Speaker 1You need to understand the total portfolio, every new investment that comes into the portfolio, you're thinking about the overall risk budget, liquidity needs, all these goals that every pension fund has. TPA begins to think about this not just as an asset allocation project. The word TPA to me feels more like an investor identity project. TPA is the next level of advanced. It implies that you have all of this real-time stuff at your fingertips that you can think about, this piece of knowledge that's being delivered to the investment committee. Is that knowledge better than this other knowledge? And then you can act on that knowledge. Well, some knowledge is going to be, we've found a manager that does X. Over on the other side, it's, we've got an ETF that does Y. Now it's the CIO's job to recommend which to do. Finding a way of looking at those different opportunities with apples to apples is really valuable. I'm Ted Seides, and
Speaker 2this is Capital Allocators. Technology and investment strategy. He's also a co-founder of KDX Management, a venture capital firm focused on invest tech, a co-founder of several startups in the space, and a repeat past guest on the show. His first and most recent appearances are replayed in the feed. Our conversation explores the increasingly popular total portfolio approach, Ashby's perspective on the role of AI and data in the investment office of the future, including his work with Hoopit AI, a very cool relationship intelligence platform, and examples of innovation at Saudi Arabia's Public Investment Fund and the New Mexico State Investment Council. Before we get going, as we turn the calendar on the new year, past guest Katie Milkman reminds us that it's a wonderful time for a fresh start to form new and improved habits. And start small, like the atomic habits James Clear has made so popular. I am going to stop responding to emails prolifically while I talk. My team confirmed that I'm both inefficient when doing so, and in a rush to get answers that might do more harm than good. So I'll stop, slow down the decision, and write a funny out-of-office reminder instead. In the event you're struggling to find a New Year's resolution, how about telling someone you encounter about the award-winning Capital Allocators podcast? It's true, we've won some awards along the way, but don't worry about that. It sounds really impressive, and you'll sound culturally plugged in for mentioning. If you do that repeatedly over the next few weeks, you'll form a positive new habit, and get in our good graces as we look to expand this year. So you'll have that going for you, which is nice. Wishing you a very happy New Year, happy listening, and a warm thanks for spreading the word. Capital Allocators is brought to you by AlphaSense. Here's something for you. Most AI tools today are very good at sounding right. But can you actually do it? Can you trace it back to a filing, transcript, or specific passage that drove the answer? Or are you just trusting the confidence of the output? For allocators, that's not a minor concern. A missed filing, incorrect source, or context that gets lost somewhere in the retrieval chain aren't edge cases. They're how decisions go wrong. AlphaSense is the AI platform built specifically for this. They own the content over five years. 500 million curated documents from broker research and expert transcripts to filings and earnings calls. And they own the retrieval layer on top of it. That means every answer can link back to an exact verifiable source. Because the answer is only as good as what's underneath it. And with AlphaSense, you know exactly what that is. See it for yourself. Try a free trial at alpha-sense.com slash capital. That's alpha-sense.com with a hyphen in the middle slash capital. Capital Allocators is also brought to you by Morningstar. In a sea of data, you need to know what you can trust. Morningstar's data, analytics, and research helps bring clarity across public and private markets, connecting independent research and data into the tools and AI platforms you use every day. So insights are easier to spot and act on. Morningstar. Nothing in your way. Visit morningstar.com slash game on to learn more. Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations and has the ability to build the strongest and most durable relationships. Having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com slash capital allocators. Please enjoy my conversation with Ashby Monk. Ash, great to see you.
Speaker 1Great to be here again. How many people are in the four-timer club? We don't keep track of things like that. I have to tell you, even though this is the fourth time, it is scary. You have such a remarkable impact in the world now, my friend.
Speaker 2Well, thanks. Let's kick it off with this continued focus you have on the largest asset owners of the world. Why do you think that's so important to do?
Speaker 1They have quietly become the most important organizations in the world. And I don't put a caveat. They are the cornerstone of our modern social welfare state. They are integrated into so much policymaking from Saudi Arabia to the United States to Australia. As banks have been regulated out of risk-taking, they have become the capital in capitalism. I continue to be focused on these asset owner investors. I talk to so many students that still do not know what pension funds do and sovereign funds do. There's a whole ecosystem of young people that we need to drag along this journey, which is why what you do is so important because a lot of people do listen to your podcast and they'll show up asking me about asset owners because they wanted to learn about investing. I wish more people knew about this industry that we're passionate about.
Speaker 2How's the work that you've done with them evolved over the last few years?
Speaker 1If the first decade of my career was about design governance process, the second decade or so began to blend data technology. The last five years has been a pivot for me into data analytics, software technology, tech enablement. You can't do investing without good governance, without culture, without technology. It's which leverage point you're going to go after to drive the change. You want to see in the industry. And so for me now, that leverage point is largely tech, but tech touches everything.
Speaker 2We can't talk about TPA without tech. We've been talking about TPA, total portfolio approach, for a while. It does seem like in the last year, maybe with Steve Gilmore going to CalPERS, that more and more you're starting to hear about this as a thing. I'd love to hear your own description of what TPA is.
Speaker 1Dare I say, old wine and new bottles. When we came out of the financial crisis, we ended up with this factor-based asset allocation and work by Andrew Ang, but also Dimson and a few others that were going into what are the true nutrients of return. Those nutrients were thought of as factors. If you were a really forward-thinking investor and you wanted good diversification and not to have all your assets correlated in a crisis, you would think about your diversification across those factors so that when these crises hit, your drawdown wasn't quite as severe. I think of that as the beginnings of what we are now calling TPA. You need to understand the total portfolio, every new investment that comes into the portfolio. You're thinking about the overall risk budget, liquidity needs, all these goals that every pension fund has. TPA begins to think about, not just as an asset allocation project. We often think of asset allocation as the biggest driver of return. That's the Brinson work. But asset allocation can't just be set in a vacuum. You can't just say we're going to do factor-based asset allocation if you're CalPERS. I can remember having a the late, great Joe Deere, who was the CIO at CalPERS, coming out of the financial crisis. And he explained to me that his goal was to do factor-based asset allocation at CalPERS. And he even talked about how he was going to do it inside an organization that was designed along product categories. He had this ambition to create a translation committee that would translate a factor-based asset allocation, a total portfolio approach, to a product-based strategic asset allocation with bucket filling. And I think the fact that we're 15 years on from that moment, and we're here talking about CalPERS' attempt to do TPA, tells me that original project at CalPERS probably didn't go the direction they were hoping, because here they are trying another total portfolio approach. It's a very exciting moment. Just as we came out of the financial crisis, we had factor-based asset allocation, and we had insourcing, we had the Canadian model taking off. This is a very exciting moment. This is the new model. People have looked at New Zealand, GIC, Canada Pension Plan, and they've said, wow, there's great performance there. How do we replicate that? But it's going to be hard. TPA, to the point of my life's work pivoting from pure governance to almost pure technology, getting TPA right means you have to build this nerve center at the center of the organization. You are aligning everything with an organization's goals. Our risk budget, liquidity, cash flows, capabilities, our people, everything is thinking about how this portfolio connects to our goals. To do that, you need to know where your portfolio is today. What are your exposures? What are your assets valued at? The more you have private markets, that's going to be hard. I don't know any plans today that are really good at valuing their private assets. It's incredibly difficult to bring real-time valuation into venture capital, private equity. This whole TPA push is designed for organizations that do less in privates. You can do it. There are places that have big alternative buckets that take a total portfolio view, but you really need to invest in your organizational capabilities. You have these gears. Anytime you shift your asset allocation, gear, there's a consequence on your organization and your implementation. If you're going to go from a strategic asset allocation to a total portfolio approach, that's a shift in asset allocation. You can't do that in a vacuum. You're going to have to completely change your organization and how you're implementing it. That's the part that we'll need to watch and see how people do.
Speaker 2For a pool of capital that's deeply ensconced in strategic asset allocation, where the way they report multiple assets, classes are, as you say, these products. Ultimately, they need to roll up risk. They need to measure what they have so they understand where they are. How different is it from someone who starts with a sophisticated strategic allocation to say they're now going to use TPA? It's very different.
Speaker 1If you're shifting people's incentive compensation to align with a total portfolio approach, you're building analytics that allow you to look across real estate, infrastructure, timberland, hedge funds, on and on and on. Understand where you're going to squeeze that next unit of return out of the risk available to you. It's very difficult. It's the fully advanced level of investing. It's the future. 22 years from now, we'll be like total portfolio approach. That's so funny. We weren't doing that. It's like asset liability management. I'm old enough to remember in 2001 where we were like, wait, we need to link assets and liabilities. That's the way we'll see TPA. Right now, you need to have a GPS for your portfolio, global positioning system. Let's call it a portfolio positioning system for your portfolio. Where is everything now? Because if you're going to make real-time changes to your asset allocation, you need to know where you are to choose left or right. You then need to know what kind of car are you driving? How are you getting from A to B? Because that's actually going to have an effect whether you choose to invest in hedge funds, private equity, et cetera. That's your identity. Then you have to have this map of the set. We need to be much better at forecasting and predicting the future. I can remember the New Zealand Superfund, which is one of the best total portfolio investors, having to scrub out all of the individual portfolio links to their compensation. It was total fund, qualitative metrics for compensation. That's hard. A lot of people are still compensated. Based on their own individual portfolios. So it's hard to tell them not to do deals for a year when their asset class goes out of favor.
Speaker 2People have asked me about TPA. The hardest thing to describe is the difference in the unit of work. Strategic asset allocation, we have our buckets. We're going to go find managers to fill those buckets. If you're now in TPA, how does the individual investment decision differ from that in the strategic asset allocation? The unit of work
Speaker 1becomes knowledge work instead of deal work. The unit of work is different. It's not capital deployment. It's not bucket filling. It's something else moving you towards your objective, intelligent understanding of additionality in your portfolio. That's why I say TPA is the next level of advanced. It implies that you have all of this real-time stuff at your fingertips that you can think about. This piece of knowledge that's being delivered to the investment committee, is that knowledge better than this other knowledge? I have a soft spot for the SAA people that I've got a board that isn't an expert board. So an SAA is actually useful in keeping us tied to the mast. How much
Speaker 2more movement, whether it's turnover or refinements within a TPA approach is there from their initial reference portfolio or an SAA model? If it's done well, there's a
Speaker 1constant reflection on whether or not this opportunity coming in adds value. So some of it is a bottom-up understanding of deal sourcing and deal opportunities. You would add a deal if it improves the portfolio and you wouldn't if it doesn't. You could imagine where you're quite happy with your portfolio and you're just watching it. That's a very hard thing to do, sit and do nothing. We're giving you the power to make pretty tactical moves. People don't like saying TAA in relation to TPA because it makes people feel the short term possibilities of TPA. It is there. Once you have these systems in place, you could pivot around beliefs, assumptions. It also allows you to be counter-cyclical very quickly. If markets move quickly, you're going to be able to buy low. And if you feel like things are inflated, you can sell high. I am a big fan of counter-cyclical investing for long-term investors. We'll see how a lot of these CIOs like Stephen Gilmore and others implement it.
Speaker 2And so much of the long-term drivers of strategic asset allocation returns have been private market investments, venture capital and private equity. And you mentioned it's not really designed to incorporate that. How does a pool who's trying to implement TPA think about that trade-off of the flexibility versus what's historically been the return driver in these asset owners?
Speaker 1There's a couple of hybrid versions where there is basically an underlying commitment to each traditional asset class. 50% is going to go to the traditional buckets, which looks and feel like bucket filling. And 50% is that TPA around the reference portfolio. By the way, that's going to help you to recruit and retain human beings. It's hard to recruit and do a TPA. You recruit people into private equity jobs, real estate jobs, because we demand, especially at the senior levels, a certain level of expertise. And networks that goes into being successful today. There's a question about whether or not that's the recipe 10 years from now, but today it's the recipe. Having that hybrid version of TPA would allow you to recruit people and retain people into it. As it relates to the private markets, there is this strong tension. If you're a big private equity infrastructure investor, you're probably a little nervous about the TPA push. It's hard to do TPA, when you're making a 15 year commitment. You're planting seeds that are going to take a long time to grow. It's harder to move around that portfolio and add asset allocation alpha. When it's done well, it goes back to this notion of every deal that comes in is judged in relation to everything else in the portfolio. It doesn't mean that you're not doing private equity. It just means that you're judging your private equity in relation to everything else. And you're liquidity. and is it better to maintain optionality or is it better to bury this in the ground and generate 22 returns i want to circle back
Speaker 2to this thought of your pivot to technology everyone's talking about ai what have you seen in different use cases of ai tools for the asset community a lot
Speaker 1of asset owners are thinking in terms of automation what fte can we automate it's a natural place to start because you think about artificial intelligence as replacing human intelligence i don't love that framing i love thinking about how technology unlocks additional basis points of return it gives permission to pension funds to spend more money you especially on the initial setup cost of getting your data right there's a big piece here which is technology enables two things for every investor one is speed get to where you're going faster and the other is insight for 4 000 years i would argue most of the tech innovation that went into our industry was speed you can go back to the babylonians and look at cuneiform tablets and you can literally see regressions being done on these cuneiform tablets around the depth and flow of the euphrates river and commodity prices we're still on tablets today it's just they're digital that tells me most of that tech advancement has been about speed but in 2016 we had alpha go we had the beginning of this ai moment that alpha go case study you see this moment where inhuman intelligence revealed itself for the first time for most of us we're still on tablets today it's just they're digital but in 2016 we had alpha go we had the beginning of this ai moment that alpha go case study you see this moment where inhuman intelligence revealed itself for the first time for most of us the machine did a move that had never been trained on before it was an inhuman move move number 37 in fact all the humans in the room thought the move was a mistake the move ended up to be the winning move so all of a sudden we realized oh wow when you define the rules of the game for these machines and you unleash them in these generalized adversarial networks they create moves that we hadn't even thought of that's the beginning of this ai moment that alpha go case study you see that's inhuman intelligence and so moving from speed to inference and insight is this great unlock that's what i'm mostly excited about and that inference is going to benefit the long-term pension fund investors they're the ones that are managing assets over longer horizons where inference insight have enough time to get priced when i'm working with pension funds a lot of the technology that we're applying ai to our simulations models projections of the future you got to get data clean you got to get it matched you have to have a security master this is what a lot of work that's going on right now in pension funds they're spending a lot of money on their portfolio positioning system their source of truth what you build on top of that source of truth is the insight that allows you to understand where your portfolio is and change it not just automate away a lawyer which is probably great but to use the technology to say gosh i thought we were in a different position than we are and now we should change our
Speaker 2portfolio there's two ways of assessing the data as you've described it one is looking at what you own and making sure you understand your risk factors and the other is trying to predict what might happen how do you think about the possibility of these ai tools going from understanding what you own to helping a cio make judgments about where they want to head this is one of my favorite topics because the
Speaker 1investment business we're crystal ball gazers we're tarot readers we're living in a world where we're trying to predict the future human intuition gut feel these are the things that most of us are using and so the question becomes what happens when you have really trustworthy reliable data upon which you can begin to build analytical engines that reveal new knowledge about the world right now where we get knowledge are from podcasts we get it from books other people have gone and done the work and now they're giving us knowledge but you can imagine a world where knowledge gets built from the bottom up in your data you're starting to spot patterns in your data and you're starting to find patterns in your data and you're starting to spot patterns in your data and you're starting to spot patterns in your data and you're patterns heuristics shortcuts those are all code words for knowledge as our algorithms basically code words for knowledge we're going to build this knowledge on top of clean data i often think in terms of navigation it's a very easy way for people to pull themselves out of the investment industry where we have a bunch of priors and say well what's happened over the last 20 years in personal navigation going from where i am today to my destination my goal a lot has changed when was the last time you pulled out a rand mcnally map well what happened was we got a gps that told you where you were google then went and indexed the world so we know the universe of destinations we had all this alternative data coming into this ecosystem to tell us that the possible pathways to take me from where i am to where i'm going and the overlay for the investment industry that i think is really important is the type of vehicle you're driving or you're traveling in is incredibly important to connect you from your current location to your destination we understand your portfolio we understand your goals your preferences that's your destination let's maybe stop calling our destination an expected return target on an annual basis which is again an intermediate goal rather than a true goal and we can start to communicate that goal in the cash outflows now machines once they know your current position and your cash inflows and they know your outflows and all the scenarios around those outflows machines can start to optimize and really understand the universe of options available to you the important part is to say because we understand you ted and we know your resources your people your process your information we can see where you are on the map your portfolio we can layer just like google maps does the different risk factors we can see the satellite view we can see the traffic view we can see all these things on your portfolio when the ai starts to optimize between your destination and your location today it will give you very unique guidance so i often get asked won't ai just tell everybody to buy the same stock that's a very short-sighted moment of ai which is yeah if we're applying ai to the outside world of investable opportunities maybe it's going to tell everybody to buy the same stock but that's not the way we're going to apply ai in our world it's going to be more like when you pull up your google maps and say give me directions to in and out burger it's going to tell me hey ashby's in los gatos the nearest in and out burger is a san jose airport but the line is too long at san jose airport so it's going to direct me to palo alto because there's no line because google knows that my destination is the hamburger it's not the back of the line of in and out burger think about how powerful that is that's where the human beings in these organizations will become the co-pilot to the ai rather than the ai being the co-pilot to the human beings because they're going to have all the data and they're going to have that customization available
Speaker 2as we take this from the conceptual stage of what allocators in general doing to some of the ones that you've seen and worked with that are doing interesting things would love to hear some examples of what you see as some of the most interesting things happening in the allocator world because innovation is hard in this
Speaker 1industry we don't often see r d teams inside pensions the really interesting pension funds sovereign funds are those that are trying new things new models the way that best practices are transmitted around the industry is when a new model drives high performance then everybody else looks around and says oh hey how did they do that and could we do that is our organizational identity similar enough to do that that's what's happening right now with tpa people have seen the high performance of new zealand superfund over 20 years and they're saying how do we get a little bit of that you literally have calpers hiring the cio of new zealand well where can i find places that are taking on big grand challenges and trying to build new models the most interesting sovereign funds feel like they have a development angle right now the two that i would flag are pif in saudi and new mexico's state investment council not all that similar when we dig into it the pif trillion dollar ish organization started over a hundred companies this is a sovereign fund think about how different that is this sovereign fund has started over a hundred companies even more than that the crown prince of saudi arabia has said that he wants Saudi Arabia to be net zero by 2060. Saudi Arabia, that is synonymous with fossil fuels. For the crown prince to say, we're going to go to net zero by 2060, and then point at the PIF and say, this is my lever for change, we can all get excited about that opportunity to watch and see, can PIF take this place that is the global epicenter of fossil fuels and help turn it into a net zero economy? Really fun project there that if they need help, we should all be interested in seeing that through. Because if you can get Saudi to net zero, haven't we sort of by definition avoided climate change? The next one is the State Investment Council in New Mexico. Similar idea. It's a sovereign fund. A lot of the wealth comes from the subsoil assets, a lot of it coming out of the fracking boom. The exciting thing about New Mexico is that the goal is education. They are taking the assets under the ground, and through this investment vehicle, they are creating a generation of educated humans. That's the difference from a pension fund, where you're taking all of this wealth and you're creating retirement security. They just made this announcement that they're going to do universal child care from zero to four. That's only possible if they manage to invest this capital well. That's first of all, cornerstone of the modern social welfare state. What a neat illustration of how these organizations can have a tangible impact on people. You're going to see that in New Mexico. Because of the scale of that organization, they're going to add $20 to $30 billion. They will soon be the biggest sovereign fund in America, passing Alaska. There's an opportunity to say the model that was working there for the last 10 years probably needs to change. The door is opening because of the scale coming into that organization to think about what's next. I love those moments where the board says, hey, we probably need to change because of some dynamic. In this case, it's inflows are coming so fast, they're going to need to change. The other piece that's fun about New Mexico is they are maybe the biggest developmental investor in America, not because they are too, but because they see it as an opportunity to connect the investment fund to the local population and drive positive impact. They also see it as an opportunity to drive alpha. That's where I get excited because that's when things can be repeatable role models. Very few pensions are going to copy a development fund that is delivering 2% return. But if there's a development fund like a Tomasek that is out there driving really high performance investments, then all of a sudden they could become a role model that gets copied. That's SIC's ambition. What's in New Mexico? Two of the national laboratories, Los Alamos, Sandia. There's amazing universities. They have a burgeoning venture ecosystem. There's energy, a spaceport that they're working on where people are launching rockets into space. Both those funds, PIF and SIC, are developmental investors that are taking this really long-term and they are combining these objectives, whether it's education, net zero, diversification of the economic base. They're combining those goals with high performance. They won't achieve those goals unless there's high performance. That's a recipe for something exciting that might show us new ways, more resilient ways of investing.
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Speaker 1In the case of New Mexico, it is about understanding their comparative advantages, which is obviously the state. Santa Fe is a beautiful place, so you're going to be able to recruit amazing people to go live there. They have recently done an upgrade to the compensation. You can go and make a life in Santa Fe working for a spectacular organization that's mission-driven, so that's part of it is recruiting the right team. They have an opportunity to leapfrog in technology, which is another way of saying maybe the technology wasn't very good until recently, but maybe it's actually to your benefit to be entering the AI age with a clean slate, but also a thoughtful approach to asset allocation that has delivered good performance. So the team is pretty solid. The neat thing about the moment is defining the organization for the future is in the hands of whoever the next CIO is. Part of the reason why I'm being cagey is I don't want to close doors for whoever's next. I want to make sure that whoever comes in can look at it with fresh eyes because that's probably one of the coolest jobs available. If you get the right person, they might have a totally different perspective than me on what the opportunity set is, and that would be great. Who else is doing cool stuff? Our friend Jagdeep is trying to buy college leagues. That's fascinating. We have the Maple 8, but we also have the Maple 8. We also have the Aussie 8 because of the consolidation that's gone on down there. There's now the big eight Australian super funds. They're doing a lot on private market real-time valuation because you can move from one super fund to another super fund in real time. They're in competition with each other, which drives a lot of innovation in that space. There's another one, PGGM in the Netherlands. So they're about to launch their version of TPA. Which is exciting because PGGM has what they call 3D TPA, three dimensions, risk, return, and impact. Every deal gets analyzed in terms of those three dimensions. That's very hard to do. They've had to do a complete organizational upgrade. It will give them unparalleled insights into those long horizon risks and uncertainties. Everybody is trying to grapple with AI right now. They're trying to grapple with AI right now. If AI has done anything for me, it has unlocked resources for tech and data. Most of the big investment organizations are now setting aside money to experiment with AI.
Speaker 2On that venture capital side with your fund, KDX, what are some of the most exciting features that you've seen serving the asset owner community? The one that
Speaker 1is breaking out right now does private equity. And real-time valuations. That's Shelton AI working with a lot of the supers and Canadians to do the private equity marks. The reason I got so excited about this company in the beginning was the founders, a spectacular human being that the chancellor of Berkeley once told me was one of the smartest people he'd ever met, which means something. This young guy, Harrison Shaw, was excited about fees and costs for private equity. He was excited about fees and costs for private equity, which there's not many people that share that passion for aligning interest between LPs and GPs. One of the features of this toolkit is called Verifees, where literally it is a real-time audit, the fees and costs being charged by GPs. You'd be surprised to have the GPs actually want it too, because turns out GPs don't want to make mistakes and be embarrassed. Most of them want to get it right. With all of these endless side letters, it can be hard if you're a big fund to get it right. I like the systems that study inside asset owners. A lot of the systems that I see others investing in are hedge fund tooling, understanding the outside world. There's two companies in our portfolio that are taking a lens on internal understanding. One is called GrowthSphere, where when you onboard, it goes your investment beliefs, your strategy your goals all that stuff it seeks to model your process it can even generate memos i would describe the right way to use it as red teaming because most people are uncomfortable handing decision making to ai right now but if you were an investment committee the way that you would use a growth sphere is to say all right this system understands our organization about as well as anyone on earth because that's part of the process of the ai and when a deal arrives at an investment committee let's have the investment team load up all the deal docs in growth sphere and present a report and you can prompt the report and say hey make this quite negative on this deal or we have an assumption that we need to be net zero by 2050 those are the types of things that can on the flip you hit reprocess of a sudden you've got a new 50 page memo that takes that stance it's remarkable for me to watch those things the unlocking of language in our investment analytics is this new exciting thing the other one that goes internal is called hoop it where it tries to find the people in your network that you are sort of connected to you can imagine it is if google is like what search and chat gpt is this one hoop it is who i need somebody for x who should i talk to and rather than just doing a universal search across the world goes into my network and these are people that i have connections you'll say you went to college with this person and you probably think of them as a very good rower but do you know that now they run an insurance broker those are the type of things that we all lose touch with hoop it is the toothbrush company you use it twice a day because inevitably i have students or portfolio companies coming to me and saying hey can you help me get access to fill in the blank how many times are you and i sitting there being like i think i have connections there i just run a hoop is what we call it and the hoop then goes and unlocks all of these people what
Speaker 2are the areas when you're looking at allocators now that you just think they're still hopelessly behind or weak and need improvement on
Speaker 1oh i'm so empathetic now i wrote that paper the investor identity understanding the context is so important you can't do asset allocation in a vacuum i'll meet a cio at a medium county pension plan who's like yeah we're doing 14 and private equity and eight percent hedge funds and i think to myself you're one person you're so reliant on the consulting industry and maybe that's okay maybe that works how do you pick your consultants that's the question you got to ask it's a different question when you're looking at when you're talking to the pif you've started 103 companies how do you pick which companies to start understanding their process their governance their people i run this analysis it's like a version of swat strengths weaknesses opportunities and threats i think of it as categorical advantages cultivate advantages weaknesses and goals categorical are the things you're born with if you're the state investment council of new mexico you're born in new mexico if you're alberta you're born in alberta that's where you are in the world it's going to guide the people you can recruit so i was born in edmonton you might be able to convince me to go back to edmonton they could probably never convince you ted to go to edmonton it's very cold in the winter minus 50 there's not even skiing nearby it's a lovely city you could probably convince me that's the context of the category that you're in where are you born are you born on yale's campus are you a foundation are you a national pension are you a state pension are you a state pension all those types of things on top of that what are the cultivated advantages you've sought to build if you're tia it's agriculture if you're new zealand it's tpa if you're yale maybe it's venture capital but then you got to go look at the weaknesses and this is really what your question was so what are the weaknesses and inevitably the weaknesses are very long and painful because these organizations often live inside bureaucracies they may be the base of the capitalist system but they are rarely described as capitalist compensation isn't quite market the processes are often defined by bureaucracy so oftentimes a pension fund will say we're really innovative we're an amazing partner to our funds they bring us a co-investment and we respond in 15 days i have to remind them what you've just described is speed and efficiency it's the opposite of innovation because to be a good partner you have to move fast and you have to be on time whereas innovation is messy there's failure and sometimes you're disappointing people i know that all too well when we start thinking about overcoming the weaknesses how do we build an engine of innovation inside these funds in practice we're struggling with data and tech incentives still working through governance issues how do we get the right capabilities on boards and how do we build the right capabilities on boards and how do we build I think i saw the first technologist at a canadian maple 8 applied to the board and is appointed to the board now forever we were like how do we get people with finance backgrounds on boards of pensions just as we're sort of achieving that i'm going to turn around and go back to them and say we need technologists people who've built data infrastructure we need the right skills on these boards if you're going to make a hundred million dollars you're going to need a hundred million dollar investment in technology which isn't that crazy if you're a 500 billion dollar fund wouldn't it be great to have a board member who really knows about building advanced analytics and data mission critical systems and all that stuff as
Speaker 2you try to push the agenda of technology and innovation on some of these large plans there's still a fair amount of investment activity that is just an lp investing in a gp how have you encouraged the asset owners that you work with to think about the dynamism of that relationship on the gp side
Speaker 1i often say you want to build a partner program with pensions that's great what's your definition of partnership well to the gp it's often well we don't have to fundraise for very long it happens in two months instead of two years that's not what the lp is looking for in a partner so i often tell gps the sign of a good partnership is you help drive a change in your partner's portfolio that you don't get paid for imagine that you gave them a piece of advice you introduce them to somebody that's the type of partnership that the pension funds want out of their manager relationships you can codify some of these in contracts no fee no carry co-invest or right of refusal on the next fund that's possible but if it's codified in the contract it almost goes outside the partnership what i'm talking about true partnership is what happens outside the contract and you're not interpreting every gray area for yourself you start interpreting gray areas for the benefit of your limited partner that's what the limited partners want they want deep relationships they want to understand what you're doing and why you're doing it especially as the tpa comes on hold to tie it back to that if you're a good hedge fund manager a private equity manager that knowledge of how markets work and what you're looking for could be invaluable to a cio that's really thinking about what risks are the right risks for our fund to take right now that true partnership is what we're looking for gps are going to have a role this is why i'm so passionate about seeding managers and building an ecosystem of new talent and i'm constantly pushing pensions how are you investing in fund one not fund three if you only invest in one fund you're not going to be able to do that if you only invest in fund three you've decided you're going to overpay for managers because they don't need your money if you're investing in fund one you're building a really thriving ecosystem of managers thinking about new technology new data they're not just managing their reputation they're not just clipping the coupons from prior success there's a lot of hungry managers spectacular managers that are in fund one that are desperate for your capital that is really a neat
Speaker 2opportunity when it comes to developing talent inside the investment office you've had a few new initiatives to train young people on the asset owner side love to hear what you're doing there we've invented a new fellowship
Speaker 1we had an observation two or three years ago that it was difficult to take the best undergraduates and put them on a trajectory to land in a pension that's not quite true in a place like canada or new york you know there's a lot of new things going on in the capital markets and there's a lot of new things going on in the capital markets and there's a lot of new things going on in the capital markets but in america most graduates of yale harvard princeton stanford berkeley they barely know what a pension fund is let alone a sovereign fund let alone the difference between a reserve investment corporation and a stabilization fund we wanted to make working at a pension fund as cool as it possibly could be so that young people got excited we looked at the success of teach for america and taking all these amazing young people and we looked at the success of teach for america young people and placing them in inner city public schools. For a long time, that was the most difficult job to get in America was to be a core member and teach for America. And you would have the honor of going to a really difficult classroom. And as somebody who teaches, it's not that luxurious of a gig. It's pretty hard. We wanted to tap into that cool factor with young people. We were lucky to have a very willing partner in CalPERS. CalPERS was ready to pay for four fellows a year. We were lucky to have a university that was willing to build an experimental fellowship. The contours of the program, you apply like it's a fellowship. We get hundreds of applications for four spots, which builds. The brand. I will admit that I'm excited about those hundreds of applications because every one of those kids has to learn about CalPERS and pension funds. They have to write two essays. They have to go and get three letters of reference, which means those people are having to learn about CalPERS and what the job is. One application cycle. I've now educated thousands of people just to pick four to six fellows. So that's part of the goal. We then pick the. These four superstars and we have graduates of Berkeley, Stanford, Princeton, Harvard, Yale. All of those people are part of our fellowship program. They spend a year working at CalPERS and now we have a second pension, Orange County. They're on deal teams. They're learning. They're operating. We work with CalPERS in Orange County to understand the profile they're looking for. Are you interested in AI? Well, guess what? We've got a graduate of Stanford computer science. Who did a co-term in AI? Do you want that person? Because that person could go to Citadel or that person can spend a year at a fellowship in CalPERS or Orange County. That's the type of caliber we're looking for. And because it's a year fellowship and it's this cool thing that you win, they say, yes, these kids. So we get these spectacular humans going to work at CalPERS. That was the program idea for building up direct pipeline to place the best and brightest minds from undergraduate. In public pensions and see if we can build this alumni network of fellows. We say to them when they go in, we'd love for you to stay at CalPERS. CalPERS would probably love for you to stay at CalPERS. We'd want you to understand this space, bring change and think about the space and understand alignment of interests and what they need. And we set ourselves the goal of having one stay every year at CalPERS. And we achieved that goal in year one. We have one person staying. Right now in their second year at CalPERS.
Speaker 2Alongside the teaching, alongside the work with these funds, alongside your venture fund, you seem to dabble in podcasts every now and then. Hopping it out. I'd love to hear about your experience and the podcasting that you're currently doing.
Speaker 1There was a realization not too long ago that you could spend an inordinate amount of time writing a book, writing a paper. But it's the tweet or the podcast that captures. The imagination of everybody. You probably need to do that other work to be able to write the tweet or the podcast, but you don't get that other work paid attention to unless you do that next level of engagement, meeting people where they are. Where they are is not in the Journal of Finance or the Journal of Financial Perspective. I do think a lot of people are reading working papers on SSRN and things like that, but not many people are subscribing to journals outside of academia. Those podcasts are part of our work. They're on the Stanford website. They're on SLTI, Stanford Long-Term Investing. They're meant to come at innovation and institutional investment from two perspectives. The first perspective, which is the Don't Get Fired podcast, is the CIO perspective, where we've realized that much of the innovation in pension funds is courage-based. Some leaders fed up and they're willing to put their job on the line. My friend Prabhu Palani said on the podcast, I'll dare them to fire me, pounding the table. This has to happen. The Don't Get Fired podcast is meant to share stories of innovation where people didn't get fired. Those people managed to pull it off, and we want to build repeatable role models for how innovation gets done. You can go try whatever they've done, and you can point to this case study that's live in a podcast for your board. Or to listen to on how it got done. That's the innovation from the CIO perspective. The second one is about explaining what new technology is coming to the investment audience from the lens of the founders of tech firms. We just recorded our fourth and fifth podcast. There's three on the site. It's called the Technologized podcast. Dane Rook and I, Dane is my co-host. We wrote a book called The Technologized Investor in 2020. It's kind of an extension of that work, trying to show everybody in our community what's coming. They're early stage companies. These are companies that are in my portfolio, or they've been through the screener. I can vouch for the scalability of their tech. They're not going to disappear. And we want to hear their perspectives and share them. You see people be like, we're the Uber for X, or we're the SpaceX for Y. There's all these patterns. Pattern matching algorithms that happens in the startup world. I want to start presenting possible pattern matches so that if a new founder comes along, they can say, we're the Shelton for Timberland. And that's the way of framing what they're doing. And I think that's how you build more momentum behind the tech innovation in an industry. So I hope the Technologized podcast over time gets listened to by students and founders. Not just the investment space. I don't think we do a great job of explaining to technologists what we do as pension funds.
Speaker 2What is on your docket in terms of research projects that you're working on?
Speaker 1I got three or four papers I need to finish. The first one with my friends, Evan Greenfield of BCI and Dane Rook of Stanford with me. We're doing an ESG is awesome paper. So I love to go against the grain. I have to say, I was one of the first original haters of ESG five years ago because I was like, we're just talking about policies. We're not talking about facts. But now that everybody hates ESG, I feel this obligation back to it. We've done this project where we have revealed in three different transactions, the economic and financial uplift from ESG. Nothing to do with society being awesome or governance being our priority or environment. It's about how ESG drives financial performance. So that's coming. I'm doing another paper with Joseph Saenz of Fremont. And you'll notice I'm doing more co-authoring with investors. I find I need that connection into the organization sometimes. It's been a really fun process to write more with the investors themselves. Joseph and I are passionate about neurodiversity as a superpower. If you're in the investment industry, it won't be a surprise. That there's a lot of neurodiverse people. You maybe don't call them neurodiverse. You call them geniuses or brilliant or he's idiosyncratic or boy, he's direct or she's direct. Radical candor or whatever the culture is at Bridgewater these days. There's some neurodiversity throughout our industry. And we're trying to write a paper that says, this is how you can see the same data set differently. That's the pathway to alpha. Joseph and I have done two different surveys of major groups, seven or eight case studies. We're starting to unravel how neurodiversity gets integrated into organization and delivers outperformance, but then also how organizations accommodate these different ways of working. Google and Facebook and all of the accommodations they were making for engineers, dentists, doctors, dry cleaning, and dog walkers, all these things that were, you know, there to allow the engineers to put their headphones on and just focus. You see some of that in hedge funds. People will be frustrated that we're putting a label of neurodiverse on there. I'm sure that's what it's called. And as somebody with dyslexia, I'll own it and be that person for you. It's a superpower. I promise you it makes my life challenging at times. So that's my second big project. And I want to describe the gears of innovation inside pension funds and sovereign funds. I've gone through and I've done 20 case studies of what I would describe as a catalyst model for innovation. What are the triggers that allow an organization to pursue an innovative path? The classic one is a crisis, internal or external. The next classic one is a leader. That leadership change leads to some new innovation and on and on and on. So that's the third. And there's more coming. I love the writing stuff. It informs a lot of stuff I do outside. All right, Ash, I want
Speaker 2to ask you a couple of closing questions and then we'll wrap it up. be valuable to our community. One is Ascension Data. Ascension provides workflow software for compensation that allows you to track, plan, and take care of your team. We're excited for you to check out how they can help solve the sticky pain point of compensation. There's a link in the show notes so you can learn more. And here are those closing questions. What's one thing most people don't know about you that you find interesting? I am dyslexic.
Speaker 1Came up quite strongly when I was first, second, third grade. This is the learn to read years. I was born in Edmonton and my dad came down here to California in 1980. So I was four. I was part of a PhD thesis in the Stanford Medical School where they were studying dyslexia, how you help kids manage it. I can remember doing crawling to retrain brain. You were seven or eight and they were asking you to crawl and say things. And then you would stand up and you would try to connect a line and then you would do more crawling. I have learned to deal with it. I struggle like other people in the world. What's a mystery you wonder about? My dad is a physicist and he just turned 80. So I found over the last four or five years, one of the things I've really wanted to do is to learn how to do it. And I've been doing it for a long time. So I wanted to do is read physics and spend time with him. And quantum mechanics is how we end up with this multiverse concept. I'm going to try not to go too deep into the physics of all this. There's this many world story. At a given point, we have all these choices ahead of us and we can pick. And then all of a sudden, once you make your choice, you're decohering superposition. Off you go. The math doesn't really make sense. Unless you have this multiverse concept, you can either believe we live in this infinite multiverse because that's the math of quantum. Sounds crazy. Or you could think we live in a simulated environment where there's our universe and some other universe that's designed ours. How crazy is it to think that you could be in a quantum simulation?
Speaker 2All right, Ash, one more. If the next five years or a chapter in your life, what's that chapter about?
Speaker 1Scaling ideas. I have to launch two children into the world, 15 year old, 13 year old. I do think a lot about that project right now. A lot of my waking moments that aren't focused on work are focused on helping them in some way. Outside of the family piece, I want a lot of software and technology and data to make its way into the cockpit of investment organizations. A ton of my work is focused on that. And so I'm going to do a lot of that. And I'm going to do a lot of that. That bridge between the chief investment officer who knows they need something and the founder who has built something but doesn't know the use cases, trying to be that connective tissue between the two, that's probably what the next five years will be. Rather than me going and being that founder again and building it, I think I need to be that connective tissue.
Speaker 2Well, Ash, thanks as always. So much fun to hear what's on your mind. Thanks, buddy. Really appreciate it. Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com where you can access past shows, join our mailing list and sign up for premium content. Have a good one and see you next time.
Speaker 3All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or Podcast Guests are solely their own opinions and do not reflect the opinion of Capital Allocators may maintain positions and securities discussed on this podcast.
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