Speaker 1: This is Master's in Business with Barry rid Holds on
Speaker 1: Bloomberg Radio. This week on the podcast, I have an
Speaker 1: extra special guest. Elizabeth Burton is Goldman Sachs's Assets Management's
Speaker 1: client investment strategist. Previously, she was chief investment officer at
Speaker 1: various state pension funds, including Maryland and Hawaii. I found
Speaker 1: this to be really an intriguing conversation with somebody whose
Speaker 1: investment charge is unconstrained. She can go anywhere do anything.
Speaker 1: She provides advice to institutions and high net worth investors
Speaker 1: that isn't limited by the typical buckets or lines or
Speaker 1: structure that you so often see. Her job is portfolio
Speaker 1: and product solutions, and that means she could go anywhere
Speaker 1: in the world than do anything. I thought this conversation
Speaker 1: was absolutely fascinating, and I think you will also with
Speaker 1: no further ado, Goman Sachs Asset Managements. Elizabeth Burton, Hi Arry,
Speaker 1: thank you for having me. That is quite a resume.
Speaker 1: Let's start a little bit before we get to what
Speaker 1: you do with Goldman Sachs. Let's talk about your background,
Speaker 1: which is really kind of fascinating. First, you have a
Speaker 1: degree in French, how does that lead to a group
Speaker 1: to a focus on investment management?
Speaker 2: I do have a degree in French, A little bit
Speaker 2: of a cheat there, unless you consider English majors cheating
Speaker 2: as well who speak English. But my grandmother's from Normandy,
Speaker 2: and so I've been speaking French since like as long
Speaker 2: as I can remember, and I love French literature. I
Speaker 2: actually have some relationship far far away to Jules Vernen.
Speaker 2: So how does that relate to finance?
Speaker 3: It doesn't. But my parents told me college is the
Speaker 3: last time you can.
Speaker 2: Study in our dime anything you would like, and so
Speaker 2: they were both in finance, and I decided that must
Speaker 2: be the absolute last thing I ever wanted to do.
Speaker 1: So University of Chicago Booth School of Business. Was this
Speaker 1: just an inevitable, unavoidable thing your parents come from that
Speaker 1: it seems like you're getting a lot of your focus
Speaker 1: from your genetics. What led to Booth?
Speaker 2: Well, so I will this will be the first time
Speaker 2: I'm telling honestly why I went to Booth Two reasons.
Speaker 2: One one is true, and I've always said is that
Speaker 2: I wanted people to stop asking if I could do math,
Speaker 2: And no one asked me if I can do math anymore?
Speaker 2: With a degree from both, particularly in econometrics and statistics.
Speaker 2: But the other reason was Booth rejected me an undergrad.
Speaker 1: Oh really, yes, I'll show that of Chicago, so right.
Speaker 2: And then the third and final reason was my dad
Speaker 2: got his PhD in econ from Northwestern, but he's so ancient.
Speaker 2: Back then it was taught at the University of Chicago,
Speaker 2: and so I.
Speaker 1: Wait, so Northwestern grad students took classes at you see.
Speaker 2: At you Chicago, and my dad lived in the International House.
Speaker 2: He's from Houston, so I don't know how he pulled
Speaker 2: that one.
Speaker 1: Well, it's really like a different a different kind of
Speaker 1: humidity makes it feel in Houston, makes it feel like
Speaker 1: you're in the tropics. So it's close totally. That's very amusing.
Speaker 1: So people really ask you, if you take French, you
Speaker 1: do math? Is that like still the sort of thing
Speaker 1: that we ask people.
Speaker 2: I think it's because I went into risk management straight
Speaker 2: out of school, on the risk side of fund of
Speaker 2: funds and various other industries, and without a formal degree
Speaker 2: in math and statistics. I think there was some hesitation
Speaker 2: on whether or not it was capable of doing it,
Speaker 2: which which may be fair, And I wanted to bolster
Speaker 2: my resume a little bit away from politics and French
Speaker 2: and so I thought, what better places to go?
Speaker 3: And you know it might hurt a little bit.
Speaker 2: Chicago's a pretty good place to learn some math.
Speaker 1: And flance, I'll say for sure. So how do you
Speaker 1: go from coming out of Booth School in University of
Speaker 1: Chicago to getting named CIO magazines top forty under forty.
Speaker 2: So that was kind of a meandering path a little bit.
Speaker 2: What ended up happening was I met my husband right
Speaker 2: before I went to business school.
Speaker 3: He was living in Maryland.
Speaker 2: My boyfriend during business school and he was living in Maryland,
Speaker 2: and so after school, I decided I should probably move there,
Speaker 2: not back to New York, not back to California. And
Speaker 2: the hedge funds down there looked like Post made off
Speaker 2: post GFC that they were really.
Speaker 3: Going to struggle. So I had to switch industries.
Speaker 2: So I actually went to work in M and A
Speaker 2: in payments, and I enjoyed that.
Speaker 3: After three years, I decided I don't.
Speaker 2: Love payments enough to continue to do consulting in M
Speaker 2: and A and payments, so I actually went and worked
Speaker 2: in economics. I was an econometrician. And then when my
Speaker 2: second child was born, I needed a little bit of
Speaker 2: a different lifestyle. I had two kids, they were both young.
Speaker 2: My father had worked with public pensions and he said,
Speaker 2: this is a pretty good place to be in finance
Speaker 2: if you want to raise kids. It's a little bit better,
Speaker 2: better of a lifestyle. Well, so I applied to Maryland
Speaker 2: State Retirement. I actually think I interviewed there a couple
Speaker 2: of days after my child was born because they were
Speaker 2: cutting off the application. And I luckily, thankfully got the job.
Speaker 3: Got to work for one.
Speaker 2: Of the most amazing CIOs in the businesses and a
Speaker 2: close friend, Andy Palmer. But how I got the award,
Speaker 2: I'm not sure. I think, you know, I was in
Speaker 2: my main thirties at the time, and I think I
Speaker 2: was a little bit outspoken. And I also believe that
Speaker 2: I have never really believed in bucketing very much in investments,
Speaker 2: and so I often look at investments in my portfolio
Speaker 2: that may be different from what most other people put
Speaker 2: in their portfolios.
Speaker 1: So I have like a half a dozen questions that
Speaker 1: has led me to But let's start with bucketing, or
Speaker 1: what some people call silos, different types of investing. When
Speaker 1: you say you haven't been much for bucketing. Tell us
Speaker 1: what you mean by that.
Speaker 3: Well, let me give you an example.
Speaker 2: I don't know if you're in the market for a
Speaker 2: house currently, but let's say you're real at her goes
Speaker 2: and says, I talk to you, and you say I
Speaker 2: love Cape CODs, And he's like, okay, okay, I've also
Speaker 2: got this amazing condo that overlooks all of Central Park
Speaker 2: and it's only a one million dollars, right, or it's
Speaker 2: only two hundred thousand dollars. And you say, wow, two
Speaker 2: hundred thousand dollars for a condo overlooking Central Park. That
Speaker 2: sounds great. But I only have spots in my portfolio
Speaker 2: for a Cape Cod. How ridiculous is that?
Speaker 1: Right?
Speaker 2: So it's a problem that institutions often suffer from that
Speaker 2: Retail investors do not like you and me, we probably
Speaker 2: don't have this bucketing issue. And so I always felt
Speaker 2: an institutional management that we were hamstrung by these bucketing
Speaker 2: issues because we weren't able to invest in things because
Speaker 2: of these prescribed rules, which I'm not saying are bad,
Speaker 2: but they can be limiting. Anytime you have a rule,
Speaker 2: you limit your availability of option.
Speaker 1: So let's stay with this. So when I think of bucketing.
Speaker 1: I think of a large institution that says, well, we're
Speaker 1: gonna we like this space, pick a space, private credit,
Speaker 1: venture capital, real estate doesn't matter, and we want to
Speaker 1: allocate ten percent of our portfolio to that particular space.
Speaker 1: What you're suggesting is regardless of whether they're fantastic deals
Speaker 1: elsewhere or this space is pricey. You think that that
Speaker 1: sort of bucket very much hamstrings the CIO to make
Speaker 1: the best decisions.
Speaker 2: I believe it can. I believe it can save you
Speaker 2: from making poor decisions outside of your mandate. But here's
Speaker 2: a good example that's come up in recent years. Real
Speaker 2: estate that has been something in recent years that is
Speaker 2: something that we're seeing in institutional portfolios. So does that
Speaker 2: go in real estate or does that go in debt?
Speaker 3: It can be a tricky problem.
Speaker 1: Well, it depends on how it's financed.
Speaker 3: It could It.
Speaker 2: Could also depend on the bogie or the target return
Speaker 2: for either of the If the person managing those two
Speaker 2: portfolios are different, they may have different objectives, so it
Speaker 2: may slip the cracks even though it's a good investment.
Speaker 2: There's also some sort of some hedge fund structures that
Speaker 2: have private equity, like investments. If the private equity team
Speaker 2: doesn't feel that the return.
Speaker 3: Is high enough, they will pass.
Speaker 2: But if the hedge fund team feels like it has
Speaker 2: too high of inequity beta, right, they may pass on that.
Speaker 3: So you may miss.
Speaker 2: Out on a good investment. So I always try to
Speaker 2: find a way to not miss out on those investments. Plus,
Speaker 2: often those investments are some of the better investments because
Speaker 2: a lot of people have these constraints, right, so there's
Speaker 2: not as much capital flying flying in there, and when
Speaker 2: you have limited capital chasing you know these really amazing deals,
Speaker 2: you can often earn a higher return.
Speaker 1: So before you said perhaps it was because you were
Speaker 1: outspoken and I was going to say, how do people
Speaker 1: work in public pensions? Not spoken, but I get the
Speaker 1: sense of what you're saying. You're pushing back at established
Speaker 1: assumptions of investing, that we can create these broad categories
Speaker 1: regardless of whether it helps our performance or not. In fact,
Speaker 1: it sounds like you think these rigid rules get in
Speaker 1: the way of good investors making good decisions.
Speaker 3: I think sometimes.
Speaker 2: But you could also take that and apply it to
Speaker 2: a company, right, So you could say that if you
Speaker 2: have a company that has people working there for twenty
Speaker 2: five years. They all have seen the same thing for
Speaker 2: twenty five years. When you get one person that comes
Speaker 2: in and has a year of experience in that industry,
Speaker 2: they're going to bring a new vision to it. And
Speaker 2: it may be wrong, but there might be parts of.
Speaker 3: That that are really interesting.
Speaker 2: And I feel that because I was only there for
Speaker 2: a year when I won that award, there might have
Speaker 2: been flaws in my argument. But because I hadn't grown
Speaker 2: up in the public pension spase, I had a different
Speaker 2: perspective of what might work, and that's what I applied.
Speaker 1: Right, So not only diversity as we tend to think
Speaker 1: of it broadly, but diversity of experience, diversity of ideas,
Speaker 1: just different ways of looking at things. So let's talk
Speaker 1: about your prior experience. You worked at a South African
Speaker 1: based hedge funds or fund of funds.
Speaker 2: But fund of funds, and they did have an F
Speaker 2: three product as well, if you can believe it, a
Speaker 2: fund of fun to funds.
Speaker 1: Oh so that's fun to fun squared. Tell us about
Speaker 1: that experience. Were you actually in South Africa? Are you
Speaker 1: working in the States.
Speaker 3: I was working.
Speaker 2: So they had four offices, one in Switzerland, one in Johannesburg,
Speaker 2: one in Cape Town, and one in New York. And
Speaker 2: so the New York team was the Diligence team, and
Speaker 2: we had a couple of products. I had originally started
Speaker 2: out on the multi strategy product. I had gone to
Speaker 2: work there because I'd previously worked in mortgages, in mortgage backs,
Speaker 2: and as you know, that was around seven and eight
Speaker 2: tricky time.
Speaker 3: Wanted to diversify this.
Speaker 1: Something happened, Something happened.
Speaker 2: So I wanted to try other strategies, and multi strat
Speaker 2: sounded like a good place to learn about a bunch
Speaker 2: of different types of strategies. I was really interested in
Speaker 2: hedge funds. Our clientele was mostly x US, almost exclusively
Speaker 2: x US, and it was great.
Speaker 3: It was the best part about that job.
Speaker 2: Actually, it wasn't even the investing and the meeting funds.
Speaker 2: It was actually that I worked on a team across
Speaker 2: multiple continents and like just trying to stay in touch
Speaker 2: and trying to work together on this portfolio and coordinate meetings.
Speaker 2: And we all had different backgrounds and different investment ideas
Speaker 2: and different clients. Like US clients are very different from
Speaker 2: clients in other countries, so it was really a unique experience.
Speaker 2: I still keep in touch with them. I eventually moved
Speaker 2: over to the global macro CTA type side of the business,
Speaker 2: a little bit of a diversifier, which is funny because
Speaker 2: later at Maryland and then Hawaii, that was a big
Speaker 2: part of our investment strategy was investing in macro or
Speaker 2: CTA and trend type funds.
Speaker 3: So it was a great learning ground for me.
Speaker 1: Was there a lot of travel? You were back and
Speaker 1: forth at Geneva or London or Johannesburg, Zurich.
Speaker 2: Johannesburg and Cape Town the majority of the trips, and
Speaker 2: we tried to go a couple times a year to
Speaker 2: each of the different offices. They would come here as well,
Speaker 2: but at that point I was still fairly young, and
Speaker 2: it wasn't as much client faxing x US, not as
Speaker 2: much explaining, and because I was on the diligence team,
Speaker 2: so more research base.
Speaker 1: That flight to South Africa is thy.
Speaker 2: Two hours with a layover in Dakar, and I remember
Speaker 2: before the airline rules, I got stuck on the tarmac
Speaker 2: once for five hours.
Speaker 1: Wow, no fun. So you end up going from the
Speaker 1: fund of funds to pension funds and what was first
Speaker 1: Maryland or why so Maryland's first.
Speaker 2: I had two brief jobs between the Fund of Funds
Speaker 2: in Maryland and business school in between there, Maryland was first,
Speaker 2: and I never intended to leave Maryland. It was one
Speaker 2: of my favorite jobs. Probably my current job is probably
Speaker 2: my favorite job, but that is a very close, good safe.
Speaker 3: For very similar reasons.
Speaker 1: Actually, But well, tell us why why was Maryland and
Speaker 1: Goldman your favorite jobs?
Speaker 2: I think number one the team my team at Goldman
Speaker 2: and the broader team even and the team at Maryland
Speaker 2: are some of my favorite people. Just really wonderful, smart,
Speaker 2: fun human beings to work with with a very clear mission.
Speaker 2: I also really like the access talking to really smart
Speaker 2: people at Golman. It's the internal access, talking to the
Speaker 2: traders and the pms and the CIOs. And we have
Speaker 2: so many offices across the world that are.
Speaker 1: A unique vision of what's going on in the world, right,
Speaker 1: I mean, I have to think the intelligence that comes
Speaker 1: from that team in what they see everywhere has to
Speaker 1: be incomparable. It's just about anything else.
Speaker 3: It is amazing.
Speaker 2: I sometimes wonder if I would have rather having started
Speaker 2: with this experience and then got what I would have
Speaker 2: been better at Maryland having known what I know now,
Speaker 2: or am I better now having learned how things work
Speaker 2: on the clients. So I go back and forth. But
Speaker 2: I'm lucky to have had both. And at Maryland it
Speaker 2: was a giant pool capital fifty five billion back then.
Speaker 2: I'm not sure exactly what it is now. But you
Speaker 2: could talk to pretty much whoever you wanted to talk
Speaker 2: to if you had a question. If you had a
Speaker 2: question on high yield, It's not conceivable one day you
Speaker 2: might get to talk to Milkin about it, and that
Speaker 2: is just so cool. And I learned a lot because
Speaker 2: remember I majored in French and politics. I did go
Speaker 2: to Chicago, but they teach more finance less about like
Speaker 2: these esoteric strategies. And that's one of the things I
Speaker 2: love about Goldman, and I also loved about Maryland is
Speaker 2: like good people and you're constantly learning and it never
Speaker 2: is boring.
Speaker 1: That sounds fascinating. Let's talk a little bit about your
Speaker 1: time as CIO at Hires. Is that how that's pronounced, Yes,
Speaker 1: the acronym for the Hawaii Investment Employt Retirement System or
Speaker 1: where it's to that effect. How did that come about?
Speaker 1: That seems like such a fascinating position and so far
Speaker 1: away from Maryland's.
Speaker 3: It is interesting how it happened. I guess I got lucky.
Speaker 2: In January or February of twenty eighteen, Hawaii HA parted
Speaker 2: ways with their then chief investment officer and there was
Speaker 2: an article in a magazine for institutional allocators about it
Speaker 2: and how they were hiring. And I still have the
Speaker 2: email I sent to my husband and I said, ha, ha,
Speaker 2: want to move to Hawaii. And I forwarded it to
Speaker 2: him and I was very happy at Maryland. Wasn't planning
Speaker 2: on leaving, and I had a lot of ties to
Speaker 2: Maryland that I didn't think I wanted to break. But
Speaker 2: on a whim, I applied, and at the same time
Speaker 2: had mentioned to a friend of mine that I had applied,
Speaker 2: And it turns out the recruiter had called my friend
Speaker 2: about the job and he said, I'm not interested, but
Speaker 2: I know someone who applied and she's got a risk background,
Speaker 2: and I know you at.
Speaker 3: How I care about risk, and so he put me
Speaker 3: in contact with a recruiter.
Speaker 2: They reached out and they said, look, you're one of.
Speaker 3: One hundred and forty. It's unlikely.
Speaker 2: So I actually went on vacasion. I went to work
Speaker 2: in Asia. It was gone for a couple of months
Speaker 2: here and there. When I got back, they said, okay,
Speaker 2: that's STI unlikely, but you're down to about forty.
Speaker 3: I was like, oh, oh, well, I like those odds.
Speaker 3: Thos are okay.
Speaker 2: And then by June I was telling my husband I'm
Speaker 2: in the final four. We got to fly out there,
Speaker 2: and he said, I moving to Hawaii. He had he
Speaker 2: had a great job. He's very senior in his career.
Speaker 2: Both our families are on the Ease coast. She went
Speaker 2: out there for about a week and at the end
Speaker 2: of the week that I interviewed, got the job and
Speaker 2: we accepted by the.
Speaker 3: End of the week.
Speaker 1: Really, so what changed to make your husband say, yeah,
Speaker 1: I could live in tropical paradise if I have to.
Speaker 3: I think, you know, he's a really good guy.
Speaker 2: I basically said, I've been working in my whole life
Speaker 2: for something like this. I was thirty four, I was
Speaker 2: a female. It was, you know, a Hawaii pension. There's
Speaker 2: only so many pensions take pensions in the US. I said,
Speaker 2: who knows what the next one to crop up will be.
Speaker 3: This is unique.
Speaker 2: There's just there aren't that many young or females cee
Speaker 2: Ia is I have got to try this, And I
Speaker 2: think he could tell how badly I wanted it, and
Speaker 2: he sweetly gave up his job of fifteen years and
Speaker 2: wow followed me out there.
Speaker 1: Wow. So, how long did you stay in Hawaii?
Speaker 3: For four years?
Speaker 1: You lived on the islands? We did, so part of
Speaker 1: me thinks of Hawaii as his tropical paradise. But I've
Speaker 1: spent time on other islands, and I know at a
Speaker 1: certain point you get a little island fever. You're stuck
Speaker 1: with your seeing the same things. How long did it
Speaker 1: take before it was no longer tropical paradise? It's just
Speaker 1: where we lived.
Speaker 2: Well, I think COVID sped up the process a little bit.
Speaker 2: I also, I don't know if you've ever experienced this.
Speaker 2: There's like one day when your parents are really young,
Speaker 2: and then within thirty minutes they all of a sudden
Speaker 2: mamede and you miss them and you've got to take
Speaker 2: care of them. And so my parents, if they listen
Speaker 2: to this, are going to kill me for calling them old.
Speaker 2: But you know, I had little kids had when I
Speaker 2: moved there. My daughter was two, my son was four,
Speaker 2: and I think they saw them two three times, right,
Speaker 2: and I was realizing I was sacrificing my family to
Speaker 2: live in this beautiful location. I also really missed being
Speaker 2: in New York. It's an island too, and that's an island, right,
Speaker 2: And I missed being around the buzz of finance. It's
Speaker 2: very easy in Hawaii to get wrapped up in the
Speaker 2: water and surfing in the mountains and the hiking and
Speaker 2: all of that is lovely. But I run it about
Speaker 2: one hundred and sixty miles an hour, and I'd like
Speaker 2: to be at a place where people run at least
Speaker 2: at that And I have to say Goldman Sachs definitely
Speaker 2: runs at one hundred and sixty miles an hour, and
Speaker 2: I just I wanted to go back to finance and
Speaker 2: being more like in the middle of all the frenzy.
Speaker 1: I totally get that. I know this is sort of
Speaker 1: old school, but it's true. Once you leave New York,
Speaker 1: you've left town. You really have And it's and I
Speaker 1: don't just mean waiting twenty minutes for an egg McMuffin
Speaker 1: in Richmond, Virginia. I mean I leave New York, I
Speaker 1: make a concerted effort to like take it down a
Speaker 1: gear because the rest of the world has a very
Speaker 1: different pace than New York City, and I imagine places
Speaker 1: like London and Hong Kong and other financial capitals where
Speaker 1: it's pedal to the metal. Did it take you a
Speaker 1: while to get back into the rhythm here or like
Speaker 1: riding a bike, you were just right back into.
Speaker 2: It's funny that Hong Kong's my second favorite city in
Speaker 2: the world. New York is number one. No, it took
Speaker 2: all of thirty seconds. In fact, I very much wanted
Speaker 2: to live in Manhattan. I wanted to go back to
Speaker 2: the West Village where I lived in my twenties.
Speaker 3: But my husband was.
Speaker 2: Like, well, with two kids and a dog and a cat,
Speaker 2: maybe we should not do that. But no, I actually
Speaker 2: pretty long commute. I love coming in the city every day.
Speaker 2: I don't think for me personally, there's no better city
Speaker 2: in the world.
Speaker 1: I love. Well, your commute is not bad. There are
Speaker 1: much worse commutes.
Speaker 3: Than It's about an hour forty five.
Speaker 1: Oh really, because you have to go down to Yes,
Speaker 1: that's why. See, they need to move into the space
Speaker 1: between right between Penn Station and Grand Central knock a
Speaker 1: half hour off your commute each other. Oh. Absolutely, So
Speaker 1: let's talk a little bit about risk management. How does
Speaker 1: that come into play when you're looking at a big
Speaker 1: pension fund that has all of these obligations for employees
Speaker 1: in perpetuity.
Speaker 2: Right First, management is tough a pension and Goldman Sachs
Speaker 2: provides itself on being a good manager of risk. But
Speaker 2: Goldman Sachs has fewer constraints. We actually have a budget
Speaker 2: for risk management and technology and tools. That is not
Speaker 2: something your typical pension is able to do. And it's
Speaker 2: a critical need and they often have to find multiple
Speaker 2: tools that they can use, some free, some not free
Speaker 2: to try to make a good and robust risk management system.
Speaker 2: But it's definitely a challenge and it's really important because
Speaker 2: to your point, especially now, it's always been important, but
Speaker 2: I think post COVID, the industry is starting to realize
Speaker 2: that liquidity for pension funds is extremely important. It affects
Speaker 2: almost everything they do and the lack of it could
Speaker 2: have really dire outcomes for the pensioners and for the
Speaker 2: system itself and have a host of other consequences.
Speaker 1: Is it something that can be outsourced or does it
Speaker 1: have to be managed in house?
Speaker 2: I think it would be tough to outsource all of
Speaker 2: it unless also the investment team was partially outsourced.
Speaker 3: I think there needs to be.
Speaker 2: Some marriage between the two. But I do think that
Speaker 2: you can outsource certain functions of it, or you can
Speaker 2: have a consultant assist with the risk management. But I
Speaker 2: think the most important thing that you have to do
Speaker 2: at a pension fund for that is get a hold
Speaker 2: on your You have to have good lawyers and good contracts.
Speaker 2: You have to have a clear view of your liquidity
Speaker 2: and your cash flows.
Speaker 3: It's critical.
Speaker 1: So let's talk a little bit about that, because that's
Speaker 1: kind of fascinating. When when I think of a pension fund,
Speaker 1: I think of existing employees contributing into the funds a
Speaker 1: source of liquidity, and retirees drawing down on the fund,
Speaker 1: which is the liability or the future obligations. When when
Speaker 1: the pandemic shuts everything down, does this mean the current
Speaker 1: employees are not making contributions? What happened during that period.
Speaker 2: So we actually never fully shut down. We were always
Speaker 2: in operations, and we were I was in the office
Speaker 2: pretty much full time. But one thing I want to
Speaker 2: point out is that not all employees at all.
Speaker 3: Pension funds contribute. Some don't.
Speaker 2: There are certain types of employer sponsor plans where some
Speaker 2: portion of the employees are potentially all are part of
Speaker 2: non contributory plans. Now, their multipliers are different, their payouts
Speaker 2: are different. But that's a tough situation when you're not
Speaker 2: paying in and you're only receiving, right, but what you
Speaker 2: did mention So in COVID, a bunch of pension funds
Speaker 2: experienced or thought they were going to experience furloughs or
Speaker 2: cuts in their work week, which are essentially cuts into wages. Right,
Speaker 2: So fifty percent furloughed, you're also fifty percent wage cut.
Speaker 2: Those would slow contributions into the system, but it depends
Speaker 2: on how you calculate the multiplier going out. So if
Speaker 2: it's based on their highest wage, ever, it could be
Speaker 2: your contribution to actually stay constant while the incoming cash
Speaker 2: flows are not. Also, in many pension funds, while there
Speaker 2: are technically penalties for employers not contributing to the system,
Speaker 2: it's very politically unpopular for a pension fund to go
Speaker 2: after it's counties or teachers or police for payments, So
Speaker 2: it's very unlikely that would happen.
Speaker 1: Especially in the middle of a crazy pandemic with everything
Speaker 1: associated there too.
Speaker 2: So it's a very precarious position. Luckily it actually, as
Speaker 2: you probably know, the market turned around rather sharply. There
Speaker 2: was a good equity rebound. A lot of this didn't
Speaker 2: end up happening. In fact, state revenues were often at
Speaker 2: all time highs from taxes when this happened, so that
Speaker 2: the worst was somewhat avoided in the US, I will say,
Speaker 2: but it did shed a light on the fact that,
Speaker 2: you know, you still can have equities and bonds right
Speaker 2: down at the same time, you can have a challenging
Speaker 2: liquidity environment, just like we had No eight, which I
Speaker 2: don't think you know, they're not the same thing, but
Speaker 2: similar challenges in some respects.
Speaker 1: So how do you think about I'm still looking at
Speaker 1: the liquidity issue. How do you think about under normal
Speaker 1: circumstances matching future liabilities with liquidity or cash flows. I'm
Speaker 1: sure there are all sorts of actuarial tables that you
Speaker 1: were working with, but you have to think, what are
Speaker 1: obligations going to be five years, ten years, twenty years out.
Speaker 1: Most investors don't think in those times, No.
Speaker 2: They probably don't unless they're investing in private markets or
Speaker 2: in your house. You're probably thinking about how to afford
Speaker 2: those payments, So in the US and Europe or abroad,
Speaker 2: they're actually two separate things. So in the US, corporate
Speaker 2: pensions other than public pensions, right, corporate pensions tend to
Speaker 2: focus more on the liability driven side, meaning they're matching
Speaker 2: their cash flows very carefully. On the public side, usually
Speaker 2: it's not an LDI type format, they are monitoring their liquidity.
Speaker 2: So they might have a coverage ratio, so they might
Speaker 2: say how many times can we meet our pension payments
Speaker 2: and private market private equity capital commitment pacing over a
Speaker 2: certain ratio with no contributions over a certain umbur of years.
Speaker 2: So maybe they say, okay, we want it to be quarters,
Speaker 2: we want it to be twenty times, and then they
Speaker 2: can manage to that or something like that. And they
Speaker 2: often have models for modeling the on corporate pensions or
Speaker 2: European pensions. They most likely are involved in either liability
Speaker 2: driven investing or this cash flow matching. But I will
Speaker 2: say of the top ten questions I get from allocators
Speaker 2: this year, one of them is can we implement cash
Speaker 2: flow matching to try to help our liquidity issues? Because
Speaker 2: of the denominator effect right now, a lot of pension
Speaker 2: funds in the US are still suffering from some liquidity
Speaker 2: issues since they're super overweight private equity and the equity
Speaker 2: markets had stumbled right.
Speaker 1: So that means while the value of the fund is
Speaker 1: where they wanted to be, the liquidity in the ability
Speaker 1: to send out cash is somewhat compromise.
Speaker 2: It's challenging, especially because private equity funds are not distributing
Speaker 2: as much as they used to because there haven't been
Speaker 2: as many sales in the market or exits, so they're
Speaker 2: getting hit on sort of both ends.
Speaker 1: So in twenty twenty two, when equities were down and
Speaker 1: fixed income were down, they were both down double digits.
Speaker 1: Were you saying to yourself, I'm glad I'm not running
Speaker 1: a state pension fund this year, or like, what was
Speaker 1: that experience like from your perspective where you are now?
Speaker 2: No, so, I you know Hawaii, It should have done
Speaker 2: probably quite well during that time. It depends on your
Speaker 2: asset allocation. I also don't think you should ever really
Speaker 2: beat yourself up for sticking to your acid allocation.
Speaker 3: And your beliefs.
Speaker 2: I also think that was a great learning experience. But
Speaker 2: more importantly, I have always struggled with why there seems
Speaker 2: to be some belief that equities and bonds will be
Speaker 2: negatively correlated throughout time.
Speaker 3: Oh, it's simply not the case.
Speaker 1: Go back to nineteen eighty one, you've had both stocks
Speaker 1: and bonds down. I believe double digits that year, and
Speaker 1: the year before was pretty close as well.
Speaker 2: Right, And if you look at inflationary environments, a positive
Speaker 2: correlation between the two.
Speaker 3: It's also not uncommon.
Speaker 2: And I think, sitting back in twenty twenty, twenty twenty one,
Speaker 2: I was adamant that inflation was not transitory, adamant and
Speaker 2: super public about it. I had many people, super famous
Speaker 2: people telling me I was completely wrong. It's the one
Speaker 2: good call I made ever my entire life. But so
Speaker 2: I felt confident that I had prepared myself for this
Speaker 2: type of environment. It's tricky, though, because one of the
Speaker 2: things that can help you in this sort of environment
Speaker 2: is a diversifier. It could be head friends, it can
Speaker 2: be commodities, it could be cash, right, but commodities were
Speaker 2: often taken out of institutional portfolios a decade or so ago,
Speaker 2: because really they so there was at one point right
Speaker 2: after I think actually the Gonzex Commodities Index came into
Speaker 2: existence commodities actually struggled right after that index came out
Speaker 2: for a while, right, And also the makeup of that
Speaker 2: index has changed over time. It used to be I believe,
Speaker 2: mostly like cattle features, but in commodities and disease. So
Speaker 2: a lot of institution investors got tired of like the
Speaker 2: challenging returns and the volatility and commodities. Also, it can
Speaker 2: be challenging to invest in something without like an you
Speaker 2: know that's based on supply and demand and.
Speaker 3: Not some sort of like intrinsic value.
Speaker 2: And they took it out of their asset allocation in
Speaker 2: favor of other strategies. So when the pandemic came, they
Speaker 2: didn't have that as a diversifier outright. They might have
Speaker 2: had it through it's also hard to invest in start.
Speaker 1: It would have been a good inflation diversified but it
Speaker 1: wasn't there.
Speaker 2: And once you start looking for something when the ship's
Speaker 2: already sinking, right, it's.
Speaker 3: A little late. So I was what I was most curious.
Speaker 2: About actually in twenty twenty two, if when we saw
Speaker 2: asset liability studies come out in twenty twenty three for
Speaker 2: pension funds, where we going to see people putting commodities
Speaker 2: back into their portfolio. And no, but out of the
Speaker 2: cash allocations at some endowments and foundations, at some pensions
Speaker 2: there's gold allocations like the outright gold allocations, but they're
Speaker 2: not they're not in the investment policy statement. The interesting yes,
Speaker 2: in for the most part, this is not you know, ubigodius.
Speaker 2: But so that was an interesting play. And then but
Speaker 2: another question I got in twenty twenty three that I
Speaker 2: haven't heard in a long time is people asking for
Speaker 2: information on CTA's trend following importable alpha to have diversified
Speaker 2: buyers and try to ease cash in this environment.
Speaker 1: That's intriguing. Let me stick with either gold or commodities
Speaker 1: or both. How much of the large allocators a voidance
Speaker 1: of that has to do with the fact that academia
Speaker 1: is not a big fan of commodities. They are not
Speaker 1: just gold. But when you look at Kamali's general as
Speaker 1: opposed to trend following and specific trading systems, the academics
Speaker 1: I always look at it and say, we don't see
Speaker 1: a real return here over longer periods of time. There
Speaker 1: are specific short periods of time where they do spectacular,
Speaker 1: but over long time and eventually mean reverts. Is the
Speaker 1: allocator issue with commodities a function of, Hey, we just
Speaker 1: don't have the white papers to show this is a
Speaker 1: good long term investment or is it something else? And
Speaker 1: I know I'm calling on you to speculate because it's
Speaker 1: a goofy question.
Speaker 3: Well I'm not.
Speaker 2: I would love to agree with you that it is
Speaker 2: the academia, But academia a and always predict the best
Speaker 2: outcomes in I can say this because my dad's an
Speaker 2: academic don't always have the best outcomes in terms of investing.
Speaker 2: I do think there's some merit in staying that. But
Speaker 2: I would also point out that risk parity doesn't have
Speaker 2: a deep history in academia and doesn't have a ton
Speaker 2: of support. And yet risk parity was historically very popular.
Speaker 1: And it's done fairly well recently.
Speaker 2: Great So I don't know if it's purely academic based.
Speaker 2: I think part of it is a volatility, and part
Speaker 2: of it is that it is genuinely unless you're doing
Speaker 2: it through a hedged vehicle or a hedge fund or
Speaker 2: an alternative investment, it is hard to get access to commodities. Typically,
Speaker 2: it's just not the easiest thing to invest in. And
Speaker 2: a lot of funds historically were prohibited from investing in alternatives.
Speaker 1: Meaning they can't invest in futures or anything with the
Speaker 1: liability components of it. So let's talk a little bit
Speaker 1: about what you do at Goldman Sachs's asset management, starting
Speaker 1: with how did you end up at Goldman? It sounds
Speaker 1: like things were delightful on the island of Oahu where
Speaker 1: you were working in Hawaii. Is that where you were
Speaker 1: living or yes? Uh huh not a terrible place to
Speaker 1: set up shop, right, No, it was.
Speaker 3: A wonderful place to live. Yes.
Speaker 2: I would have bet you money I wouldn't have ended
Speaker 2: up at Goldman Sachs two years ago.
Speaker 1: So you weren't going to leave Maryland. You were never
Speaker 1: going to end up in a while. You weren't going
Speaker 1: to go in Goldman. I'm taking the other side of
Speaker 1: your trade, your career. So how did this come about?
Speaker 4: Well?
Speaker 2: I decided to leave Hawaii, believe in about maybe March
Speaker 2: April May of twenty twenty two, and I gave a
Speaker 2: couple months notice and I did not have another job
Speaker 2: lined up.
Speaker 1: I did not know what I wanted to do. Wow.
Speaker 3: So that is a common trend with me.
Speaker 1: I usually yes, something will come up.
Speaker 2: I just can't quiet quit, so I need to just say, hey,
Speaker 2: this isn't the right fit.
Speaker 3: Something will happen.
Speaker 2: And I evaluated what I wanted to do next, and
Speaker 2: I sort of just assumed, Okay, I'll go be a
Speaker 2: CIO somewhere else. We'll see what happens. And I was
Speaker 2: close to taking another role. And when I started thinking
Speaker 2: about we're at Goldman Sachs, I thought, this is again
Speaker 2: just like Chicago. This may hurt, this may be really hard.
Speaker 2: It's going to be a lot of very smart people.
Speaker 2: But I really, like I said earlier, I missed running
Speaker 2: at like one hundred and sixty miles an hour.
Speaker 3: I wanted a challenge.
Speaker 2: I was, you know, forty, and I figured I have
Speaker 2: a couple more moves in me and I wanted something different,
Speaker 2: and I thought, let's see if I can do this.
Speaker 2: And most importantly, like I said before, I loved the team.
Speaker 2: Some of my favorite investors right now are people that
Speaker 2: came out of Goldman Sachs, mostly hedge funds, because I
Speaker 2: love hedge funds. But to me, it was like joining
Speaker 2: the Yankees, like I had followed their versions of Derek
Speaker 2: Jeter and I was like, Wow, I could I could
Speaker 2: go work for these people that I idolized.
Speaker 3: This would be amazing.
Speaker 1: And I'm assuming you know a lot of these people
Speaker 1: through both Maryland and Hawaii, CIO, you're interacting with them
Speaker 1: on a regular basis. What made you think, Hey, I
Speaker 1: can I can keep up with these guys. I want
Speaker 1: to play on this team.
Speaker 2: I think was the one that said you can keep
Speaker 2: up with us, you can play on this team. And
Speaker 2: the amount that they letting me come here and do
Speaker 2: this interview, the amount that Goldman believes in me every day.
Speaker 2: I had to tell you, it's it's like the best
Speaker 2: feeling in the world to wake up and put on
Speaker 2: the Goldman jersey, like they believe in me.
Speaker 3: And it's crazy. I think they believe more than my family.
Speaker 1: I'm going to tell you right now, I don't think
Speaker 1: it's crazy at all, given your history and your your
Speaker 1: track record. But at what point in the process was
Speaker 1: it who was interviewing, who were they recruiting you, or
Speaker 1: had you kind of quietly reached out How did this
Speaker 1: specific position come about?
Speaker 2: You know, I don't even know if the position it self,
Speaker 2: Huven came about till very late in the summer until
Speaker 2: you know, I started in September, and I don't even
Speaker 2: know that it was fully ironed out like much before then.
Speaker 2: I think for me though, the opportunity to join the group.
Speaker 3: That I was joining.
Speaker 2: I have so much respect for this group and to
Speaker 2: be part of what they wanted to do, which was,
Speaker 2: you know, reignite their asset management business. I really like,
Speaker 2: I really like to join places that have something they
Speaker 2: need to get.
Speaker 1: Done and that you can help contribute to making that happen.
Speaker 2: Yes, And I thought, you know, why don't I try
Speaker 2: something different? And if you look at my career and
Speaker 2: all the next steps, they're all a little different and
Speaker 2: in some cases very different. And I think actually all
Speaker 2: those different careers I had led me to be a
Speaker 2: really good CIO. So I thought, if I add this in,
Speaker 2: what does that make me next?
Speaker 3: I don't know.
Speaker 1: So let's talk a little bit about what you do
Speaker 1: with the team you work with at Goldman Sachs. Are
Speaker 1: the clients primarily retail? Are they institutional? Is it a mix?
Speaker 1: What does that group focus on it is?
Speaker 2: Well, the whole group of the client Solutions group is
Speaker 2: a mix of all different kinds of clients, right, But
Speaker 2: I mostly step in with the institutional clients. I don't
Speaker 2: own the client relationships, but I do help advise from
Speaker 2: the perspective as a former institutional allocator and occasionally have
Speaker 2: comments on the retail side that may be tangential. But
Speaker 2: it's mostly institutions.
Speaker 1: So this sounds like this is a very unconstrained position.
Speaker 1: You can help clients work on setting goals, put together
Speaker 1: an investment policy statement, like you've done all the stuff
Speaker 1: from the from the client side, and now you're saying
Speaker 1: what can we what can we do for you?
Speaker 2: They can ask confidential questions. They can say, do you
Speaker 2: think we should sell part of this portfolio? Do you
Speaker 2: like this private equity fund, do you like that? Do
Speaker 2: you like this equity in this country? Do you like
Speaker 2: emerging markets right now? Do you like local bonds? They
Speaker 2: can ask me anything, And because I'm not running my portfolio,
Speaker 2: I can have a more honest position on what I
Speaker 2: would do if I were them in that environment.
Speaker 1: Huh. So this is much broader than the typical relationship
Speaker 1: with a client, So that sounds quite fascinating. You mentioned
Speaker 1: you really like hedge funds. Let's talk a little bit
Speaker 1: about alternative investments within a portfolio. What do you think
Speaker 1: of those various I'm gonna use a dirty word, buckets
Speaker 1: of different types of investments.
Speaker 2: So I want to qualify that I don't know that
Speaker 2: everyone should be invested in alternative investments, and I don't
Speaker 2: mean you and me, I mean institutions as well. But
Speaker 2: I have to say I think their alternatives are the
Speaker 2: most fascinating part of the investment landscape to me, and
Speaker 2: it's why I love them.
Speaker 1: So tell us a little bit. Why why are alternatives
Speaker 1: so fascinating? Here's the pushback? Let's start with this. The
Speaker 1: pushback is, alternatives are great. If you're in the top
Speaker 1: death style of hetche funds, venture capital funds, private equity,
Speaker 1: that stuff is awesome. But there's so much competition, so
Speaker 1: much delution of talent, so many people chasing so few deals,
Speaker 1: that unless you're really in the best funds, it's a
Speaker 1: challenge to generate alpha. How do you respond to that
Speaker 1: sort of criticism?
Speaker 2: Well, I think that's true in the public equity markets
Speaker 2: as well, in the mid large.
Speaker 1: Gap, right, it's certainly true in individual stocks. Rites what
Speaker 1: was it a best in Binders research? Two point three
Speaker 1: percent of equities or responsible for all the returns. It's
Speaker 1: not even top death style. That's a teeny tiny percentage.
Speaker 1: So you're saying that, hey, if you can be in
Speaker 1: a better fund, you want to be in a better fund.
Speaker 2: I think that's true across everything. You always want to
Speaker 2: be in the best possible fund. Picking funds is very challenging.
Speaker 2: I think it is most challenging in the private market space.
Speaker 2: There's an information gap which makes it pretty challenging. But
Speaker 2: I think what I love most about it is so
Speaker 2: I think I've always loved credit, and part of that
Speaker 2: is that I love contracts.
Speaker 3: I should have been a.
Speaker 2: Lawyer, and for me, private equity, private credit, and some
Speaker 2: other liquid strategies real estate included, they have a complexity
Speaker 2: component to it and a lot of that is contract
Speaker 2: related and you have to get very Like my favorite
Speaker 2: class in.
Speaker 3: Business school is taxes. I should tell you I like
Speaker 3: loopholes and I like figuring out unique.
Speaker 1: Ways to structure its supposals right.
Speaker 2: But for private equity, private credit, private real estate, for me,
Speaker 2: those make sense. Those are complex deals and there's ways
Speaker 2: to derive value out of them, and if you can
Speaker 2: get access to those, I think it's brilliant. If you
Speaker 2: can't get access to those. The other way I think
Speaker 2: it's interesting to play in those markets is to play
Speaker 2: the discrepancy and value between public equity and private equity,
Speaker 2: public real estate and private real estate, public infrastructure private infrastructure.
Speaker 2: So for those reasons, I just think they're the most
Speaker 2: interesting place to look. And in terms of hedge funds,
Speaker 2: specifically where I started my career, they invest in every
Speaker 2: asset class, So if you want to learn about commodities,
Speaker 2: fixed income, rates, equities, bonds, they're all there, right, And
Speaker 2: so I think it's a really great proving ground, and
Speaker 2: it also teaches you to understand relative value in which
Speaker 2: trades are better relatively speaking, not absolutely speaking. In an
Speaker 2: environment like today and probably the next ten years, relative value.
Speaker 3: Is going to be critical.
Speaker 1: Huh. That's really interesting. Let's stay focused on the complications
Speaker 1: of the private side, because you're touching on something that's
Speaker 1: really fascinating and a little bit contrarian to the consensus view,
Speaker 1: which is complications tend to be expanded and very often
Speaker 1: simple is better. What you're saying on the private side
Speaker 1: is if you have an ability and correct me if
Speaker 1: I'm getting this wrong, if you have an ability to
Speaker 1: manage through that complexity in a way that doesn't disadvantage
Speaker 1: you as an investor. There's potential upside from complexity because
Speaker 1: most investors aren't finding that thread that really leads you
Speaker 1: to Hitchcock used to call it the McGuinty, but that's
Speaker 1: whatever everybody is chasing, that's driving the action. You're looking
Speaker 1: through complexity to define where is the piece of alpha
Speaker 1: that everybody is missing.
Speaker 3: If that is.
Speaker 2: Your edge, and that is the one thing I want
Speaker 2: to be very clear on. You should not be investing
Speaker 2: in complex issues that you do not understand. So if
Speaker 2: you do not understand technology, do not go do a
Speaker 2: technology co investment.
Speaker 1: Right, we shouldn't all be piling my money into AI startups.
Speaker 1: You don't think that's that's a savvy thing to do today.
Speaker 2: I have Plowing money into anything is usually a good idea.
Speaker 2: But I mean to use an example. So I did
Speaker 2: Killimanjaro a year ago, and I didn't get altitude sickness.
Speaker 2: And so to do hiking at high elevations when something
Speaker 2: isn't a challenge for you, it is a challenge for
Speaker 2: other people. That's not a terrible idea and experience that
Speaker 2: you get that's unique, right, And so I think that
Speaker 2: if there are managers you can find, or if you
Speaker 2: yourself are good at certain parts of these markets, then
Speaker 2: I do think you in any investment, if you have
Speaker 2: an edge, you should lean into that edge, right, And
Speaker 2: I think that is why, or I believe that's why alternatives.
Speaker 2: There are people who have edges, there are people who don't,
Speaker 2: and they raise money, and that's the world, right, right.
Speaker 2: But if you can find when you find a good
Speaker 2: manager or you find a good investment, I mean, I
Speaker 2: think that's one of the best feelings in life. And
Speaker 2: when it comes to fruition is incredible and unique and
Speaker 2: you learn so much, and you learn so much about
Speaker 2: the industry you're investing in.
Speaker 1: Huh, know your skill set, know your blind spot, know
Speaker 1: your edge.
Speaker 3: Right.
Speaker 1: That sounds like very savvy advice. Let's talk little bit
Speaker 1: about institutional investing. What's happening these years. We had rates
Speaker 1: and yields on fixed income shoot up in twenty twenty
Speaker 1: two and twenty twenty three, and pension funds, especially in Europe,
Speaker 1: seemed to stumble around. That tell us a little bit
Speaker 1: what's been going on with institutions as you see it
Speaker 1: from the thirty thousand foot view. Why was last year
Speaker 1: into this year so challenging for many large institutions.
Speaker 2: Well, I think in Europe it was some of what
Speaker 2: we mentioned earlier with the liability driven investing. They had,
Speaker 2: you know, rates go up precipitously as well for various
Speaker 2: reasons twice in a very short amount of time. And
Speaker 2: you know, because they had leveraged in some casions, bomb
Speaker 2: portfolio has been rates to go up as you know,
Speaker 2: prices go down. They had margin calls because they were
Speaker 2: trading on margin in a world.
Speaker 1: Were their duration issues? Also because I know some areas
Speaker 1: seem to be in did very long and they're much
Speaker 1: more sensitive to rate moves than others. Is that part
Speaker 1: of the issue where they mandated to have longer dated bonds.
Speaker 1: What's to happen in Europe?
Speaker 2: It's part of the liability matching, right, So if you
Speaker 2: have an infinitely lived asset or a very long lived asset,
Speaker 2: you're going to want to match your investments to that.
Speaker 2: So that's why they had some of these longer term bonds.
Speaker 2: US pension funds also had a fair degree of long
Speaker 2: bond exposure and they hurt you know, I think in
Speaker 2: the two thousand and eight crisis, a lot of pension
Speaker 2: fund boards struggled with the fact that their equity portfolio
Speaker 2: and their bond portfolio and credit portfolio all stumbled around
Speaker 2: the same time. And it's why you saw in ten,
Speaker 2: twenty eleven, twenty twelve a lot of the investment policy
Speaker 2: statements of pension funds changed from saying equity and fixed
Speaker 2: income to saying growth risk and diversifying risk. And I
Speaker 2: don't know that anyone really noticed that and this they
Speaker 2: were working in it, but that is what changed in
Speaker 2: a large part, because if you have your growth bucket
Speaker 2: drawn out, so credit and equity, it feels less bad
Speaker 2: than if you thought something that was diversifying all of
Speaker 2: a sudden wasn't diversifying, right. So I think last year
Speaker 2: potentially we still hadn't quite learned the lesson as we
Speaker 2: were discussing earlier, that these things can all kind of
Speaker 2: suffer at the same time. And that's true diversifying strategies too.
Speaker 2: That's two of alternatives. It's true of CTAs. Unless you
Speaker 2: have a short term trend follower, usually in the instant
Speaker 2: the market drops, you're going to get all those things
Speaker 2: to kind of drop too. Beauty about alternatives they're not
Speaker 2: going to mark, so you might just not notice it
Speaker 2: for quite a bit of time, so you have some
Speaker 2: cushion there, and by that time they may have rebounded.
Speaker 1: Right.
Speaker 2: But the biggest issue that happened with both Europe and
Speaker 2: the US, and you can look up a broad elsewhere,
Speaker 2: was that when these things drop, when your equity portfolio
Speaker 2: which is supposed to be some return generating mainly, and
Speaker 2: you're fixing come portfolio which is supposed to be your
Speaker 2: liquidity provider, but then you don't have a job necessarily
Speaker 2: in your private markets bucket, you're in a really tricky
Speaker 2: position for funding new investments, for funding you know, retirement benefits,
Speaker 2: healthcare benefits, the like. And so they were all kind
Speaker 2: of in this illiquidity spiral for a little bit of time,
Speaker 2: and so they actually had to alter a lot of funds,
Speaker 2: altered their investment policy statements, which are never.
Speaker 3: Supposed to do.
Speaker 2: These are supposed to be setting stone reviewed every couple
Speaker 2: of years in order to allow them to have wider
Speaker 2: bands in the private markets until things sort of reset.
Speaker 1: Now, to be fair, you're not really getting marked in
Speaker 1: private markets what you are in stocks and bonds every tick,
Speaker 1: so you could kind of ignore that for a while.
Speaker 2: And they actually might have liked to have been marked
Speaker 2: down right because it.
Speaker 4: Would have reseent it would hurt yours as long as reset,
Speaker 4: but was a loser anyway, you might as well clear
Speaker 4: the decks, get everything off, and start fresh the following year.
Speaker 1: You can't really do that with private equity.
Speaker 3: But it also makes it challenging if you're an investor
Speaker 3: and you.
Speaker 2: Decide, well, what do I do about the iniquity I'd
Speaker 2: like to sell part of my private market book? Well,
Speaker 2: then where are you pricing it? Because if you go
Speaker 2: with these inflated asset values and you try to sell them,
Speaker 2: and they know you're a force seller and they know
Speaker 2: that the value is likely lower, it actually made it
Speaker 2: a really tricky environment to kind of close those transactions
Speaker 2: as well.
Speaker 1: No one wants to be a distressed seller now, boy.
Speaker 1: So let's stick with Europe a little bit, and I'm
Speaker 1: going to ask you to put your econometricians hat on
Speaker 1: for a second. Us are CPI peaked around nine percent
Speaker 1: a year and a half ago or so, and the
Speaker 1: last CPI print was what three point two percent three
Speaker 1: point three percent year of a year, it seems, and
Speaker 1: that's with this massive fiscal stimulus, the pig is still
Speaker 1: working his way through the python. Europe seems to be
Speaker 1: having a harder time wrestling inflation into submission. Why do
Speaker 1: we think that is?
Speaker 3: I think that well.
Speaker 2: I believe that they our US economics team would say
Speaker 2: that the wage pressures in Europe are part of the
Speaker 2: reason they still remain as much.
Speaker 1: Greater than here in the US, where there seems to
Speaker 1: be such a shortage in almost every sector of people
Speaker 1: want to come in and work for a living.
Speaker 2: We're seeing improvement and I think we're about four or
Speaker 2: five percent, It could be off on the wage increase
Speaker 2: number somewhere around there. So we've got stickier inflation still
Speaker 2: happening in Europe, and in the US we were starting
Speaker 2: to see signs of improvement. Who knows what could happen
Speaker 2: between now on the.
Speaker 3: End of the year.
Speaker 2: You can't Some of it you can't predict. But we're
Speaker 2: seeing improvement here and you've got emerging markets. We're seeing
Speaker 2: more improvement on the inflation front than you're seeing in
Speaker 2: the US.
Speaker 1: Huh. Just kind of interesting that that's what's taking place there.
Speaker 1: So let's stay with the concept of we had inflation.
Speaker 1: We now have higher FED funds rates, and we have
Speaker 1: what a number of people have been calling very attractive yields,
Speaker 1: certainly much higher than they've been in decades. One of
Speaker 1: the ag funds of I want to say about seven
Speaker 1: years duration is five percent for investment grade. We haven't
Speaker 1: seen that in you know, ten fifteen years. What how
Speaker 1: do you work around those sort of numbers? What does
Speaker 1: that do to the sort of advice you give to clients.
Speaker 2: So if we just take the US public pension market
Speaker 2: and kind of separate it from the corporates and other
Speaker 2: institutional investors for a moment, five percent is still below
Speaker 2: most target returns. Most target returns are still around on average,
Speaker 2: like let's call it seven percent. It might be six
Speaker 2: and three quarters, but it's not five. So in order
Speaker 2: to take advantage of some of those, so like agency
Speaker 2: mortgages may be a good trade right now, right, but
Speaker 2: you probably want to even that's what the thirties at
Speaker 2: seven plus rate, So you even want to think about
Speaker 2: that more in like a credit long short context in
Speaker 2: and outright by But in terms of a higher rate environment,
Speaker 2: I still think look, Goman would probably say they're aggressively
Speaker 2: neutral on on ponds. I love that aggssively right the
Speaker 2: next three to three to twelve months, because there is
Speaker 2: still some duration risk. Now the numbers that have been
Speaker 2: recently coming out that are showing more likely to you know,
Speaker 2: the economy slowing, we should have avoid a recession. And
Speaker 2: I will say Goldman's opinion on this is that there's
Speaker 2: a twenty percent out of a recession in the next
Speaker 2: twelve months. That is still meaningfully higher than the twelve
Speaker 2: percent in any given year, right, but it's it's not
Speaker 2: one hundred percent. It's also not zero. But there's still
Speaker 2: risk that rates could rise, right. There still could be
Speaker 2: something that happens we get another rate increase. Our view
Speaker 2: is that there's not going to be another hike this year,
Speaker 2: and that in the back half of next year we'll
Speaker 2: start seeing FED funds comes.
Speaker 1: Down back half of twenty twenty four. Yeah, So, hypothetically,
Speaker 1: an investor has listened to you three years ago when
Speaker 1: you were screaming about inflation is not transitory. It actually
Speaker 1: turned out to be transitory. Transfory just took a whole
Speaker 1: lot longer than everybody expected. Everything in life is transitory,
Speaker 1: all right. So a couple of years ago you had said, Hey,
Speaker 1: this inflation thing is for real. The Fed's going to
Speaker 1: raise rates substantially, and given how sensitive dated bonds are
Speaker 1: too moves up in FED funds, rate investors should be
Speaker 1: thinking about shortening their duration. Clients who listened to that
Speaker 1: advice avoided at least some of the bloodshed last year.
Speaker 1: Now though that rates have gone up five hundred and
Speaker 1: something basis points and you can actually get five five
Speaker 1: and a half percent yield. At what point are clients
Speaker 1: going to want to think about taking advantage and extending
Speaker 1: duration you mentioned? Goldman says there's a twenty percent chance
Speaker 1: of recession in the coming twenty twenty four and we
Speaker 1: may see rate cuts in the back half of twenty
Speaker 1: twenty four. How do you respond to I have to
Speaker 1: think clients are asking about duration at this point. What's
Speaker 1: your response to people who shortened duration a few years ago?
Speaker 1: And we're very successful because.
Speaker 2: Of it, right, So I do get asked quite a bit,
Speaker 2: when can we start adding duration back to the portfolio.
Speaker 3: It's probably the third biggest.
Speaker 2: Question that I have been getting In twenty twenty three.
Speaker 2: A lot of clients weren't able to shorten their duration,
Speaker 2: some were, some can take advantage of two years, right,
Speaker 2: and you could get a pretty good return there. But
Speaker 2: some couldn't, not in their investment policy or they didn't
Speaker 2: want the reinvestment risk, right, So some are still holding
Speaker 2: onto those long bonds portfolio. But what I would say
Speaker 2: is I would look to see where you could add duration,
Speaker 2: but I would be cautious. There's still risks to the
Speaker 2: upside on rates and the other part of that. I
Speaker 2: would say that let's say inflation is coming down and
Speaker 2: it's moderating, it's coming down from a very high level,
Speaker 2: but it's not coming down to zero, right, so we
Speaker 2: could see a three percent level for a while.
Speaker 3: We could see and that you know, in the grand.
Speaker 2: Scheme of life, grand scheme of history, maybe that's not exorbitant,
Speaker 2: but it is a higher cost of capital. Right, So
Speaker 2: if you think about where term premiums might end up
Speaker 2: off of that number one hundred and fifty two hundred
Speaker 2: basis points, you're still looking at a pretty high cost
Speaker 2: of capital compared to the last ten years, right, So
Speaker 2: for firms and for refinancing risks. So if you can
Speaker 2: add a duration, then where you can and take your pockets.
Speaker 2: And yes, but I still think there's still risk to
Speaker 2: the upside there, and so again I would reiterate that
Speaker 2: Goldman's views right now are pretty neutral on equities and
Speaker 2: bonds the next three to twelve.
Speaker 1: Months, aggressively neutral. I like that. And you know you're
Speaker 1: pointing out that it's a very different regime today. In
Speaker 1: the twenty tens, not only did you have cheap capital,
Speaker 1: but real returns were so low given how low inflation was.
Speaker 1: So now capital costs more, inflation is higher. So how
Speaker 1: do we think about real returns when discussing fixed income?
Speaker 3: Right?
Speaker 2: Interestingly enough, there's only you know, a handful of valcators
Speaker 2: actually benchmark themselves to real returns, and I think, really, yeah,
Speaker 2: it's not as popular as one would think, particularly when
Speaker 2: they're having to worry about that on the back end
Speaker 2: and their payouts and their liability side. But I think
Speaker 2: it's going to becoming increasingly more important, and it might
Speaker 2: very well to your point, I believe this is where
Speaker 2: you get It might change what you're looking looking at
Speaker 2: and what you evaluate in terms of your outcomes. You
Speaker 2: also probably will see a change in benchmarking if you
Speaker 2: think about some of the real asset and infrastructure and
Speaker 2: real estate investments that were benchmarked a CPI plus a
Speaker 2: spread for example, or even absolute return that likely was
Speaker 2: challenged in the last couple of years, So you may
Speaker 2: see portfolios change as a result of a benchmarking. I
Speaker 2: do believe the next couple of years will probably start
Speaker 2: to get more questions on deflation what that means for portfolios,
Speaker 2: and that can be very tricky if you haven't figured
Speaker 2: out your liabilities, because that can hurt the liability side
Speaker 2: of your balance sheet. And if your liabilities are really struggling,
Speaker 2: then the ability of what you can invest in will
Speaker 2: be truncated.
Speaker 1: All right, So you said the duration question is the
Speaker 1: third most asked question you get from institutional investors. I'm
Speaker 1: curious what are questions one and two?
Speaker 2: So number one would be give me ideas on how
Speaker 2: to raise liquidity in my portfolio.
Speaker 1: And this is mostly from institutions.
Speaker 3: Mostly from institutional investment.
Speaker 1: So when someone says I want more liquiditly is this
Speaker 1: because they're kind of tied up with long dated bonds
Speaker 1: or is it more because they're tied up with ill
Speaker 1: liquid investments looking for the illiquidity premium.
Speaker 2: Typically it's because they're tied up in inliquid investments and
Speaker 2: they don't want to miss out on a vintage cycle,
Speaker 2: or they want to out they see good deals that
Speaker 2: they want to get done. Another option is that their
Speaker 2: pension is finite, and so they are not able in
Speaker 2: certain cases to make the same investments that they used
Speaker 2: to make. But they see interesting deals and they want
Speaker 2: to find a way to do them without hurting the
Speaker 2: liquidity of their structure. And those would be the two
Speaker 2: biggest cases, but usually it's funding other investments or trying
Speaker 2: to stay within their policy balance. The second most asked
Speaker 2: question I get is around either crisis position, crisis risk
Speaker 2: offt set positions or tail risk hedging or diversifying strategies.
Speaker 2: People are looking for ways investors, I should say, are
Speaker 2: looking for way to be protected should this happen again.
Speaker 2: But you know, one interesting statistics I like to mention
Speaker 2: is if you think of twenty two diversifiers that are
Speaker 2: typically involved in a sort of crisis portfolio or when
Speaker 2: you're in a tail hedge, twenty.
Speaker 3: Two take twenty two of the most common ones.
Speaker 2: There's a paper that Goldman has done on this, No
Speaker 2: two in these three periods, So there are no one
Speaker 2: in these three periods pre twenty twenty from twenty twenty
Speaker 2: through twenty to twenty twenty one, and then post twenty
Speaker 2: twenty two were positive. Huh, so you need more options
Speaker 2: than you think to kind of hedge the risk there,
Speaker 2: But more than I've heard probably in the last decade,
Speaker 2: investors are asking I would like to put a tail
Speaker 2: hedge on.
Speaker 3: How can I do that? What should I be looking at?
Speaker 1: Let's jump to our favorite questions that we ask all
Speaker 1: of our guests, starting with, Hey, what are you streaming
Speaker 1: these days? What kept you entertained during the pandemic.
Speaker 3: So I don't.
Speaker 2: Watch a ton of TV, I will say, I am
Speaker 2: a shark tank addict. I am a huge fan of
Speaker 2: Kevin O'Leary, I think the absolute greatest, But that is
Speaker 2: really the extent of my TV watching, other than, of
Speaker 2: course blow bird.
Speaker 1: So let me throw a Kevin O'Leary thing at you
Speaker 1: that you probably haven't seen, okay, or if you have,
Speaker 1: I would be surprised. So there's a young watch geek
Speaker 1: named Teddy I'm gonna get his last name wrong, Balderas
Speaker 1: or balder Ass say something like that, and he is
Speaker 1: pretty well known in the time piece of community, and
Speaker 1: somehow he him and Kevin O'Leary became friendly and the
Speaker 1: two of them go on these watch shopping for lack
Speaker 1: of a better word, expeditions and they're just shockingly hilarious.
Speaker 1: So if you're a Kevin O'Leary fan, it this is
Speaker 1: him up close and personal talking about why he likes
Speaker 1: certain things and doesn't. And you know, Teddy's a young guy.
Speaker 1: Kevin is a different generation and the interaction it's just charming.
Speaker 1: And if you're a fan of leary's you'll find this
Speaker 1: absolutely Thank you for the tips, So yeah, you will
Speaker 1: thank me for sure. Let's talk about mentors who helped
Speaker 1: shape your career.
Speaker 3: Number one would be my dad.
Speaker 2: We are very close, we have had very similar career careers.
Speaker 1: We look alike.
Speaker 2: He's my best friend by far. We talk two or
Speaker 2: three tight times a day. I'm admittedly super codependent.
Speaker 3: He's awesome. I was joking earlier.
Speaker 2: I think Goldman believes me more than he does that
Speaker 2: I am totally joking. He is wonderful and he's the
Speaker 2: one person I can trust to give me honest advice.
Speaker 3: Other than that, I think second.
Speaker 2: Grade soccer coach, a guy named Jeff Easter. He actually
Speaker 2: told me to read this book. Golf is not a
Speaker 2: game of perfect, but he he taught me to like
Speaker 2: it was a good lesson for being a trader. He
Speaker 2: taught me to like, move on from your last you know,
Speaker 2: mystical and just stop stressing over it.
Speaker 3: I finally.
Speaker 2: Somebody I used to work with Hawaii, my deputy Cio.
Speaker 2: He has thirty more years probably an investment experience in me,
Speaker 2: but always treated me as an equal even though it's
Speaker 2: his boss, and gave me wonderful advice and to this
Speaker 2: day is a close friend that can ask anything else.
Speaker 1: Let's talk about books. What are some of your favorites?
Speaker 1: What are you reading right now?
Speaker 2: I just finish The Wager and Endurance and wait.
Speaker 1: So the Wager I'm not familiar with. Endurance is the
Speaker 1: Shackleton the Stories, which is insane. I can't believe that's
Speaker 1: made hit into a movie that anyone knows of what's
Speaker 1: the Wager?
Speaker 2: The Wager is a shipwreck actually around the same area,
Speaker 2: but it is a true story of a shipwreck, and
Speaker 2: similar to the reasons I like the Shackleford story. It's
Speaker 2: an interesting examination of leadership in crisis. And also it
Speaker 2: helps me when I'm running in the morning and I'm tired.
Speaker 2: I'm like, well I have and I've had water and
Speaker 2: not covered in lice.
Speaker 1: Right or sub sub zero temperature with leopard seals.
Speaker 2: Trying to use I know, it's incredible story.
Speaker 1: I think I just read not too long ago that
Speaker 1: they found the Shackleford ship the uh No Way and
Speaker 1: it's the water is so cold, everything is preserved. Normally
Speaker 1: the wood would have wrought it away a long time ago,
Speaker 1: but nothing eats it away because it's barely of a
Speaker 1: phreezing most It's Unloubal.
Speaker 2: The Shackleling story really struck me because if you look
Speaker 2: at the wager, I won't this is not a spoiler.
Speaker 2: They're mostly negative in this story and he is just
Speaker 2: like continually positive and it's incredible. It's just it's a
Speaker 2: great story in leadership.
Speaker 1: Like if you would have told me, hey, you're gonna
Speaker 1: lose your ship and you're stuck somewhere in the Antarctic,
Speaker 1: my assumption is you're gone or you have no chance
Speaker 1: of survival. Yes, like the fact that if you if
Speaker 1: you've never read the book Endurance, it's just one of
Speaker 1: the most amazing. It couldn't be fiction because it just
Speaker 1: wouldn't be believable. The fact that it's a true story
Speaker 1: makes it really amazing, right right, Yeah, So two books,
Speaker 1: The Wager and Endurance. I'm going to have to check
Speaker 1: out The Wager. Our final two questions, what sort of
Speaker 1: advice would you give to a recent college grad interested
Speaker 1: in a career in either investment or risk management, or
Speaker 1: public pensions or anything else in finance.
Speaker 2: I think I would encourage them to know the full
Speaker 2: scope of what jobs you can have investments. You can
Speaker 2: be in marketing, you can be in communications. We need writers.
Speaker 2: Everybody needs good writers these days. We need good public speakers.
Speaker 2: We also need traders, we need pms, we need leaders,
Speaker 2: we need hr need legal So it always strikes me
Speaker 2: how the young people seem to think you're just a
Speaker 2: banker or a trader.
Speaker 3: Nope, there's a lot of other things.
Speaker 1: And our final question, what do you know about the
Speaker 1: world of investing today? You wish you knew let's say,
Speaker 1: twenty years ago when you first got it started.
Speaker 2: Then no one knows all the right answers all the time.
Speaker 2: They all act like they do, but they don't. And
Speaker 2: if you get it wrong, they've gotten it wrong too.
Speaker 1: Really interesting, Elizabeth, Thank you for being so generous. With
Speaker 1: your time. This was absolutely fascinating.
Speaker 3: Thank you for having me.
Speaker 1: We have been speaking with Elizabeth Taylor Slash Elizabeth Burton
Speaker 1: of Goldman Sachs's Asset Management. If you enjoy this conversation,
Speaker 1: be sure and check out any of the five hundred
Speaker 1: previous conversations we've had over the past eight years. You
Speaker 1: can find those at iTunes, Spotify, YouTube, wherever you get
Speaker 1: your favorite podcast. Sign up from my daily reading list
Speaker 1: at ridults dot com. Follow me on Twitter at rid
Speaker 1: Holts or at Barry Underscore Ridults. Follow all of the
Speaker 1: Bloomberg family of podcasts on Twitter at podcast I would
Speaker 1: be remiss if I did not thank the craft team
Speaker 1: that helps us put these conversations together each week. Ana
Speaker 1: Luke is my producer, Sean Russo is my researcher. Attica
Speaker 1: of albron is my project manager. Sam Danziger is my
Speaker 1: audio engineer. I'm Barry Hults. You've been listening to Masters
Speaker 1: in Business on Bloomberg Radio.