CIO Greatest Hits: Public Pensions – Ash Williams (Florida SBA)

This week's Summer Series is with Ash Williams, the former CIO of the Florida State Board of Administration, where he oversaw one of the largest state pension funds in the US. Ash was an innovator in the space, modernizing the compensation scheme, asset allocation, and governance in a public pension fund – a notoriously tricky political seat. Original Release Date: July 7, 2019 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

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

• 0:01Ted Seides?

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• 0:46Ted Seides?

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• 1:29Ted 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

• 2:12Ted Seides?

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• 2:57Ted Seides?

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• 3:32Ted 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.

• 3:59Speaker 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.

• 4:18Ted Seides?

  This week's summer series is with Ash Williams, the former CIO of the Florida State Board of Administration, where he oversaw one of the largest state pension funds in the US. Ash was an innovator in the space, modernizing the compensation scheme, asset allocation, and governance in a public pension fund, a notoriously tricky political seat.

• 4:42Speaker 02

  Before we get to the interview, a quick announcement. We've set new dates for our Capital Allocators University for investor relations and business development professionals. Those dates are December 3rd and 4th in New York City. Later in the year is just a better time of year for this gathering. It's post AGM season, travel starts to wind down, it's right before the holiday crunch time, and it's a great time for capital raisers to reflect on their previous year and plan for the year ahead. December 3rd and 4th in New York City. CAU for IRBD is a closed-door gathering for capital raisers to connect with peers, learn from allocators and other experts, and really share invest practices with each other. You can learn more at capitalallocators.com/university. Thanks so much for spreading the word about Capital Allocators University for investor

• 5:27Speaker 02

  relations and business development professionals.

• 5:30Ted Seides?

  Please enjoy my conversation with Ash Williams from 2019. Ash, thanks so much for swinging by.

• 5:38Speaker 03

  Thank you for having me.

• 5:39Ted Seides?

  There aren't that many people who come through that are truly Florida royalty.

• 5:44Ted Seides?

  Why don't you start with your history in Florida and the start of your investment career, and we'll go from there.

• 5:50Speaker 03

  I grew up in Jacksonville, Florida. I was born in the mid 50s. My family had been in Florida for quite a while. We actually came to Jacksonville from a place called Fernandina, Florida, in 1916. My family had been in Fernandina since before Florida was a state, actually, and a relative

• 6:10Speaker 03

  Of mine by the name of Marcellus Williams was a surveyor who worked for George Washington's surveying firm and did the original survey of the territory of Florida when it was being considered for statehood. Florida became a state in 1845. So, Marcellus, a small group of other people and a handful of mules somehow surveyed the entire peninsula of Florida without being eaten by anything else, either two-legged or four, and filed a survey that was acceptable to Uncle Sam and Florida became a state and that was that.

• 6:42Speaker 04

  So, as you went through, how did you get started in investing?

• 6:45Speaker 03

  It was like so many things in life. It was indirect, but it wasn't without intention and it wasn't without thought. So, ever since I was a little kid, I was always interested in businesses and why people did things. And so, you walk into something like a grocery store where there are hundreds of thousands of consumer choices, people follow consistent patterns with what they put in that basket. There's brand loyalty, there's product loyalty, there's all kinds of stratification about how people make consumption decisions. And that's true at every level of economic activity. That's always fascinated me. So, when I was in high school, I graduated from high school in 1972. So, if you think about all of the giant conglomerates that were formed in those days, I was absolutely fascinated by the

• 7:30Speaker 03

  notion that people would do these add-on entities like AT&T or any number of the other big ones of the day that had all kinds of businesses that were seemingly unrelated, but were represented to be highly synergistic and collectively additive each to the other. Well, we know history proved that wasn't quite the case. But nonetheless, it interested me and caused me to want to, at some point, have a career on Wall Street. And the original direction I was thinking in terms of going was studying business at the undergraduate level and then coming to graduate school in New York and probably going into investment banking as a normal entry-level path. And I was in fact planning to go to grad school

• 8:15Speaker 03

  at New York University. And when I was a senior and undergrad, that plan was somewhat, at least temporarily, derailed by a professor approaching me and saying that he had been approached by one of the committees of the Florida Legislature to do a consulting project that was in his area of expertise. And he- Told them, "Look, I'm too busy, but my star pupil could do this under my supervision." Long story short, I ended up doing a consulting engagement for a committee of the Florida House of Representatives back in the mid-'70s as a senior and undergraduate school. And that in turn led to being invited by the chairman of that committee, who was one

• 8:58Speaker 03

  of the rare individuals, who was actually a very successful private business person, was not a career elected official, and he had made a decision, he was going to give back a certain number of years in public service, and that he intended to complete his service by being Speaker of the House of Representatives, which is a bold thing to say, "A priori, I'm going to be in the House for six years, and now I'm going to be Speaker for the last two," because there's this planned succession in these political institutions that extends out years in advance, and that was in place at the time. Well, this fellow didn't let that stop him for a second. He made plans to disrupt the succession mechanism and succeeded. And he then approached me and said, "What are you going to do?

• 9:42Speaker 03

  I need staff in the Speaker's office while I'm Speaker. I need some people who are completely independent, and you are apolitical, merit-driven, and you have a business background. It's very unusual. Most of these people are political science types of one kind or another, hangers-on of one flavor or another." So I said, "Well, thank you very much." This gentleman's name was Hyatt Brown. He's still around as a wonderful guy and a mentor. And I said, "Thank you, but I'm planning to go to New York and pursue my career in the investment world." And he said, "Listen, you're a native Floridian. You're coming back here at some point, aren't you?" And I said, "Sure, I am." And he said, "So here's my proposition. Stay here. Go to graduate school at Florida State. The marginal difference

• 10:22Speaker 03

  in an MBA from NYU and one at Florida State will be more than offset by the walking around sense you will pick up, working two years at the very top of state government at this stage in your life. And if you're ever going to come back to Florida, the relationships you will build at this point will be with people that most would never have an opportunity to come into contact with until they were in their 40s at least. So it's a major head start." I know, by the way, the other thing is, if you go to grad school here, the legislature will pay for it. You have no debt. And I was thinking, those are all good points. And then there's the matter of my girlfriend and my wife of 37 years, all of which said, Matthew, work can wait. I'll get up there

• 11:02Speaker 03

  later. So I stayed put. And one of the first things I was asked to do was look at the Legal Investment Authority for the state pension fund, which had been newly created in 1974, and was created by bundling together a large number of state and local government pension plans that shared the characteristics of being either chronically or acutely underfunded, or both. So the funded ratio for this overall statewide plan that had just been created was something like 45%. And in most places, you'd say, just dig a hole and bury it. Don't even think about this. Not Florida. So I was asked to take a look at that. This was

• 11:42Speaker 03

  a period of very high inflation, if you think back. And the allowable investments were US Treasury bonds and investment-grade corporate bonds. Well, very hard to close an underfunding situation in a high inflation environment with fixed income instruments. So I looked at that question, and we changed the law to allow up to 25% of the portfolio to go into US equities. And as part of that process, I got to know the various people who were involved with the pension plan. And the way Florida's constitution works, and Florida's laws work, the State Board of Administration has responsibility for investing pension assets.

• 12:27Speaker 03

  And so I became acquainted with the State Board way back in about, oh, gosh, this must have been 1976, something like that. And then after working in the House for a couple of years, Hyatt finished his speakership. The next speaker came to me and said, by the way, I'm forming a staff, and I've been elected speaker, but the difference between you and me is you know what the speaker does. So I think it'd be a good idea if you'd come to work for me. So I did. And about a year into that, we had a new governor named Bob Graham, who later became a US Senator, was Chairman of the Senate Intelligence Committee. And Governor Graham was having a terrible time with legislature.

• 13:08Speaker 03

  One of his staff people called me up and said, would you consider coming to work for the governor? We conducted a little poll of House members and Senate members, and we asked each of them, if we were going to hire a staff person to cover you, who would you pick? And apparently, the House members liked me. I think I was 23 years old or something. And he persuaded me to join his staff, which I did, and that was a wonderful learning experience for me. And then, just rolling the clock forward, one of the things I covered for him was the pension fund. The governor is one of the three trustees of the state board, so I continued deepening my knowledge of the state board and its activities.

• 13:50Speaker 03

  And then, after a number of years in the governor's office, he decided to run for the US Senate. And at the time, my oldest daughter was a little girl, and it didn't make any sense for me to relocate to Washington. And one of the other trustees of the SBA, the state comptroller, asked me if I would come be his chief of staff. Well, he also happened to be the banking and securities regulator in the state. And this was right before what is now known as the savings and loan crisis, which nobody knew was coming. So I wound up being chief of staff to the state financial regulator during the SNL crisis, and saw all kinds of businesses fail, saw all kinds of chicanery where boards had

• 14:32Speaker 03

  shirked their responsibility, they'd covered up self-dealing, there were fraudulent real estate deals. Florida, Texas, Arizona, and California, and that is the sand states, were the epicenter of the SNL crisis. It was an incredible crucible of learning, because you saw the consequences of poor underwriting, ignoring the risks, insider dealing, lack of transparency, and just plain out-and-out greed. So that was a great learning experience. And all the while, I'm still working for one of the trustees of the SBA. I'm involved in working with the SBA day to day. And finally, in about

• 15:13Speaker 03

  1991, I believe it was, the fellow who was then the executive director of the board, Cliff Hinkle, came to me and he said, you know, I've decided I'm going private again. And it's really important that the board be led competently and we don't want to have this thing fall into a political environment. That will not be helpful. You need to come run it. You've been engineering it behind the scenes for years. You know as much as anybody, more than most. You need to come do this job. And I thought, you know, that's, I could actually do that. And it was up to three elected officials to decide. So the treasurer and the controller were immediately there and their offices were next door to

• 15:57Speaker 03

  each other. So that took all of about 10 minutes to cover those votes. So I went to see Governor Charles with two votes and he gave me great advice. He said, you know, I'm gonna give you the same advice I give my airplane pilots, which is there are gonna be plenty of times where I'm gonna push you to do something because I want to go somewhere and I'm in a hurry to get there. And he said, the first time you listen to me and override your own judgment and get us both in trouble, I'll fire your ass. That's exactly what he said. I thought, that's great advice. And that's how the world works. Because it's your job as a fiduciary to know when to say when and just say no if you have to. And there are plenty of times in life where that's the best thing you can do.

• 16:36Speaker 04

  What did the plan look like when you were first at the board?

• 16:40Speaker 03

  Well, I became executive director for the first time in December of 1991. And back then, we had US equities. We had a brand new infant-sized private equity program. It wasn't even really a private equity program yet because we hadn't clarified the law about partnerships and whatnot. We had fixed income and we had a real estate program. And the most advanced thing we had, I would say, was our real estate program. And it, to this day, is a unique model in that we manage about 60% of that book, a little over half, in what we call our principal portfolio, which means we own the properties directly

• 17:21Speaker 03

  and we manage them ourselves. And we often have them with not a great deal of leverage on them. So we have a terrific valuation cushion. And you know, if you think about Warren Buffett's stories about the best possible businesses, what's example number one? Owning the only toll bridge.

• 17:38Speaker 03

  Across a body of water that everybody needs to cross because the places on either side are important and you get to set the price. So if you own a fabulous piece of real estate, why wouldn't you want to keep it forever? But if you're in a traditional partnership structure, partnerships have lives, which means there's a capital raising cycle, there's an investment period, there's a holding period, and there's a contemplated liquidation date that might have a year or two of extensions, but it's not infinite. And all the while, you're paying carried interest and management fees.

• 18:10Speaker 04

  So this was in place back then?

• 18:12Speaker 03

  Yes. I think it was pretty close to unique in the country then, and it still is.

• 18:16Speaker 04

  What percent of the portfolio today is in, is direct real estate?

• 18:19Speaker 03

  Well, the direct book is a little better than half of our real estate allocation. I think that's currently around 8%.

• 18:25Speaker 04

  And are some of those assets the same ones they were when you were first in the scene?

• 18:28Speaker 03

  Yeah. One of my favorite examples is if you think about uniqueness of location, location, location, what do you want? You want to be in a wealthy area, so you have pricing power. You want an asset that's absolutely needed and is not subject to becoming an eight-track tape as an asset. You also want to have natural barriers to entry for competition. So the example I give is a place that we bought back in that period called Corte Madera Town Center. If you left San Francisco on your way to a weekend in the Napa Valley and you went on the 101 over the Golden Gate Bridge, on your left is a very nice residential area called Corte Madera. And the little mixed office building in

• 19:12Speaker 03

  the town center is called Corte Madera Town Center. We own all of it and have ever since way back then.

• 19:18Speaker 04

  So this isn't just Florida real estate?

• 19:20Speaker 03

  No, our real estate portfolio is national and is now global, but our direct book is U.S.

• 19:25Speaker 04

  Why did you decide to leave SBA the first time?

• 19:28Speaker 03

  Well, there was a great reason, and it is emblematic of the problem that plagues public pension funds everywhere, which is there was a misalignment between the decision authority stakeholders, in this case trustees and legislature, and the beneficiaries and the staff of the state board. As reflected by the fact that I think I was there six years on the first tour of duty. In six years, we doubled the size of the fund. We had terrific investment results. We had a completely clean, controlled environment, no issues there, and did a lot of pretty creative things. And we moved the fund in some new directions. One of the things I did was globalize the fund and go into emerging markets for the

• 20:13Speaker 03

  first time, which we did during the Mexican peso crisis. That was entertaining. And a lot of interesting things like that. So during that six-year period, I think I had one change in my comp. And at the end of six years, in doubling what was then one of the biggest pension funds in the country, and still is, I think I was making $140,000, and the direction that our governor was going, and he was well-intended from a health policy standpoint, but Florida was the place where the tobacco litigation originated. The idea that tobacco companies knew they were selling a lethal product, and to the extent they sold it, and as a result, serious, if not fatal, diseases affected thousands

• 20:57Speaker 03

  of people, many of whom were on Medicare, Medicaid, and those on Medicaid, the states ended up paying the bill for a lot of that healthcare. So the idea was, there's a course of action for states who provide Medicaid expenditure, that the tobacco companies should make the states whole for that Medicaid cost. That was the genesis of the tobacco litigation that became a national, if not international phenomenon, and resulted in settlements way into the billions of dollars for the tobacco companies. And so our governor was very focused on that. And we were in the odd spot, that we had a tobacco portfolio of $740 million or so,

• 21:40Speaker 03

  as I remember, and our top-performing outside managers were heavy in tobacco.

• 21:48Speaker 03

  And I raised the question and said, listen, we really need to separate the fiduciary duty and the political policy as it relates to health and dangerous products like cigarettes. Because I can't really hold a manager accountable for beating the S and P 500 and then tell him he can't own one of the fastest growing, most lucrative sectors of the S and P 500. With no legal authority to do that. I just pulled it out of the air because you thought it was a good idea, Mr. Chairman. And the other problem I had was two of the three trustees agreed with my point of view and didn't think we should get into tobacco divestiture. The governor was emphatic on that. And that's all he wanted to talk about. And there got

• 22:31Speaker 03

  to be a point of stress over that subject. And we had had an accord for the first couple of years that this battle was brewing, that if it came up, each of us would say, we're going to separate the fiduciary duty from the health policy. But the fight got so ugly between the governor and the tobacco people, he wanted to stop it and wanted to use the equivalent of the nuclear weapon, which in his mind was divestiture. So he became equally emphatic to me. I want those blanking stocks sold. And my view was, well, sorry, the other two trustees don't think so. And about that time, I got a call from Schroders, based here in New York, the British asset management firm, the oldest asset management firm in

• 23:13Speaker 03

  the world, asking if I would consider coming to work for them. They were making their first US acquisition. And the proposition was, come to New York, work for us. You know the firm, we've worked for you, your family's half English, it's a good fit, you're an Anglophile. Come on, you'll love this. And I thought, wow, what a contrast. On the one hand, I have the chief executive of Schroders calling me ever so politely and deferentially from London, offering me a path to a different life versus here at home, where I've worked and done the best I can for years and years and years. I'm getting no recognition for what I've done. I'm getting beaten on for something I won't do that I don't think's in the fund's best interest. So I left.

• 23:55Speaker 03

  And the wrap up on that is that there was, after a number of years, the legislature decided they did do divestiture. They then came back years later and reversed the decision. One of the consulting firms did an analysis of the impact of tobacco divestiture on public funds. I think Florida's piece of that cost about 500 million bucks. I think California was a couple of billion.

• 24:17Speaker 04

  So what was that experience like for the first time shifting to the private sector?

• 24:21Speaker 03

  Pretty intense. Pretty darn intense. I was living in Connecticut, commuting into Manhattan. Our offices in those days were 787 7th Avenue, which from Grand Central, where we sit now, that's a hike. Even double timing it, about the best I could do was around 17 minutes. So if you've got a 17-minute walk from the train, you're catching, your normal morning train would be 6:50 in the morning, 6:51, and best case, you're going to catch a 5:40 train home. More likely, you're going to catch something later, in which your base day was about a 12 or 13-hour day, base day, and three hours of that is

• 25:02Speaker 03

  tied up with a combination of walking and riding on the train, which means you're extremely well-read. But wow, it takes a lot out of your life.

• 25:11Speaker 04

  Yeah. So what was the experience at Schroders like?

• 25:14Speaker 03

  It was good. It was a global company, and one of the lessons there was that cultures matter, and cultures are different in the UK and Europe work-wise than they are in the US, particularly New York. Just different work norms, different expectations, and you have, particularly in a company that at the time was, I think it was 220 years old, there were things that they had to deal with that we didn't, particularly in the tech area. They had a lot of legacy mainframe computer systems. So when the whole Y2K thing was around, that was a hair-on-fire issue in London, and they were asking us to do all kinds of things here, keep people in the office overnight and have supplies for a

• 25:58Speaker 03

  nuclear war. It was really something. It was over the top. So you'll learn things like that, and you also learn that there are layers in organizations. And one of the great lessons in life always is knowing what you don't know. And you might think you know an issue based on the inferences you've drawn from talking to your colleagues here in New York, but if the headquarters is 3,000 miles away, and there are a lot of other players there that you're not talking to on a day-to-day basis, some of whom may be from families that have owned equity stakes in the firm for hundreds of years, there's a pretty good chance what you know is a thimbleful of what there is to know, and your idea that you understand a situation is just wrong.

• 26:42Speaker 04

  How did you process that? As you're in the seat, there are things you see, believe, and know from the people you're talking to, and then you find out, oh, that's not what the organization believes or what other people that are important believe. How do you work through that?

• 26:56Speaker 03

  Well, I think it's really, that's where working in a legislative body and a government was great training, because it's the same thing. You've got all kinds of people with agendas that have nothing to do with the signals that are being messaged publicly, or the framing that's being messaged publicly. And the faster you get used to the idea of, look, life is sort of like one big card game, and unless you're incredibly good at reading tells in human behavior, there's a very good chance that you have no idea what cards are involved here, or where your hand stacks up. So play accordingly.

• 27:36Speaker 04

  That makes sense. So then you go from one of the most established asset managers to a boutique.

• 27:43Speaker 03

  Another shock. Well, that was a great thing. One of the people I've always admired is a fellow named Sandy D. Allenberg. Sandy was president of Florida State University at one time. He's a noted lawyer from northwest Florida, was dean of the Florida State Law School, president of the American Bar Association, et cetera. And Sandy used a phrase once before he became president of Florida State University.

• 28:11Speaker 03

  People need to be intellectually repotted from time to time. And serving in a university presidency for someone like me, this was him talking, who's sort of naturally curious and a scholar by nature, this to me is a real intellectual refreshment. And he did that later in life. And in retrospect, that's what Fertre was for me, because I'd always been in big organizations. I'd worked for state government in Florida, I'd worked for the SBA. I'd had legions of people and analysts and levels of folks at my, at least that I could access. And Schroders, big global company, resources all over everywhere. And when we completed the cleanup of their acquisition here in the US, which was the

• 28:55Speaker 03

  old wartime investment partnership, and got that on a completely clean, control footing, and rebuilt the professional staff, et cetera, it was integrated into Schroders Global Investment Management out of London. So the good news was, I had fulfilled my mission. The bad news was, there was no longer a need for a CEO of asset management in the US. So the options were really three. A, stay in New York at a lesser rank, which if you've been the sheriff who cleaned out the saloon, that could be a dangerous role without a gun. Two, go to London and assume some role in the headquarters down in the city.

• 29:39Speaker 03

  Three, if you want to continue being a country head for asset management, the immediate option was Kuala Lumpur. And so while that decision process was going on, I was sort of thinking, well, obviously there are other options in the world. And a gentleman named Jeff Tannenbaum cold called me. Jeff founded Fertre Partners and is a very gifted guy. He had worked for Jerry Kohlberg, is Jerry's analyst when Jerry left KKR. And he had started a fund about five years prior, which had earned net returns of around 25% annualized over that time. Very unique business model, combining sort of private equity and public markets and activism in a constructive way.

• 30:23Speaker 03

  He had gotten just big enough, he had around 400 million in assets, including some very silk stocking founding investors. He was looking for somebody to be between him and potential clients and existing clients so that he could focus on the portfolio. And somebody else could do the other. And he got some advice from a fellow named Steve Berger. Steve, years ago, ran hedge funds for Cambridge Associates. I think he was the first hedge fund guy there. And Steve told Jeff, Jeff, you're a young man. Let me give you some advice. Whoever you want to be your ambassador to your investors and potential investors needs to be an older person relative to you. Doesn't mean they're an old person.

• 31:04Speaker 03

  Just means they're older and have enough gray hair and they have some independent reputation on the street. Because most IR people walk into a room with a PM, carrying a bunch of books, introduce the PM and then sit there and take notes and then do follow up. That's not what you need. You need somebody that's capable of knowing this book inside and out, presenting it, answering questions, understanding the client's needs, and having the credibility that they're perfectly happy talking to that individual. So you need somebody who's been around. And of course, Jeff was no fool. He was a value guy and his immediate reaction was, do you know what somebody like that's gonna cost?

• 31:46Speaker 03

  I don't like that idea. So Jeff got my name from somewhere and called me. And I said, you know, that actually could work. Might be very interesting. This was a real shift. But so here, I had the shock of going from a place that literally, at tea time every day, we had people who served tea and cakes, to at Fertree, if you need a legal pad, I think there's an office supply store down the street. Go get one. Want some coffee? Go make it. A pencil? Fine. I think I might have one. You can go sharpen it and use it, but give it back. You know, that kind of thing. So it was a completely different environment in that regard, but it was a scrappy, creative place.

• 32:31Speaker 03

  We built an unbelievable business. We had a great team. Our clients were the best of the best in the family offices, university endowments, and all kinds of folks.

• 32:41Speaker 04

  How long did you stay at Fertree?

• 32:42Speaker 03

  Nine years.

• 32:43Speaker 04

  And then what happened?

• 32:43Speaker 03

  Well, what happened then was... When I left the State Board in 96, it was in very good shape. And in the ensuing dozen or so years, there were a couple of changes in leadership, and there were some changes in attitudes. And what happened that led to my coming back to Florida was in the fourth quarter of 2007, the ranks of the SBA over the years that I had been gone, the headcount had stayed, was actually down a little bit. The assets under management had grown very substantially. The number of investment mandates they were managing had quadrupled. The budget had remained flat. Something's not right with that.

• 33:28Speaker 03

  Somebody's not putting on the right number of coats of paint to make the car look good and be durable. And sure enough, a young portfolio manager who had more or less sole responsibility for about a 30-plus billion dollar cash pool that the State Board ran for local governments, bought some securities that were asset-backed paper that were legally not suitable. Let me guess, AAA? Of course. Supervisory chain had been winnowed down to being nonexistent. There was no money being spent on training. There was very little participation in industry thought leadership, getting out and building the brand like the conversation we're having today. And so that news hit Bloomberg.

• 34:13Speaker 03

  These securities were downgraded and became illiquid. There was a lead Bloomberg story on it that with the luck of no one lucky, hit the Bloomberg Wire during, coincidentally, the day that the Florida Finance Officers Association was meeting, I think in Orlando. So I'm picturing all of these local government types who all have their money in the SBA's local government pool, standing around at a reception saying, "Do you believe that? What are you gonna do, Ted?" "Well, I think I'm just gonna redeem." "Well, Ted, if you're redeeming, we're redeeming too." And guess what? In about 48 hours, the cash pool of the SBA, which was, like I said, about a $34 billion

• 34:56Speaker 03

  pool, received redemptions for something on the order of 80% of its assets. I don't think there's a financial institution in the world that could survive that. And in reality... The proportion of the illiquid assets was tiny. It was less than 3%. It was not life threatening. It was not really even material to the size of that pool, given a normal liquidity environment. But when you get a panic like that, no theater has exits big enough to handle a stampede like that. So it created a huge problem. It was front page of the Journal and the Times at the time. It led to major political issues.

• 35:37Speaker 03

  I had been working in Manhattan and living in Connecticut for 12 years. My wife and I had a third child while we were in Connecticut. She was at about age seven or eight when this was going on. And we thought, you know, the first two girls came out beautifully. We think part of it was because they grew up in a humble place called Tallahassee, Florida that's very family oriented and you don't have anywhere near the, the level of, what would you say, sharp elbows and perhaps situational ethics that you have in big cities. So we thought, you know, it might be time to go back and we could do some good things and fix what used to have our fingerprints all over it.

• 36:19Speaker 04

  So when you show up in this seat now, it's 2008. You know you have problems. How do you start?

• 36:27Speaker 03

  It was way better than anybody thought. And I had a huge head start for several reasons. First of all, many of the people who were in positions of responsibility at a senior level were people I had hired at a junior level years before. So I knew these people. It's not like I'd never seen them before and I didn't have any judgment on who they were or what their competence or trustworthiness was. Quite the opposite. The problem that was the blow up was not a failed pension portfolio. It wasn't even in the pension. It was a cash pool. It was completely independent, had nothing to do with the pension. But the other advantage I had was by the last week in October, the financial markets were way closer to a bottom than they were anything else.

• 37:12Speaker 03

  So my view was, this is an ideal time to come in because the building's burned to the foundation. It's going to be essentially up from here. And I always steal this quote from Bret Harris, but I always give him credit for it.

• 37:27Speaker 03

  The major advantage we had was being long-term oriented, liquid, and unlevered. So we had the ability to look at opportunities and be a solution provider to others who are in a jam. So there were lots of very prestigious institutions, endowments and what have you, who were longer illiquid investments, and particularly those subject to capital calls, than they realized they were. And they got in a liquidity pinch in late 08, early 09, and were quietly doing secondary offerings to raise cash. So we picked off a number of those at very advantageous prices and a number of things

• 38:12Speaker 03

  like that.

• 38:15Ted Seides?

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• 38:52Speaker 02

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 38:58Ted Seides?

  And now, back to the show.

• 39:02Speaker 04

  Let's walk through the investment program. I know there's pension fund, there's a bunch of other pools, but a lot of the money's in the pension fund. How do you think about how you attack managing such a large pool of assets?

• 39:15Speaker 03

  It's sort of like eating an elephant. You do it a little bit at a time. And I think the way to do it is, like any super complex task, you divide it into units that are manageable and divisible, and then you assemble them so that each has its own infrastructure and its own intellectual feeds for ideas and oversight and everything else. And if you build a team right... You just go from there and it's simpler than it sounds.

• 39:48Speaker 04

  So let's start with the team. You touched on when you left after years of toiling away and making great progress, you at the top were getting paid $140,000 a year. How do you start with building a team or keeping the people that you have in place when compensation clearly isn't the driver?

• 40:06Speaker 03

  Well, the first thing you do is you fix the compensation. The problem is in the public sector, that's sort of like saying, well, all you need to do is have peace in the Middle East. People have been trying that for a long time and it's hard, which is why it doesn't exist. But in our situation, we had historically had less turnover than one would imagine because a lot of people were in their jobs, not the way people are in jobs in New York or Los Angeles where there are a million alternative employers right around the corner. And if you're unhappy at point A, you cross the street and go to point B and take another job. If you're a portfolio manager in Tallahassee, Florida, there aren't a lot of other options

• 40:49Speaker 03

  than the SBA. So most people were there for some combination of having family there, enjoying the lifestyle, enjoying the reality that you could live in a very peaceful place, travel to New York pretty regularly, have New York come to you and the rest of the world come to you pretty regularly. The parade of talent we get in and out of our building is absolutely amazing and very refreshing. People were there for non-economic reasons. The problem is that's sort of like the line from the old Marilyn Monroe movie about relying on the kindness of strangers. It's just not a reliable way to run a railroad.

• 41:29Speaker 03

  When I got back, there was a lot of talk about dramatically increasing the compensation of the position for the executive director and they added the term NCIO to give it a little more specificity. And at the end of the day, what was done was about half of what was said, but the direction was good. And I think the reasons that it came out that way were very appropriate, which is to say, the state had just been dealt the worst financial blow in its modern history and was completely broke. And the idea of making some massive pay move for somebody in a job like mine when all the beneficiaries are... In a terrible position. Believe me, I got it. I was fine with that and I was interested

• 42:13Speaker 03

  in the service anyway. And it was still a significant shift from where it had been before. And the commitment was given, "Look, we understand this needs to be addressed and we want you to work on it. So, go do it." And that was the beginning of a six-year effort that I undertook where we figured out how to completely change our compensation culture and design a comp scheme from the ground up that was legitimate, market-driven, created great alignment, included an element of base and incentive compensation that was very specifically tied to achievement, bounded to avoid unnecessary incentivization of

• 42:58Speaker 03

  risk, etc. We spent six years and working through our advisory council, got an actual plan document written, had, I want to say, between 15 and 20 public meetings on this thing over all that time. It's been in place and operating now for going on five years and it is a life changer.

• 43:17Speaker 04

  Let's dive into the investment side and start with your thoughts on asset allocation.

• 43:23Speaker 03

  I guess our view is that what is practical and has been proven to work for us, I can't speak for others, over time, has been to have a thoughtful allocation process that you revisit annually at a sort of a high level, just to validate your asset class return assumptions and make sure it's still reasonable. Then about every three to five years, do a much deeper dive on how you're approaching it. But what we found is, setting an allocation that's a rational allocation to begin with, given your liabilities and your liquidity needs and your governance environment, and then sticking to it over time, will work.

• 44:07Speaker 03

  What was tried in the 80s and to a degree in the 90s that failed miserably was the idea of making active judgments and jiggling around the tactical asset allocation, as people now call it.

• 44:23Speaker 03

  Just a bad idea.

• 44:24Speaker 04

  So where do you end up across the assets you invest in?

• 44:27Speaker 03

  We end up with a pretty heavy equity beta that we will always have. But as long as you are truly a long-term investor and one of the powers of defined benefit plans is risk pooling, which means you're always investing as a perpetuity over a very long horizon. You're not constrained by the mortality curve of risk that individuals can tolerate. That's important because over the long periods of time, equities by definition are going to be the higher returning asset class relative to fixed income. And then when you have what I would call equity-like risk assets, private equity, venture capital,

• 45:08Speaker 03

  et cetera, then those are complementary as well and will tend to be a little more pro-cyclical in a lot of ways. And then we have another sleeve in which we put more opportunistic things that might be transient opportunities that come and go. So we wouldn't have a permanent allocation to those. High-yield debt would be an example. There are times when high yield is compelling, there are times when not so much. So let's go there when the spreads are attractive and leave when they're not and we'll get paid for renting our capital for that period of time. So that at the high level is the way we do things and to the extent we can find ways

• 45:50Speaker 03

  to win on a relative basis by playing by a different set of rules, we'll take that opportunity every chance we get.

• 45:57Speaker 04

  What are those set of rules that are different, how you're playing the game?

• 46:00Speaker 03

  So what do we have to offer? Well, first of all, we have scale in our favor. Secondly, we have the ability to manage money ourselves. We've got a lot of investment professionals. Our team is over 200 people, investment professionals 50-plus, and a lot of people with deep experience and we are running active and passive fixed income. And in equity investing, we do passive investing and

• 46:30Speaker 03

  Factor investing. We're not saying we can necessarily say what the factors are or what the mix of the factors ought to be in any given month. But we are really, really good at replicating indices dead accurately. And then through a combination of sec lending and playing the names that the index providers signal in advance are going to be added to or taken out of the index. Doing those two things will get you enough marginal revenue that you can beat the index pretty consistently in a passive fund. Well, that's kind of taste great less filling, isn't it? So what we've figured out how to do, and I give our global equity team credit for this,

• 47:10Speaker 03

  it wasn't me, was buy from some of the factor investing firms. Instead of buying their services in a traditional asset management relationship, do the equivalent of buying the recipe. Don't buy the cake. Buy the recipe. Go bake the cake yourself. And you can bake as many cakes as you want from that recipe without paying any more money. That's powerful. So we do that. One of the great powers we bring is our low-cost operating environment. We have been the lowest-cost provider for three or four of the last five or six years per CEM. Our costs on average are about half those of our peers.

• 47:51Speaker 04

  And does that mostly come from that internal management piece?

• 47:54Speaker 03

  That's a big part of it. And the other thing is scale. Better team, better terms, better fees. Very powerful. I think those are the main things.

• 48:04Speaker 04

  So when you go through the global equity piece, you mentioned the sort of passive, passive plus and factors. How do you decide how much should be internal and how much is external?

• 48:16Speaker 03

  Well, it's pretty easy. That's not a complicated thing. What we do is We think, first of all, how much should be active and passive? We're really good at the passive part. And you can do that in scale for, if you look at the, what the compensation packages cost for our traders who execute this, even though we, I think we pay them in a well, in a manner that, that they're happy and motivated and it's reasonable and competitive, that compared to management fees on a similar amount of money, it's practically free. In which case, you've got a huge advantage. And then you do the active in the parts of the market where you're going to get paid for spending the money and taking the extra risk, which is generally going to be, as

• 48:59Speaker 03

  you move out of the US into non-US equities, and the further afield you go into emerging markets and eventually into frontier markets, then the attractiveness of active versus passive becomes compellingly active.

• 49:13Speaker 04

  Are you restrained on your travel budget?

• 49:15Speaker 03

  There's, there's several areas of natural friction with public pension funds, because in a political environment where optics are everything, the truth of it is, most legislative bodies these days are under term limits. So somebody's got two or three two-year terms to make their bones and move on to the next highest office. You can't raise money constantly and move on and keep your name in the press to get free media without regular soundbites. And if you can make a soundbite by grousing about something that some public employee did that the average taxpayer might take out of context and see as an affront, you're going to do it. That's just the reality. That is it.

• 49:57Speaker 03

  So in a lot of places, there are travel restrictions, et cetera. What does that derive from? The same thing on what they pay people and how they're resourced. Key thing there is governance. If you did an analysis of pension funds, I'll bet if you looked at pension funds and answered the question, Are you under the state legislature for your budget? Or are you under some separate body of trustees? If you're under a state legislative body, any politically derived body, chances are you're going to be suppressed for compensation, for resources, including travel, training, materials, systems, risk controls, everything.

• 50:39Speaker 04

  Everything you need.

• 50:40Speaker 03

  You're just not going to have the money. Because it's not like you're dealing with a board of directors of, fill in the blank, Goldman Sachs, or an organization like that that values excellence and is willing to pay for it. And in our case, our budget is under our trustees. And we're self-funded. We operate as a fee on assets. And the fee on assets, although it's ridiculously low, the assets are so big that we just need the trustees to authorize every year what we need. And we have developed a lot of credibility. I think what the whole thing comes down to is public pension funds, because they're big pots of money, that are in a position to be diverted for bad things. There's plenty of US history,

• 51:24Speaker 03

  whether you look at the coin scam that happened in Ohio some years ago, or the pay-for-play scams that have happened in other jurisdictions, or all kinds of irregularities over the years. Those kinds of things earn funds a bad reputation and put them in a weak position. But if you have, in the environment you operate in, the jurisdiction you've operated in, if you have earned trust and credibility through consistently telling the truth, delivering the results you're supposed to deliver. And unlike most other parts of state government, we can tell anybody on a given day, out to two decimal points, what our performance is and what our benchmark is and what the difference is between the two. And we have audited financial numbers every year

• 52:09Speaker 03

  that are part of the state's financial statements. So there's no ambiguity about whether the schools got better or got worse with us. With us, it's, did you beat the benchmark or not? And if the answer is not, and it's persistently so, you have an issue. If the answer is yes, you did, and it's by a lot, and it's very consistent, and it's also very strong relative to your peers, people like that. My sense is...

• 52:36Speaker 03

  In humankind, just like all animals, you know, we've all read the stories about how the weak animal in the litter is likely to be pecked to death by its own siblings or parents or something. People are the same way. If you show evidence of weakness, you will be set upon and eliminated. And if you show signs of strength, persistent signs of strength, and a willingness to be a voice of wisdom and a steady hand, and you have the advantage of having done that for years and years and years, and known generations of people in leadership, in whatever area you're from, which is an advantage I have, it's very helpful.

• 53:13Speaker 04

  You mentioned this consistency. In so much of investing, you can have the right process that works over time, but in shorter-term periods, you might not have the right outcome. How have you navigated that inevitable times when maybe this pocket or that pocket underperforms? Because you're being very transparent about what the benchmarks are. When you have so many people with a shorter-term focus and a political mindset that want to point fingers?

• 53:41Speaker 03

  Well, the good news is, to the extent there have been down drafts, fourth quarter of 2018, great example. That was a miserable period in global equities, and we took a beating like everybody else did. But in a time like that, then people understand, I mean, everybody has a portfolio, and these are people who are smart enough to say, yeah, I took a beating too. You know, you can run, but you can't hide. We can do well relative to benchmark, but doing well in an absolute sense is very different from doing well relative to a benchmark. So I think we're good on that. And I think we message things, too, that diversification is our friend. And we've put a lot of thought into doing things that

• 54:21Speaker 03

  are helpful when the equity winds are negative. Or we had a spirited discussion several years ago. We had a member of our advisory council, who, when we did our little annual checkup on our asset class return expectations...

• 54:37Speaker 03

  He said, wait a minute, you're expecting an intermediate term return on fixed income of negative 3%. Well, as fiduciaries, we shouldn't own bonds. We need to eliminate the asset class. You can't knowingly lose money. And we said, that's not how this works. It's not each ingredient. It's not every egg and cup of sugar and bit of flour. It's the entire totality of the recipe that makes the cake. And here's what the fixed income is for. It's not to get the marginal negative 3%. It's there because if the bottom falls out of the equity market, there will be a flight to safety, which will be fixed income. That will be the liquid asset that will be appreciated at the time. And you can rebalance into equities while they're down

• 55:22Speaker 03

  and make benefit payments out of liquid assets that are appreciated. We have negative cash flow to the tune of 700 million or thereabouts a month. So the explanation I gave to try and make it accessible was, listen, if you've ever been on a private airplane or a boat, a yacht, space is precious. And tying up a lot of space with life rafts and parachutes is just intrusive. It's no fun. But believe me, if that craft ever gets in trouble and you need the parachute or the life raft, it's going to be the best use of space you could ever conceive of. And you're going to be grateful that you took advantage of it. That's why the fixed income needs to be there.

• 56:02Speaker 04

  When you turn to these opportunistic strategies, you started by saying, okay, you want to be tried and true to your asset allocation. But then you've got these opportunistic strategies that'll flex. How do you go about that piece of the puzzle?

• 56:17Speaker 03

  Well, we are not in a position to do transactions directly other than our real estate area. And I don't think we ever will be. That's the province of the Canadian model. And you're just never going to see that here. But what we can do is partner with people who have deep and broad capability. And then if, and this sounds easier than it is. We don't have many of these things. But if you can create a structure through mutual agreement and a deep partnership that creates great alignment of risk and reward, that's shared, you can do things that are highly unusual. And I think in times like this where assets broadly are highly appreciated,

• 57:04Speaker 03

  Having investments where you really understand where the cash flows come from, what the quality of those counterparties is, why those cash flows should be resistant to broad market dislocation, that's golden.

• 57:22Speaker 04

  What are some examples of some of those today?

• 57:24Speaker 03

  Well, the real estate is a lot of it. We're renovating a building just down the street from here right now at 150 Fifth Avenue. We bought a 120-year-old building some years ago. We've had some sort of routine tenants in there, and we had a music company in there, and their lease has run out. We're redoing the building, and we've pre-leased it, and this is all public information, it's been in the press, so it's not out of school, pre-leased it to Mastercard in a long lease with good provisions from our perspective, and it'll be Mastercard's tech department. And this is in the area of Manhattan around 20th Street that's as hot as a pistol right now in terms of where young people want to be.

• 58:09Speaker 03

  It's the same region where Google is. You know, there's a lot going on down there. And a building like that, if I've got somebody like Mastercard and a 15-year lease, frankly, if the equity market falls off the end of the planet tomorrow, people are still going to use their Mastercard, and Mastercard's still going to need a tech backbone to run their system and maintain their security. So that's a good thing.

• 58:31Speaker 04

  Single asset in the scheme of $200 billion can't possibly amount to much. So how do you monitor so many different, you know, your portfolio's transparent. You can go on, you can go and look at the annual report, and there's just lots of managers there.

• 58:49Speaker 03

  Well, there are a lot of managers, but there's concentration among them. We have a lot of managers, we're in a lot of products with them. That comes back to something else that's a fundamental. The most important thing, I think, and I sound like I'm quoting Howard Marks. You know, he wrote the book, The Most Important Thing, and every single thing in that book, and there are like 30 of them, you can make an argument is the most important thing. And that's the whole point. It's all important. And any one of these things can blow your legs off if you're not careful. But I think there's no substitute for character. And if you can find relationships in life with people who are competent, honest, and

• 59:30Speaker 03

  therefore trustworthy, as simple as those three characteristics sound, as frequently as people always say the most important thing is character and that's why you should partner with us, we've both been around long enough to know the vast majority of people in a situation of real stress can't necessarily be counted on. And if you've ever been through a real jam with a partner and worked it out in a way that reflected honesty and empathy and integrity and just humanity, that's a gift. You reward that by doing more with them.

• 1:00:12Speaker 04

  As you look at the program today, what are your kind of key initiatives to continue to evolve what you're doing on the investment side?

• 1:00:20Speaker 03

  I think we have a true learning culture. I think the team we have in place is an extraordinary team. We've turned over fully half of our top management over the 10 years plus that I've been back. Every one of our asset class heads is super solid and capable and young enough that they've got plenty of runway in front of them, and they've all built deep teams. And again, this fits into what I was saying earlier about compensation. If you're going to keep capable people who are young enough to go anywhere they want to go in the country, you've got to give them a reason to feel valued and motivated. So we offer a work culture that's a very flat culture.

• 1:01:01Speaker 03

  They'll have direct access, no matter how junior they are, to everybody on the team up to and including me. And that's motivating because most big asset management firms can't offer that. Second, we compensate people in reasonable ways, in positive ways.

• 1:01:19Speaker 03

  And third, because of our size, you can come to work for us and on any given day, you might have, like recently, we've had Cusong Li end to visit us. We've had David Solomon twice in the past couple of months, new CEO of Goldman Sachs. Larry Fink comes to see us. We've had people from all over the world make the trek to Tallahassee because they're good relationships of ours and, you know, we reciprocate and help them here whenever we can.

• 1:01:47Speaker 04

  One of the things you think about in these plans is the concept of governance. We've talked a lot about how you've worked with the trustees. The other side of that is the whole issue of like proxy voting. I remember reading in your report that you filled out last year 11,000 proxies.

• 1:02:05Speaker 03

  My hand was so sore after that.

• 1:02:07Speaker 04

  That's a mind boggling number to me to begin with. How is that staffed and then how do you think about that sort of governance standards when it applies to so many different situations?

• 1:02:21Speaker 03

  So the answer to that is reflective of so much of what we do. We accept the value of voting the proxy and valuing the vote. We actually financed a study at Harvard Law School a few years ago called Valuing the Vote that quantified the value of fiduciary participation in the proxy process and ensuring that companies did the things they should to enhance shareholder value. In fact, back in the 1980s, Florida was one of the founding members of the Council of Institutional Investors. So Florida has a high profile in governance circles and much the way we've done other things, have figured out ways to

• 1:03:02Speaker 03

  automate proxy voting processes and use a limited staff internally that's levered through using third-party service providers as extension of staff to do exactly the kind of monumental job you just sketched out. The idea that you could vote proxies in, I don't know, 50 or 70 different countries that number in the tens of thousands, it's mind boggling. But on any given thing, no, we actually know these things. And if somebody calls and says, what about Airbnb? We had one of the earliest things that came up with the new governor. I first met with him in December of 2018 after he was elected in 17.

• 1:03:44Speaker 03

  He asked me if we were aware of Airbnb and had Airbnb had issues involving the boycott, divest and sanction Israel movement. And I said, as a matter of fact, we're very familiar with that and we've been in contact with Airbnb already. Here are the issues. Here's how our process works. Happy to work with you on it. He was stunned. Do you actually knew about that? One little company that's not even publicly traded? Roll the clock forward. We engaged Airbnb. They have done a 180 on the policy that they were pursuing in the disputed territories. It was announced publicly about two weeks ago. The governor and cabinet of Florida are doing the first cabinet meeting ever in Israel, I think later this month.

• 1:04:29Speaker 03

  And one of the items on the agenda is going to be this Airbnb thing. So I'll be in Tallahassee on a satellite connection, a video connection to the rest of the group that will be in Israel. Cinderella scrubbing the floors of the castle while everybody else is at the ball. But anyway, we'll talk about that. And the Israeli government is keenly aware of this and very appreciative of the outcome. So, once again, you do well by doing good.

• 1:04:59Speaker 04

  I want to turn to your thoughts on private equity and hedge funds. Private equity is an important component and has been for a long time of what you're doing. How do you think about it in the context of the portfolio and how do you decide who you're going to partner with?

• 1:05:14Speaker 03

  Well, we've done an awful lot in the private equity space over the past five or 10 years to sort of refine the portfolio. And what I mean when I say that is rather than putting a whole lot of money with big US mega LBO-centric funds that have lots of products that cover the world.

• 1:05:38Speaker 03

  We think we've been smarter to really dig deeper and understand where the persistent ability to add value is in organizations. And how has their focus remained? How's their asset growth been? Have they just gotten geometrically bigger because they could and proliferated products? Or have they stayed focused? And we've sort of tried to concentrate relationships with the best players. So if we were in three funds in a given space, now we're more likely to be in one, maybe two. We've also taken up more specialty relationships of various kinds.

• 1:06:23Speaker 03

  Funds that distinguish themselves by a very strict focus, by capsized geography, industry, region, things of that nature, or some crosscut of those sorts of screens. We've also made an effort to be more international in our private equity through actually partnering with people who have a European focus, for example, or likewise Asia. Where that gets more problematic is when you get, particularly in Asia, where you're dealing with China, India, Southeast Asia, differences in law, differences in culture, a whole lot of things make that infinitely more complicated.

• 1:07:07Speaker 03

  So we've, we're in early days there, but we've done some things I think are fairly innovative, where we've partnered with a private equity fund of funds that we're well-aligned with and have good co-investment relationships with. And they in turn have found tremendous GPs for us, and it's worked out beautifully. And we've done similar things in the venture space.

• 1:07:29Speaker 04

  At your size, I imagine you're one of the few people in this ecosystem that has the possibility of being somewhat of a price maker in some of these relationships. At the same time, there's so much aggregate demand for private equity. It's not clear that that would be the case. Where do you come out across your portfolio on just finding the funds you like and other people like them and accepting the price compared to doing something off-market?

• 1:07:55Speaker 03

  There are definitely times when... Something is a scarce commodity that's always oversubscribed and getting any allocation to it is a good allocation. And in those cases, you take the terms. And frankly, the reason you don't feel bad about that is net of whatever the terms are, the performance is so good, that's why there's a line out the door. That's a high-class problem. I always tell people, the fees should not be your first focus. The net result should be. And if the net risk-adjusted result is tantalizing, go for it. If the result is mediocre and the fees are cheap, is that appealing? The analogy I like to give people is, listen, I'm very picky about food and drink. And if I go to a restaurant and the

• 1:08:37Speaker 03

  food's not very good, I don't care what it costs. I'm not going back. Period.

• 1:08:42Speaker 04

  And then how's that break out across your portfolio? If you were breaking out the, take the private equity relationships as a whole, what percentage of them do you think are, kind of market terms, best in breed managers? And what percentage of them do you think because of your size, they may also be your perception best in breed, but you're able to get better terms?

• 1:09:00Speaker 03

  I don't have an exact answer for that, but I think the majority of them, we would have some superiority in terms. And the reason I think that's a pretty safe statement is there are some things that are required under Florida law that are inconsistent with most GP's documents. So, for example, one thing we can't do is indemnify people. Any GP agreement will have an indemnification provision. And if we can say, look, it's Florida law, and most MFN provisions, most favored nation provisions in partnerships, we'll have some sort of provision about applying to similarly situated investors. And if we can say, okay, we're a state fund, this is a function of state law. If you have other state funds

• 1:09:42Speaker 03

  with other state laws, you're going to have to accommodate them otherwise as well, because they just can't give you money otherwise.

• 1:09:49Speaker 04

  And how about hedge funds? I know hedge funds or absolute return are not a line item, but if you do go through manager by manager, there are a number of them in the opportunistic bucket. How do you view those strategies?

• 1:09:58Speaker 03

  Well, I think a lot of those strategies have not distinguished themselves of late. And the common reason that's given is the strong equity tailwind, and you can't keep up, et cetera, et cetera. I suspect hedge funds...

• 1:10:15Speaker 03

  Will venerate themselves when the market cycle fulfills itself. That said, there are a lot of them that have disappointed in the interim and we've made changes in our lineup and we're constantly searching for folks that are doing things that are different.

• 1:10:34Speaker 04

  When you have a market headwind like that, particularly say in long short equity, which is sort of commonly known, to what extent do you look at an individual manager that you thought deserved a place in the portfolio, hadn't delivered for a while, and you're replacing with another who maybe has delivered, and how do you make that determination?

• 1:10:53Speaker 03

  Well, first of all, we're patient. I mean, chasing performance is the bane of any successful investment existence. So we tend to be very patient. We tend to listen to people. We've been through iterations with firms where they've had an overseas office and a New York office and they've decided to close one or the other. They've moved people around. We tend to be patient through things like that. Could be they come up with a structure as a gesture of good faith after a period of sort of being undersatisfying to their investors that is attractive. And if we still have confidence in the group, we might take advantage of something like that. Sometimes there'll be a unilateral offer to change the terms to our advantage as an acknowledgement of, look, we've disappointed

• 1:11:37Speaker 03

  ourselves. We know we've disappointed you and we want to reflect good faith, so we're lowering your fees. Or we're going to do this or that or the other. So we tend to be patient with things like that. And I wouldn't say that if we pull out of any given fund, we're automatically going to repurpose that capital into another fund sequentially. It could be that we'll repurpose that capital into something altogether different that may be a different investment format.

• 1:12:04Speaker 04

  With all the people on your team, particularly the people focused on external managers, how do you ultimately make your investment decisions?

• 1:12:10Speaker 03

  Well, most of them are made pretty much at the

• 1:12:15Speaker 03

  Asset class level, we make broad decisions in terms of characteristics that we like, areas that we want to emphasize at a given point in time. And then the different asset classes all have depth and existing manager bases. And we do annual work plans where we take the time at the asset class level to really think through, what does our current pipeline look like vis a vis the portfolio today? How do we envision the portfolio evolving as we go through this pipeline over the next 12 months? What resources are we going to need? What capital flows are there? What are going to be the flows in and the flows out? We're a mature plan. So our private equity program's largely self-funding.

• 1:13:00Speaker 03

  Strategic is largely self-funding.

• 1:13:02Speaker 04

  And at the manager level as CIO, do you make the ultimate decision?

• 1:13:05Speaker 03

  I sign all the documents and nothing gets done without my okay. And if we have an objection to something, and there have been things that I've held up before, our process is such that the checks and balances are constant and they're both internal and external, and the transparency is very high. So we have simultaneous compliance, participation, and oversight. We have an internal investment memo that's written at the inception of an idea, say to propose the Harvest Volatility Fund or something like that. We'd have an initial write-up on why this strategy makes sense and the principals are good people and we think it would complement our portfolio. And on the basis of that, and I've got to sign that, we go forward with due diligence

• 1:13:49Speaker 03

  with some rough idea of what we might put into it, pending the diligence and negotiation of terms. And then if it comes out the back end, and it could be a year later, with an investment memo that's the actual memo authorizing the completion of the docs, and then the next thing is the docs themselves, all along the way, there are going to be business points that are going to come up, there are going to be terms that are going to come up, there will be scaling issues, constraints, all that kind of thing. And once in a while, you will have a barrier in the form of

• 1:14:23Speaker 03

  Could be you've gotten some intelligence somewhere or somebody does something that was inappropriate. I mean, I remember a case years ago where we were looking at a fund and an item appeared and I think it was the New York Post on a Monday morning where somebody who was a principal of a fund had had a fit at a social event out on Long Island over the weekend. And the behavior, we just, we just thought, you know, if that's what's under this individual, life's too short.

• 1:14:51Speaker 04

  All right, Ash, I want to leave a little time for some closing questions. So we'll get you out of here. What's your favorite hobby or activity outside of work and family?

• 1:14:58Speaker 03

  Well, I don't have a single thing. I would say if I looked at where most of my time goes, it involves food and wine. I cook a lot. I have all my life. I collect wine. I love to entertain. My wife and I love to entertain. And I like to play with an idea for a themed dinner for a long time and put it together and figure out the execution, match the wines and get a nice group of folks together and do that. You can't live where we live and not do a little hunting and fishing. I also like live music and enjoy the fine arts. And with the university right in our backyard and all the trips I take to major cities, there's ample opportunity to indulge those tastes. And lastly, I have a motorcycle

• 1:15:41Speaker 03

  and I love riding out in the country in the quiet of a weekend morning. Nothing better.

• 1:15:47Speaker 04

  What's your biggest pet peeve?

• 1:15:48Speaker 03

  I think the thing that bothers me the most right now is I think social media is creating a generation of people who are grossly underinformed and very subject to manipulation. Nobody seems to read newspapers anymore, really understand issues in real time. And I read a lot of newspapers. I read a lot of books. I read things like The Economist and other barons and stuff that comes out weekly. And if you read enough and you understand the nuances, you really understand the world around you. And the number of people I know, and I see this in my own kids, whose idea of understanding the news is whatever their Facebook feed tells them. That's scary.

• 1:16:31Speaker 04

  How about your biggest investment pet peeve?

• 1:16:32Speaker 03

  I think the thing there would be the constant barrage of inquiries and pushes we get from people who've obviously taken no time to know who we are, what we do, what we're interested in, what we've signaled we're not interested in. Think about the message that gives a potential investor. You're out here recruiting for business and you're either so, shall we say unmotivated, that's more charitable than saying lazy, or your research skills are so poor that you're writing me a letter or an email saying, "Dear Ms. Williams," or you're proposing something that we just don't do and would never do, and we've all spoken about it publicly,

• 1:17:17Speaker 03

  why on earth would we do business with you? Just do your job, will you?

• 1:17:22Speaker 04

  What have you learned recently that's most struck you?

• 1:17:25Speaker 03

  I don't know that I could point to a single thing. Maybe it's just the more I learn about the whole cyber risk area, that is truly terrifying. And I don't know that we've got our arms around that as a country. I don't know that we can.

• 1:17:42Speaker 04

  What teaching from your parents has most stayed with you?

• 1:17:45Speaker 03

  There are several things I think of that I can hear my father and mother saying. Two from my father, one from my mother. My dad used to always say to me when I was yammering on about one thing or another, "The empty vessel makes the most noise." Very true. How many times have you met somebody and they're just off into the acronyms and, you know, basically singing their own tune over and over and over again, and you just think, "Everything you're saying is based on a phony premise. You should listen to this." It just, no, you're just wrong. Cut it out. So that would be one. And another one would be, which I think was attributable to Roosevelt, "Walk softly and carry a big stick." And there's a lot to be said for that.

• 1:18:28Speaker 03

  And particularly if you have an institution like ours, there are times when you get into some sort of potential conflict. And I'll never forget one time, somebody was threatening to sue me and sue us. And I said, "You know, if you've got a minute," we were in our offices in Tel Aviv, "if you've got a minute, we can walk around the corner, I'll show you a row of offices with our lawyers in them who work for salary. And frankly, we can tie you up for the next 15 years if you'd like, and the incremental cost to us is nothing. And by the way, I could also show you the list of outside firms we have in New York and other places who would be happy to make your life miserable if we'd like them to. So if you really want to go there, you can. But I don't think that's a great opener for you.

• 1:19:11Speaker 03

  I think we need a peaceful resolution." And I can remember my mother saying, "Know thyself."

• 1:19:19Speaker 03

  Great advice.

• 1:19:20Speaker 04

  All right, last one. What life lesson have you learned that you wish you knew a lot earlier in your life?

• 1:19:26Speaker 03

  How much I don't know. And the more you know about the world, and I consider myself a lifelong learner, and I'm interested in just about everything. I'm always asking why, and how does that work? And what's the history? And how'd that policy get the way it is? All that sort of stuff. And the more of that you do, the more you realize you don't know. And when you're young, think about it. Anybody who's ever been a parent knows, nobody knows more about the world than a 16 or 17-year-old kid. They know everything. And if you try and tell them anything, you're just, no, you're wrong. So that's pretty important.

• 1:20:02Speaker 04

  Ash, thanks so much. Fascinating.

• 1:20:04Speaker 03

  Thank you.

• 1:20:05Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.