AltsViews Episode 1 - A View From the Top

[Music] Welcome to the ALTSFUE Podcast, an educational and informative discussion of the alternative investing industry. I am your host, Roslooby. On this podcast, we discuss all things alternative investing, including private credit, private equity, and hedge funds. But the goal is to explain and demystify these instruments rather than just talk about them. We're looking to stay away from jargon and buzzwords so that anyone can follow along, not just those in the finance business. I'm delighted to be sitting here today with our very first podcast guest, Jeff Whitaker, CEO of Chevy Chase Trust Company. Chevy Chase Trust is a traditional investment management firm with over 40 billion in assets under management, headquartered in Washington, D.C. Now, you may be thinking, "Ros, this is a show about alternative investments. Why are you interviewing the CEO of a traditional asset manager?" Well, I teach a college finance class on alternative investments and I always start each course by discussing traditional investing. It's a lot easier to understand alternative investing when you understand traditional investing first. I also believe that a key theme of alternative investing today is its convergence with traditional investing and investing vehicles. So I thought this would be a great place to start our podcast on alternatives. Now, for as long as I've been in the investment business, Jeff Whitaker has been among my favorite people to discuss markets and investing with. Not just because he's a high level executive, but his insights and his humor have always been top notch. This led me to ask him to be my first ever podcast guest on the old-sphere podcast. Jeff, welcome to the podcast. Thank you for having me. My pleasure. Maybe let's start by talking a little bit about your background. Tell us how you came to be CEO of Chevy Chase Trust. Sure. So the short answer is my predecessor who'd been the CEO for most of the firm's history retired. I'd always admired Chevy Chase Trust sort of outside in initially as a management consultant and then working at a number of competitor organizations and was excited for the chance to step into the role. That's great. Tell me about Chevy Chase Trust. Tell us about how it's unique, how it's different, what type of services they offer. Sure. So I think you mentioned a little bit in the introduction about us, but we were founded in 1999. We're headquartered in the Greater Washington DC area. And we work with about 1200 families and institutions across 47 states and 10 countries. We provide for our clients two very broad services, investment management, and then financial and estate planning. We also act as a fiduciary or a corporate trustee for a number of our families. And a number of the defining characteristics about what we do. We're a discretionary investment manager. That means that our clients are giving us the discretion to build portfolios, trade securities for them with our own discretion as opposed to the more maybe common setup that people are familiar with where you might be making an individual decision to buy. Or a fund or an individual stock or bond on your own. We are an SEC registered investment advisor. And that means that everything we do involves operating under what's called a fiduciary standard, which means when we make our decisions about what to put into a client's portfolio or how to operate in a given circumstance. We're contractually, legally, ethically obligated and make those decisions in the client's interest as opposed to, for instance, our profit interest, which is something that's a distinguishing characteristic of investment advisory firms. And I think a very important distinction that unfortunately not all clients understand. I'd say there are three things that probably make us pretty unique as a firm and these were all things that really brought me to the firm when I joined it as CEO over five years ago. The first is the thematic equity approach to investing that we have and I can go into that in more detail later. The second is we have a pretty substantial in-house planning team for financial planning and estate planning that is really able to go deep with our clients to help them. And then the final thing is that we're a family owned business and think the stability that comes from having a private owner and a permanent source of capital allows us to invest in different ways for our clients and our service capabilities that might be more challenging if we had a different model. You mentioned earlier that one of the things that makes Chevy Chase unique is their use of themed investment portfolios. Can you maybe unpack that for us a little bit? Sure. So thematic investing is an approach to how we invest. I think of it initially as a philosophy and then that philosophy is something that we have machined into a set of processes that result in it kind of manifesting in your account holdings and your performance. And so the philosophy of thematic investing it's really the definition of our starting point for how we invest in equities. So rather than starting from the point of view of a particular sector like financial services or health care or a geography or some other kind of starting point, whatever you might want to choose. Instead, we're looking for themes and that means basically we are looking to identify long term secular trends that are stemming from economic demographic or technological change. And those need to be things that are so big, so powerful and at least in our understanding predictable enough to influence corporate performance across multiple industries. So to make that a little bit real, let me just take an example of one of our longer standing themes we call it the advent of molecular medicine. And you know, the idea here is that because of a whole range of technological improvements and changes in computing power in work that's been done around understanding the human genome and so on. That we're moving into an era where treatment for medical conditions is increasingly customized to the individual based on either some aspect of the individual or the specifics of the disease and so on. And so we look for opportunities to invest in companies that we think are going to benefit from that change. Conversely, an example of a big trend that's not a theme would be something like Wi-Fi. We all remember a day before Wi-Fi. In fact, some of us remember loading discats into our computers for our prescribed amount of AOL dial up time. But if you think about Wi-Fi, this is something that has fundamentally changed how a lot of us work. It's increased productivity and efficiency and convenience for consumers a great deal. But did Wi-Fi actually change the fortunes positively of a set of companies? And so, you know, I always ask people, do you know the brand of Wi-Fi router you have? And the answer is no one does. So you ended up with a common standard and you ended up having the margins competed away to next to nothing. And so if you had gone and tried to invest in that space broadly and thought of it as a theme and correctly, you know, you would have ended up with a set of companies, some of which don't exist anymore. Others of which just, you know, have not delivered the kind of outsized returns that we seek to find from companies that end up developing, you know, a competitive mode or some other sustainable advantage that warrants a higher share price. And as we do that, you know, we're looking for companies and themes that right now or perhaps a little underappreciated by the market, but where we think the market is going to come to appreciate them over say three to five year time horizon, where we're going to then see the growth and the equities there that we're looking for in a portfolio. So that's the sort of the general idea is just one of let's find a set of trends, a set of broad tailwinds that are going to help propel our success and make it more likely than not that a company is going to do well. So it's not just a matter of their own operational excellence. It's a matter of, you know, a set of broad trends pushing them along toward success. So that's that's sort of the broad approach to how thematic investing meant to work. We typically have five to seven investment themes at any one point that we're researching and investing in. And we build portfolios around those. So we actually only build portfolios that cover all of our themes. We know that from time to time one theme might do a lot better than another. We know that occasionally our view of how a theme is going to materialize proves to be incorrect or thesis changes. But when you invest across all those themes, you end up with a much more balanced operational. opportunity to do well, we think, through time. And the portfolios we build would typically have call it 40 to 55 names in them representing, today it's five themes, plus we have what we call balanced or opportunistic names. So when we go through and build a portfolio, sometimes we'll find that it lacks a certain geographic exposure or a sector exposure. And from time to time, there's sectors that just do incredibly well and you weren't expecting it. And when you set out as we do to build an equity portfolio that can be really your whole equity exposure, we know we need to balance that portfolio and make sure that it's well-rounded. But again, you're looking at a statement. We only invest in individual stocks, so you're not looking at buying a whole series of third-party funds or ETFs. And you're going to look at those and know why you own each of those stocks. I mean, they are tied to one or two of our themes. And at the end of the day, it's a pretty well-rounded portfolio. I think now it's probably around-- covers 11 sectors, holdings of companies in 12 countries. And we manage it such that it's a relatively low turnover portfolio, usually around 20% per year. So it's got a level of natural tax efficiency that comes from the fact that we are investing over a cycle, not looking to day trade our way to a return. Makes sense. So these are traditional, long-only, stock-based investments. Do any of these themes involve other asset classes, like currencies or commodities or interest rates? The short answer is no. The slightly longer answer is that we will invest in a commodity-linked product from time to time if it's consistent with the theme that we have. So as an example, one of our themes is related to what we call the end of disinflationary tailwinds. That's a mouthful. But basically, the general idea is that we've gone through this multi-decade period of disinflationary trends in the global economy with hundreds and millions of Chinese people entering the workforce, a whole host of things that have driven down the cost of consumer goods and a lot of other kind of disinflationary forces. And it's our view that we're at the end of that period and that you will now see a higher level of inflation through time. We, commodities generally tend to do better in inflationary periods. And so we've from time to time had a gold holding in the portfolio. But for the most part, you are really just looking at our ownership of individual equities. Nothing more than that. I'd love to switch gears here and talk a little bit about alternative investments and how the rise in popularity of investing in things like private equity, venture capital, growth equity, private credit. How has it impacted specifically Chevy Chase Trusts business? And then maybe if you could also speak to how you think it's impacting the investment industry, broadly. Sure. Focusing on us first and then maybe talking more broadly. Look, we definitely have clients who've invested in these asset classes for a long time. They just haven't done it with us. I'd say over the course of the last several years, we've had quite a few conversations with clients who have a level of interest and curiosity in these alternative asset classes. Frankly, I think a lot of that has been driven by media interest and by different forms of outreach from some of our competitors that have a pretty singular focus on asset gathering. And I think that the way that those products are being discussed or have been discussed in the popular press for much of the last several years, I can understand that they look really appealing to investors who are seeking either outsized returns or maybe new return streams. I'd say though that it does feel as though there's sort of a FOMO, a fear of missing out component there. But we've had a lot of those conversations. And I'm sure we've lost some commercial opportunities because of the fact that we've historically not focused on selling alternative investments to our clients. I think also this is probably a broader industry trend. But our firm basically began with a real focus on doing a handful of things that we thought mattered a great deal. And the subset of those that we felt through time, we could do really, really well for our clients. So we believe in an expert model as opposed to a supermarket model of financial services and investment advice. And I think unfortunately, and maybe this is partly a consequence of a very, very long bull market that many investors have been kind of educated to expect, that there's, I think sometimes a conflation of quantity and quality, where the mere availability of a broad set of products is misinterpreted as a level of expertise or a level of quality. And we find ourselves fighting that. I'd say from time to time commercially. And it's a thing where I expect through time, the market and the client, the sophisticated client understanding of one institution can't be great at everything, is going to, I think, come back into favor. But yeah, so I mean, I think if you look at the alternative space, and this is an area where we have increased our ability to work with really large, more complex clients. And we do have the ability to meet their needs in the alternative space. It's just an area where we're not going to be putting ourselves in a position of this sort of the joke that many of these asset classes are sold, not bought. We, at the most, intend to be a Sherpa, a guide, a counselor of the Dusherry, an advisor to clients as opposed to a sales channel for these. That makes a lot of sense. Which alternative investment in terms of either asset class or investment product do you think is best suited to a customer of Cherry Trace today? Look, I think these are things that are very, very individual. I'd say that for the vast majority of high net worth clients, affluent clients, there is no suitable alternative investment. And there are a whole host of things that I think people need to really understand about alternative investments. And I would say that obviously this is a very individual conversation in that an individual clients and family circumstances are the most important aspect to this decision. And then as someone starts to wait into these asset classes or return streams, understanding at a very detailed level, at a manager level, at a fund level, whether you are getting the thing you think you're getting, or whether you think you are setting yourself up to get the thing you wanted to get. Whether that's happening. But the reason that my quick answer is, look, I don't know that there is an appropriate alternative. For the most part comes down to one factor, which is liquidity. When you look at how we invest money, we invest in the public markets. If you want to know what your portfolio is worth, you can know what it's worth right now. If you find yourself in a position where you need the money, that happens. That happens a lot more than people would like. That happens a lot more to wealthy people than wealthy people might expect. But if you need the money, the money is there. If you lose faith in our approach to how we invest. If you lose faith while you're having your morning coffee, we can have sold everything out before lunchtime and T plus one settlement. You're going to have your money the next day. If you think about that liquidity space and let's just pick on private equity just to be mean. But if we look at the private equity space and we look at a standard fund structure where a fund life is 10 to 12 years, look at that. And I think about all the instances I've seen where a client found that they needed more liquidity sooner than they thought, or where maybe they went into a fund thinking it was going to behave like the fund that they had a decade ago where they were getting realizations after three years and all of a sudden they're not. And maybe they have new commitments to meet and so on. But if you think about wanting to get out of a private equity investment, it's easier to dissolve a troubled marriage than to get out of a private equity investment. And you can probably also get out of that troubled marriage at a lower cost. So I think about that sort of 12-year type fund life. And I don't know how many of your listeners are old enough to remember Liz Taylor, wonderful actress, married eight times to seven men. The longest of those was one of her two marriages to Richard Burton. And that was a 10-year marriage. So her longest marriage was shorter than the life of a private equity fund. So when people are looking at these, I think they've got to be operating on it. under a set of worst case assumptions of saying, all right, let me assume I don't get my money out for a long time. Let me assume that I get the lowest return that this manager has delivered in any of their past funds. And let me imagine that a set of not great things happened to our family, right? You can have a massive increase in health care or home care costs. You can lose your employment. Any number of things can happen that radically changed that liquidity profile for the family. And private equity in particular is probably the definition of where you would not want a lot of your wealth at that moment when you needed liquidity. Fair enough. And thank you for bringing up liquidity because that is my favorite topic. So liquidity is an afterthought until it is everything. Well, I think some say that one of the hardest things about having wealth is converting wealth to money. And this is a great example of that. It's a lot of wealth on paper. But then when you try to convert it to cash, you may not get what you want as much as you want when you want. Obviously, liquidity is a pretty major drawback of most of alternative investing. I mean, these things are liquid by design. That's the point. The pushback to traditional investors has been-- like yourself-- has been that equity markets, particularly in the US and even globally, are very narrow right now and dominated by a handful of companies that are levered to a one very specific theme. So people are turning to alternatives purely just to diversify away from public equities, particularly US public equities. And obviously, you counter some of that with your thematic investing. But what do you make of the diversification argument for alternatives? What do I make of the diversity? The idea of just, hey, this is a unique return stream. And so on. I agree with the aspect of that. What I would say is that with regard to these two alternative asset classes, particularly private equity, private credit, private infrastructure, the subscription fund facility, the biggest benefit of that, I think, is a little bit like a gym membership and a private trainer or something. That the hardest thing about any investing is often having the discipline around when to buy, when to sell, when to hold. And there's a lot of research that shows that many individual investors find themselves on the wrong side of those decisions far more often than not. So I guess the silver lining of having that liquidity is that you're going to be getting that return stream for a decade, whether you wanted or not anymore. But look, I think that there are definitely arguments to be made that hedge funds, which come in a whole lot of different flavors, are seeking to create a unique differentiated high quality return stream of some sort. And that can be really diversifying. I think a lot of clients are really into return enhancement, though. And diversifying usually does not enhance your total return at the end of the day. I mean, you are giving some of that up in the form of insurance, in a sense. I'd say that when I look at private equity, my worry is how differentiated of a return stream is that really. I mean, it has many more of the characteristics of a levered equity investment. In fact, an investment that has multiple layers of leverage behind it at the portfolio company level at the fund level. And then who knows how you funded the investment as an eliminated partner? So I think in some ways, you put yourself in a position of amplifying the ride up and the ride down as you would with leverage in any case. So I don't know whether I buy that that's a really a differentiated return stream. I do get that it can, particularly in today's market, give someone the ability to invest in a different set of companies than they would get if they, for instance, were just buying the S&P 500. And there is a large percentage of privately held companies in the United States. So again, this is why I don't tell people you just shouldn't do this. That's a really undifferentiated broad brushed view here. And I think people who do invest in these asset classes, some of them are going to make money. I do think it's going to be harder than it was during perhaps parts of the '90s and the 2000s, in particular, where you had, for a period of time, a near zero cost for that leverage. So we'll see. I think we haven't talked about private credit. Private credit certainly been in for quite a few knocks in the press recently. That is an alternative asset class. We don't offer our clients. We won't offer our clients in the foreseeable future. And that really comes from a more conservative mindset that we have, which is-- we just haven't seen how these things perform through a full cycle. And that's something that we would like to see happen with someone else's money and not our clients' money right now. And then we'll see it some future date if that makes sense. But that is a very, very long way off. I think all of us are very interested to see how that asset class performs through the next economic downcycle. That said, we wish it the best. Yes. I'd love to move on to our closing segment now. And I'd really just like to take a step back and talk a little bit and ask you some more personal questions just about, in the context of your job, what is the best part of what you do all day, being CEO of Chevy Chase Trust? Sure. I'd say what I really love about what I get to do is the impact that I get to have on families, particularly across generations. There's just something for me, at least that's really gratifying about that tangible impact that you can have. I spent my career in consulting, investment and wealth management. I've worked in private equity. I've worked in a hedge fund. I'm glad I've done all those things. But the thing that has always been really meaningful for me is when you're able to work with a family through the full cycle from setting up and then executing a great plan for wealth building, for wealth protection and transfer. And then the working through the tough parts, when those transitions are happening or when that plan needs to get reworked because circumstances have changed. But there's something about it. And I get this experience maybe once or twice a year. And it's enough to motivate me and really keep me going and exciting. And that's-- there's that day where you're sitting with the next generation client where you're watching how well all of that work that you helped them to architect and execute has played out. And you're seeing how well they're doing, living in a way that's really consistent with the goals and the values that the family has. And they've kind of fully stepped up into that broad role as the lead generation. I love that. And I love the fact that we get to bring all these different tools to the table to make it happen. That's great. Continuing on that theme, you obviously had a differentiated career path. You haven't always been in the investment business. Can you just give us a trace thumbnail of your career path to becoming CEO just for the benefit of those who are looking and listening and saying, wow, that sounds like a great job. How do I do that? Sure. I would say probably everyone's path is pretty unique. I think of mine as a slightly non-traditional one in that I came out of business school-- before business school, and then when I came out of business school, and was a consultant and then moved into the kind of operator manager side, there probably are more people who end up in a seat like mine through more of a sales track or an investor track. And I'd say that at least for people who are coming at it more from my origin point, that the main lesson to me is really looking laterally and not just straight ahead and through your career, trying to build a mosaic of experience in different areas with different kinds of people, and using that to create your own worldview and your own path. What specific academic training do you think has made you the most successful? Was it business school? Was it liberal arts? Was it anything? Sure. You know, a little bit of everything, but I'd say from an academic perspective, I am a big, big believer in liberal arts. I think that I was a history and political science major. I took a lot of economics. I took a little bit of psychology. I took a little bit of art history, a little bit of everything. And I think that at the end of the day, what that did was it really helped me to build up an ability to kind of learning to learn. If you think about how much the world changes during the course of your career, like as an example, I spent a summer taking engineering and computer science courses. And I was trained in cobalt and photography. Now, if I had spent four years of college learning how to use those languages, I really hope I would have found a way to continue my education because those are by large, obsolete languages at this point. But the ability to learn how to learn through your life, the critical reasoning, critical judgment that comes from the practice of learning the liberal arts, I think it's sort of a natural hedge for a changing world. And I'd also say it's a good background for building what I call discernment as opposed to just judgment. So I would say the practical skills that I learned through the MBA program at Wharton were incredibly valuable. It was a great experience. But the foundational liberal arts education is something that I think has paid greater dividends through time, frankly. I meant to that I couldn't be a stronger supporter myself. I'm preaching to the choir. I do sometimes joke that I would probably trade an economics class or two for more psychology classes. I'd say that that's more a point about trying to understand, appreciate, and accept how people think and feel both alone and in groups. But that's an area I would encourage any economics major to definitely take some psychology and political science along the way to not be too grounded in the dismal science. Makes total sense and explains the rise of behavioral psychology more thing into behavioral economics. Yes. Yes. All right. Well, listen, that is going to conclude our discussion. I want to thank you for your fascinating insights and it's a pleasure to sit down with you and talk markets again. I hope we can do it again. Great. Look forward to it. Thanks, Jeff. I hope you enjoyed this frank discussion with Jeff Whitaker about what it's like to run an asset management firm in a rapidly evolving market for alternative investing and for markets. Please keep in mind that my securities licenses expired long ago and this podcast does not constitute investment advice nor is it the solicitation for business. The old's view podcast is a branch of old site queue, a platform for education, training, career development, and insight.