Pod Insights Capital Allocators CIO Greatest Hits: Single Family Offices – Dawn Fitzpatrick (Soros) About this episode This week's Summer Series is another twofer, Dawn Fitzpatrick from Soros and Steve Rattner from Willett Advisors, Michael Bloomberg's family office. We packaged these two leading single-family offices together to hear their different approaches to a similar investment challenge, with Soros leaning heavily on internal teams and Willett primarily on external.
Please enjoy my conversations with Dawn Fitzpatrick and Steve Rattner, both from 2019.
Original Air Dates:
Dawn Fitzpatrick EP. 111 – November 3, 2019
Steve Rattner EP. 153 – November 17, 2019
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0:01 Ted Seides? Capital Allocators is brought to you by AlphaSense. Every allocator sits at their desk for hours preparing the work around investment decisions, getting up to speed on a new theme, prepping for the next investment committee meeting, and tracking what changes across an entire portfolio. AlphaSense just launched something built to help. It's called SuperAnalyst, an always-on agent that works like a power user on your behalf. It draws on over 500 million premium sources, including broker research, expert transcripts, company filings, and earnings calls, and keeps working long after you've gone home for the day. Point SuperAnalyst at a theme, company, or market, and it learns the coverage universe
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1:29 Ted Seides? built for firms who are rethinking how work gets done. You're at your desk looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. RidgeLine is built to change that line's trajectory, to be the inflection point that takes your growth from incremental to accelerated with the team you already have in place. RidgeLine is the only AI-native investment management platform that brings together the front, middle, and back office with one set of data and powerful AI agents that automate
2:12 Ted Seides? away operational drudgery, so your talent can shift from managing old technology to materializing new ideas. RidgeLine helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai/trajectory. If you file Form ADV, your firm is already there. Then talk to RidgeLine about how you can do more with the team you already have. Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable
2:57 Ted Seides? relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations, and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible, so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com/capitalallocators.
3:32 Ted Seides? Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.
3:59 Speaker 01 All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast.
4:18 Ted Seides? With eight years and over 500 podcasts under my belt, I'm often asked to recommend my favorite episode. But I can't really answer that question. I feel like I have 500 children and don't think I've disowned a single one. So when asked, I usually offer up a great recent episode to get a listener started. Finding the best episodes in a big library of content isn't easy, so we thought we'd help. Each summer going forward, we're going to share our best. Over seven weeks, we'll replay conversations curated from our favorites and yours, excluding those from the last 12 months. Our 2025 summer series focuses on CIOs.
5:03 Ted Seides? We're blessed to have an incredible library of long shelf life content, and we just couldn't pick seven. Instead, we'll share a dozen gems canvassing every type of institutional asset owner. This week's summer series is another two-fold. Don Fitzpatrick from Soros and Steve Rattner from Willett Advisors, Michael Bloomberg's family office. We packaged these two leading, single-family offices together to hear their different approaches to a similar investment challenge, with Soros leaning heavily on internal teams and Willett primarily on external.
5:41 Ted Seides? Before we get going, it's about that time of year when the summer breeds leisure activities. So whether you're an active participant or a fan, you've likely noticed a few memes spreading recently.
5:54 Ted Seides? First, there was Bill Ackman making his professional tennis debut. Now, Bill's a solid player, right around the same level as me. But tennis has different levels. My level of play puts me squarely at the bottom of the A-team at my club. My club's A-team is fairly even with the C-team at another local club. And that club has players like Peter Brosens at Jordan Park and John Pastel at Alliance Bernstein, who destroy everyone else at their club. John and Pete probably can't take a game off of Elliot Spaziri, a local kid who's now 132 in the world. And you don't see Elliot making it that far at the tennis majors. That's another level.
6:36 Ted Seides? I've often described Jen Prosek as a major league communications entrepreneur competing with little leaguers. It's kind of the same with tennis. So, no ill will towards Bill, but jumping levels is tough to watch. And then there was the infamous kiss cam at the Coldplay concert. One moment in time, one poor reaction, and hundreds of thousands of replays already. If there's a moral to these stories, it's sometimes you have to stay in your lane. You might see me hit some balls at a Pro-Am, but I'm not going to compete against pros, let alone head-to-head against Brosens or Pastel. And to the extent you see me on a kiss cam, that'll definitely be with my wife, Vanessa.
7:17 Ted Seides? As for staying in your lane with content, what better way than sticking with the leading voices of institutional investing, right here at Capital Allocators? Thanks so much for spreading the word. Please enjoy my conversations with Dawn Fitzpatrick and Steve Rattner, both from 2019. Dawn, it's great to see you.
7:38 Speaker 02 Likewise, Ted.
7:39 Ted Seides? Well, why don't we just start in how in the world you go from a cross-country star to trading right out of college?
7:48 Speaker 02 So, I had an interesting summer intern experience. It was 1990, and I was going to be an intern at Citibank. And if you remember 1990, it was in the midst of probably the biggest banking crisis since the Great Depression. So we show up for the first day of the intern program and someone comes and asks for a volunteer to be an executive assistant. And the other interns around me are looking at this person incredulously, wondering why anyone would raise their hand. But I figured there had to be a catch here. So I raised my hand.
8:26 Speaker 02 And long story short is they needed an executive assistant for John Reed's chief of staff's chief of staff. But the good thing was, back then, Citigroup was run by the policy committee and they all sat at 399 Park on the second floor. And believe it or not, the chief of staff's chief of staff sat on that same floor. But better yet, because he was the lowest ranking executive on that floor, my desk that summer was right outside the men's room. So you had a front row seat. You know, Citibank was the biggest bank in the country at that time to this crisis. And it was incredible.
9:11 Speaker 02 And right then and there, I decided that I wanted to be an investor and not an investee.
9:17 Ted Seides? Where'd that insight come from?
9:18 Speaker 02 It was hard what they were solving for at that moment in time. And there was a lot of politics and you didn't necessarily control your own destiny. And being an investor and being a trader, it felt like every day I would have a report card and you'd live and die on the merits of the work you did.
9:34 Ted Seides? So what was that first stop out of college?
9:37 Speaker 02 So right out of college, I went to O'Connor, which at the time was arguably the preeminent derivatives trading firm. They were actually a beta test site for Steve Jobs' NEXT because they were one of the first trading kind of franchises to really embrace technology and compute power. And it was fun because it was run by a bunch of 30 something year olds, mostly from MIT and University of Pennsylvania. Very meritocratic, very entrepreneurial. And I went first to the American Stock Exchange where I was a clerk. And then I went to CBOE where I was a market maker.
10:18 Ted Seides? So what did technology look like? She said, the use of technology for trading, what did that look like in the 90s, in the early 90s?
10:25 Speaker 02 I might have overstated. So we had good computers, but the truth is, when we went down to the trading floor each day to make markets, we had things that we called were pilgrims, and they were paper sheets where you'd set off of spot price and they'd basically, and you could move around Vols and spot, and you could use them to give you some context when you were making the markets. But it wasn't quite high tech when you were actually on the floor, but the models we used to make those sheets were pretty advanced.
10:51 Ted Seides? How were the models produced back then?
10:54 Speaker 02 It was more advanced than Black Shoals, and it was just a lot of crunching of numbers and scenario analysis.
11:00 Ted Seides? Was either Amex or CBOE an open outcry pit back then?
11:05 Speaker 02 So the American Stock Exchange was a specialist system, and O'Connor back there, we were the specialist for US Surgical, which was the most active option in the world at that time. So that was a fun place to clerk. And then the CBOE was open outcry. And that was a real education, going from clerking in a specialist system and then going to an open outcry pit in Chicago. But it was great.
11:27 Ted Seides? And for those people not here, how tall are you?
11:31 Speaker 02 So this is a big family joke, because I come from a family of, my dad's 6'6", my brother's 6'7", 5'4" in the program, and probably 5'2" in real life.
11:41 Ted Seides? So what was that like, being in that pit?
11:43 Speaker 02 It was an amazing education. I think you learned a lot in terms of how to think on your feet. You learned to understand technicals in terms of how flows operated and how momentum operated. You learned to work as a team with the other members of the pit, and you had to earn the respect. You know, the interesting thing is, when you first go into those pits back in the early 90s, you were invisible, and they did not acknowledge you until you could prove you had utility value to them.
12:11 Ted Seides? What does that mean of like, working in a team with other traders in a pit?
12:15 Speaker 02 It's about sharing risks. It's about sharing opportunities, helping kind of cover blind spots for everyone. So it's an interesting kind of culture, but it actually worked pretty well.
12:25 Ted Seides? So how long were you trading?
12:27 Speaker 02 I'd like to say I'm still trading or investing. I intermix the two words, but I still watch markets. I still put on positions. It's what makes me excited to get up in the mornings.
12:37 Ted Seides? So what were the formative lessons that you learned from those early trading experiences?
12:43 Speaker 02 One of the first lessons you have to learn, and it's a painful lesson to watch, is gap risk, especially when you're an options trader. So I was down in the pits in 1994. And the way a lot of trading operations worked in O'Connor was one of them. You got paid each year at the end of the year. And December 1994, the peso devalued. And we went from having a spectacular year to having a horrendous year. And then one of the pits I was in, because you would cover more than just one pit, we traded a lot of Mexican ADRs. And that pit was, I was probably the only trader that was associated with institutional platform.
13:27 Speaker 02 The rest were locals, so they were primarily risking their own money. And watching them get devastated by the peso devaluation was like a really formative moment in my career. And also, by the way, watching the opportunity on the back end of that, when there weren't too many people left standing and able to take advantage of that. There were two sides to that, but it was a pretty awesome learning experience.
13:54 Ted Seides? All right, so as you roll forward from being in the pits, what path did your career take from there?
14:01 Speaker 02 So from there, I went and I traded convertible bonds, which, when you look across the hedge fund industry, it's kind of interesting because there's a lot of us who spent some formative years trading convertible bonds. And I think that's because, first of all, they're cross-asset class security, but it's also a security where a lot of things can go wrong and right. So it's a great teacher. You also learn about the perils and benefits of correlations between equities and rates and what can happen when a dividend arrives or disappears. So it makes you think in a lot of different dimensions that I think ultimately has served myself and a couple of my peers pretty well throughout their career.
14:45 Ted Seides? So you're trading converts and keep rolling me through.
14:49 Speaker 02 So I traded converts for a while and then over time I was parachuted in when we had risk that needed to be kind of watched over or things kind of went off the wheel. So I ran our Mergerb desk for a little bit. And also I should step back. So a group of original O'Connor traders, myself included, reassembled in Chicago, probably in 1998, January of 1998, to start what became O'Connor, the hedge fund. And we launched O'Connor as a hedge fund in June of 2000. And at the time that we launched, it was actually the largest hedge fund launch post Long Term Capital, which to remind you blew up in the fall of 1998.
15:32 Ted Seides? So how big was that at the time?
15:33 Speaker 02 We were a $3 billion launch. And I guess maybe $3 billion is becoming big again.
15:40 Ted Seides? And what was that strategy?
15:42 Speaker 02 So we were primarily market neutral, equities and credit. And it was a multi-strategy, but it's distinct to kind of a millennium type strategy in that we really were a team. And I think one of the things that I always loved about my time at O'Connor is that we were an incredibly cohesive team. We were really good at kind of connecting the dots and looking at relative opportunity sets. I think that's really, really important and it's probably becoming increasingly important. And at O'Connor, I took over equities and credit in 2006. I took over running all of O'Connor in 2007, right before the financial crisis.
16:25 Ted Seides? And that strategy, so there's a lot of ways of thinking about a multi-strat across equity and credit. What was the kind of risk and return framework you were trying to create?
16:35 Speaker 02 We wanted to produce returns that weren't highly correlated with natural risk assets that clients would have in their portfolios. We were trying to keep a fairly high liquidity profile to give us the ability to be nimble. From a return perspective, we were looking at something in low single, mid teens type of returns. And I think we did a really good job for a period of time in the financial crisis. I think we navigated as well as anyone, both in terms of truncating risk, but as importantly, taking advantage of the dislocation that was created.
17:15 Speaker 02 And we started to make money in November of 2008, just by kind of repositioning the portfolio and taking advantage of areas where kind of the rubber band had really stretched.
17:28 Ted Seides? Were there seminal moments in that time that you remember? So it's one thing to look back and say, hey, we were able to do that. It's another thing to actually step in when everything's falling off a cliff.
17:38 Speaker 02 So a couple of things. And again, this, I think, goes back to the culture that O'Connor has, is in the fall of 2008, when things obviously were going pretty badly for markets generally, the group of senior investors and myself, we literally hunkered down in a room and we looked across the opportunity set. And we were, instead of people wanting to hoard capital or point fingers, we really were able to kind of evaluate and pivot to where we saw the best opportunity. And that, at that point in time, one of the things that was really key is you didn't know the next firm or bank that was going to get tapped on the shoulder and liquidated.
18:21 Speaker 02 So you wanted to go to opportunities where there was a catalyst that might not be market dependent. And you also wanted to make sure you weren't beholden to financing markets and leverage. And I think we did that well. And by, in doing that, we had to sell some things where we were basically crystallizing losses and pivoting to other areas. But it was, I think, the only way to execute on that is if you have a team that trusts each other and is communicating really well. The other thing I think we executed well in that moment in time is as markets started to recover post the first quarter, there was a ton of momentum and we didn't sell into
19:06 Speaker 02 that momentum. If anything, we added into it. Whereas I think a mistake some investors would make is taking their ball and going home at that moment in time.
19:16 Ted Seides? It always sounds great to say, hey, we have a group of senior people who were able to communicate together. What did it actually take to get to that point in time? So when you were in the room where it was happening, that you already had that trust?
19:31 Speaker 02 So I think it's the actions leading up to that point in time, the moments in time when someone invariably loses money, but loses money for the right reason. We're in a business where we make calculated bets and sometimes they just go against you. So I think that trust in moments like that had been built up over a long period of time. I'm also a really, really big believer in like physical proximity. So spending time kind of shoulder to shoulder with people over 20 years, it matters and it's really helpful. I'm also, I'm a pretty candid person, you know, and I have an Irish temper. So people tend to know where they stand with me.
20:14 Ted Seides? So you mentioned over 20 years, how many people on that senior team had been working together for a long time?
20:18 Speaker 02 Our average tenure there was, on the investment side, was over a decade at that point. So we really knew each other well. We knew each other's strengths and weaknesses. We didn't hold back in terms of opinions and it was really invaluable at that moment in time.
20:35 Ted Seides? So you mentioned the risk of not knowing which domino was going to fall next on the banking side. Was O'Connor part of UBS at that point in time?
20:43 Speaker 02 We were. So we were wholly owned by UBS and we actually had prime brokerage kind of assets exposed at that point in time. And actually, one of the somewhat controversial decisions I made was I pulled from a number of different prime brokers, but UBS was one of them. You know, and again, that from my perspective, I had a fiduciary responsibility to protect our clients and I also felt an obligation to the team members. If something had happened to UBS during the financial crisis, we all had a lot of deferred that depending on what legal opinion you believed, may or may not have been money good anymore. So I felt a real responsibility to both stakeholders.
21:27 Speaker 02 I knew that politically it could be dangerous, but I didn't think that should be part of my calculus.
21:31 Ted Seides? And when you were in that room, making the decision to step on the pedal and things started to turn, you still had to have that overhang of, yeah, but we're sitting inside a bank.
21:40 Speaker 02 We did. And to be candid, we attempted a management buyout at that moment in time. And we got close, but we were recovering too quickly, as were financial markets. So the trader, me and my peers, actually tried to extract ourselves at a good price. But ultimately, they decided they wanted to hold on to us.
22:00 Ted Seides? And so now, a few years after that, you got moved into being Head of Asset Management for UBS?
22:06 Speaker 02 Head of Investments. So all of the investment teams within UBS Asset Management reported to me.
22:12 Ted Seides? Okay. And how did that role shift from what you were doing, kind of stewarding a hedge fund?
22:18 Speaker 02 It's an interesting topic, and it's something that we talk about a lot here. I think in the asset management world, the difference between, quote unquote, "traditional asset managers" and "hedge funds," those worlds are blurring. And it's really all about what's the value you can deliver, above and beyond what I can do for myself. And in that context, I think what we wanted to do with our products we offered clients at UBS was exactly what we had been doing at O'Connor. And it was about delivering valuable set of returns in the context of kind of opportunity set and risk. So it felt like a really natural progression. And I also think, from my perspective, it was a moment in time when the asset management industry overall
23:02 Speaker 02 was going through a lot of transition, and that usually creates a lot of opportunity.
23:07 Ted Seides? Yeah. And did your day-to-day role shift from being on the desk, making the investment decisions, to kind of running this big global business?
23:15 Speaker 02 Yeah, it definitely shifted. And there was aspects of that that I didn't enjoy as much.
23:21 Ted Seides? What were those?
23:22 Speaker 02 You spend your time doing non-investment tasks and not an insignificant amount of time. And it was one of the reasons coming to Soros was so appealing, because it really kind of got me back to what I'm passionate about.
23:38 Ted Seides? And what did you learn in that time about motivating and managing people in this space that you might not have been exposed to before when you were running a hedge fund?
23:46 Speaker 02 So I think a couple of things. First of all, communication. I talked about the fact that I'd worked at O'Connor with people for such a long period of time. When I took over running investments at U V S, yeah, I had to earn credibility with people who I didn't know as well and they didn't know me as well. And to do that, you really have to spend time, you have to communicate. So those skills actually were transferable when I came here. And I think that was really interesting. I also, it was good to understand the utility curve of the client who allocate traditional asset classes. I had a big passive business under me in that role, given the increasing dominance of passive players in
24:31 Speaker 02 markets. I think that was really, really helpful.
24:34 Ted Seides? Okay, so you get the big call to come over here at Soros. What was the structure of how the investments had been run before you showed up?
24:45 Speaker 02 Somewhat concurrent with me coming over here, George transferred the bulk of his wealth to the Open Society Foundations. So before I came here, these assets, it wasn't managed the way you would think in a traditional foundation, because it was a family office and they didn't have to think about solving for the things that you need to solve for when you're a foundation or endowment. So we had to lay all of that groundwork and build that kind of foundation of thinking and the foundation of organizing the portfolio. And that's been a lot of work, but it's also been like a fun problem to solve for.
25:20 Ted Seides? So when you came over, there's probably a common outside view that George and Soros, certainly he made his money from macro trading and taking big bets and lots of portfolio managers. And what you described in coming is this risk-controlled, market-neutral background with some oversight of a beta shop.
25:40 Ted Seides? How did that framework about thinking kind of shift? And what does it really look like today?
25:46 Speaker 02 So the interesting thing is, the portfolio when I arrived was actually over diversified, I'd argue. So there weren't enough big bets in the portfolio. And one of the first things we set about doing is putting in place kind of a top-down architecture that would inform our bottoms-up asset allocation. And in doing that, we really reduced the number of allocations we made to managers to try to increase the concentration and give ourselves the ability to make more big bets.
26:27 Speaker 02 And in terms of that top-down architecture, we have two important kind of constructs. One is for the long term, and one is for the more short and medium term. The long term is we've set kind of a neutral risk level.
26:41 Ted Seides? Neutral to what? Neutral to markets? Is it neutral?
26:46 Speaker 02 It's not neutral to markets. This is neutral to what we expect to exist over kind of a five-to-seven-year period. And for us, that equates to about a 60-40 portfolio. So definitely not market neutral. That's fairly high-octane, although it's less than your typical foundation or endowment.
27:08 Ted Seides? In terms of equity risk?
27:09 Speaker 02 In terms of equity risk. And there's a reason for that. When you think about your typical foundation, they tend to have fairly elastic spends. The Open Sided Foundation has a less elastic spend because it's a huge global organization. So the ability to maneuver spend very quickly, it's just harder. And in that context, you can't take as much risk. One of our board members is a big fan of yours, actually, someone named Ben Inker. And he introduced me to a gentleman named John Hagler. He's kind of a understated luminary in the industry, in my opinion.
27:52 Speaker 02 So in the 70s and 80s, he was the CIO and treasurer of the Ford Foundation. And can you think of a worse time to be CIO of anything? So you had the oil embargo, you had Watergate, inflation hit 12%. S and P went down 45% and took a decade to recover. And so when he got to the Ford Foundation, he started to have them think in the context of the interrelationship between risk in the portfolio and spend. And he introduced concepts, and this, by the way, this is 40 some odd years ago.
28:32 Speaker 02 He introduced concepts like if you have forward foundation commitments, that is effectively leverage in your portfolio. So really, really interesting and obviously, I think, correct thinking. But those are things that I'm working with the investment committee I report to and the foundation to really think about how we want to flex risk in one aspect relative to risk in another aspect.
28:59 Ted Seides? You said it distilled into this some risk structure that looks like 60-40, but it started with this view of what you see in the world three to seven years out. Talk a little bit more about what that view is and how that translates into a longer term structure that kind of resembles 60-40 in risk.
29:19 Speaker 02 A couple of things on that. So the reason we define it as risk allocation instead of just saying 60-40 is because this platform is pretty incredible in terms of the investment horsepower we have in-house and the degrees of freedom we have with the $25 billion. And we want to be measured against a passive 60-40 portfolio over that cycle. But the truth is, we can grab a lot of other building blocks that play to our competitive advantage. So when we think about how we want to get Risk. We want to really think about what are the different pieces of risk we can grab? And what's the best at this moment in time? That's part of the thinking.
30:03 Speaker 02 And then the other thing we have is a shorter and medium term policy portfolio. And that speaks to what blocks or what risk are we grabbing at this moment in time? And also where we are relative to what we think that average risk level is over the longer term. So we don't expect always to be at the risk of a 60 40 portfolio. We'll expect to be above that at times and we'll expect to be below that at times based on the opportunity set.
30:33 Ted Seides? Yeah, so I'm really curious to ask how you get into there. So you're starting with a normalized or kind of a policy risk framework and you want to grab all these attractive pieces of risk. How does that happen?
30:45 Speaker 02 Again, we have this top down framework, but we also bottoms up and we look externally and internally. And again, it goes to the amazing advantages I think this platform affords. So we allocate to 20 external hedge funds. We allocate to over 90 external or private equity funds. And internally, we have 28 portfolio managers and 17 kind of strategies or netting units. But we're thinking about building that portfolio. We're looking at those opportunities. We're thinking about, when we look at a given external or internal strategy, we're thinking about what's the persistent beta of that strategy? What do we think the excess return looks like?
31:28 Speaker 02 And how does that excess return look relative to both the beta in our portfolio, but also the other excess returns that we have available to us?
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32:19 Speaker 01 This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital. And now, back to the show.
32:28 Ted Seides? Let's start at the individual manager unit, whether internal or external. How do you decide if a manager is right for your portfolio?
32:38 Speaker 02 So, and I know this is one you hear all the time. Alignment is a really big deal. And like that, without alignment, you don't get out of the box. So I think it's first about alignment. Then I think it's about process and then being able to articulate and us being able to believe that they really do have edge and something persistent in terms of how they can extract that edge over time. Internally, it's really important. One of the things that we've been trying to do is really connect the dots. So when we think about the competitive advantages of this platform and you think about kind
33:19 Speaker 02 of the asset management industry overall, or the hedge fund industry, allocators tend to allocate capital in very, very tightly defined ways and tightly defined boxes. And being able to kind of connect across asset classes and across geographies, there's not a lot of places that can do that with internal investment expertise. So when we think about allocating internally, we want to make sure that manager is going to make the other team members alongside them better at what they do. And by the way, that also makes the bar for an external allocation that much higher.
34:01 Speaker 02 Because if we can do it well internally and get that mind share, I'd rather do it internally.
34:07 Ted Seides? What rough percentage of the assets are internal versus external?
34:11 Speaker 02 So in public markets, we're about 75% internal and 25% external. And when I came in, we were about 50/50. And one thing I'll say, Ted, is our internal managers, because we're trying to play to our advantages, which are, again, I think are pretty distinct relative to typical asset managers and hedge funds. They've persistently produced really, really attractive returns. And even when you look at kind of the hedge fund industry returns this year, or traditional asset management returns, they were pretty good going into May. It's been lackluster might be kind since then.
34:54 Speaker 02 Internally, our excess return, and we kind of measure it on a, you take out BAE and then you normalize four or five volatility, they're up about 6% year to date. And it's been a pretty steady March.
35:08 Ted Seides? That's 6% excess return.
35:10 Speaker 02 6% excess on a five all. So we've kind of normalized. And it's been steady. And I think it's because we don't need to solve for the same things others are solving for. And one of the things that I think is really notable is the platform shops are becoming really, really dominant. And they're solving for pretty similar things. And one of the things that was really kind of notable to me, we have an internal consumer staples portfolio manager, and that's been a tough place to make money for a while. So year to date, coming into September, he was losing money, not a lot, but painful. And if he was at a platform shop, he doesn't make it till September.
35:54 Speaker 02 He had an epic month in September, and I don't think there's anyone else standing in that space. So it's an easy example of playing our own game.
36:04 Ted Seides? How much of that internal book is equities and credit?
36:08 Speaker 02 The majority is equities and credit, and we do have a macro book as well, but the majority is equities and credit. We also have been building in a fairly focused way, an internal private credit book. And in private credit, we've been very focused on going after, obviously, every day you see a story on the crowdedness of private credit, but a lot of the assets that have, this goes back to our competitive advantages. The assets that are being raised for private credit tend to be being raised in dedicated private credit funds. They usually have some kind of term lock, and they need to produce something like high single digits, low teens returns to keep their investors happy and to justify both their fees and their lockup.
36:54 Speaker 02 What we've done is we've gone after lower yielding private credit that has hard asset coverage that isn't sexy enough for those private credit funds. But for us, it gives us a really attractive return. We can lever that return to get to a double digit because we have this incredible set of assets on our balance sheet. So we can borrow against our public equities at Fed funds plus 20 basis points, lever up this safe but esoteric private credit, and it works really well. And the other thing is, when we're kind of underwriting that private credit, we don't want to be in a deal where there's 20 other people around the table.
37:39 Speaker 02 Because invariably, in a moment in time when something goes wrong in a credit deal, if you're trying to solve for 20 utility curves, forget it. It's going to be lowest common denominator versus when we do deals, it's only us or us and one or two trusted partners. So that if you get to that moment in time when you need to seize the collateral, it's not hard to solve for how to create the best outcome.
38:02 Ted Seides? How do you think of the sizing and duration of that particular private credit opportunity set for you?
38:09 Speaker 02 So the duration of our book, on average, is pretty short. It's about 2.2 years. Sizing wise, that book 15 months ago was less than 2%. It's about 8% right now. And given the quality of the deals we're able to source, I would expect that to double over the next 12 to 24 months. The hard thing with a short duration book like that, and a lot of the deals amortize, is that you have to kind of run to standstill.
38:38 Ted Seides? How do you think through the private equity opportunity set? You mentioned there's a big roster of managers externally.
38:44 Speaker 02 So, private equity, first of all, I have seen, and we have some truly exceptional managers. That said, in aggregate...
38:56 Speaker 02 If that industry feels really frothy to me and it feels like there's some bad practices that will come back to kind of haunt the industry, I also worry that it's maybe been oversold to retail. Because if you think about it, I think people take false comfort in kind of marks that don't necessarily move without actual asset value changes. And if you're a financial advisor and you're recommending private equity, first of all, it's the thing you can sell where you get paid the biggest fees usually. And nobody's going to know if you're right or wrong for 10 years. So I think you have to be really careful. There's
39:39 Speaker 02 things that the industry as a whole does that we've been slowly trying to push back on. So borrowing against LP commitments, we can borrow at Fed funds plus, like I said, 20 basis points. I don't need you doing me any favors and taking out a loan to goose your IRR. So things like that, we get picked. When you get picked, you get picked based on the spot. So when a company goes public, they sometimes obviously don't sell, there's lockup. But then they pick you the stock, they take their performance fee off the moment in time when they pick. But by the time everyone gets their stock, stock's down 10% or 15%, it doesn't seem totally fair.
40:22 Ted Seides? As a whole, your pool of capital is big enough so you could make big commitments and try to exert some of those desires on a general partner. The flip side is, well, maybe you don't want to be big when those practices are out there. So how do you kind of address that in practice in the market with the relationships you have?
40:40 Speaker 02 So I think it's just in conversations, and I think you pick your moments in time when you are going to be bigger and you ask to address them. I have talked to some of our peers, that, you know, we're not the only ones who are focused on these issues. Right now, private equity firms are able to dictate a lot of the terms because there is so much money chasing that opportunity set. But I think starting these conversations now is important. And acknowledging that the issues exist. We just had a firm that asked for an extension. The results of so far have been poor. It's like a 6% IRR. They're asking for an extension where they want us to pay a management fee while they extend the call option of their performance fee.
41:24 Speaker 02 And it's funny, I was talking with our team and they're like, ah, let's just consent. It's not worth it. And I'm like, wait a minute, let's have a conversation about why we will be happy to consent, but why they should not charge us a management fee since they're extending the duration of their call option. So I think it's having those conversations and not shying away from them, I think is pretty important.
41:43 Ted Seides? And do you have an internal team so that you don't have those same kind of misalignment issues?
41:48 Speaker 02 In terms of internal private equity, we do it. So one of the things, and this goes about making us kind of a more unified team, we have sector specialists and we have regional specialists. And really, one of the things that we've tried to do is better connect private and public markets because it's, again, it's something that generally it's hard for people to do. Even the big sovereign wealth funds, they tend to be siloed between public and private markets. So one of the very purposeful things we've done strategy-wise is take down those walls between public and private. So when we see a private direct deal now, we'll tap, we have 70 investment professionals
42:33 Speaker 02 internal at SFM, we'll tap the professionals who are best suited to evaluate that versus having a generalist private equity team, if that makes sense.
42:42 Ted Seides? In the same way that you've kind of shifted the public equity more towards internal, do you try to do that on the private side to, over time, to address these structural problems?
42:51 Speaker 02 The private equity allocation that I inherited, and this goes back to our spend and what we're solving for being a little bit different than your typical foundation or endowment. We were over allocated to private equity generally with money in the ground and forward commitments. So we're in a situation right now where we're still making allocations, but we do want our portfolio to naturally roll down. So I don't want to build up a big internal capability. And again, you know, I mentioned we have 90 external private equity allocations. Some of those firms are really spectacular at what they do. And one of the things that that I constantly push myself and the team to be intellectually
43:33 Speaker 02 honest on is we should do internally what we're good at doing internally. And when there's people who are outstanding and have a niche, they deserve our capital and we should be allocating to it. And specifically in the private equity space, the people who I see doing the best job are the middle market type private equity firms who've really carved out a niche where they do add a lot of value to the companies they buy in their portfolio.
44:01 Ted Seides? As you look at other, I don't want to say traditional, but say endowment or foundation type asset allocation structure portfolios, are there other things that you think you do or approach sort of meaningfully differently?
44:15 Speaker 02 So I do think our ability to invest directly is really, really differentiated. And it's one of the things that we're spending a lot of time trying to leverage. And I can give you an example of that without naming the company's name. Publicly traded company, $20 billion market cap, but it's regulated and it has a certain amount of CapEx that it has to spend each year. The company needed to raise $300 million. They were also in a situation where they were potentially going to be downgraded from investment grade to junk. So they're a little bit in no man's land. You're not getting a fat enough yield for junk bond investors to focus on it.
44:58 Speaker 02 Investment grade investors generally, if something's downgraded, they have to sell right away. So they don't want to buy it today and have to sell it tomorrow. That's not good for their job security. This past summer, it's a Friday, and the bankers thought this was going to be easier than it turned out to be. Our public market equity portfolio manager owns the public stock. He gets a phone call and the banker is saying, it's Friday, we need to solve for this and we're struggling mightily. Is there any chance you guys can help?
45:30 Speaker 02 He quickly turns to our investment grade credit trader, who says, "Yeah, you know, it's a little dicey. It's potentially about to be downgraded, and it could end up in kind of that no man's land. But there's a price for everything." And the banker said, "But we need $300 million, literally committed no later than Monday afternoon." So they come to me and say, "Hey, you know, can we do this at the right price? And we have 48 hours effectively to figure it out." So I turned to our third portfolio manager, private credit, and say, "All right, if we own this for the next 10 years in our private credit portfolio, are you fine with it? Because if we buy the whole issue, it's a level three asset. It's never going to trade. But by the way, we have the ability to do that.
46:14 Speaker 02 There's not a lot of pools of capital that can solve for that. We agreed on a price with the company, agreed on a price with the banker. But then we said, "You can feel free to shop our kind of backstop, as long as you guys remember we helped you out." Long story short is it ended up being the best investment grade deal in years. They got it done. They upsized it. We did very, very well on buying it. So it was win-win-win. We did something that I don't think any other investor in the market could have solved for in that timeframe, in that size. And we did it by having three portfolio managers who are in really different disciplines working together. That's where I think we really are differentiated.
46:59 Speaker 02 And it's the strengths we're really trying to play to. There's other examples like that.
47:04 Ted Seides? Yeah, so it's a great, specific example. And as you're walking through it, I'm kind of rolling my head up into, how do you think about risk across the portfolio? Because you have traditional asset class buckets. And in this case, you've got a nominal dollar size that you're going to commit, or maybe commit to this one issue. So when you come in in the morning, what does your risk sheet look like?
47:26 Speaker 02 And we have it relatively simple. So we have kind of our public market equity beta, private market equity beta, public credit, private credit, real estate, and then we have idiosyncratic, which is a little bit of, I admit it's a catch-all, but in that bucket, we try to be intellectually honest about really taking out the betas that we think will persist over time. It doesn't mean within that bucket, there isn't beta from time to time, right? Because manager might have skill, macro manager will have skill in moving around that beta. So there will be beta in the idiosyncratic. But that at a very high level is kind of how we think about it. Given kind of the sophistication of the platform, I can see real time ticking P and L. And one of the really important
48:11 Speaker 02 games you play is you should be able to look at a Bloomberg and know pretty well what your P and L is. And if you're off by too much, something bad is going on in markets. That is a huge advantage that we have given, even with our external allocations, we get real time price feeds on the vast majority of them. So it's pretty easy for us to know where we are. And where, by the way, in the portfolios where we don't have perfect ticking prices, we estimate what that ticking P and L is and true back up to it. So we have a pretty good idea of where we are at any given moment in time.
48:52 Ted Seides? So you mentioned at the outset that you've got this sort of long-term structural portfolio, and then there's this short-term and tactical piece. Where does that fit into the equation?
49:00 Speaker 02 From a tactical perspective, so we have our long-term, where we think we're going to be over the cycle risk-wise, and then we have our policy portfolio, which can deviate from that. Right now, we're lower risk than kind of where we expect to be long-term because we think we're late cycle.
49:17 Ted Seides? And how often does that policy portfolio get reviewed?
49:20 Speaker 02 So the policy portfolio is set by the investment committee that I report to, and we have quarterly board meetings. And then to your question, the investment team and I can deviate from that policy portfolio, and the investment committee actually encourages us to. But I think it's really important that we're measured. Both against that policy portfolio and then over the longer term against where that kind of 60-40 neutral risk portfolio.
49:49 Ted Seides? Okay, and so does that tactical piece end up being where most of that deviation occurs?
49:55 Speaker 02 It occurs both at the beta level relative to the policy portfolio. Our public market beta is lower right now. You also see it flow through in the idiosyncratic leans. The interesting thing is that in the idiosyncratic bucket, I value the beta moves I get from macro portfolio managers. When you look at equity long-short managers, when they move beta, and we've looked at this a lot of different ways, we don't think there's real value added. I actually consider that rolling that back up into where I am in the aggregate versus the macro managers, I'll pay them to make those bets.
50:31 Ted Seides? What's been the most challenging aspect of taking this role?
50:35 Speaker 02 I think it's just earning credibility. I was at UBS for 25 years. I had earned a lot of credibility. You have to kind of start all over and re-earn it to some degree when you come to a platform like this. That was probably the biggest challenge. And then putting a construct in place in terms of the overall portfolio construction was also a bigger task than I anticipated. And probably the third thing was cleaning up the portfolio. I didn't always make friends doing that.
51:07 Ted Seides? How do you calibrate the degree of concentration? So you talked about coming in and saying, wow, we're over diversified. Where are you trying to get to?
51:16 Speaker 02 We're trying to get to returns that are durably better than what you can get from a passive portfolio. And when I say we're over diversified, one of the easy tells is that when you aggregated our external managers and you took out kind of beta, which isn't hard to kind of approximate, we were not getting an excess return. It was zero. And that's you're paying a lot of fees and you're adding a lot of complexity and not getting compensated for it. So I think that's an easy tell. The interesting thing is I've been asked, like, what's the right number of managers?
51:59 Speaker 02 And if you can find really, really differentiated managers.
52:05 Speaker 02 Maybe there's not an answer to that question, but it's really hard to find those differentiated managers. And I think it's gotten harder over time. So we're at, as I mentioned, we have 17 or 16 internal strategies, 20 external. My guess is over time, internal grows a little bit and external probably stays around here.
52:28 Ted Seides? What are the inputs that you use to try to make the decision of, say, shifting from the policy portfolio?
52:35 Speaker 02 I think it's watching pressure points in markets. We have a head of macro here at SFM. He and I sit right next to each other, so there's conversations there. It's watching what your external managers are doing and seeing if there's anything in there that could be a tell. It's trying to connect all those dots and seeing if you think there's vulnerability either to the upside or the downside. It's hard, though.
53:02 Ted Seides? And when you look at yourself and you're evaluating that differential performance of the policy portfolio, what kind of period of time do you think is fair to say, well, we deviated and we've added value, or we were too early, or whatever the case may be?
53:14 Speaker 02 I think it's probably a couple of years. I don't think it's as long as the five to seven year period. I think it's probably two to three years, I think, is the right period of time. We made a strategic decision to take out beta in October of last year, and that looked like a really good decision going through December. And then, you know, basically between here and there. Now I think the MSCI is up just over 3%, but it's been a pretty wild ride.
53:42 Ted Seides? Is there anything that you wish you'd be able to do here that you haven't been able to do yet?
53:49 Speaker 02 I think just get our message out. I mean, this platform is really, really extraordinary. And we get to serve this amazing foundation. And the competitive advantages this place has, if you're a portfolio manager, they're enormous. And I think I appreciate them that much more, having spent the 25 years back at O'Connor and UBS and understanding what other hedge funds and asset managers have to solve for. My biggest goal is just to get that message out and to make sure that we have kind of the best portfolio managers in the world working here.
54:27 Ted Seides? Yeah, well, hopefully we've done our little part in that process today. So I want to turn to a couple of closing questions. What's your favorite hobby or activity outside of work and family?
54:37 Speaker 02 So I ran track and cross country in college, and I love trail running. And I think it's the contrast of being in this beautiful, serene nature and just really pushing yourself physically. And it's really where I do my best thinking. So whenever I get frustrated or caught on something, that's where I go.
54:55 Ted Seides? All right. What's your biggest pet peeve?
54:57 Speaker 02 Healthy people who walk slowly.
55:00 Ted Seides? How about your biggest investment pet peeve?
55:06 Speaker 02 People who quote, "multiple uninvested capital while pounding their chest and give no regard to time value of money or opportunity cost."
55:15 Ted Seides? Oh, nice one. All right. What reading do you almost never miss?
55:20 Speaker 02 So there is a web scraper called The Browser, and they curate five articles a day from really diverse set of magazines and newspapers. And you can't help but read it and learn something that you would otherwise never know.
55:37 Ted Seides? Well, that's great. What teaching from your parents has most stayed with you?
55:41 Speaker 02 Probably the power of persistence and perseverance.
55:46 Ted Seides? Was there a particular way you got that lesson?
55:48 Speaker 02 They never let us quit at anything. It definitely stuck with me. I came from a super kind of athletically and academically competitive family. And as I mentioned, I am the runt of the litter. So you had to be, you know, I had to be tenacious.
56:05 Ted Seides? Yeah. All right. Last one. What life lesson have you learned that you wish you knew a lot earlier in your life?
56:10 Speaker 02 Always bet on the home team getting points.
56:14 Ted Seides? Always bet on the home team with the points. All right, fantasy football players. Great. Dawn, thank you so much for taking the time.
56:22 Speaker 02 Ted, thank you so much.
56:24 Ted Seides? Thanks for listening to this episode. I hope you found a nugget or two to take away and apply in your investing and your life. If you liked what you heard, please tell a friend and maybe even write a review on iTunes. You'll help others discover the show and I thank you for it. Have a good one and see you next time.
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