Ashby Monk – Total Portfolio Approach and the Future of Asset Owners (EP.480)

Dr. Ashby Monk is the Executive and Research Director of the Stanford Research Initiative on Long-Term Investing. Over the last two decades, Ashby has worked closely with some of the world's largest sovereign wealth funds and pension funds on governance, organizational design, technology, and investment strategy. He is also a co-founder of KDX Management, a venture capital firm focused on investech, a co-founder of several startups in the space, and a repeat past guest on the show. His first and most recent appearances are replayed in the feed. Our conversation explores the increasingly popular Total Portfolio Approach, Ashby's perspective on the role of AI and data in the investment office of the future, including his work with Hoopit AI https://www.hoopit.ai/, a very cool relationship intelligence platform, and examples of innovation at Saudi Arabia's Public Investment Fund and the New Mexico State Investment Council. Learn more about our Strategic Investments: Ascension Data https://www.ascensiondata.co/capitalallocators. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (⁠ https://thepodcastconsultant.com/https://thepodcastconsultant.com https://thepodcastconsultant.com/⁠ https://thepodcastconsultant.com/)

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

• 0:00Speaker 00

  You need to understand the total portfolio. Every new investment that comes into the portfolio, you're thinking about the overall risk budget, liquidity needs, all these goals that every pension fund has. TPA begins to think about this not just as an asset allocation project. The word TPA to me feels more like an investor identity project. TPA is the next level of advanced. It implies that you have all of this real time stuff at your fingertips that you can think about. This piece of knowledge that's being delivered to the investment committee. Is that knowledge better than this other knowledge? And then you can act on that knowledge. Well, some knowledge is going to be we've found a manager that does X.

• 0:43Speaker 00

  Over on the other side, it's we've got an ETF that does Y. Now it's the CIO's job to recommend which to do. Finding a way of looking at those different opportunities with apples to apples is really valuable.

• 1:03Ted Seides?

  I'm Ted Seides and this is Capital Allocators. My guest on today's show is Dr. Ashby Monk, the Executive and Research Director of the Stanford Research Initiative on Long Term Investing. Over the last two decades, Ashby has worked closely with some of the world's largest sovereign wealth funds and pension funds on governance, organizational design, technology and investment strategy. He's also a co-founder of KTX Management, a venture capital firm focused on invest tech, a co-founder of several startups in the space and a repeat past guest on the show. His first and most recent appearances are replayed in the feed.

• 1:44Ted Seides?

  Our conversation explores the increasingly popular total portfolio approach, Ashby's perspective on the role of AI and data in the investment office of the future, including his work with Hoopit AI, a very cool relationship intelligence platform, and examples of innovation at Saudi Arabia's Public Investment Fund and the New Mexico State Investment Council.

• 2:06Speaker 02

  Before we get going, as we turn the calendar on the new year, past guest Katie Milkman reminds us that it's a wonderful time for a fresh start, to form new and improved habits, and start small, like the atomic habits James Clear has made so popular. I am going to stop responding to emails prolifically while I travel. My team confirmed that I'm both inefficient when doing so and in a rush to get answers that might do more harm than good. So I'll stop, slow down the decision, and write a funny out of office reminder instead. In the event you're struggling to find a new year's resolution, how about telling someone you encounter about the award-winning Capital Allocators podcast? It's true,

• 2:49Speaker 02

  we've won some awards along the way, but don't worry about that. It sounds really impressive, and you'll sound culturally plugged in for mentioning it. If you do that repeatedly over the next few weeks, you'll form a positive new habit and get in our good graces as we look to expand this year. So you'll have that going for you, which is nice. Wishing you a very happy new year, happy listening, and a warm thanks for spreading the word.

• 3:14Ted 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,

• 3:57Ted Seides?

  and it learns the coverage universe so you can easily turn new insights into the briefs, models, and memos you'd otherwise build by hand. It was designed to work like an extension of your team, so it remembers your projects, follows your templates and processes, and links every output to its source so you can see where each conclusion came from. The best way to judge its quality is to give it a whirl. Pick the research task on your desk before your next committee meeting and hand it to super analyst. Start a free trial at alpha-sense.com/capital and see what it has ready for you. Capital allocators is also brought to you by RidgeLine, the investment management

• 4:39Ted Seides?

  platform 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

• 5:22Ted 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

• 6:06Ted Seides?

  relationships with LPs are the ones that have both strong returns and strong operations.

• 6:13Ted Seides?

  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. Please enjoy my conversation with Ashby Monk. Ash, great to see you.

• 6:41Speaker 00

  Great to be here again. How many people are in the four-timer club?

• 6:47Ted Seides?

  We don't keep track of things like that.

• 6:51Speaker 00

  I have to tell you, even though this is the fourth time, it is scary. You have such a remarkable impact in the world now, my friend.

• 6:58Ted Seides?

  Well, thanks. Let's kick it off with this continued focus you have on the largest asset owners of the world. Why do you think that's so important to do?

• 7:08Speaker 00

  They have quietly become the most important organizations in the world. And I don't put a caveat on that one. They are the cornerstone of our modern social welfare state. They are integrated into so much policymaking from Saudi Arabia to the United States to Australia. As banks have been regulated out of risk-taking, they have become the capital in capitalism. I continue to be focused on these asset owner investors. I talk to so many students that still do not know what pension funds do and sovereign funds do.

• 7:50Speaker 00

  There's a whole ecosystem of young people that we need to drag along this journey, which is why what you do is so important, because a lot of people do listen to your podcast and they'll show up asking me about asset owners because they wanted to learn about investing. I wish more people knew about this industry that we're passionate about.

• 8:10Ted Seides?

  How's the work that you've done with them evolved over the last few years?

• 8:14Speaker 00

  If the first decade of my career was about design, governance, process, the second decade or so began to blend data, technology. The last five years has been a pivot for me into data analytics, software technology, tech enablement. You can't do investing without good governance, without culture, without technology. It's which leverage point you're going to go after to drive the change you want to see in the industry. And so for me now, that leverage point is largely tech, but tech touches everything. We can't talk about TPA without tech.

• 8:57Ted Seides?

  We've been talking about TPA, Total Portfolio Approach, for a while. It does seem like in the last year, maybe with Steve Gilmore going to CalPERS, that more and more, you're starting to hear about this as a thing. I'd love to hear your own description of what TPA is.

• 9:17Speaker 00

  Dare I say, old wine in new bottles. When we came out of the financial crisis, we ended up with this factor-based asset allocation and work by Andrew Ng, but also Dimson and a few others that were going into what are the true nutrients of return? Those nutrients were thought of as factors. If you were a really forward-thinking investor and you wanted good diversification and not to have all your assets correlated in a crisis, you would think about your diversification across those factors so that when these crises hit, your jaw down wasn't quite as severe. I think of that as the beginnings of what we are now calling TPA.

• 10:00Speaker 00

  You need to understand the total portfolio. Every new investment that comes into the portfolio, you're thinking about the overall risk budget, liquidity needs, all these goals that every pension fund has. TPA begins to think about this not just as an asset allocation project. The word TPA to me feels more like an investor identity project. We often think of asset allocation as the biggest driver of return. That's the Brinson work. But asset allocation can't just be set in a vacuum. You can't just say we're going to do factor-based asset allocation if you're CalPERS.

• 10:44Speaker 00

  I can remember having a conversation with the late, great Joe Deere, who was the CIO at CalPERS, coming out of the financial crisis. And he explained to me that his goal was to do factor-based asset allocation at CalPERS. And he even talked about how he was going to do it inside an organization that was designed along product categories. He had this ambition to create a translation committee that would translate a factor-based asset allocation, a total portfolio approach, to a product-based strategic asset allocation with bucket filling. And I think the fact that we're 15 years on from that moment and we're here talking about CalPERS' attempt to do TPA tells me

• 11:28Speaker 00

  that original project at CalPERS probably didn't go the direction they were hoping, because here they are trying another total portfolio approach. It's a very exciting moment. Just as we came out of the financial crisis, we had factor-based asset allocation and we had in-sourcing. We had the Canadian model taking off. This is the new model. People have looked at New Zealand, GIC, Canada Pension Plan, and they've said, wow, there's great performance there. How do we replicate that? But it's going to be hard. TPA, to the point of my life's work pivoting from pure governance to almost pure technology,

• 12:09Speaker 00

  getting TPA right means you have to build this nerve center at the center of the organization. You are aligning everything with an organization's goals. Our risk budget, liquidity, cash flows, capabilities, our people. Everything is thinking about how this portfolio connects to our goals. To do that, you need to know where your portfolio is today. What are your exposures? What are your assets valued at? The more you have private markets, that's going to be hard. I don't know any plans today that are really good at valuing their private assets.

• 12:52Speaker 00

  It's incredibly difficult to bring realtime valuation into venture capital, private equity. This whole TPA push is designed for organizations that do less in privates. You can do it. There are places that have big alternative buckets that take a total portfolio view, but you really need to invest in your organizational capabilities. You have these gears. Anytime you shift your asset allocation gear, there's a consequence on your organization and your implementation. If you're going to go from a strategic asset allocation to a total portfolio approach, that's a shift in asset allocation. Can't do that in a vacuum. You're going to have to completely change your organization and how you're implementing

• 13:37Speaker 00

  it. And that's the part that we'll need to watch and see how people do.

• 13:41Ted Seides?

  For a pool of capital that's deeply ensconced in strategic asset allocation, where the way they report multiple asset classes are, as you say, these products, but ultimately they need to roll up risk. They need to measure what they have so they understand where they are. How different is it from someone who starts with a sophisticated strategic allocation to say they're now going to use TPA?

• 14:07Speaker 00

  It's very different. If you're shifting people's incentive compensation to align with a total portfolio approach, you're building analytics that allow you to look across real estate, infrastructure, timberland, hedge funds, on and on and on, understand where you're going to squeeze that next unit of return out of the risk available to you. It's very difficult. It's the fully advanced level of investing. It's the future. 22 years from now, we'll be like, total portfolio approach. That's so funny. We weren't doing that. It's like asset liability management. I'm old enough to remember in 2001 where we were like, wait, we need to link assets and liabilities? That's the way we'll see TPA.

• 14:49Speaker 00

  Right now, you need to have a GPS for your portfolio, global positioning system. So let's call it a portfolio positioning system for your portfolio. Where is everything now? Because if you're going to make... Real time changes to your asset allocation, you need to know where you are to choose left or right. You then need to know, what kind of car are you driving? How are you getting from A to B? Because that's actually going to have an effect whether you choose to invest in hedge funds, private equity, et cetera. That's your identity. Then you have to have this map of the opportunity set. And we need to be much better at forecasting and predicting the future. I can remember the New Zealand Superfund, which is one of the best total portfolio investors,

• 15:34Speaker 00

  having to scrub out all of the individual portfolio links to their compensation. It was total fund qualitative metrics for compensation. That's hard. A lot of people are still compensated based on their own individual portfolios. So it's hard to tell them not to do deals for a year when their asset class goes out of favor.

• 15:58Ted Seides?

  People have asked me about TPA. The hardest thing to describe is the difference in the unit of work. Strategic asset allocation, we have our buckets. We're going to go find managers to fill those buckets. If you're now in TPA, how does the individual investment decision differ from that in the strategic asset allocation?

• 16:21Speaker 00

  The unit of work becomes knowledge work instead of deal work. The unit of work is different. It's not capital deployment. It's not bucket filling. It's something else, moving you towards your objective, intelligent understanding of additionality in your portfolio. That's why I say TPA is the next level of advanced. It implies that you have all of this real time stuff at your fingertips that you can think about. This piece of knowledge that's being delivered to the investment committee. Is that knowledge better than this other knowledge? And then you can act on that knowledge. Well, some knowledge is going to be, we've found a manager that does X. Over on the other side, it's, we've got an ETF that does Y.

• 17:05Speaker 00

  Now it's the CIO's job to recommend which to do. Finding a way of looking at those different opportunities with apples to apples is really valuable. I have a soft spot for the SAA people that got a board that isn't an expert board. So an SAA is actually useful. And keeping us tied to the mast.

• 17:29Ted Seides?

  How much more movement, whether it's turnover or refinements within a TPA approach is there from their initial reference portfolio or an SAA model?

• 17:42Speaker 00

  If it's done well, there's a constant reflection on whether or not this opportunity coming in adds value. So some of it is a bottom up understanding of deal sourcing and deal opportunities. You would add a deal if it improves the portfolio and you wouldn't if it doesn't. You could imagine where you're quite happy with your portfolio and you're just watching it. That's a very hard thing to do, sit and do nothing. We're giving you the power to make pretty tactical moves. People don't like saying TAA in relation to TPA because it makes people feel the short-term possibilities of TPA. It is there. Once

• 18:24Speaker 00

  you have these systems in place, you could pivot around beliefs, assumptions. It also allows you to be countercyclical very quickly. If markets move quickly, you're going to be able to buy low. And if you feel like things are inflated, you can sell high. I am a big fan of countercyclical investing for long-term investors. We'll see how a lot of these CIOs like Stephen Gilmore and others implemented.

• 18:49Ted Seides?

  When so much of the long-term drivers of strategic asset allocation returns have been private market investments, venture capital, private equity, and you mentioned it's not really designed to incorporate that. How does a pool who's trying to implement TPA think about that trade-off of the flexibility versus what's historically been the return driver in these asset owners?

• 19:14Speaker 00

  There's a couple of hybrid versions where there is basically an underlying commitment to each traditional asset class. 50% is going to go to the traditional buckets, which looks and feel like bucket filling, and 50% is that TPA around the reference portfolio.

• 19:34Speaker 00

  By the way, that's going to help you to recruit and retain human beings. It's hard to recruit into a TPA. You recruit people into private equity jobs, real estate jobs. Cause we demand, especially at the senior levels, a certain level of expertise and networks that goes into being successful today. There's a question about whether or not that's the recipe 10 years from now, but today it's the recipe. Having that hybrid version of TPA would allow you to recruit people and retain people into it. As it relates to the private markets, there is this strong tension. If you're a big private equity infrastructure investor, you're probably a little nervous about the TPA push.

• 20:17Speaker 00

  It's hard to do TPA when you're making a 15 year commitment. You're planting seeds that are going to take a long time to grow. It's harder to move around that portfolio and add asset allocation alpha. When it's done well, it goes back to this notion of every deal that comes in is judged in relation to everything else in the portfolio. Doesn't mean that you're not doing private equity. It just means that you're judging your private equity in relation to everything else. And you're thinking about the cost of this illiquidity. And is it better to maintain optionality? Or is it better to bury this in the ground and generate 22% returns?

• 20:59Ted Seides?

  I want to circle back to this thought of your pivot to technology. Everyone's talking about AI. What have you seen in different use cases of AI tools for the asset owner community?

• 21:13Speaker 00

  A lot of asset owners are thinking in terms of automation. What FTE can we automate? It's a natural place to start because you think about artificial intelligence as replacing human intelligence. I don't love that framing. I love thinking about how technology unlocks additional basis points of return. It gives permission to pension funds to spend more money. Especially on the initial setup costs of getting your data right. There's a big piece here, which is technology enables two things for every investor. One is speed, get to where you're going faster. And the other is insight.

• 21:57Speaker 00

  For 4,000 years, I would argue, most of the tech innovation that went into our industry was speed. You can go back to the Babylonians and look at cuneiform tablets and you can literally see regressions being done on these cuneiform tablets around the depth and flow of the Euphrates River and commodity prices. We're still on tablets today. It's just they're digital. That tells me most of that tech advancement has been about speed. But in 2016, we had AlphaGo. We had the beginning of this AI moment. That AlphaGo case study, you see this moment where inhuman intelligence revealed itself for the first time for most of us.

• 22:42Speaker 00

  The machine did a move that had never been trained on before. It was an inhuman move, move number 37. In fact, all the humans in the room thought the move was a mistake. The move ended up to be the winning move. So all of a sudden we realized, oh, wow. When you define the rules of the game for these machines and you unleash them in these generalized adversarial networks, they create moves that we hadn't even thought of. That's inhuman intelligence. And so moving from speed to inference and insight, is this great unlock? That's what I'm mostly excited about. And that inference is going to benefit the long-term pension fund investors.

• 23:27Speaker 00

  They're the ones that are managing assets over longer horizons where inference insight have enough time to get priced. When I'm working with pension funds, a lot of the technology that we're applying AI to are simulations, models, projections of the future. You got to get data clean. You got to get it matched. You have to have a security master. This is what a lot of the work that's going on right now in pension funds. They're spending a lot of money on their portfolio positioning system, their source of truth. What you build on top of that source of truth is the insight that allows you to understand where your portfolio is and change it.

• 24:08Speaker 00

  Not just automate away a lawyer, which is probably great, but to use the technology to say, gosh, I thought we were in a different position than we are, and now we should change our portfolio.

• 24:22Ted Seides?

  There's two ways of assessing the data as you've described it. One is looking at what you own and making sure you understand your risk factors. And the other is trying to predict what might happen. How do you think about the possibility of these AI tools going from understanding what you own to helping a CIO make judgments about where they want to head?

• 24:50Speaker 00

  This is one of my favorite topics because the investment business, we're crystal ball gazers, we're tarot readers. We're living in a world where we are trying to predict the future. Human intuition, gut feel, these are the things that most of us are using. And so the question becomes, what happens when you have really trustworthy, reliable data upon which you can begin to build analytical engines that reveal new knowledge about the world? Right now, where we get knowledge are from podcasts. We get it from books. Other people have gone and done the work and now they're giving us knowledge. But you can imagine a world where knowledge gets built from the bottom up in your data.

• 25:34Speaker 00

  You're starting to spot patterns, heuristics, shortcuts. Those are all code words for knowledge as are algorithms, basically. Code words for knowledge. We're going to build this knowledge on top of clean data. I often think in terms of navigation. It's a very easy way for people to pull themselves out of the investment industry where we have a bunch of priors and say, well, what's happened over the last 20 years in personal navigation, going from where I am today to my destination, my goal?

• 26:04Speaker 00

  Lot has changed. When was the last time you pulled out a Rand McNally map? Well, what happened was we got a GPS that told you where you are. Google then went and indexed the world. So we know the universe of destinations. We had all this alternative data coming into this ecosystem to tell us of the possible pathways to take me from where I am to where I'm going. And the overlay for the investment industry that I think is really important is the type of vehicle you're driving or you're traveling in is incredibly important to connect you from your current location to your destination. We understand your portfolio. We understand your goals, your preferences, that's your destination.

• 26:47Speaker 00

  Let's maybe stop calling our destination an expected return target on an annual basis, which is again, an intermediate goal rather than a true goal. And we can start to communicate that goal in the cash outflows. Now, machines, once they know your current position and your cash inflows, and they know your outflows and all the scenarios around those outflows, machines can start to optimize and really understand the universe of options available to you. The important part is to say, because we understand you, Ted, and we know your resources, your people, your process, your information, we can see where you are on the map, your portfolio.

• 27:32Speaker 00

  We can layer, just like Google Maps does, the different risk factors. We can see the satellite view, we can see the traffic view, we can see all these things on your portfolio. When the AI starts to optimize between your destination and your location today, it will give you very unique guidance. So I often get asked, won't AI just tell everybody to buy the same stock? That's a very short sighted moment of AI, which is yeah, if we're supplying AI to the outside world of investable opportunities, maybe it's going to tell everybody to buy the same stock. But that's not the way we're going to apply AI in our world.

• 28:15Speaker 00

  It's going to be more like when you pull up your Google Maps and say, Give me directions to In-N-Out Burger. It's going to tell me, hey, Ashby's in Los Gatos. The nearest In-N-Out Burger is the San Jose Airport, but the line is too long at San Jose Airport. So it's going to direct me to Palo Alto because there's no line. Because Google knows that my destination is the hamburger. It's not the back of the line of In-N-Out Burger. Think about how powerful that is. That's where the human beings in these organizations will become the co-pilot to the AI, rather than the AI being the co-pilot to the human beings, because they're going to have all the data

• 28:57Speaker 00

  and they're going to have that customization available.

• 29:01Ted Seides?

  As we take this from the conceptual stage of what allocators in general are doing to some of the ones that you've seen and worked with that are doing interesting things, would love to hear some examples of what you see as some of the most interesting things happening in the allocator world.

• 29:19Speaker 00

  Because innovation is hard in this industry. We don't often see R and D teams inside pensions. The really interesting pension funds, sovereign funds are those that are trying new things, new models. The way that best practices are transmitted around the industry is when a new model drives high performance, then everybody else looks around and says, oh, hey, how did they do that? And could we do that? Is our organizational identity similar enough to do that? And that's what's happening right now with TPA. People have seen the high performance of New Zealand Superfund over 20 years, and they're saying, how do we get a little bit of that?

• 30:01Speaker 00

  You literally have CalPERS hiring the CIO of New Zealand. Well, where can I find places that are taking on big, grand challenges and trying to build new models? The most interesting sovereign funds feel like they have a development angle right now. The two that I would flag are PIF in Saudi and New Mexico's State Investment Council. Not all that similar when we dig into it. The PIF, trillion-dollar-ish organization, started over 100 companies. This is a sovereign fund. Think about how different that is. This sovereign fund has started over 100 companies.

• 30:46Speaker 00

  Even more than that, the Crown Prince of Saudi Arabia has said that he wants Saudi Arabia to be net zero by 2060. Saudi Arabia, that is synonymous with fossil fuels. For the Crown Prince to say, "We're going to go to net zero by 2060," and then point at the PIF and say, "This is my lever for change." We can all get excited about that opportunity to watch and see, can PIF take this place that is the global epicenter of fossil fuels and help turn it into a net zero economy? Really fun project there that if they need help, we should all be interested in seeing

• 31:28Speaker 00

  that through, because if you can get Saudi to net zero, haven't we sort of by definition avoided climate change? The next one is the State Investment Council in New Mexico. Similar idea, it's a sovereign fund. A lot of the wealth comes from the subsoil assets, a lot of it coming out of the fracking boom. The exciting thing about New Mexico is that the goal is education. They are taking the assets under the ground and through this investment vehicle, they are creating a generation of educated humans. That's the difference from a pension fund, where you're taking all of this wealth and you're creating retirement security. They just made this announcement that they're going to do universal childcare from zero

• 32:13Speaker 00

  to four. That's only possible if they manage to invest this capital well. That's, first of all, the cornerstone of the modern social welfare state. What a neat illustration of how these organizations can have a tangible impact on people. You're going to see that in New Mexico. Because of the scale of that organization, they're going to add $20 to $30 billion. They will soon be the biggest sovereign fund in America, passing Alaska. There's an opportunity to say, "The model that was working there for the last 10 years probably needs to change." So the door is opening because of the scale coming into that organization to think about what's next.

• 32:57Speaker 00

  I love those moments where the board says, hey, we probably need to change because of some dynamic. In this case, it's inflows are coming so fast, they're going to need to change. The other piece that's fun about New Mexico is they are maybe the biggest developmental investor in America. Not because they are mandated to, but because they see it as an opportunity to connect the investment fund to the local population and drive positive impact. They also see it as an opportunity to drive alpha. That's where I get excited because that's when things can be repeatable role models.

• 33:37Speaker 00

  Very few pensions are going to copy a development fund that is delivering 2% return. But if there's a development fund, like a Tamasak, that is out there driving really high performance, then all of a sudden, they could become a role model that gets copied. That's SIC's ambition. What's in New Mexico? Two of the national laboratories, Los Alamos, Sandia, there's amazing universities. They have a burgeoning venture ecosystem. There's energy, a spaceport that they're working on where people are launching rockets into space. Both those funds, PIF and SIC, are developmental investors that are taking this really long-term view.

• 34:20Speaker 00

  And they are combining these objectives, whether it's education, net zero, diversification of the economic base. They're combining those goals with high performance. They won't achieve those goals unless there's high performance. That's a recipe for something exciting that might show us new ways, more resilient ways of investing.

• 34:43Ted Seides?

  Something like New Mexico, where it's been around for a long time. There's a lot more money coming in, has fresh capital to put to work. How are they thinking about that objective of driving high performance?

• 34:57Speaker 00

  In the case of New Mexico, it is about understanding their comparative advantages, which is obviously the state. Santa Fe is a beautiful place, so you're going to be able to recruit amazing people to go live there. They have recently done an upgrade to the compensation. You can go and make a life in Santa Fe, working for a spectacular organization that's mission-driven. So that's part of it, is recruiting the right team. They have an opportunity to leapfrog in technology, which is another way of saying maybe the technology wasn't very good until recently, but maybe it's actually to your benefit to be entering the AI age with a clean slate,

• 35:41Speaker 00

  but also a thoughtful approach to asset allocation that has delivered good performance. So the team is pretty solid. The neat thing about the moment is defining the organization for the future is in the hands of whoever the next CIO is. Part of the reason why I'm being cagey is I don't want to close doors for whoever's next. I want to make sure that whoever comes in can look at it with fresh eyes because that's probably one of the coolest jobs available. If you get the right person, they might have a totally different perspective than me on what the opportunity set is, and that would be great.

• 36:20Ted Seides?

  Who else is doing cool stuff?

• 36:23Speaker 00

  Our friend Jagdeep is trying to buy college leagues. That's fascinating. We have the Maple Eight, but we also have the Aussie Eight because of the consolidation that's gone on down there. There's now the Big Eight Australian Superfunds. They're doing a lot on private market real time valuation because you can move from one super fund to another super fund in real time. They're in competition with each other, which drives a lot of innovation in that space. There's another one, PGGM in the Netherlands. So they're about to launch their version of TPA, which is exciting because PGGM has

• 37:03Speaker 00

  what they call 3D TPA, three dimensions, risk, return and impact. Every deal gets analyzed in terms of those three dimensions. That's very hard to do. They've had to do a complete organizational upgrade. It will give them unparalleled insights into those long horizon risks and uncertainties. Everybody is trying to grapple with AI right now. If AI has done anything for me, it has unlocked resources for tech and data. Most of the big investment organizations are now setting aside money to experiment with AI.

• 37:43Ted Seides?

  On that venture capital side with your fund, KDX, what are some of the most exciting features that you've seen serving the asset owner community?

• 37:55Speaker 00

  The one that is breaking out right now does private equity and real-time valuations. That's Shelton AI, working with a lot of the supers and Canadians to do the private equity marks. The reason I got so excited about this company in the beginning was the founders, a spectacular human being that the chancellor of Berkeley once told me was one of the smartest people he'd ever met, which means something. This young guy, Harrison Shaw, was excited about fees and costs for private equity, which there's not many people that share that passion for aligning interest between LPs and GPs.

• 38:38Speaker 00

  One of the features of this toolkit is called Verifees, where literally it is a real-time audit, the fees and costs being charged by GPs. You'd be surprised, Ted, the GPs actually want it too, because turns out, GPs don't want to make mistakes and be embarrassed. Most of them want to get it right. With all of these endless side letters, it can be hard, if you're a big fund, to get it right. I like the systems that study inside asset owners. A lot of the systems that I see others investing in are hedge fund tooling, understanding the outside world.

• 39:17Speaker 00

  There's two companies in our portfolio that are taking a lens on internal understanding. One is called GrowthSphere, where when you onboard, it goes through your investment beliefs, your strategy, your goals, all that stuff. It seeks to model your process. It can even generate memos. I would describe the right way to use it as red teaming, because most people are uncomfortable handing decision-making to AI right now. But if you were an investment committee, the way that you would use a gross fears to say, all right, this system understands our organization about as well as anyone on earth, because that's part of the process of the AI.

• 40:02Speaker 00

  And when a deal arrives at an investment committee, let's have the investment team load up all the deal docs in gross fear and present a report. And you can prompt the report and say, hey, make this quite negative on this deal. Or we have an assumption that we need to be net zero by 2050. Those are the types of things that AI can on the flip, you hit reprocess. And all of a sudden, you've got a new 50 page memo that takes that stance. It's remarkable for me to watch those things. The unlocking of language in our investment analytics is this new exciting thing. The other one that goes internal is called Hoopit, where it tries to find the people in your

• 40:47Speaker 00

  network that you are sort of connected to. You can imagine it is if Google is like, what search and chat GPT is how? This one hoop it is who? I need somebody for X. Who should I talk to? And rather than just doing a universal search across the world, goes into my network. And these are people that I have connections to will say, you went to college with this person and you probably think of them as a very good rower. But do you know that now they run an insurance broker? Those are the type of things that we all lose touch with. Hoopit is the toothbrush company. You use it twice a day. Because inevitably I have students or portfolio companies coming to me and saying, hey, can

• 41:32Speaker 00

  you help me get access to fill in the blank? How many times are you and I sitting there being like, I think I have connections there? I just run a hoop is what we call it. And the hoop then goes and unlocks all of these people.

• 41:45Ted Seides?

  What are the areas when you're looking at allocators now that you just think they're still hopelessly behind or weak and need improvement on?

• 41:53Speaker 00

  Oh, I'm so empathetic. Now, I wrote that paper, The Investor Identity. Understanding the context is so important. You can't do asset allocation in a vacuum. I'll meet a CIO at a medium county pension plan who's like, yeah, we're doing 14% in private equity and 8% hedge funds. And I think to myself, you're one person. You're so reliant on the consulting industry. And maybe that's okay. Maybe that works. How do you pick your consultants? That's the question you got to ask. It's a different question when you're talking to the PIF. You've started 103 companies. How do you pick which companies to start? Understanding their process, their governance, their people.

• 42:38Speaker 00

  I run this analysis. It's like a version of SWOT. Strengths, weaknesses, opportunities and threats. I think of it as categorical advantages, cultivated advantages, weaknesses and goals. Categorical are the things you're born with. If you're the State Investment Council of New Mexico, you're born in New Mexico. If you're Alberta, you're born in Alberta. That's where you are in the world. It's going to guide the people you can recruit. So I was born in Edmonton. You might be able to convince me to go back to Edmonton. They could probably never convince you, Ted, to go to Edmonton. It's very cold in the winter, minus 50. There's not even skiing nearby. It's a lovely city. You could probably convince me. That's the context of the category that you're in. Where are you born?

• 43:22Speaker 00

  Are you born on Yale's campus? Are you a foundation? Are you a national pension? Are you a state pension? All those types of things. On top of that, what are the cultivated advantages you've sought to build? If you're TIA, it's agriculture. If you're New Zealand, it's TPA. If you're Yale, maybe it's venture capital. But then you got to go look at the weaknesses. And this is really what your question was. So what are the weaknesses? And inevitably, the weaknesses are very long and painful because these organizations often live inside bureaucracies. They may be the base of the capitalist system. But they are rarely described as capitalist. Compensation isn't quite market.

• 44:05Speaker 00

  The processes are often defined by bureaucracy. So oftentimes, a pension fund will say, oh, we're really innovative. We're an amazing partner to our funds. They bring us a co-investment and we respond in 15 days. I have to remind them, what you've just described is speed and efficiency. It's the opposite of innovation. Because to be a good partner, you have to move fast. And you have to be on time. Whereas innovation is messy, there's failure, and sometimes you're disappointing people. I know that all too well. When we start thinking about overcoming the weaknesses, how do we build an engine of innovation inside these funds?

• 44:47Speaker 00

  In practice, we're struggling with data and tech incentives, still working through governance issues. How do we get the right capabilities on boards? I think I saw the first technologist at a Canadian Maple Eight applied to the board and is appointed to the board now. Forever, we were like, how do we get people with finance backgrounds on boards of pensions? Just as we're sort of achieving that, I'm going to turn around and go back to them and say, we need technologists, people who've built data infrastructure. We need the right skills on these boards. If you're going to make a $100 million investment in technology,

• 45:29Speaker 00

  which isn't that crazy if you're a $500 billion fund? Wouldn't it be great to have a board member who really knows about building advanced analytics and data, mission-critical systems and all that stuff?

• 45:42Ted Seides?

  As you try to push the agenda of technology and innovation on some of these large plans, there's still a fair amount of investment activity that is just an LP investing in a GP. How have you encouraged the asset owners that you work with to think about the dynamism of that relationship?

• 46:04Speaker 00

  On the GP side, I often say, you want to build a partner program with pensions. That's great. What's your definition of partnership? Well, to the GP, it's often, well, we don't have to fundraise for very long. It happens in two months instead of two years. That's not what the LP is looking for in a partner. So I often tell GPs, the sign of a good partnership is you help drive a change in your partner's portfolio that you don't get paid for. Imagine that. You gave them a piece of advice. You introduced them to somebody. That's the type of partnership that the pension funds want out of their manager relationships. You can codify some of these in contracts.

• 46:48Speaker 00

  No fee, no carry, co-invest, or right of refusal on the next fund. That's possible, but if it's codified in the contract, it almost goes outside the partnership. What I'm talking about true partnership is what happens outside the contract. And you're not interpreting every gray area for yourself. You start interpreting gray areas for the benefit of your limited partner. That's what the limited partners want. They want deep relationships. They want to understand what you're doing and why you're doing it, especially as the TPA comes on hold to tie it back to that. If you're a good hedge fund manager or private equity manager, that knowledge of how markets work and what you're looking for could be invaluable to a CIO that's really thinking

• 47:32Speaker 00

  about what risks are the right risks for our fund to take right now. That true partnership is what we're looking for. GPs are going to have a role. This is why I'm so passionate about seeding managers and building an ecosystem of new talent. And I'm constantly pushing pensions. How are you investing in Fund One? Not Fund Three. If you only invest in Fund Three, you've decided you're going to overpay for managers because they don't need your money. If you're investing in Fund One, you're building a really thriving ecosystem of managers thinking about new technology, new data. They're not just managing their reputation. They're not just clipping the coupons from prior success.

• 48:17Speaker 00

  There's a lot of hungry managers, spectacular managers that are in Fund One that are desperate for your capital. That is really a neat opportunity.

• 48:26Ted Seides?

  When it comes to developing talent inside the investment office, you've had a few new initiatives to train young people on the asset owner side. Love to hear what you're doing there.

• 48:39Speaker 00

  We've invented a new fellowship. We had an observation two or three years ago that it was difficult to take the best undergraduates and put them on a trajectory to land in a pension. That's not quite true in a place like Canada or even Australia, where those funds play an outsized role in the capital markets. But in America, most graduates of Yale, Harvard, Princeton, Stanford, Berkeley, they barely know what a pension fund is, let alone a sovereign fund, let alone the difference between a reserve investment corporation and a stabilization fund. We wanted to make working at a pension fund as cool as it possibly could be so that young people got excited.

• 49:23Speaker 00

  We looked at the success of Teach for America and taking all these amazing young people and placing them in inner-city public schools. For a long time, that was the most difficult job to get in America was to be a core member and teach for America. And you would have the honor of going to a really difficult classroom. And as somebody who teaches, it's not that luxurious of a gig. It's pretty hard. We wanted to tap into that cool factor with young people. We were lucky to have a very willing partner in CalPERS. CalPERS was ready to pay for four fellows a year. We were lucky to have a university

• 50:05Speaker 00

  that was willing to build an experimental fellowship. The contours of the program, you apply like it's a fellowship. We get hundreds of applications for four spots, which builds the brand. I will admit that I'm excited about those hundreds of applications because every one of those kids has to learn about CalPERS and pension funds. They have to write two essays. They have to go and get three letters of reference, which means those people are having to learn about CalPERS and what the job is. One application cycle, I've now educated thousands of people just to pick four to six fellows. So that's part of the goal.

• 50:47Speaker 00

  We then pick these four superstars and we have graduates of Berkeley, Stanford, Princeton, Harvard, Yale. All of those people are part of our fellowship program. They spend a year working at CalPERS and now we have a second pension, Orange County. They're on deal teams, they're learning, they're operating. We work with CalPERS in Orange County to understand the profile they're looking for. Are you interested in AI? Well, guess what? We've got a graduate of Stanford Computer Science who did a co-term in AI. Do you want that person? Because that person could go to Citadel or that person can spend a year at a fellowship in CalPERS or Orange County. That's the type of caliber we're looking for.

• 51:31Speaker 00

  And because it's a year fellowship and it's this cool thing that you win, they say yes, these kids. So we get these spectacular humans going to work at CalPERS. That was the program idea for building up direct pipeline to place the best and brightest minds from undergraduate in public pensions and see if we can build this alumni network of fellows. We say to them when they go in, we'd love for you to stay at CalPERS. CalPERS would probably love for you to stay at CalPERS. We'd want you to understand this space. Bring change and think about this space and understand alignment of interests and what they need. And we set ourselves the goal of having one stay every year at CalPERS. And we achieved that goal in year one.

• 52:16Speaker 00

  We have one person staying right now in their second year at CalPERS.

• 52:21Ted Seides?

  Alongside the teaching, alongside the work with these funds, alongside your venture fund, you seem to dabble in podcasts every now and then, hopping in and out. I'd love to hear about your experience and the podcasting that you're currently doing.

• 52:35Speaker 00

  There was a realization not too long ago that you could spend an inordinate amount of time writing a book, writing a paper, but it's the tweet or the podcast that captures the imagination of everybody. You probably need to do that other work to be able to write the tweet or the podcast, but you don't get that other work paid attention to unless you do that next level of engagement, meeting people where they are. Where they are is not in the Journal of Finance or the Journal of Financial Perspective. I do think a lot of people are reading working papers on SSRN and things like that, but not many people are subscribing to journals outside of academia. Those podcasts are part of our work at Stanford.

• 53:18Speaker 00

  They're on the Stanford website. They're on SLTI, Stanford Long Term Investing. They're meant to come at innovation and institutional investment from two perspectives. The first perspective, which is the Don't Get Fired podcast, is the CIO perspective, where we've realized that much of the innovation in pension funds is courage-based. Some leaders fed up and they're willing to put their job on the line. My friend Prabhu Pallani said on the podcast, "I'll dare them to fire me," pounding the table. This has to happen. The Don't Get Fired podcast is meant to share stories of innovation where people didn't

• 54:03Speaker 00

  get fired. Those people managed to pull it off, and we want to build repeatable role models for how innovation gets done. So you can go try whatever they've done, and you can point to this case study that's live in a podcast for your board to listen to on how it got done. That's the innovation from the CIO perspective. The second one is about explaining what new technology is coming to the investment audience from the lens of the founders of tech firms. We just recorded our fourth and fifth podcast. There's three on the site. It's called the Technologized Podcast. Dane Ruck and I, Dane is my co-host, we wrote a book called The Technologized Investor in 2020.

• 54:48Speaker 00

  It's kind of an extension of that work, trying to show everybody in our community what's coming. They're early-stage companies. These are companies that are in my portfolio, or they've been through the screener. I can vouch for the scalability of their tech. They're not going to disappear. And we want to hear their perspectives and share them. You see people be like, we're the Uber for X, or we're the SpaceX for Y. There's all these pattern matching algorithms that happens in the startup world. I want to start presenting possible pattern matches, so that if a new founder comes along, they can say, we're

• 55:30Speaker 00

  the Shelton for Timberland. And that's the way of framing what they're doing. And I think that's how you build more momentum behind the tech innovation in an industry. So I hope the Technologize podcast, over time, gets listened to by students and founders, not just the investment space. I don't think we do a great job of explaining to technologists what we do as pension funds. What is on your docket in terms of research projects that you're working on? I got three or four papers I need to finish. The first one with my friends Evan Greenfield of BCI and Dane Rook of Stanford with me. We're doing an ESG is awesome paper.

• 56:14Speaker 00

  So I love to go against the grain. I have to say, I was one of the first original haters of ESG five years ago, because I was like, we're just talking about policies. We're not talking about facts. But now that everybody hates ESG, I feel this obligation back to it. We've done this project where we have revealed in three different transactions, the economic and financial uplift from ESG. Nothing to do with society being awesome, or governance being our priority or environment. It's about how ESG drives financial performance. So that's coming. I'm doing another paper with Joseph Sines of Fremont. And you'll

• 56:55Speaker 00

  notice I'm doing more co-authoring with investors. I find I need that connection into the organization sometimes. It's been a really fun process to.

• 57:06Speaker 00

  Write more with the investors themselves. Joseph and I are passionate about neurodiversity as a superpower. If you're in the investment industry, it won't be a surprise that there's a lot of neurodiverse people. You maybe don't call them neurodiverse. You call them geniuses or brilliant, or he's idiosyncratic, or, boy, he's direct, or she's direct, radical candor, whatever the culture is at Bridgewater these days. There's some neurodiversity throughout our industry, and we're trying to write a paper that says, this is how you can see the same data set differently. And that's the pathway to alpha.

• 57:46Speaker 00

  Joseph and I have done two different surveys of major groups, seven or eight case studies. We're starting to unravel how neurodiversity gets integrated into organization and delivers outperformance, but then also how organizations accommodate these different ways of working. Google and Facebook and all of the accommodations they were making for engineers, dentists, doctors, dry cleaning, and dog walkers, all these things that were there to allow the engineers to put their headphones on and just focus. You see some of that in hedge funds. People will be frustrated that we're putting a label of neurodiverse on there, I'm sure.

• 58:28Speaker 00

  That's what it's called, and as somebody with dyslexia, I'll own it and be that person for you. It's a superpower. I promise you, it makes my life challenging at times. So that's my second big project, and I want to describe the gears of innovation inside pension funds and sovereign funds. I've gone through and I've done 20 case studies of what I would describe as a catalyst model for innovation. What are the triggers that allow an organization to pursue an innovative path? The classic one is a crisis, internal or external. The next classic one is a leader. That leadership change leads to some new innovation, and on and on and on. So that's the third. And there's more coming.

• 59:13Speaker 00

  I love the writing stuff. It informs a lot of stuff I do outside of academia.

• 59:17Ted Seides?

  All right. I just want to ask you a couple of closing questions and then we'll wrap it up. Before we get to the closing questions, I want to tell you about one of our strategic investments. We've made a few and each are working on a product or service we think will be valuable to our community. One is Ascension Data. Ascension provides workflow software for compensation that allows you to track, plan, and take care of your team. We're excited for you to check out how they can help solve the sticky pain point of compensation. There's a link in the show notes so you can learn more. And here are those closing questions. What's one thing most people don't know about you that you find interesting?

• 59:58Speaker 00

  I am dyslexic, came up quite strongly when I was first, second, third grade. This is the learn to read years. I was born in Edmonton and my dad came down here to California in 1980. So I was four. I was part of a PhD thesis in the Stanford Medical School, where they were studying dyslexia, how you help kids manage it. I can remember doing crawling to retrain brain. You were seven or eight and they were asking you to crawl and say things. And then you would stand up and you would try to connect a line and then you would do more crawling.

• 1:00:39Speaker 00

  I have learned to deal with it. I struggle like other people in the world.

• 1:00:45Ted Seides?

  What's a mystery you wonder about?

• 1:00:48Speaker 00

  My dad is a physicist and he just turned 80. So I found over the last four or five years, one of the things I really wanted to do is read physics and spend time with him. And quantum mechanics is how we end up with this multiverse concept. I'm gonna try not to go too deep into the physics of all this. There's this many world story. At a given point, we have all these choices ahead of us and we can pick. And then all of a sudden, once you make your choice, you're decohering, superposition, off you go. The math doesn't really make sense unless you have this multiverse concept.

• 1:01:29Speaker 00

  You can either believe we live in this infinite multiverse, because that's the math of quantum. Sounds crazy.

• 1:01:37Speaker 00

  Or you could think we live in a simulated environment where there's our universe and some other universe that's designed ours. How crazy is it to think that you could be in a quantum simulation?

• 1:01:51Ted Seides?

  All right, Ash, one more. If the next five years are a chapter in your life, what's that chapter about?

• 1:01:57Speaker 00

  Scaling ideas. I have to launch two children into the world. Fifteen year old, thirteen year old. I do think a lot about that project right now. A lot of my waking moments that aren't focused on work are focused on helping them in some way. Outside of the family piece, I want a lot of software and technology and data to make its way into the cockpit of investment organizations. A ton of my work is that bridge between the chief investment officer, who knows they need something, and the founder who has built something but doesn't know the use cases, trying to be that connective tissue between the two. That's probably what the next five years will be.

• 1:02:41Speaker 00

  Rather than me going and being that founder again and building it, I think I need to be that connective tissue.

• 1:02:48Ted Seides?

  Well, Ash, thanks as always. So much fun to hear what's on your mind.

• 1:02:52Speaker 00

  Thanks, buddy. Really appreciate it.

• 1:02:55Ted Seides?

  Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com, where you can access past shows, join our mailing list, and sign up for premium content. Have a good one and see you next time.

• 1:03:10Speaker 03

  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 and securities discussed on this podcast.