CalSTRS Scott Chan: Allocating Capital Dynamically Across Public And Private markets

(upbeat music) - Hello and welcome to the Don't Get Fired Podcast. I am Ashby Monk. I am the co-host of The Don't Get Fired Podcast. And this is a podcast for pension funds and sovereign funds and endowments and foundations and the people who manage other people's money and would probably like to keep doing so hence the Don't Get Fired Podcast comment. Daniel, you're my co-host. Introduce yourself, my friend. - Hi, Ashby. I am as our listeners know, Daniel Adamson. I'm the co-founder and CEO of Collective Global, which is an innovation investor, a venture firm. And as I tell my kids, I'm an adventurer capitalist. And Ashby, I'm excited because I'm taking my adventure capitalism on the road in the next couple of weeks. I'm going to a place that you love. - Oh, hit me. - Australia New Zealand. - Oh my goodness. - You know, there's a lot of wine tourists down there. - Yeah. - I'm like a superannuation tourist. - I know. - It's the spot. - I just go down there, I just raise a glass to the superannuation people. Like I'm so impressed with what that country is not. But-- - It's the nape of superannuation. - Exactly. There you go. A superannuation superfan. (laughing) But Ashby, I also given how often you've been down there. I hope that you'll give me some travel wrecks. - I sure will. I love it down there. Obviously when you're in the airport, you gotta grab like 14 packets of Tim Tamms. - Mm, because that's what they do when they visit me. So I have always receiving Tim Tamms, which is a much better version of an Oreo cookie. I mean, they will be very frustrated with me for saying that it is an Oreo cookie. - And you know, we just lost our sponsorship but from the Biscoe right there. - We did, yeah. Ah! Whoops. So whoever makes Tim Tamms, we're looking for new sponsors. - Ashby is a dress. - Yes. (laughing) - Yeah, let me just tell you my personal details. You can just wire it here. Let me give you my bank details. - I've gotta try the Tim Tam. I've never tried it before. - Are you serious? Oh my gosh, you're gonna love it. You're gonna love it. Next time, well, you know what Daniel, it's on you now, man. You gotta go down. - I'm gonna come back with Tim Tamms and next time I see you in Sack Town, I will bring some Tim Tamms. - Beauty. Well, that voice, that unknown voice that we've heard weighing in on Tim Tamms, Daniel, we should probably introduce that voice because that voice is gonna talk to us about the hottest topic. Seriously, I don't think I've seen a hotter topic in institutional investment since post GFC insourcing. And that person is Scott Chan. He's my dear friend. He is the chief investment officer of CalSTRS, which I believe is the largest educator only pension fund in the world. Is that right, Scott? - We are indeed at over 380 billion in assets under management. You are a correct sir. - Beautiful. I talk about CalSTRS a lot in my discussions with students and on the road when I'm giving talks because I like to think about that teacher that's 22 years old. It's that teacher gets tenure at 24, 25 in California. It doesn't take very long to get tenure. It's a different conversation. But then that person lives, marries, the spouse might pass on and at age 80 that teacher remarries. She gets married to a young man who happens to be 25 years old. So the 80 year old teacher is married to a 25 year old and then that 25 year old gets a spousal benefit. And so that liability that the chief investment officer of CalSTRS is managing might be 100 years long. Do you think about that 100 year liability? - Well speaking about 100 year liability, we would be I think a blue zone in the landscape of that Netflix series because we have, I wanna say over, or close to 500 centaurians. - No way. - Yeah. - Wow. - So the 25 year old and your fictitious example would be like 50 before you start the clock on that. But you're thinking about your 25 year old teacher. I'm thinking about my wife who out of the 1 million California educators is obviously the most important. - Yeah, that's amazing. - I am the biological 25 year old married to the teacher. - Yeah, exactly. - And if you guys are investing in any sort of longevity related innovations, you could be changing the liability curve for an entire pension system. Watch out. - But we have a serious longevity issue. And it's like one of the few times that people are like is living long a bad thing, right? Because it's gonna create, people are gonna retire at 55. And if they live to 120, how do we do that? - It's actually definitively a trend because the average male or woman teacher in California is living six to eight years longer than the national average. So it is putting pressure on the investment team for higher returns. - Amazing. - It's also a good advertisement for teaching positions and schools in California. I mean, come here and enjoy a good, long, prosperous life. - That's true. - Yeah, they should probably advertise that. - That is, well, we're trying right now. Now we're gonna leave it in so that everybody can know that if you work at CalSTRS, you might live an extra 68 years. I mean, it's a good life. California's nice, it's a really nice place. So what are we doing here, Daniel? We are doing a case study of innovation. That's what we always do in these podcasts. And so we've invited Scott to talk us through an innovative idea. For those that don't know, CalSTRS is one of the most innovative plans in the world. They were the adapter of the college model. - Oh, stop that. - Stop that, stop it. - Well, we had Chris Albin on in the early days before you were CIO and he kind of also told me to stop that. But admitted that you once had investment staff showing up in front of the board, wearing lab coats and goggles to like reinforce how interested your organization is in building a culture of innovation. So what was hard to pick, Scott, is all I'm saying. There were plenty of things when we did our prep call because we are so prepared on this podcast. There were so many things we could have picked. And in the end, you told an interesting anecdote about TPA, which will tell near the end of the podcast. And we decided to do that. Really because you can't open the newspaper these days without hearing about TPA and how it's being applied. Maybe even in the same city down the road from you guys, we hear about it a lot. Daniel, any thoughts before we jump into the case? - I'm already at the edge of my seat. I was part of said prep call. And so I, unlike our listener, know just what they have in store. And let's get on with it. Let's hear if I'm so excited. - All right, Scott. So give us a little history of you. How did you end up in this role? I think this is actually not your first CIO role. And then we will move into the case study, the problem, the solution, the implementation, et cetera. - Yeah, I mean, just a quick bio. I always like to think of it that my career path looks like a reverse triangle. The tip of that triangle by Nero's point, I was on the cell side covering like a dozen stocks and wireless tech and telecom during the boom bus days. So I had a front row seat of the bus stand the boom. Then I, you know, I got wider, joined hedge fund, covered multiple sectors. Then I got even wider. And as you were saying, Ashby, I became the CIO of Sacramento County about an 8 billion at the time, covering all different asset classes, soup to nuts. And then I got larger. I worked for the UC Regents, focused on public equities, but also helping to co-manage the defined benefit plan, about 60 billion each at the time. - Yeah. - And then at the widest point, I joined first as the deputy CIO about seven years ago under Chris Aelman as a CIO. And at that time, it was, you know, 200 plus billion. Now we're over 380 billion. And I've been in the seat as CIO, succeeding Chris for about a year and a half. - My goodness. - And the scope of the CIO at CalSTRS, give us a sense of the asset base that rolls up into your decision-per-view. How are you guys delegated? How big is the team? Things like that. - Yeah. So we're about 380 billion in assets and undermanagements. And the team now is 260 or so investment professionals. Yeah. I mean, I think I joined around 200 billion in assets and called 115 or so in investment steps. So we've grown a lot. But on that journey, as you know, we've become a lot more sophisticated and complex. We've built out more and more of our private market assets. We started investing a lot more directly. 80 to 85% of our investments in the public markets are direct. And on the private market side, we've really tried to become the global partner of choice and executing the cloud model, trying to work with our partners in a lot more of a spoke way, whether it be co-investments all the way to owning, [BLANK_AUDIO] right on the majority interest in some of these asset managers. In your tenure, did it was the additional office that was set up in San Francisco under you or that happened before? You know, I, that I can't even remember. It was sort of in between the time Chris was a CIO and and I became the CIO somewhere in there. I can't even tell you was it was it his tenure was my turn. Yeah, I don't know. It's it's blending into one, but it was, you know, it's probably been a year and a half or so in the running. So I would say just on the cusp, you might be the only pension fund now with kind of an office off site like that in America. Obviously many pension funds around the world have many offices, but I think Texas had an office in London that they closed. And so I think right now maybe there's like WSIB, it might have a Seattle office as well. Anyway, bit of a, you know, not sequer, but Daniel, you have a question. Scott, I know that it's not the focus of today's conversation and you just mentioned it, the collaborative model. Could you just say a word because in the in the unlikely event that this is the first time that somebody's hearing about CalSTRS, I think what you've done there has been so impactful and innovative and should be widely appreciated. How did that come about and how what was your role in pulling that together? Well, yes, so the cloud for model started before I joined CalSTRS. So even earlier than seven years ago, but it was my first project that Chris, you know, gave me and give credit to Chris, but also credit Ashby helped name it. He came into one of our board meetings and I think we we loved that naming of it. But the cloud for model for us was how do we invest more directly in the public markets and how do we invest in a similar frame to get the same benefits of cost savings or a boost in returns sourcing advantages or better control of risk in the private markets. And we realized we weren't going to build our own direct team there, but it would be a lot better for us to transform our partnerships one by one. So if you looked at the journey, it was quite a lift to get the investment committee to help us, you know, develop the right resources so that we could have the firepower to to convest so we could have the firepower to to structure these types of deals and transactions. And in the public markets accelerate the direct investing we were doing. We had some goals and we set out some cost savings targets even though, you know, as an investor, you think, well, the alpha is going to be a lot more powerful if you can get better sourcing and better transactions or if you can even share with some of the economics of the managers, you don't know that all too well, Daniel. But we set these cost saving targets in this last year. We far exceeded them. I wish Chris was around, but he set a target of $300 million a year in annual cost savings. We did something like $550 million in the last year of record. But we've gone from like a hundred, we measure the transactions we do. A hundred kind of cloud of model transactions to, you know, call it over 450 at a run rate basis. So aggregate saved about 2.6 billion in costs over the the last seven years of acceleration. But the alpha has been more powerful. I mean, that number is like 16 billion. I mean, I think about that over the last 10 years. Ash, I think if we can ever convince God to come back for a second podcast, really sort of unpacking some of those lessons for others would be so powerful. I know it's not the topic today, but I just couldn't let that one pass without a follow-up question. Yeah, I know I'd be happy to in the team. You know, I look at the CalSTRS team amazing. They just did an amazing job and it's all the team. You know, these guys are really shout out to Rob Margot, the whole gang. Yeah. We we we know them well as leaders in exactly this regard. And I will just say before we move on to TPA, I often tell people the only risk-free return in the investment business is getting the exact same exposure at a lower cost. And so if risk-free return is like the mythical thing that exists in the world, many people don't think it exists. We're reducing that that fee burden is really as close as you can get. So that's amazing to hear. Scott, let's shift gears. What on earth is the problem that has inspired everybody to pursue TPA? Everybody that I know is trying to do factor-based asset allocation, tactical asset allocation, dynamic asset allocation, total portfolio approach. One fund. There's a lot of people just talking about one fund. All these things seem to be pointed at some problem. Can you help me understand that problem? Well, I can help you from CalSTRS perspective that our strategic asset allocation benchmark led approach, it's provided clear governance. It was a great building block, but we've hit a major fork in the road. And we're facing challenges in our implementation. These challenges, to me, suggest CalSTRS needs to evolve, evolve our approach to do both to do better, but because the market dynamics are also shifting. So, challenge number one for us is seeking relative value. So with a strategic asset allocation approach that's benchmark led, it serves as a constraint to invest in the best opportunities and/or avoid or sell your worst opportunities, because that might not conform to the benchmark. So your incentive system is off. Number two, many investments they just don't fit neatly in our divisions or asset classes. Think about hybrid opportunities. This whole energy transition has a risk reward that is in between private equity and core infrastructure. And so we've been investing in that, but we've got to find a better dynamic to do so. Number three, think about this way, we've got multiple divisions now taken similar risks. I got five different divisions doing private credit. But out of private credit, if they have similar risk reward, which one stands out where we should be allocating a lot more capital to, versus a lot less capital to. So I'll just start an example. Infrastructure debt for us, it's diversifying for the total fund. And yet if it's backed by something that tends to be less cyclical, and this would be great. And so out of all the different private credit we could do, how are we determining which ones to flow more capital into? And they all have different premiums as well, different parts of the cycle. And I think finally what I would say is that, you know, CalSTRS at 380 billion were significantly large as a total fund, but not necessarily at a division level. Right? And so where can we find collaboration across our divisions for greater scale? I mean, right now, for example, I've three different divisions in the data center building, you know, building that infrastructure. So it's appropriate, and when and where would it be appropriate for the teams to really collaborate and synergize that. But I would say I leave you with this. The ultimate problem I have is one of change. Not only because change is hard, it's hard no matter how positive the change is, but you know, CalSTRS has been very successful in achieving its mission and goals over time. 10 years, we've done 8.1% returns, 16 billion dollars of alpha over our benchmarks, about 37 billion above our 7% actual rate of return. So we've been adding a lot to that. Our realized risk has been, you know, called 31% below the reference portfolio. So we continue to be very successful in implementing this current strategic asset allocation model. There's no quote unquote burning need to improve, but I think that, you know, if I look at the future, I think that CalSTRS can double the alpha over the next 10 years. If we successfully implement our three strategic priorities, one of which is this TPA approach. We're calling it internally the CalSTRS one fund approach. And it's certainly become now one of the top three priorities, one of our top three strategic priorities, which every, you know, call it three to five years, we put in there. The collaborative model was one of them for seven years, something like that. And we recently, because it's just becoming grained in the culture of what we do, it's no longer one of our top three priorities. And this is one of them. How's an example? Scott, I have a layperson's question for you about TPA before we get into more details. And as our listeners know, I'm always the one on the show that knows the least about pensions and sovereigns and super animations, because Ashby is one of the world's leading academics on the topic. And then we get a CIO of leading institution and then there's a load of me. So sometimes I like to ask the layperson's question. And as I've tried to understand these motivations behind TPA, behind one fund approach, tilts, etc. I'm wondering, is part of it that the world has changed underneath us as long-term investors and our themes you mentioned a few energy transition. We, in the preamble talked about longevity. Obviously we're living in a century of life sciences being a dominant driver of change across the human experience and the economy. AI is at the tip of everyone's tongue and technology changes never been faster. These are cross portfolio themes. You may miss the alpha from a specific AI opportunity but you sure as heck better know how that's going to impact the other 99% of your portfolio. So I'm wondering if if TPA can be seen in part as a response to themes which have always been an important part of investment decision making at the senior most level. Becoming even more horizontally critical for large asset owner to take into account throughout their process. I think you're spot on. You know and that's what I was mentioning that it's not only some of the challenges around the strategic asset allocation approach but it's some market dynamics themselves. I mean think about public and private now they're merging into one. You know we talked about AI in this big build out of the data centers. Well all that capital's coming at once right they got the private equity they got the private debt. They got the public debt and it's mixing and matching right I mean you saw recently I'm not going to name names but some organizations came out with private debt and they created them into public securities and and you know kind of you know there's there's just a blending of public and private themes are cross cutting across multiple divisions across your organization right. So I mean data centers is well yeah infrastructure should be interested because of the energy and the power your sustainable teams should because of the renewable aspect of this your real estate team is interested because of the you know the the the the build out of the actual physical data center but you got your fixed income team interested now based on the public debt and you've got your private credit team you know interested in the private credit piece of this and so you know these themes are mega themes they cut across industries they cut across companies countries I mean we can look at the AI and tech theme across countries even so it's you know to your point the dynamics of the market have also shifted beyond the you know the traditional strategic asset allocation approach and and so you're you're getting hit from from every angle. So we see a bit of crowding around bench marks which is a actually by definition that's the point of benchmarks it's the market and so if you're using benchmarks for your own internal incentives or guiding portfolio construction you're going to be probably setting yourself up to overpay moving away from the problem of bucket filling again if you've got a bucket you're going to fill it finding between product category opportunities so that's the silos which is a little bit of a different concept than the buckets we can one point do a definition game but not for today and I love the the description of the data center I think the power of a data center is interesting because it can be infrastructure private equity real estate but now it can also be crypto teams energy teams because somebody has told me that a crypto mining operation is really just a energy operation and so a lot of these crypto miners are now being pivoted into AI data centers and so like if you aren't taking a total portfolio approach like how the heck are you going to think about the suite of opportunities available so I think I really get that but now I want to understand how does TPA actually solve that like what is TPA what is the CalSTRS one fund that you're building well let me define what we're building with the one fun approach here at CalSTRS I think you have to define it at the highest level which is you know it was deeply cultural where everyone is all in on the one team one dream philosophy right it's about a greater level a greater sense of teamwork across divisions across entire fund with the goal of the total fund performing the best right above any of the divisions and so the good news is that in this regard I think CalSTRS we no longer work in silos we've been working on the one team one dream approach for you know five seven years with the cloud model so there's a lot of groundwork here for us to hopefully excel as you know as we move into this one fund approach I could say that all the leadership is very excited at CalSTRS about this on a more granular level though I think it's important to define define it as well and so we have three major components number one is acid allocation number two is risk and the third is the scale advantages I was discussing so if I just crack in the acid allocation it's really about more dynamically allocating capital across divisions for the benefit of the total fund so think about relative value and risk one of the things we did in the past year was overweight fixed income versus RMS and for the first time we started to do that I'd like to talk more about that but that that's one area as an example you've got evolving opportunities that don't fall neatly in an asset class they fall in between one we talked about some of the energy transition data centers acid back private credit they're all examples and I think you know the biggest element obviously in this idea of dynamically allocating capital at CalSTRS is the teamwork it's it's cultural is bringing everyone together for their insights and coordinating across the entire fund so secondly you know for us it's about risk and so we're monitoring or reporting total risk on a total fund basis for example we're using an overlay mechanism to gain or maintain or reduce exposures so that we're intentional we're maintaining the right type of diversification in an opportunity a rich environment and just a little plug and you know my only advertisement is that we're gonna we're hiring currently for a senior risk professional to oversee this beautiful of course you've got a block this is an amazing opportunity amazing off to but number three it's about scale advantages right so maximizing the scale while hopefully achieving our diversification goals you know I'll just talk about position sizing for for the size of of CalSTRS the diversification level we need we're probably over diversified in a sense right because I have every division diversifying their own portfolio and then you put it all together and we're super diversified at the total fund level so how can we up size our positions with great insight from the bottom up investors across divisions we're working on that Daniel you know talked I think aptly about themes so that's an element of these scale advantages where can we team up we've got five divisions doing private credit three doing AI data centers you know I can't even tell you how many is doing energy around the energy transition so so how can we you know scale up we're appropriate across the divisions and of course we talked about the cloud for model but that's another element of scale for us and so those are the three areas that we've you know more granularly defined hey what does the one fund approach mean at CalSTRS so that sounds amazing I think as a student of long-term investing the opportunity to build thematic regime-based investment strategies and pursue them is incredibly elegant and it ties into your ability to take this intergenerational view I would actually say it's one of the advantages that long-term investors bring to capital markets that's really really should be leveraged because you can look out 20 years and say AI is going to transform everything rather than just building an AI fund you can build AI tilts across everything you do if you have a total portfolio approach so I think I really understand the intuition behind doing it how you do it organizationally how you unlock the resources how you change the incentive structures like literally changing human beings compensation packages that in historical terms has been the the roadblock that has allowed people to actually implement this so talk us through a little bit about that implementation path and the challenges along the way yeah and I think again one of the biggest challenges for us to innovation and change is that you know we we all get used to doing business in a certain way it becomes deeply ingrained in the culture and the operations how you implement and so the challenge is not necessarily developing the framework but it's really taking the organization on the right journey and progressing year after year. And so when we talk about the one fun approach. I mean, this goes back three years, maybe four years. It calcars in building the building blocks. And so, when I'm always trying to do is, you know, in a sense, balance the speed of trust with the speed of market, right? Because the speed of the market is moving, but I've got to maintain trust with the board, with the staff. And so how do we evolve quickly enough and balance that? Because the market's moving. But I would say in a word, the biggest element for us has been flexibility, you know, building more flexibility. So at the board, we changed our policies, you know, called three years ago. And we went on a, and even before those three years ago, we went on a year-long educational campaign with our board to study these issues. So somewhere in the archives, maybe in the YouTube archives, we have several videos of senior staff playing starring roles in these educational videos. But we did three things. One thing we did was we widened the asked allocation bands around our SAA to give us more flexibility to invest in the best relative value adjusted for risk across the portfolio. You know, it's that's one element to to grow into it and progress. The second is we we upped our options portfolio to five, zero to five percent of the portfolio. And that gives us a lot of flexibility to invest in areas that don't fit neatly in any of the asset classes might be outside of their divisions. So we have a fairly sizable way to do that. And the other element for us was liquidity and leverage management. So we created policy from zero to 10 percent to take on leverage as needed, which really gives us the ultimate flexibility. Right? So in any part of the market cycle, if they're if it's distressed or we were for finding great opportunities, we can be a liquidity provider. Right? And so at the board level, we sought flexibility first and foremost to start moving in this direction. And I think it's it's it's important to develop that track record with staff of putting milestones and wins together on a path to to completely changing towards this path of the one fund approach. We talked a little bit about some of these policy changes. But let me talk to you also a little bit about how we've been progressing on the staffing and in the cultural evolution. One of the things that that I did was create a senior investment director of publics and of private markets. And so that consolidates the bottom up views across both publics and private. So I would say we're you know a bottom up fundamental shop. And so having those points really helped to organize and consolidate the views across the asset allocation, allocation and frame. The other is we created a new division. A division called the total fund management and and a senior investment director overseeing that really to help me bring all of these views together and make them actionable from an asset allocation or risk perspective. And so you know that was just some of the building blocks when we built some committees, a pacing committee and liquidity committee, which is the private markets and pacing to position and understand where they want to be positioned in private markets. liquidity committee for where do they want to be positioned in the public markets. And then the annual last allocation run by the senior investment director of the total fund to tie together all the views collectively for the organization and an annual plan that we review quarterly now. So I mean this is just some of the of the last call it four years how we've been building the right kind of flexibility, the right kind of organizational structure and culture to move into the space. Perfect. It's elegant that the teachers pension plan kicked off that process with education. And you know I'm sure we're going to crash YouTube's website now with everybody rushing in to find these old videos of you explaining TPA. But I it's a very common theme. You know you start by taking the board on journey and educating them on the power and then you know what you're asking for was very clear you're asking for some flexibility. But also you need new capabilities and I'm guessing those new capabilities were not just about you know implementing that flexibility. They were about reporting back to the board on the use of that flexibility and the use of those delegations because in my experience those delegations that come there's a requirement that they have data information risk systems that power back into a dashboard. Is that right? Absolutely. Absolutely. We transformed our risk dashboard so to speak which is in my CIO report that goes to the board. We sent emails and relationships to our liquidity and leverage for a couple of years and we actually just did away with that reporting because the board felt very comfortable with that. So that's the speed of trust. You just defined it. It's two years. It's a two year speed of trust. You can quantify that one I suppose. Yeah. No, no, I know. That's really neat. So thank you for sharing all that. I'm curious how it's going. Like if you are too early to tell us or if you have any wins or bruises that you can share because you said you've been doing it for three to four years, I'm curious. Yeah. I mean look there's obviously fits and starts but one of the milestones we had happened in our our calendar-ass allocation in the last year. And so maybe just taking you through some of the major points of that annual allocation plan, some of which we know the performance of some of which we don't because they're private markets and it's inherently going to take more time for us to determine. But you know, one of the things we did in last year's annual last allocation was we for the first time in that I can remember we moved our diversifying portfolio back to target. So fixed in Co. Mara-Messon cash is our- that's at risk-minigating strategies in RMS. And you know, do largely to the uncertainty environment. So we kind of have this like growth versus barbelled approach bringing back our diversifying portfolio because we think diversification is going to mean more and more as we head out into the next decade. And I think the second point for the first time within that diversifying portfolio, we made a relative value decision overweating fixed income and underweating our risk-minigating strategies portfolio. And RMS has things like alternative assets and it's so CTAs, it has macro managers, long duration treasures. It's supposed to be diversifying and uncorrelated to the rest of the portfolio. But you know, we smashed these two teams together and this was Geraldine Amenez, my senior investment director of public markets leading the charge there. But you know, fixed income, you know, what we think the divisions are great at doing is understanding the expected return and fixed income was saying, look, we can generate with rates higher 6.7% and you know, risk-minigating strategies thinking long-term were probably at the 5.5. And so, you know, given the adjusted risk return, why don't we overweight fixed income? So we, yeah, we did that and you know, it's for, I mean, looking at fixed income, they're pretty spot on. I think they generated 6.5% on the fiscal year. But the spread was about 13.5%. So we generated about 20 basis points of alpha through this one fund approach. And in a year, we're collectively, and this is unusual, our divisions were negative alpha. So we ended up with a slightly positive year, a base point. So I'm not, that's nothing, you know, really exciting. But it just shows you the power of the new approach. I just say it's not exciting because the team has generally over the last 10 years, 47 basis points a year of alpha, annualized, five years, 76 basis points of alpha, annualized. And so, you know, but, you know, that's pretty remarkable because I think we would have had a negative alpha year for the first time in memory that I can remember, at least. And that would have been, you know, and so this helped preserve it. And we made a bunch of other decisions as well that I think are harder to tell because we started to flow more into infrastructure, energy transition, certain areas of private credo, like infrastructure, debt, and asset backed, and maintaining our private equity exposures. And so, this was like a holistic plan. I'm just giving you the punchline of, from what we can see, that was a big milestone. And something that, you know, for the team to be really proud of, to come together because, you know, like I said, we created the flexibility to start progressing. And to me, you really want to develop a positive track record for everyone to see. Like, investment committee, the team, and then keep moving in that direction. So you're three now on that annual athletic education plan. I'm super excited about because I think we're progressing even more. My last question, and then we'll go very deep into the depths of Daniel's brain. But my last question here is about the advice you would give yourself or the prior team that you were a member of two, three years ago. If you could go back and just hand yourself a note and say, you know, don't do this or do that. Is there a little piece of information or guidance that you would have given yourself? Because I expect there are a lot of people listening that would be at that scotch-and-moment three years ago right now. You mean on this approach? Yeah, on the implementation of TPA. One of the things that has made the process a lot smoother is bringing people in more into the process, not surprisingly. And that has involved a few extra meetings here and there. But what I'm hearing is the team really appreciates that. And the other thing is being super transparent and all the things that are being done. Because I think early on what we didn't realize is it was a little bit compartmentalized. And with that little like, hey, I don't know exactly what's happening in this new approach, created a lot of anxiety. And so if I were to go back until my myself two years ago, I'd say start communicating a lot more, be super transparent, bring more people, be more inclusive. You know, when teams are together and they see it together, it makes all the difference. And so I would say that. And that's been accelerating now. And I'm just hearing from the team and how wonderful they like it even though they might take on a one or two more meetings more, which is like crazy. Because most people, they don't want the extra one or two meetings. But in this case, it's really built up the teamwork and collaboration even more. So. Thank you. Daniel, over to you. Thank you, Ashby. Thank you, Scott. And I always like to start this deep thoughts section of our podcast with a warning for our, and a word of encouragement for our listeners and our guests that while we're going to spend a couple minutes detouring into some deeper, chopper parts of the ocean that I promise I will return to shore. And ultimately, this is going to be a question for you, Scott. So please, I beg your patience and forgiveness as I say I'll have to see for a moment here. So I, at the top of our podcast, I mentioned that I'm headed to Australia, New Zealand soon. And I always love to read about places that I'm soon going to be visiting. And I read a wonderful book which I highly recommend called Sea Peoples, S-E-A peoples about Polynesia, which includes New Zealand and the first European trips there. And one moment in particular that stood out in my reading was this moment when Captain Cook arrives into Haiti for the first time. And you have these two, arguably the two greatest cartographers and navigators of the 18th century, Captain Cook and a Tahitian named Tupaya, meet for the first time. And they are trying to communicate to each other about the landscape around them of islands and hattles. And boy do they struggle. It is, and we have the map that they worked on together. It's this incredible historical artifact that shows not only how much Tupaya knew and how little cooked knew, but also how hard it was for them to communicate. And the author of this book has a theory that I've been trying to emphasize that coming from a written language culture in Europe that Captain Cook just had a way of thinking about things that was very foreign for someone coming from an oral language culture. And so they had a lot of trouble even thinking about a top-down map, for example, a bird's-eye view. Nobody had done that even in Europe until Da Vinci. Right? So you're talking about a fairly recent invention even in Europe and you can imagine how being part of a written language culture just encourages a certain level of abstraction. You're naming something, you're writing it down, you're handing that piece of writing to somebody else, and all of a sudden you're a level above the physical object or experience itself. So the moral of the story is that the reason these two had such a difficult time communicating with one another is that their brains were hardwired differently by virtue of being in a written versus an oral language culture. Now this has been a fascinating thing for me to read because I don't think I've ever shared this on our podcast, but my wife and I adopted a daughter from Kyrgyzstan when she was seven. And Kyrgyzstan is an oral culture. So it's been part of our getting to know her and how her mind works. That's amazing. Bridging the same gap in some way. I mean of course she's seven and we're old, but so there's other gaps you have to bridge to. But I've learned a lot from this book about the experience of understanding my own daughter. Believe it or not. Now fast forward 200 plus years later and it strikes me that we're at another moment in history in which a technological change and a global change, which is what they were experiencing in the 1800s during this age of exploration, we also have a technological change and a cultural change that are happening simultaneously, which are changing the way that our minds work. So AI may very well be as powerful as written language was and reshaping the role of the human brain in what we do every day. So I wouldn't shock me if in 100 years we think very differently because we're now copiulating through life with AI. Also, I, the reason I ask you about themes earlier and how that relates to TPA is that it seems to me we're living in a much more connected world today and that visit by Captain Cook Tahiti was an early foreshadowing of this deep connections that we have that express themselves from an investment manager's perspective as themes. So themes of energy transition, themes of AI and technological change, themes of biological drug discovery, acceleration, life span extension, etc., etc. You have to think about these things to be a great investor today in a way that perhaps you did 50 years ago. So my question for you is this. So just as if I'd been there as a little birdy fly on the wall for Captain Cook's conversation with TPA, I might have been able to convey that something about the gap that they faced in terms of the different ways of thinking. As you think about moving to a TPA model, a one CalSTRS fund, how has that forced you to think differently, not just to act differently, but how is your brain working differently in the context of this mode of investing? Well, I love that. I'm going to have to read that book. You got me really excited about it, Daniel. It is a great book. Couldn't recommend it more. Yeah. But I think it resonates with the TPA approach in the sense that I do think that the public markets and private markets are hardwired in a different way. I'd say it's a lot easier for the public markets to think about relative value and shifting dynamically because it's what they do. But in the private markets, with a longer duration, they've not tended to think that way. They've thought about steady allocations over years. I don't think a lot of my private markets, folks, wake up thinking they're going to sell an asset or two or three. They tend to be thinking about buying hold long-term. I think the hardwiring at CalSTRS too is different because we're a bottom-up fundamental research shop. I don't think that's going to change. The TPA approach is really about harnessing all of this insights rather than bringing a macro view and moving the portfolio based on that. The second is like I discussed, we have a pretty significant allocation of private markets in alternative assets. It's no surprise that one of the milestones was relative value in the public markets between fixed income and RMS. We're working more and more on the private markets. That's where some of these themes are coming in closer focus. Talking about AI, I agree with you. I think it's going to be transformative. It's a huge opportunity. But there are also huge risks. So why can't Anything that's hard for investors is that they have to quickly come up to speed and not only come up to speed, but they have to become an expert to the degree that they can actually invest. That's a high calling. I'm asking everyone to look through all the portfolio companies and say, "What are the winners?" Also, I'm portally, "Who are going to be the losers?" Some of these multiples might be cut in half. I think it's hard. We're still evolving, but some of the areas we've been looking at, and when we look across all of the divisions, and we think about the theme holistically in a TPA approach, enterprise software, horizontal software, this could be under transition. The office space might have a little bit of an inflection point up, but long term, what's going to happen? If we become a lot more efficient in many of these areas, that could be long term. Long term risk. Right now, we're seeing the premium of AI, lift all boats, but I really think it's a time for us to understand the exposures deeply in the realm of how do you protect yourself as a large allocator for some of the risks that are really difficult or uncertain to understand? We don't know the trajectory of how short we're going to be compute for how long. We don't know if there's another technology that will leapfrog that and will need suddenly less data centers, power energy, etc. How do we find ways in a total fun context to do that? We talked to then on the flip side, "How do we gain scale advantages to in the exposures we want?" A lot of it is we're thinking about how much exposure we want in AI and then how do we de-risk it for a similar premium given that the market doesn't seem to be discerning that today? Then how do we think about not only the opportunities but the risks and potentially trimming before there's some multiple contraction, which is a very difficult thing to do for us a long term investor to think about selling a long-dirated asset. I think it's challenging thinking about a long term investor, the dynamic nature of the shift and how quickly that could move with AI, like how do you then allocate your assets? We're looking at it from multiple levels. I would say the other things that we're doing in the private market side again is we're more and more we're seeing an opportunity set in what I call the hybrid risk reward areas, energy transition, power, some parts of infrastructure. They're in between the core infrastructure and private equity. Then we're thinking more and more that we might be heading into the later part of a cycle. We look at our private credit book, where can we get the relative value and premium to make sure we get paid for the risk at this point? What kind of structures in terms of flexibility do we want to negotiate because having the flexibility and discerning how the capital gets allocated and when it gets allocated, that should be coming with a lot higher value at this point in the cycle. How do we start to pivot that? We think about the TPA approach from a bottom-up perspective. It is thematic, but it's also implementation. How do we want to systematically implement if we think that we could be later cycle in the credit. We could be early in some of these hybrid risk reward opportunities and we could be sort of the middle of AI. How do we handle that? Some of the responses. Dear Deep Thoughts, Daniel. I wouldn't have been done if we had the answer, but it's really square in the middle of our one-fund approach. Yeah. Well, Daniel, thank you for that deep thought because so much of what we're seeing, not just at CalSTRS, but across the industry, is this rewiring of thinking around how you navigate from where you are to your goal, to your liability. I do think, like TPA is the trial run for technology, which is going to completely transform our industry. It is fun to think about that bottom-up approach to that ancient problem of navigating the seas versus the top-down approach because it is very similar to what we're facing now. Scott, thank you for coming on. We've learned that we need to educate our board. We need to do that because we can only move as fast as the speed of trust and if we want the right to flexibility, we need to explain and report and be transparent. And that transparency you've learned over the last three years needs to also go down and sideways in the organization because moving from product-based categories is inherently a compartmentalized program. And so now you're having to help everybody go on a journey internally. It's an incredible story and it's one that I think will resonate with listeners because many are thinking about TPA and how to do it. But thank you, Scott, and thank you, Daniel. And we will be back with more Don't Get Fired Podcasts. (upbeat music)