E257: What I Learned Advising the World’s Top CIOs at Goldman Sachs

Why do the world’s best CIOs make investment decisions based on gut — not spreadsheets? In this episode, I’m joined by Julia Rees Toader, CFA, Founding Partner at PrinCap and former Global Head of Portfolio Strategy at Goldman Sachs Asset Management. Julia spent a decade advising sovereign wealth funds, pensions, private banks, and ultra-wealthy families on portfolio construction, risk management, and asset allocation. She shares the biggest lessons she learned from working with the world’s top CIOs — from why diversification rarely drives behavior, to where the smartest allocators take idiosyncratic risk, to how emotions secretly influence the most sophisticated investment decisions.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  So Julia, you started as an intern and rose to become Global Head of Portfolio for your team at Goldman Sachs, which advised CIOs all across the world. First of all, how did you accomplish that? And secondly, what did that teach you about constructing and putting together portfolios?

• 0:16Speaker 01

  I learned so much. As you mentioned, I was the founding intern on a team called Portfolio Strategy in Goldman's Asset Management Division. But over time, I worked on that team, grew that team, and I ended up being the global head of the business over time. I had the very privileged position of speaking with and sitting next to and advising chief investment officers and other decision makers at private banks, RIAs, sovereign wealth funds, pension plans. Any of our clients were sort of fair game for my team. And so, we would step in to advise them and help them solve asset allocation and portfolio construction problems. I really grew up in the doctrine of risk management. In fact, my granddaddy at Goldman was the founding father of modern portfolio theory. So my training is very classical.

• 1:01Speaker 01

  It was all about getting up and to the left on the efficient frontier, being well diversified, thinking about risk first. Nowadays, I build portfolios that are a bit more concentrated and high-octane than I did in those days because I've found that actually, if we don't have good conversations about risk with the owners of the portfolios, we can end up accidentally building portfolios that don't take enough risk.

• 1:23David Weisburd?

  And sorry, you said your granddaddy, Harry Markowitz?

• 1:27Speaker 01

  Bob Litterman. He was in the quant business at Goldman, and his business birthed several other business lines, of which mine was one.

• 1:35David Weisburd?

  So you would travel all around the world for a decade, meeting with the world's top CIOs. What did you learn that's a pattern across the very best portfolios in the world?

• 1:47Speaker 01

  I reflected on this a lot. One thing I learned, and this is hard for me to admit as a classically trained engineer, is that the CIOs who were doing the best job were actually holding the emotional and qualitative considerations high in their minds, right alongside the technical and the quantitative. That was actually a big surprise for me. I thought that technicals would rule the day. I thought that the numbers would win. But over time, I learned that especially as investors get more senior, the gut becomes more involved, and that's a global phenomenon. I found investors globally are

• 2:23Speaker 01

  Doing, yeah, everyone's a mere mortal human trying to do a good job. And that was consistent globally. We were really more similar than we were different, even speaking with, you know, a UK financial advisor versus a Middle Eastern sovereign.

• 2:36David Weisburd?

  So as, as these CIOs rose through the ranks of their respective organizations, it was more about their gut versus their raw IQ.

• 2:49David Weisburd?

  Double click on that. What exactly determined the CIO's success as they rose through their organization?

• 2:55Speaker 01

  Mm hmm. So, starting with the textbooks, you would assume that if something helped your portfolio become more diversified, you should invest in it. If, if an investment was a good idea strategically, you should do it. But I found that actually diversification doesn't move the needle, doesn't make people actually change their portfolios. And also, people won't invest if it's only a good idea strategically. It has to be a good idea tactically right now. And so I saw that folks would develop more of a holistic, both sides of the brain decision-making process as they got more senior. And there's certainly a lot of theater about showing the numbers, that the numbers certainly matter. But at the end of the day, people were making decisions, big decisions, based

• 3:40Speaker 01

  mostly on vibes.

• 3:42David Weisburd?

  Taken to the extreme, if you're fully diversified, that is definitionally market beta, so you'll get the average of all the markets. Nothing necessarily wrong with that, but you're not going to be a top performer almost by definition. So you do have to take these idiosyncratic risks in certain parts of our portfolio. Where did you find that the very top CIOs took idiosyncratic risks?

• 4:05Speaker 01

  I actually learned this lesson the most when dealing with ultra-high-net worth families. Nobody got rich by being diversified. No one landed in the position of being able to found a family office by holding a well-diversified portfolio. That takes too long. Rather, you got to that position by taking a well-calculated risk and banging away at it for usually decades. Right? So you did some one thing so well that the rest of it didn't matter as much. So actually, I learned this lesson about how the mindset changes from wealth generation to wealth preservation from the ultra-high net worth families. CIOs in more institutional setting, you know, they are thinking multi-generational, long-term returns, much like a family.

• 4:49Speaker 01

  And at the end of the day, they're focused on building a portfolio that is sustainable. But they also don't want to be hugging the benchmark too much because then, are you doing a good job? Is it worth, you know, going out there looking for alpha? So I found folks are trying to thread that needle of taking enough risk to be somewhat above benchmark, but not so much risk that you could potentially be very, very wrong. And people want to build a portfolio that won't embarrass them in public.

• 5:16David Weisburd?

  When you think about these patriarchs, you think about this deserved ego. They've bet against what everybody else was saying over 20 years, and they were right. And then they go into asset management, and you could say, well, what got you there won't get you to the next level, and wealth concentration doesn't lead to great wealth preservation. But in which cases, does it lead to good investing? In other words, where does the patriarch have alpha versus the wealth manager or the CIO?

• 5:44Speaker 01

  You picked up with something that really matters to me. I am wondering, why isn't every family doing operating business-aware portfolio construction? You know, and this theme also plays out across other kinds of investors. For example, you know, the institutions have deeper pockets, so they're able to do certain trades that a family couldn't do. But on the flip side, institutions often will have a very strict investment policy statement. And that made many of my CIO clients be forced sellers of private equity exposures that they liked a lot because the public markets were down. Their investment policy statement said, hey, you need to have no more than 11%. And they were at a higher number because public markets were down.

• 6:27Speaker 01

  So then the families who are less constrained were able to step in, provide liquidity and buy those positions on the secondary market. So I think really how we should be thinking about it is what are your unique strengths as an allocator? What is the unique flexibility about your capital base that'll let you step into a trade that maybe somebody else can't do? And hey, remember, the providers of liquidity always get paid.

• 6:52David Weisburd?

  There's this interesting trade off where, let's say you're one of the top biotech entrepreneurs of the last generation. Not only do you have unique insights, you also have unique deal flow. And when you go to somebody, frankly, like a Goldman Sachs or a large wealth manager, they'll do everything to diversify you away from that idiosyncratic, what I would call alpha. But really, in some ways, you should be leaning into that while also hedging it away.

• 7:15Speaker 01

  That's what I believe as well. I build portfolios that are purposely not as diversified to try to take advantage of your particular benefits, your particular skills, your particular insights. That stuff is all a moat. That is alpha. And then the risk management that we do around a portfolio like that is a lot about avoiding mistakes.

• 7:36Speaker 01

  You know, all the alpha comes from picking winners and avoiding losers. But of course, it's sexier to talk about picking winners. That's what everybody focuses on. We're focused on, let's also make sure that we avoid the losers. And what we don't own is just as important. So for us, it's about avoiding those losers as well as doing options-based hedging in addition to fixed income. You know, the usual risk management protocol is buy fixed income. But we've seen that that doesn't always work well. And frankly, the risk that most people are actually caring about deep in their guts is losing money, not standard deviation.

• 8:18Speaker 01

  And if you follow the behavior, what you should really be doing is trying to limit drawdowns, not limiting standard deviation. Bonds will limit your standard deviation. But it comes at a cost. I would rather pay something for options-based hedging and then allocate more money to equities or private equity or whatever risk-on trade is in the style of the family.

• 8:41David Weisburd?

  Having a comprehensive portfolio approach versus making sure that every little position does not lose money?

• 8:47Speaker 01

  Yeah. And also, if you think about a standard balanced portfolio, the 60-40, I'm not doing that anymore. 40% in fixed income, sure, it'll reduce your risk. It'll reduce your drawdown depth. But you could accomplish a similar level of drawdown protection using options-based hedging. And that would free up a lot of that capital towards being invested for return in equities.

• 9:16David Weisburd?

  Give me an example or best practice on how you'd use options-based hedging in order to reallocate some of that 40% of your portfolio?

• 9:25Speaker 01

  It's not DIY territory. That would be my best advice. I would find a hedge fund to do it for you.

• 9:31David Weisburd?

  How do you marry your risk mitigation with your idiosyncratic strengths? In other words, if you're heavy on biotech, then you would be hedging biotech specifically. And talk to me about how do you kind of marry those ideas of risk mitigation with idiosyncratic exposure?

• 9:49Speaker 01

  I actually quite like idiosyncratic exposure, and I wouldn't try to diversify it. If you're a biotech guy, that's what gets you out of bed. That's what delights you. Then we shouldn't be hedging out biotech, unless you had a very specific view. Then we would take that into account. But rather, what I'm talking about is, what causes investors to make bad decisions is when everything's in the red, we're all on the slide heading down. Our brains interpret financial risk the same as a physical risk. So your blood is leaving your brain and heading towards your large muscle groups so you can run or fight better. It's not exactly a good decision-making mindset.

• 10:30Speaker 01

  So in order to limit bad behavior and actually stand a chance of doing well during a bear market, the options-based hedge pays off, it's up by a lot during a market drawdown. So that overall, you feel that you haven't lost as much money. It keeps your head clearer. And then those clearer heads do prevail.

• 10:52David Weisburd?

  I had the ex-CIO of Northern Trust, Thomas Swainy, recently. And he said that you not only want your portfolio to do well on the average year, but most importantly, where a lot of returns are lost are those 10%, plus drawdowns. People take the exact worst action at the exact worst time. And making sure that your portfolio is anti-fragile enough to account for these drawdowns in the market is also very important. And in his case, he actually, as equities go down, his bond portfolio goes up. And he's actually able to lean in more into his equities and be opportunistic there.

• 11:29Speaker 01

  The most savage chart I made in my entire career was, had the S and P 500 going up and down, up and down, growth of 100. And then we overlaid the 10 biggest months where investors added money to the markets and the 10 months where they subtracted the most money from the markets. And it was a savage chart because you could see, en masse, investors are terrible market timers. We all get excited and pile in near the highs. And then we get scared and sell low. And that's the opposite of the holy rule. It's supposed to buy low, sell high, but people en masse do the exact opposite.

• 12:10David Weisburd?

  To quote Stanley Drunken Miller, arguably one of the best traders of all time, "Nothing feels as cheap as after it's gone up 40%." There's this paradoxical mismatch between how we should think about things rationally versus kind of our biology.

• 12:25Speaker 01

  Yeah. And you know, valuation, I don't actually rely on it too heavily because things always feel expensive. And if you were waiting to get into US equities... For them to feel cheap enough, you'd still be sitting on the sidelines and you would have missed out on an incredible amount of growth.

• 12:41David Weisburd?

  Speaking of missed opportunities, your mandate was to fly all around the world, meet with the largest clients at Goldman Sachs, typically pension funds, sovereign wealth funds, single-family offices, and look in their portfolio to look at misunderstood risks and missed opportunities.

• 13:02David Weisburd?

  What were some patterns around some misunderstood risks and missed opportunities inside some of Goldman's top clients?

• 13:08Speaker 01

  I have a lot of stories and patterns that I was able to find over time. First of all, in many, many scenarios outside the United States, so let's take the UK as an example. Usually, the largest alpha trade in a portfolio would be an overweight in UK equity and UK fixed income.

• 13:33Speaker 01

  So if you were to compare a typical British portfolio to the globally diversified market cap benchmark, the biggest reason why the portfolio was different was that the UK home country bias. And it was impossible to avoid. You know, there would be, you know, very large, famous asset managers creating global balanced portfolios, but it was still 50% UK equity, even though it was marketed as global. That is a 10x overweight in UK equities. And why do they do this? It's mostly for marketing. There's a perception that it'll be easier to market a fund if it has familiar names in it, household names. But arguably, the, you know, average household in the UK

• 14:18Speaker 01

  doesn't need more exposure to the UK economy, especially 10x more, because they're already, you know, exposed via their jobs and their property and everything. So that was one trend I saw all the time. There's a kind of sneaky innocuous home country bias that ends up being the number one either adder or detractor from from performance versus a truly diversified neutral starting point.

• 14:45David Weisburd?

  And that would be almost by definition a detractor, right? Because it's concentration that is not risk-adjusted positive. In other words, you're taking idiosyncratic risk without any additional return.

• 14:58Speaker 01

  And also without even realizing it, many professional investors were almost glazing over the impact of this home country overweight. And think about it, if you're going to be 10 times overweight your home country, where are you going to fund that overweight from? Usually the US. So many investors outside the US were deeply underweight US equities, and that was obviously a huge detractor. That was the wrong trade for many, many, many years. So I saw that a lot. And also, I got the privilege of looking sort of behind the closed doors in investment committees. And I learned a lot about how to overcome behavioral biases. Because as I mentioned before, we're all mere mortals, you know, trying to do a good

• 15:42Speaker 01

  job. I've even seen a couple of fake investment committees where, you know, if there's a senior guy and he wants to do something, we're doing it. You know, that's certainly a dynamic that I saw from time to time. Also, we would try to do presentations where we removed the names of the funds. So do an actual comparison blind, to remove the impact of any preconceived notions that you might have about a certain manager. That was a really valuable technique to use in investment committee because then you would just had to work up a story from the cold, hard numbers. Also, I had one great investment committee who had this rotating role of being the devil's advocate.

• 16:26Speaker 01

  So there'd be someone on the team, and it would vary every investment, who would have to take the other side and argue. That is tremendously valuable in an IC. It gets all of the counterpoints out there on the table for discussion. But you have to rotate who's doing that because it's a very socially heavy job, I would say. So now when I'm in IC, I'm using leaderless sessions. I'm using these blind comparisons that we don't have any biases based on the branding. And then also, we're taking turns being the devil's advocate to make sure that we can argue both sides of any investment decision.

• 16:59David Weisburd?

  What's a good size for an IC?

• 17:01Speaker 01

  Five is pretty perfect. You definitely need an odd number. It's also about, if you do have one dominant personality who's going to make the end decision, you have to give the other folks on the IC enough power so that they feel it's an authentic discussion. This is more of a family dynamic, right? Because at the end of the day, it's the wealth generator's money. But I've seen family office CIOs get a little frustrated at that from time to time.

• 17:34David Weisburd?

  So you have this ambition of being a very high-performing asset allocator for your clients. What does that mean? And how are you able to outperform the average or the index?

• 17:49Speaker 01

  As I mentioned before, I grew up in a very traditional portfolio construction mindset. But over time, I just started to realize that it doesn't work for wealthy people. And frankly, a lot of people are bored by their portfolios. They're in these balanced multi-asset portfolios with 80-line items. They don't feel a strong affinity towards any particular investment. So what I'm doing is trying to kind of bring the fun back into it and invest with high returns, but also with high levels of meaning. So using investments that actually delight the individual as a person and as an investor. So what I'm focused on is let's be a bigger partner to fewer asset management firms.

• 18:33Speaker 01

  That allows often for it for better economics and a saving of fees. Let's do options based hedging in addition to fixed income to free up more capital to buy equities and other things that can return high. And then also, why aren't more people focused on taxes? You know, this surprised me so much. Most of the investment advertisement that you're going to get hit with as an LP is all, you know, not considering taxes. We should be doing analysis on a post-tax basis and focusing just as much on wealth structuring as, you know, these theoretical returns that you won't get because you're going to pay tax. That shocked me. Why is that in every conversation?

• 19:12David Weisburd?

  Just to give an example on that, a hedge fund might have an 18% gross. It might be 9% net or 8.5% net to somebody living in California or New York versus there are some tax-free or even tax alpha strategies at 18% could be 20%.

• 19:31Speaker 01

  Yeah. And hey, you could, you could do some fancy footwork around where you hold the hedge fund in order to, to improve your, your tax profile.

• 19:40David Weisburd?

  It's marrying tax strategy with, with structure.

• 19:43Speaker 01

  Yeah.

• 19:44David Weisburd?

  You're also very bullish on GP stakes. What is it that you like about GP stakes? And where do you think that there's alpha in the market today?

• 19:53Speaker 01

  Mm hmm. I, I know you like GP stakes as well. For me, it's all about showing conviction. You know, we, if you really love the way a manager is approaching the market, you're not going to be doing that market yourself, you're going to be outsourcing that exposure. To show the level of conviction, I would prefer to, to take a GP stake as well as an LP stake. There is something also just so psychologically satisfying about receiving fees instead of always just paying fees. I found, you know, I haven't found a single human being who likes to pay fees. We know we must, but we all hate it. And look, I've literally seen billions of dollars move based on a five basis point difference in fees.

• 20:35Speaker 01

  You know, it moves the needle more than maybe it should. So there's this great psychological benefit to being on the GP side of the table, really collaborating with them and receiving some portion of fees. And then also, of course, we enjoy better access. Sorry, go ahead.

• 20:52David Weisburd?

  And your families that you work with, where do they bring the most value when they do invest into the GP? What value add are they providing?

• 20:59Speaker 01

  Normally, it's the willingness to go in early. Many institutions have it in their investment policy statement that they can't, you know, come in early. They can't be more than 20% of a fund. Whereas families are typically much less constrained, so they're able to be a little bit more adventurous. Right? And of course, it's easier to negotiate a GP stake if you're coming in early because you're helping that manager find their feet and raise. And when I'm analyzing these GP stakes, I'm just as focused on investment performance as well as fundraising. Because that's what GP economics is. It's you have to have good enough performance and then excellent sales.

• 21:44Speaker 01

  Even great investment products do not sell themselves.

• 21:48David Weisburd?

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• 22:33David Weisburd?

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• 22:44Speaker 01

  A lot of it is about access and showing that level of conviction and alignment. Actually, yesterday I was sitting at breakfast with an excellent hedge fund seater. He was, you know, very early or first money into several funds that you would know. And we're actually both in the same fund, the same hedge fund that's been up 100% for the last three years in a row. And many folks look at this fund and think, oh, my gosh, I've missed it. Or maybe there's some trick that I'm not understanding, or this performance is going to have to revert. This much more senior hedge fund seater, he lived through lots of different market environments where he saw huge returns of more than 100% many, many times before.

• 23:29Speaker 01

  And I have the conviction as well that that could continue. So I think it's really about being a little more adventurous and getting exposure to these great investors and just being willing to be a little bit early. That's really the strategic thing. And then they'll always take your call. And there's also a bit of pride in it, right? Of identifying someone before everybody thinks they're cool.

• 23:51David Weisburd?

  And when you build these portfolios to be idiosyncratically weighted or more risk on, you invariably have these fluctuations from year to year, from quarter to quarter, sometimes from day to day. How do you put your partners in the right mindset in order to deal with significantly higher swings than typical portfolios have?

• 24:17Speaker 01

  That's a very good point because options-based hedging, it only kicks in if the drawdown is bad enough. All right? So you have to have everybody around the table coached on what kind of swings to expect in their net asset value. I actually found that our industry is underserved on risk. You know, it's dead easy to explain to somebody why higher returns are better, but it's much harder to explain why a risk mitigation strategy is important, or why they'll be happy that they have this options hedge, or they'll be happy that they'll have fixed income. Because you really have to have both sides of the brain firing in order to have a productive conversation about risk. There's the emotional side that determines behavior

• 24:59Speaker 01

  as well as the intellectual grappling with it. Usually, folks will say, "Your portfolio has 8.1% standard deviation." And everyone's like, "Okay." You know, that doesn't resonate. So there's actually similar math called value at risk. So instead of talking about standard deviation, I prefer to talk about value at risk because it's easier to translate that into an experience and it's easier to feel that risk in your belly. So I would say, "Mr. and Mrs. Client, in 99% of one-year periods, we'd expect to be doing better than a 19% loss." And then I stare, and I make sure that they're happy

• 25:43Speaker 01

  with the thought of losing 19% of their money in a year. And if they're not, that portfolio is too volatile. We need to do something to dampen those drawdowns, either with options-based hedging or more fixed income, more hedge fund exposure, or even more private equity because it doesn't mark down.

• 26:02David Weisburd?

  What tools do you use to figure out how your portfolio fits together and what your value at risk is on a portfolio level?

• 26:10Speaker 01

  So there's lots of commercially available tools. Also, many of the big asset managers will publish, for anybody to download, their expected risk and returns for asset classes as well as correlation matrices. So you can just download those files and calculate your standard deviation, calculate your value at risk, at least at the asset class level. And then, of course, you need to adjust for your idiosyncratic stuff if you have managers that are acting a little bit more, in a more spicy fashion, for example. But yeah, you can do the calculation, but at the end of the day, I'm just not as focused on that calculation anymore because risk is half math, half emotional.

• 26:52Speaker 01

  And so if somebody's okay with the thought of losing 19%, then I'm broadly all right. You know, I know that they are willing to be in an aggressive portfolio.

• 27:02David Weisburd?

  You've been working with people on their risk tolerance for now 12 and 1/2 years.

• 27:08David Weisburd?

  Do you feel that people have good self-awareness on their risk tolerance? And if not, how do you deal with that when it comes up in their portfolio?

• 27:15Speaker 01

  People don't have good awareness, even professionals. You know, you have a certain image of, oh, yes, I will have a cool head during a bear market. I'll be investing, not freaking out and selling everything. You know, we all, I think a lot of us don't have a very clear idea of what our real risk posture is. That's why I'm so focused on getting people to envision drawdowns. You know, how would it feel to be down this much? Would you have to sell something to pay for school fees? You know, we really think through how that would feel. Because it's those drawdowns that really inspire the very worst behavior from people. We just freak out. It's your amygdala takes over and you're sort of powerless until you can calm down.

• 27:58Speaker 01

  Like I said, all the blood is in your major muscle groups, out in your brain.

• 28:02David Weisburd?

  I look at this as how the military looks at this, which is war games. They understand that at the time, that's something, there's a nuclear war, that people will not be rational. So you have to constantly have the troops simulate and simulate, simulate. And I think the military has a good self-awareness on this as part of their culture. I think a lot of people don't. And the answer to my own question, I think, around self-awareness is the people that have the highest self-awareness are the ones that are actually doing these simulations and have a prepared mind. They are aware that they will not be able to look at it rationally. So essentially, no one could look at these drawdowns rationally. But the most self-aware people prepare for this amygdala response, as you mentioned,

• 28:45David Weisburd?

  this fight or flight response, and are ready for when that kicks in, have a game plan for that.

• 28:51Speaker 01

  I actually love crypto for this. This is a bit of a hot take, but you can get, you know, a full career's worth of market drama experience in crypto in a very short amount of time. The highs, the lows, it's so stressful that I the fact that most investors now have at least experimented with crypto has actually improved everybody's awareness of their own risk tolerance.

• 29:14David Weisburd?

  It's also given context because if your crypto is down 10, 15% in a day and then the stock market is down 3, 4%, you don't even think twice about it.

• 29:25Speaker 01

  On that same train of thought, the market drawdowns and recoveries that we've had lately have been so sudden. Think of the COVID drawdown. If you could stay solvent for six weeks, you'd be fine. You know, you would, you would recover. So I think we've, en masse, investors have learned a bit of a dangerous lesson recently, which is that the market goes down fast and up fast. I think people haven't drawn the idea into their minds of a proper, you know, financial crisis type, multi-year dig out of the hole kind of experience. Because these flashes, did these crashes have been such flashes? Down and up.

• 30:06David Weisburd?

  What have been the most unexpected things about going from Goldman Sachs to now print cap your own firm? What have been some of the, some of the things that you didn't expect would come with the territory, new territory?

• 30:19Speaker 01

  Well, I did have a pit stop in between the, you know, very large structured organization of Goldman and, and running my own firm. I worked at a small multifamily office. You know, that was a 30-person organization, so very different from the big one. I'd say that the biggest changes are that

• 30:37Speaker 01

  there's this magic in the room when you're talking about direct deals that you don't feel as much in, in big organizations. Because of course, you have big asset management firms, mostly what you're selling is funds, ETFs, mutual funds, blind pool, private equity products. So it's, it's more about, you know, manager selection and portfolio construction. Whereas in the Wild West of family office world, I find that people are really coming around the table more to talk about direct deals. That's been a, a huge difference. That suits my style because I, I do like a more concentrated portfolio. I love a structured return. I've just found it's, it's freeing to be able to focus on directs

• 31:20Speaker 01

  as well as, of course, funds and, and ETFs.

• 31:24David Weisburd?

  When done effectively, where should family offices focus their energy and their time and their resources in their portfolios? And where do they play the best in the ecosystem?

• 31:36Speaker 01

  A lot of this comes down to family offices being more flexible.

• 31:41Speaker 01

  But people know that about families, right? So families tend to attract decks. Like, I am a deck magnet. People send me stuff all the time. People send me crazy stuff. And some of it's fun and interesting, wacky, wonderful. But a huge, a huge challenge for a family is just managing the inbound deal flow and being able to sort through everything. And frankly, if you're only investing in stuff that is sent to you, that's a bias. You know, how many people's had to say no before they sent it to you? Right? And so I'm focused on outbound, you know, fighting into, fighting my way into, into deals that are competitive.

• 32:23Speaker 01

  You know, doing outbound search as well as parsing the massive amounts of stuff that comes in. I think that's actually the biggest challenge of being a family is just dealing with the volume with a limited number of people that you have. So I would love to see families doing this. I'm going to call it operating business aware portfolio construction. I'm working with a great family whose wealth is from the public equity space. So their family office is 15 direct private equity investments. That's it. To me, that, that's beautiful. Right? He has enough exposure to the public markets via his company and his income from the company. So what he's doing on the family side, it's purely this high control, direct, private equity exposure.

• 33:09Speaker 01

  And this actually reminds me of a, a tough couple of lessons I had to learn. And, and you know, the Goldman days to multifamily office to running my own business. I once had the CIO of a big German pension fund look at me and just say, Julia, I don't care about risk. And this is back in the Goldman days. And I was just shocked by that. Everyone cares about risk. What do you mean you don't care about risk? That sounded bananas to me. And I was actually very glad that I had already been married for a couple of years when he told me this. Because when you're married, you learn how to listen and not judge. And how to, and you also learn that sitting there and planning what you're about to say is not real listening.

• 33:52Speaker 01

  So I, you know, I sat there, I absorbed, I absorbed his message that just was so surprising to me. But, you know, what he was getting at is that he needs to feed pensioners. So it's not really risk that he's solving for. He's going after edible returns. And then in the multifamily office world, I started talking with, you know, these ultra high net worth families. And in a, you know, strict asset allocation point of view, private equity has higher risk than public equities and higher risk than fixed income. Because it's a liquid, because it's equity, because it's smaller companies. All those things drive up the standard deviation into the twenties.

• 34:34Speaker 01

  But of course, you, you don't feel that risk because they're, they aren't mark to market. So I had a family tell me, just like right around when I transitioned from Goldman, oh, I think a private equity is having the least risk of anything in my portfolio. And I thought, wow, that is really a different way of looking at it. But now I completely see where they're coming from because of the level of control they have in these private businesses, of the steadiness of the cash flows. I've learned that, that risk really means different stuff to different people. And trying to shove standard deviation as the main metric just doesn't work very well. Yes. To put a lot of thinking into a very short sentence, I would say, outsource the stuff that you're not good at. Just get comfortable with the idea of outsourcing so that the investment professionals you do

• 35:19Speaker 01

  have are applied fully on the stuff that they love the most. That's why they'll stick around. And so then what we saw work well for, for families and for institutions as well is

• 35:32Speaker 01

  Think about the people you have that you want to motivate to stay. Let them apply themselves in whatever area they are the strongest in, and then be open to outsourcing the rest. Oftentimes, also in institutions, the board would be personally liable if something went wrong on the investment side. That led to outsourced CIO engagements becoming quite popular. How could you defend having an expensive team running, let's say, emerging market debt, when you could buy that service from an asset manager for cheaper? And there'd be more humans focused on it, more risk software being used. It's sort of hard to defend.

• 36:14David Weisburd?

  Is that somehow solved through indemnification policies? And how do you solve this personal liability on board members?

• 36:22Speaker 01

  Frankly, the way I saw it being solved was outsourced CIO mandates getting written.

• 36:30Speaker 01

  Right? There'd be, you run the math on all your people. Did you have key man risk? Did you have a lot of expensive software you were buying for the team? It's expensive to run investments in-house. So sometimes you saw boards making the decision, okay, this is slightly outside our core competency. Let's outsource this piece of the pie. That is usually how I saw it being solved. And then on the family side, it's a real mixed bag. Like, some family office executives are rotating through families quite frequently. It can be really hard to be the CIO for a family.

• 37:08Speaker 01

  Right? Because maybe lots of the investment is getting done by a family member. Maybe a family member wants to do direct VC, and that's not something that you think they should be doing. You know, these are all really hard professional situations to be put in. So, but in contrast, you know, I've, I've spent time with many decades-long family officers who've had that stamina and have found something that works beautifully. Because it is such a, such an unconstrained, great seat to have, to be a family office CIO. But it really comes down to chemistry with the principal. If you don't have that, start looking for a new job.

• 37:45David Weisburd?

  Before you join a family office, how do you suss out that dynamic?

• 37:49Speaker 01

  Family office world is really small. So you can, you know, find out quite a lot about the reputation of, of the, of the team and their style before you join. So what I've seen work well for folks is spending a lot of time in that interview process, making sure that you are truly comfortable with like all the cultural stuff, all the interpersonal dynamics, that that all has to be solid.

• 38:12David Weisburd?

  What's one piece of advice you wish you could give some family offices that you can't practically give, especially if they become your clients?

• 38:21Speaker 01

  Frankly, it's frustrating to be, you know, to be working with families sometimes because they are so well-resourced. And you see, man, it is way easier to make money when you already have money. And there's plenty of opportunities to become wealthier when you're already wealthy.

• 38:38David Weisburd?

  Give me an example of that.

• 38:40Speaker 01

  Like, you know, you qualify for cheaper lending. You're able to get into better funds because you're able to write a better, a, a bigger ticket. You're able to position yourself as a strategic LP to, to get into a fund that's supposed, that's supposedly shut to other investors. You're able to do private investments. You can get insurance policies to shield your gains from taxes. Like, there's just so many ways that it's just easier to get rich if you're already rich. And so I would love to see families thinking about pulling up, you know, smaller families or, you know, minting more millionaires in their family businesses. I, I really love to see that. And like, on the advice side, it would be, stop trying to predict the returns that are

• 39:25Speaker 01

  going to happen next year. You know, there's so many people in our industry who are obsessed with predicting, you know, what's going to be the best asset class next year? What's the path of this squiggle on the return chart going to be? It's really hard to make a career out of that. So I prefer everybody focuses a bit more on the on the longer term picture. And frankly, if you get the risk side of your house in order, the returns will come.

• 39:48David Weisburd?

  I know you're a big fan of AI and utilizing AI to improve your business. What are some clever ways of using AI to scale yourself and to save on time and potentially improve returns?

• 40:01Speaker 01

  Trying to figure out how to replace myself with AI. It's hard for now. I'm sure it's coming. One practical thing I'm doing is feeding investment memos into a LLM to look for bias. Because it can detect, you know, have I been objective? How I've been fair? Is there some bias showing up across the written record of my decisions? And actually, I heard about this in Davos. Ray Dalio was presenting about AI. And he has a whole digital Ray that he talks to because he's been keeping notes about how he made decisions for decades.

• 40:40Speaker 01

  So digital Ray is, you know, very up to speed and it's a faithful representation of him. I'm trying to build up a digital Julia where I'm actually writing down what I'm doing, why I'm doing it so that I can train a model to be my shadow, if you will. But, you know, there's, I've spent a lot of time trying to find good tools. And for families, I haven't seen anything that's great yet. How come someone hasn't made an amazing personal CRM yet? You know, for family offices, that would be so important because there's just a tremendous amount of networking. Same for venture capital. As private equity managers, we would all be buying a great personal CRM.

• 41:20David Weisburd?

  There's a couple of tools that are coming out right now that are AI native CRM solutions. We've actually just engaged one. It's something that needs to be kind of rewritten from first principles, like legacy CRMs just can't do this type of stuff and can't be as flexible as you want them to be.

• 41:37Speaker 01

  Yeah. Like, why can't I ask my phone, oh, who is that guy I met in Davos who has the small nuclear reactors? And it just does it, you know? That would be helpful for family offices.

• 41:48David Weisburd?

  What's one piece of timeless advice that if you could go back to July 2013, when you started at Goldman, that you would give yourself that would either accelerate your career or help you avoid costly mistakes?

• 42:00Speaker 01

  I would have warned my past self about the seductive power of storytelling. We as humans, your stories are so meaningful to us. And I've seen most of investment decision making comes down to great storytelling. Like, I once attended a VC healthcare pitch that was so good that I wanted to quit my job and become a doctor. It was that compelling. All right, so this is why we have to do things like those blind manager comparisons to kind of suck the seductive nature of the storytelling out of the investment decision. Right? And so there's been several big themes that have risen and fallen in my time, like thematic equities would be a good example of it. Thematic equities got really popular around the time of COVID and the boom market after

• 42:45Speaker 01

  COVID because they're a great resonant storytelling device. You know, it's, most people were dividing up their portfolios as US equities, European equities, Asian equities, kind of a regional split, whereas thematic equities resonates better. It's about, let's invest in technologies and businesses that'll make sense for an aging population. Let's invest in environmental impact. You know, instead of organizing yourself regionally, let's organize our equities according to a theme. And this worked really well for a while, but there was a sneaky, well, not so sneaky, that there was just an overexposure to growth factor across many of these thematic products.

• 43:29Speaker 01

  And the most popular risk software that people use for analyzing equity risk didn't pick up on the growth factor that much across these products. Right? So this was a time when storytelling really captured everyone's hearts and minds. And we saw private banks allocating up to 50% of their core equity exposure into thematic equities.

• 43:55David Weisburd?

  Fifty, five zero.

• 43:57Speaker 01

  Fifty, yeah. And then, you know, most of the time, growth does really well, so you're hunky dory. But then, once in a while, value rips back. So then, when interest rates spiked, growth went down, value went up, those products traded down in tandem, you know, just hand in hand, even though they were all different themes.

• 44:17David Weisburd?

  A thought experiment that I often use is how would an AI handle the situation? So it could be from a data situation. Oftentimes, AI corrects for these behavioral biases. Sometimes you're overweight at risk, sometimes you're underweighted risk. Sometimes you need more courage and AI would have more courage because on a risk-adjusted basis, it would lead to higher return. So same thing goes with this. AI would not have this storytelling bias. Sometimes this thought experiment of how an AI would look at a situation could be extremely useful.

• 44:52Speaker 01

  Yeah. You know, I saw a live example of, you know, we had two businesses, quantitative equity and fundamental equity. And often, quants would decide, sure, I'll own a state-owned enterprise if it's cheap enough. Whereas fundamental equity, people would say, no, I don't buy state-owned enterprises because it's not aligned. You know, it's aligned with the state, not with the investor. Right? So maybe that quant thinking is exactly what we need to help iron out some of these behavioral biases. But I don't want to go so far as saying, I think we all need to act like computers. Because, you know, that's not fun. That's not exciting. That's not why people invest.

• 45:29David Weisburd?

  Just another one for AI. One of the, one of the, one of the aspects of investing that I think is really interesting is that people become out of favor of entire asset classes without context to valuation. Without context to valuation. For example, people might say, well, I don't like pre-seed venture. As if every single deal is going to be struck at the same valuation, not understanding that there's supply and demand dynamics. Whereas in the very time to go into an asset class, if you time it perfectly, is when it is the most out of favor and has the most intrinsic value. And same thing with private equity buyout. Obviously, today, it has so much powder in the large buyouts. So it makes sense why people don't like it. There's a rational reason for that.

• 46:12David Weisburd?

  But oftentimes, people get down on these asset classes at the exact wrong time. Exactly when they should be bullish on it and they should be bearish on asset classes that have been run up.

• 46:22Speaker 01

  Yep.

• 46:24Speaker 01

  Do you remember how commodities were so out of favor for so long? You know, how did we all forget about the things that make the world go around? It came roaring back.

• 46:32David Weisburd?

  Gold, gold as well is actually outperforming Bitcoin this year, which I did not, did not have in my cards. Well, on that note, Julia, this has been absolute masterclass. Thanks so much for jumping on the podcast and look forward to continuing this conversation soon. Congrats on moving to the US. So it's good to have you back and looking forward to meeting up soon.

• 46:53Speaker 01

  Thank you for having me.

• 46:54David Weisburd?

  That's it for today's episode of How I Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find it valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued support.