speaker 1: on Bloomberg Radio.