Senior Decision Makers: Luis Laboy, Hewlett Foundation (EP.512)

Our next guest on the Senior Decision Makers series is Luis Laboy, Director of Public Equity at the Hewlett Foundation, where he's spent the last decade running the public equity book alongside CIO Ana Marshall — a mentor and colleague he first met nearly thirty years ago. The foundation's assets stand at roughly $14 billion today. Luis spent fifteen years as a direct emerging markets investor at Everest Capital before crossing to the LP side, and our conversation digs into how he's leveraged that experience as an allocator. We discuss how the cadence and depth of decision-making changed when he went from a high-turnover book at Everest to a handful of high-conviction relationships at Hewlett, how his time split between portfolio construction and manager selection has evolved over, and how his time marketing the fund shaped the way he interviews managers and thinks about turnover. Luis is incredibly insightful about how his early interests and upbringing have shone through across his career. He thinks and speaks in analogies, he's wildly entertaining, and — in short — he's just a genuinely good dude, and that comes through in spades in our conversation. Any leader should see for themselves the benefits of elite coaching. Try ALEX: tryalex.admiredleadership.com. http://tryalex.admiredleadership.com/ 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/)

• 0:00Speaker 00

  If I describe a market to you, I tell you this market has geopolitical risk. It has political uncertainty. It has social polarization. It's got policy risk. The market structure was changing. And I asked you to tell me which market I'm describing. You would most likely say an emerging market, but it's not. Today, it describes any market that's out there. Once upon a time, I went into Anna's office. This is back at RCM. It was maddening for a young analyst. The dollar was weakening. Emerging markets were falling. And I asked her, is a strong currency or a weak currency good or bad for emerging markets? And she just said, depends on why, which was a deeply unsatisfying answer for someone that still believed that the answers were in the spreadsheet. I wanted to put something into a model.

• 0:45Speaker 00

  What I actually realized many years later, and this is probably why this answer from her has stuck around for 20-plus years, is that my question was wrong. That's where I'm thinking a lot about today. Are we asking the right questions about markets? Markets have indeed changed, and all of those risks that I mentioned now describe any country in the world, not just emerging markets and developed markets are somehow the bastions of the opposite of all of those things. Should we be thinking about the whole structure of markets differently? What does that mean for portfolio construction?

• 1:22Speaker 01

  I'm Ted Seides, and this is Capital Allocators. The CIOs of the largest pools of capital have jobs that require broad skillsets. They cover the world across asset classes and strategies, determine portfolio construction, and decide what goes into their portfolio. They're also leaders, managing people in an investment office, working with the board, and taking care of all their stakeholders, whether students, grantees, pensioners, family members, insured recipients, or sovereign states. It's a complex role that involves far more than just investing. But they don't do it alone.

• 2:06Speaker 01

  Behind every successful CIO is a talented team who focuses most, if not all, of their time on investing. We've spent time with many of these senior decision makers at our summits and find they're closest to the action and deeply insightful about investment opportunities and the investment process. This mini-series, Senior Decision Makers, features conversations with investors that have not yet ascended to the CIO seat. These professionals are the primary driver of decisions that lead new ideas into a portfolio or exits from a manager's strategy and are at a fascinating point in their career.

• 2:48Speaker 01

  My partner and the CEO of Capital Allocators, Hank Sturmac, will take the mic and lead an exploration of the investment thinking and role of senior decision makers.

• 3:00Speaker 02

  Our next guest on the Senior Decision Maker series is Luis Laboy, Director of Public Equities at the Hewlett Foundation, where he spent the last decade running the public equity book alongside CIO Anna Marshall, a mentor and colleague he first met nearly 30 years ago. The foundation's assets stand at roughly $14 billion today. Luis spent 15 years as a direct emerging markets investor at Everest Capital before crossing to the LP side, and our conversation digs into how he's leveraged that experience as an allocator. We discuss how the cadence and depth of decision making changed when he went from a high turnover book at Everest to a handful of high conviction relationships at Hewlett, how his time split between portfolio construction and manager selection has evolved over his

• 3:41Speaker 02

  career, and how his time marketing funds shaped the way he interviews managers and thinks about turnover today. Luis is incredibly insightful about how his early interests and upbringing have shone through across his career. He thinks and speaks in analogies. He's wildly entertaining. And in short, he's just a genuinely good dude, and that comes through in spades in our conversation.

• 4:05Speaker 01

  Before we get going, we're hiring at Capital Allocators two roles that will shape our next chapter. They're two of the best jobs in the business, at least in my opinion, that'll help us bring together our community of allocators and managers to compound knowledge and relationships. And best of all, we get to serve this community without really selling them anything. The first is investor relations. The role includes both building real relationships with allocators and managers and creating the experiences that bring them together. The relationships come first, knowing who should meet who, what each person is working through, and where the connections lie.

• 4:47Speaker 01

  The experiences are how you deliver on them, the kind of unreasonable hospitality that makes Will Gaderas smile, thinking about how we make someone feel like the only person in the room. It takes off-the-charts EQ and real curiosity about how AI can deepen the way we connect with people. Tamar, our relationship savant, owns the role today, and she'll tell you it's the best seat in the business. The second is Chief of Staff, a great multitasker who takes small projects and strategic planning off Hank and my plates and helps run our three businesses with AI at the core of the job.

• 5:31Speaker 01

  It's the seat Hank stepped into five years ago after a single post across our channels. And today, he's our CEO. The sky is the limit on how the role could evolve. For context, we just hosted our 10th summit, and we've now brought together 432 allocator organizations and 301 managers who've shared over 125,000 one-on-one contacts. If either sounds like you, email us at [email protected] with your answers to three questions. One, how did you find the podcast? Two, what was your most recent project using AI?

• 6:15Speaker 01

  And three, how are you connected to someone on our team? Full descriptions of the role are available at capitalallocators.com. And thanks for spreading the word about our two new roles at Capital Allocators. Capital Allocators is brought to you by AlphaSense. Here's something for you. Most AI tools today are very good at sounding right, but can you actually trace it back to a filing, transcript, or specific passage that drove the answer? Or are you just trusting the confidence of the output? For allocators, that's not a minor concern.

• 6:55Speaker 01

  A missed filing, incorrect source, or context that gets lost somewhere in the retrieval chain aren't edge cases. They're how decisions go wrong. AlphaSense is the AI platform built specifically for this. They own the content, over 500 million curated documents, from broker research and expert transcripts to filings and earnings calls. And they own the retrieval layer on top of it. That means every answer can link back to an exact verifiable source, because the answer is only as good as what's underneath it. And with AlphaSense, you know exactly what that is. See it for yourself.

• 7:37Speaker 01

  Try a free trial at alphasense.com/capital. That's alphasense.com with a hyphen in the middle slash capital. Capital Allocators is also brought to you by Morningstar. In a sea of data, you need to know what you can trust. Morningstar's data, analytics, and research helps bring clarity across public and private markets, connecting independent research and data into the tools and AI platforms you use every day, so insights are easier to spot and act on. Morningstar, nothing in your way. Visit morningstar.com/gameon to learn more.

• 8:18Speaker 01

  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 relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations, and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible, so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com/capitalallocators. Please enjoy this conversation with Luis Leboi.

• 9:05Speaker 01

  Luis, I am so excited for this conversation.

• 9:09Speaker 00

  Thanks. I'm very excited to be here.

• 9:11Speaker 01

  With these conversations, we're keen to explore your path to the seat, how you spend your time, and insights into the life of an institutional LP. To start,

• 9:25Speaker 02

  Tell me a little bit about your upbringing.

• 9:26Speaker 00

  I was very fortunate to grow up in a big family. I was the fifth of six kids. Two parents, one grandmother. My parents thought that wasn't enough, so they got a Saint Bernard. Here, I grew up in this big house with lots of people, thankfully, lots of love, laughs, and a lot of strong opinions, which invited a lot of debate. All that played out in our daily dinners together. And some of my fondest memories come from those dinners. They were always full of lively conversation, everything from school and friends to current events to politics. I remember as early as being about six, seven years old, sitting at the adult table, listening to all these conversations.

• 10:08Speaker 00

  I remember vividly when we moved to the States, listening to conversations about the Iran hostage crisis back in the late 70s, and even the 80 election with Carter and Reagan. I think of myself back then. I've always been fairly contrarian by nature. Those family conversations sharpened that. I understood early on that if you were going to get oxygen in a room full of people that were more experienced, or in this case, older than me, you needed to say something different and value-added. There's no premium in consensus thinking. I learned to listen carefully, to see where my view differed. I developed that over time, and that's a muscle that I still have today. The thing that I really learned was that provocative thoughts were like extra credit. That's what lit up that dinner table in that room.

• 10:53Speaker 02

  What were some of your early interests?

• 10:55Speaker 00

  I was into politics as a kid. It's the result of those dinner conversations. Back then, there weren't 100 stations in streaming. We watched the news together. I enjoyed elections. More so than the candidates, the campaign strategy. You had a certain amount of money, a certain amount of time before an election, and a message. How do you marshal those forces around? What helped was that at that age, 13 or so, when we lived in Chicago, I had a friend that was a kindred spirit, someone that I still talk to today 40 years later. We used to talk a lot about politics together. We studied elections. There was this one game, while other kids were playing video games, we were playing an election simulation game,

• 11:40Speaker 00

  studying electoral maps from 1960 to 1992. Learned a lot about the evolution of politics and the political landscape, which came in handy as I started my career.

• 11:50Speaker 02

  When did your interest in financial markets and investing kick in?

• 11:55Speaker 00

  In college, I started mechanical engineering, following my father's path. Someone once told me I was great at math and science, so you become into a mechanical engineer. In the end, I would probably do what he did, which is go into business. The plan was working fine until my junior year. I took my first class in economics. Everything changed. I felt like Neo in The Matrix. I could see all of the ones and zeros. The professor didn't hurt. He was inspiring. He would sit at the edge of that platform in class, the vein throbbing in his neck as he was explaining these concepts. He would lean so far out into the class, I don't understand how he didn't fall off the platform. From that, it didn't take very long. I switched to econ. Now I was following my brother's path, my brother Carlos.

• 12:40Speaker 00

  Econ into finance, sell-side, the goal was to be an analyst. What I realized is how much mechanical engineering and econ had in common. Studying systems, studying resource management, what appealed to me about politics, too. We spend a lot of time with allocators, asking managers about their origin stories. Often, the origin story has to do with, I love stocks, something to do with Warren Buffett. They were reading financial statements at a very young age. My interest in finance came from the top-down. It was the politics, the economics. The one place where that made sense were very important drivers of return were in emerging markets. That's where I decided to launch my career.

• 13:21Speaker 02

  How'd you get into the financial industry after college?

• 13:26Speaker 00

  I spent a fair amount of time interviewing because I wanted to start my career in Mexico. I was dead set to start in emerging markets. The resume that I had up to that point would fit in well there. My first job was actually at Dresner Bank Mexico. We were building out a research team. My job was to do one of the dailies and write about the political macro market events of the day. I was fortunate to have as a first boss, Martin Benson. I credit him for really helping me launch my career. Two years into my time at Dresner, I walked into his office and I told him I needed to move to the States. I just wanted to move back. He gave me a piece of advice that I still think about today, and it's a piece of advice I give people all the time. He told me I needed a story. My story was that I couldn't leave yet. I just hadn't completed the arc to be ready for my next job.

• 14:10Speaker 00

  My story is I wanted to be an analyst. I immediately taught myself accounting. I started to work on financial modeling. While I'm doing all of this, that's where I had an opportunity to meet Anna Marshall for the first time. She was traveling to Mexico to visit companies. She was traveling with Bear Stearns. My brother was working at Bear Stearns. I got a chance to join in with them. That was the first time that I had truly seen the whole puzzle come together of that top-down, the bottom-up, how it comes together to lead to investment conclusions. It was mesmerizing. Clearly, I had found my place. I went off after the visit. I called Anna and I asked her, what do I need to do if I ever want to work with somebody like you?

• 14:49Speaker 00

  Anna's advice was get your CFA. Anybody who knows Anna, 25 years later, that would still be her same advice to anybody starting today. I studied for the CFA, and when I passed level one, I called her up to give her the update. As luck would have it, she was hiring. She invited me up to San Francisco. About a month later, I was moving to San Francisco to go work with her at Dresner RCM. That was my first tour of duty with her. I worked with her for four years before I ended up moving to Everest Capital. At Everest, I spent about 15 years. I covered Latin America. I was working in emerging markets, Turkey, parts of Europe, Africa. What was great about Everest is I invested across all asset classes. So now I was really broadening my scope.

• 15:33Speaker 00

  We were in equities, debt, commodities, currencies, often simultaneously. It really paid again to those strengths, the top-down, the finding the thematics, the macro, marrying that with the bottom-up. What stands out from all that time at Everest was how it started. It wasn't a linear move upward. Six months in, it's time for reviews, and Marco calls me into his office, tells me that I'm probably not going to have another review unless my performance improves.

• 16:00Speaker 02

  How many years into being at Everest were you?

• 16:03Speaker 00

  I was six months. I clearly felt I was over my head. Thankfully, even in that moment where I'm doing the internal calculations that I think I'm going to get fired, I had the wherewithal to ask him what he thought I was doing wrong. He saw me work every day. I asked him what he suggested. He gave me a piece of advice that I still think about today. You're trying to be right rather than make money, and our job is to make money. I didn't quite know what that looked like, so I asked him to explain. If I can visualize it, I can do it. At the end of the call, I stood up, trying to act confident. I said, Marco, I can do that. He wasn't having some of this fake bravado, and he said, I hope so.

• 16:44Speaker 02

  You have this heart-to-heart with your boss, six months into joining Everest. You think you're going to get fired. How did you respond?

• 16:53Speaker 00

  Eight months passed by. Lula had just been elected president. It's the early 2000s. Everybody thought that Brazil was going to devalue and default. I had this great benefit of doing this spectacular trip coordinated by Emmy Shiel. We went and we met with the head of the central bank, the Senate, the leader of the House of Representatives. Then we met with the chief of staff of Lula in his office. I came back from that trip believing that the market was wrong, that contrarian person, always looking for the opposite, came in. And I said, we need to own Brazil. We maxed out our limit in Brazil, and that just wasn't enough for Marco. We went to go put on an options trade. It was a structure that the market had to go up 20% in two months

• 17:37Speaker 00

  for us to make a five-to-one payout on our premium for the option structure. I still remember Marco holding his finger over the enter button before sending the trade. He looked at me and he said, are you sure? Of course, I wasn't sure. But what I was certain about was that if I said no, I was likely going to get fired in four months before my next review. I clearly understood the incentive structure that was on the table. I said, absolutely, Marco. Within two months, the market went up 23%. We made our five-to-one payout on our option strategy, all the money on the cash trade. By the time of my next review, they had promoted me to partner, from almost fired to partner in 12 months.

• 18:18Speaker 02

  15 years at an asset manager is a long time. Tell us about some of the various hats that you wore in the 15 years that you were at Everest.

• 18:25Speaker 00

  In addition to investing, I was part of a team where I was an analyst and a portfolio manager, so I was the decision-maker as well. One of the things that I learned, and I learned this from Anna early on, is figure out how to add value on the team. Because invariably, managers have bad years of performance. I figured if I added value, that one year that came that was going to be the year that tested me, that I had a buffer. I had some other way that I was adding to the team. I marketed a lot. I'm an external thinker. Marketing served two purposes. It had the defense and the offense. The defense was protecting myself against the down year. The offense was that I thought a lot about the portfolio and how I was investing it in those meetings.

• 19:08Speaker 00

  I'm not sure if LPs at the time really always understood that I was working through ideas while we were in our meetings. I worked on the EM team. I helped launch the Frontier Markets product. By the time that I was leaving Everest, I had just studied technical analysis to become a chartered market technician. I was introducing that as well into our process, working on the Frontier Markets team.

• 19:31Speaker 02

  What prompted the move from a direct investment seat to an institutional alicare?

• 19:38Speaker 00

  It's funny, the first time that I got exposure to the endowment and foundation world, I was sitting in a meeting with our salesperson. I was listening to the LP talk about how the CIO wanted him in a seat for 10 years. I'm thinking, like, what world do we live in where someone can see 10 years out? I worked at a hedge fund. I was thinking in terms of year to year. I slowly started to learn more about the world. See, because Anna was there. Anna and I, all this time over those 15 years, stayed in touch, and I got to know more and more about what she did and how they did it. It became intriguing. At Everest, our time horizon was short.

• 20:16Speaker 00

  I was longing for it to expand that time horizon to broaden out of emerging markets and Latin America. Felt like a natural step, the natural evolution of what I wanted to do, especially after I studied technical analysis.

• 20:28Speaker 02

  Such fun serendipity to have those points of connectivity with Anna early in your career, then in the latest transition from Everest to Hewlett. What was that actual transition like? How did you join the team at Hewlett?

• 20:39Speaker 00

  On the personal side, I had just finished remodeling a house after torturing myself for a year and a half. When I say I literally had just thrown out the last box, my girlfriend and I, now my wife, were hosting my parents and my oldest daughter. Saturday afternoon, I get a call from Anna in the middle of a barbecue. We talked for a while and I hang up. I turned to everybody and I say, looks like we need to move. You had lived in the place less than a month. Went to San Francisco. I interviewed with the team, got to meet everybody, which is great because they were helpful in just the ramping up and understanding what was ahead. Within a couple of months, I was in San Francisco again, working with Anna at Hewlett.

• 21:17Speaker 02

  How did your time at a hedge fund inform how you approached your new job as an LP?

• 21:24Speaker 00

  First, it's not just the time at the hedge fund that was helpful. It's the amount of time that I got to spend at Everest that was helpful. Because there's obviously the experience of the different asset classes, learning how to invest. At Everest, what I learned was how to make a decision. It's the time that I got to spend at Everest where I really learned the soft parts of an investment firm. I spent 15 years with the same team. Over those 15 years, I got to see the arc of people's careers. I got to see the arc of strategies initiate and close down. I got to see the arc of the whole firm. It was a gift to be in that one place. It's almost like watching a movie over and over. And every time you see the movie, you pick up something different.

• 22:08Speaker 00

  And that's what it's like to work with the same people for a long time. I got to understand the nuances of culture of an investment team, how people's willingness to take risk changes over time, how my own willingness to take risk changed over time. When Everest closed and the whole team moved to RWC, I got to see how the same group of people, their energy changed, how a culture changed. And there was a lot of learnings because in the end, as allocators, we're sitting on the outside, trying to understand what's happening on the inside. We're left to fill in a lot of gaps. That experience of those 15 years gave me a lot of material to know which questions to ask, where the tripwires are inside a firm.

• 22:49Speaker 02

  How did your experience marketing at Everest inform how you wanted to approach manager selection once you joined an LP?

• 22:59Speaker 00

  When you market a lot, a couple of things happen. There's learnings that come from LPs that challenged me, that made me a better investor. As I was becoming an LP, I wanted to become one of those. I wanted to be helpful to managers. The marketing was helpful, but there's this little nuance between the two jobs. There's a difference in cadence in decision making, even in the amount of research and analysis you do for every decision. You're calibrating that all the time. And I had perfected that for a high turnover world of direct investing. And when you move over to the LP side, you make many less decisions and you go much deeper in terms of analysis. You have to recalibrate that carefully. You can fall into the trap of making uninformed decisions or falling into analysis paralysis. That took a while.

• 23:42Speaker 00

  The marketing experience is helpful in that because as I started manager selection, it helped me to understand how to ask managers questions, dig through the presentation. In fact, I never even wanted to pick up the presentation. I understood it allowed me to get into the perceptual position of the manager more organically, not ask questions, trying to understand what they do from an outside perspective, but how it feels to be in the seat and sit on the other side of that table.

• 24:09Speaker 02

  What were some examples of questions that you feel you took from that experience?

• 24:14Speaker 00

  There's a great example when I first started at Everest. We weren't necessarily known for the most stringent risk management practices. I took a meeting with a manager early on. I listened, I asked them about risk management. I noticed they hadn't talked about it the whole meeting. I asked them about how they manage risk. I got this long answer with lots of words and I realized that's the answer I used to give. They stopped him and I said, look, I don't think you realize I just spent 15 years marketing and I used to give your exact answer. What I'm picking up here is that you guys really don't have a very strong risk management practice. And he laughed and said, you're right. It actually let me cut through. I understood how to interpret what they were saying and put it into a question.

• 24:56Speaker 00

  It helped me break through, understand and ask questions with a layer of empathy, with an understanding of what are the different pressure points that they're looking at. The goal is to ask managers questions that hopefully create new thoughts, but you never want to come across like you're second guessing a manager. That's not our job. Our job is to understand them and to understand whether our strategies are aligned. A lot of my questions come from that perspective and I hope that that's the way it comes across.

• 25:26Speaker 02

  How did you initially spend your time when you first joined Hewlett?

• 25:31Speaker 00

  At first, just questioning why I had made the change because I felt like I was drinking from a fire hose for years. I had the great benefit of stepping into a spectacular team. That public equity portfolio was mature and full of just really great managers. This was a portfolio that was put together by Anna herself. I was taking that over. So there was a great benefit to that because on the portfolio construction side, which is where I spent most of my time at the beginning, because we already had this built out manager set, we were shrinking the portfolio size. We were concentrating the portfolio. I understood Anna's philosophy of portfolio construction. She was my mentor. That's how I even learned how to build portfolios. On the direct side, the only difference is I was learning context. I was learning what does it mean managers instead of stocks, the different decision

• 26:15Speaker 00

  making that we have to make. In that portfolio construction, what I learned in those first years is just understanding the philosophy, understanding how the different strategies came together. Having that ability was important because that helped inform the manager selection piece.

• 26:31Speaker 02

  In those early years, when you're spending time on the portfolio construction side, what's an example of your role in a real decision that was made?

• 26:40Speaker 00

  A good example of that is during COVID. By the time COVID came around, I had been doing this a few years. COVID was the first time that I actually had a moment to step back. You were alone in your office in your house for months. We started to do deep dives into the portfolio. One of the things that we really started to focus on then, we felt there was a transition happening in the market. I started to break down the portfolio. We ended up starting to reduce our exposure to, for example, value managers. We thought value would just be a tougher place to be going forward. I started making these presentations, these 10, 15 page presentations to entertain myself as I broke down the portfolio. That helped us in understanding where the structure was today, where we thought it was going.

• 27:25Speaker 00

  We had extensive conversations about that and some of the decisions we needed to make. And there it was reducing some of the value managers that we had in the book, transitioning into a more quality compounding portfolio that was becoming more prevalent at the time.

• 27:40Speaker 02

  As you've progressed in your tenure at Hewlett, how has your allocation of responsibilities and how you balance your time changed?

• 27:51Speaker 00

  The biggest change has been that at the beginning, we had a larger manager roster and we were concentrating that manager roster. This is where the buy side experience came in. We didn't just look at it as managers. We also looked at the underlying companies. I started to build out spreadsheets that showed all the underlying positions that we had and we thought about as a portfolio of companies. As we started to get that core portfolio down to a certain size, then the shift starts to become over to manager selection. Because once you have a core portfolio, eventually over the course of 10 years that I've been at Hewlett, you have life cycles of managers and eventually you have to start searching for new managers. So I went from what was a very large, mature roster. We concentrated it.

• 28:35Speaker 00

  Now we needed to go find the next generation of manager. Now I probably spend half and half of my time really on that portfolio construction, which is so important, getting the sizing right of managers and sizing risk correctly. But then it's also the flip side of sourcing those managers.

• 28:54Speaker 02

  How much time goes into managers who aren't currently in your portfolio versus managers who are?

• 29:00Speaker 00

  An increasing amount of time. There's a tension there all the time. We want to give as much time to new managers we do to existing roster. Getting what you have right is as important as finding that next manager. And that's always a tension in the portfolio. And that was even in the structure of what we were doing. We learned early on the mix of explore versus exploit. Exploit means we have this set of managers and we want to maximize the return of those. And that's the portfolio construction side. But at the same time, you constantly need a certain velocity of new ideas into the book. One of the structures that was changed over time was instead of just having one portfolio, what we basically broke it down was we had one core portfolio because we want to maintain

• 29:42Speaker 00

  that discipline of having a limited set of managers, then making room for new relationships. So as that structure changed and we started to increase the amount of exploit, the velocity of new ideas, it takes a lot of time to meet managers and it takes a lot of time to triage and to get to know them.

• 30:01Speaker 01

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• 31:19Speaker 02

  How does a new manager make its way into such a concentrated book?

• 31:24Speaker 00

  That was the rub for a while. When you have a concentrated roster of spectacular managers, the hurdle becomes very high. One of the structures that I did is I broke the portfolio into two, where I had this core portfolio and then you carve out a piece of the portfolio for this next generation set of managers where the hurdle isn't lower. We're still trying to find the same quality or the high level manager. In fact, if you go back to my equation of make money rather than be right, those calibrate differently for the core portfolio than from the new manager set. You're giving yourself room to be more wrong there. So you're allowing a little bit more churn. Once we changed that structure, we gave ourselves room with what is the next generation

• 32:05Speaker 00

  portion of the book. You're lowering the confidence hurdle. You're not lowering the hurdle of quality.

• 32:11Speaker 02

  What are the characteristics of the managers that you look for in that carved out structure for new managers?

• 32:18Speaker 00

  We have a whole set of characteristics that continues to evolve. We build out the set of characteristics and the reason why we do that is because one of the most dangerous things that happens is that you look for what you want instead of what you need. I'm a girl dad. As much as I'd like to blame her for this, we watched reality TV and one of the shows we watched was Married at First Sight. The structure of the show Married at First Sight is that there's this set of experts that will pick out your mate for you. Instead of you doing it based on your attraction to the participants, it was done by a set of experts. There was a framework. I never forgot that because invariably these didn't work because people always went back to what they

• 33:01Speaker 00

  wanted rather than what they needed, which is what the experts were picking. I very much focus on that with manager selection. If I don't have a set of clear criteria ahead of time, I'm going to end up picking the shiny object that resonates with me. Then you're going to be introducing a certain factor risk, which is your own biases into the portfolio. The criteria that we're talking about here, it's changed over time because it moves with the opportunity set. That's one of the things that I think we do well, that we're flexible and we're adapting while we're constantly looking forward at what we need from a manager. It's a set of criteria that has shifted over time.

• 33:35Speaker 02

  I feel pretty confident that this is the first time manager selection has been comped to Married at First Sight on Capital Allocators. So thanks for that, Luis. How do you decide when to move on from a manager?

• 33:48Speaker 00

  It's always such a hard decision. The cadence of decision making is so different in what we do. One of the things that I've done, and we borrowed this from Annie Duke and her book, Quit, we've put together what we call is a kill list. For every manager in our book, we have what we call kill lists and key debates. It's basically a set of items that we're always looking at for every managers, whether that's new manager or existing managers, areas where we're trying to gain confidence, where we're trying to understand. If we have to redeem from a manager, we want it to be for fundamental reasons. We never want to be chasing performance. What ends up happening more times than not is that you end up redeeming from a manager because we're shifting our

• 34:30Speaker 00

  perspective on what's changing in the market. We have to redeem from a manager that otherwise I think is extraordinarily talented and I wish them great success. There's just no longer an alignment between what we need for the portfolio and what they deliver as a manager and their strategy.

• 34:44Speaker 02

  Who is involved on the team in this entire process around manager selection?

• 34:51Speaker 00

  For the public equity portfolio, Anna and I are the ones that spearhead that. We're one team, one approach. This is the best part of our Monday morning meetings and it almost reminds me of dinner back when I was a kid. I love to share half baked ideas, share how our conviction or our confidence in a manager is changing and really put it out there for the team. Even though Anna and I are the ones that are making that final decision on a manager, we try and get the input of the whole team. Any decision that we make never comes as a surprise to anybody and potentially has the input of everybody. We're a small team. It's myself, Brett Johnson, Tom Jankowski as directors, and Anna as the CIO. Anna plays a pivotal role

• 35:32Speaker 00

  across all of our asset classes. So we have this natural sounding board with Anna. She's deeply involved with all of us. I get so much from Anna and that experience and those conversations and we meet the managers together.

• 35:45Speaker 02

  I'd love to tap into that direct rapport you have with Anna. How much of that is informed by your previous working relationship and having known her for 30 years?

• 35:57Speaker 00

  It was the second or the third day I started at the foundation and I was sitting at my desk. I heard her voice in the background and it was just the oddest feeling. I felt like I was 27 again. Felt like no time had passed. One of the great things of working with Anna is that we see eye to eye on the basic structure and philosophy of things. And it's not that we agree with each other. There's no consensus thinking. One of the things Anna really prizes is innovation and evolution of thought and creative thinking. And I'm definitely contrarian by nature. We have that same base. We challenge and question each other and we riff well and brainstorm. That early time is great because it sets the base. This is why I wanted to work with her again. Anna leaves a lot

• 36:37Speaker 00

  of room for growth, a lot of room for you to run and to think. That's what works so well in the relationship and that's part of the culture that she sets across the team as well.

• 36:47Speaker 02

  What are some of the other philosophical commonalities that you and her share from an investment perspective?

• 36:54Speaker 00

  We have a similar view on risk reward frameworks of managers. We were a manager together. We share a philosophy of building a portfolio. We share the philosophy of manager selection. That criteria that we've put together over time is a shared criteria that we've talked about. When we're selecting a manager, we break apart opportunity set and manager selection. The steps are, we gain conviction on the opportunity set. Because we run as one team, one approach, once we have an idea of the opportunity set, like at Everest, we're looking across all asset classes. Where does this make most sense to invest? In which asset class? If it happens to be public equities, well, now we're going to get conviction on what's the right strategy for it.

• 37:38Speaker 00

  And then finally, the confidence in a manager. Our approach is common. It's that top down approach and bottom up approach combined.

• 37:47Speaker 02

  Where do you two see the world differently?

• 37:49Speaker 00

  I don't know. We see the world differently as much as the timing of how we get there is different. I have the benefit of investing in public equity. I have the benefit of having a very short convincer strategy. I can see something and say, I love this. I want this. Let's go get this. She is managing the weight of the whole portfolio and has to slow me down and move at a different pace. Japan is a great example of this. We started looking at Japan several years ago. We went on our first trip. We got to Japan ideas through technical analysis, through understanding of breakout in markets. We went to Japan together. I probably hear three words

• 38:29Speaker 00

  from the first meeting. I write in big font on the top of my computer, buy big, buy a lot. And I just turned into her and she laughs. Of course, it's not that simple. We spent a lot of time together getting to understand the market, researching it, back to our roots, what we used to do in emerging markets many years ago together.

• 38:49Speaker 02

  Did you buy big and buy a lot?

• 38:51Speaker 00

  We have eventually bought big. We were invested in Japan. We did the work together. What's really great is we both had the hunger to figure it out. We both have that same background and this is where we basically attacked the idea of Japan the same way that we did back in emerging markets where we wanted to get to know the market. We did all that work ahead of time before we surveyed our first manager.

• 39:12Speaker 02

  I want to come back to starting with an opportunity set and having that inform where you dig deep. What does that mean? How does that come to fruition in pursuit of a new investment opportunity?

• 39:26Speaker 00

  Japan example is a little bit different than most. There's very few times that there's an absolute new market that you're going to go into. It's important to understand how the structure of the market is changing and evolving. What's that impact on the whole opportunity set? And we spend a lot of time on that. That automatically is going to flow down to what are the strategies that we need? Then what are the managers we're going to select that we have confidence that can execute on that strategy within the changing opportunity set?

• 39:55Speaker 02

  You talked about Japan as a previous example of a change in market dynamics that's informing specific opportunities set to pursue. What are other changes in market dynamics that you're watching today that could be something you lean into in the future?

• 40:10Speaker 00

  I've been thinking about this, and it's something that we had been structuring the portfolio on for a while. If I describe a market to you, I tell you, this market has geopolitical risk, it has political uncertainty, it has social polarization, it's got policy risk. The market structure was changing, and I asked you to tell me which market I'm describing, you would most likely say an emerging market, but it's not. Today, it describes any market that's out there. Once upon a time, I went into Anna's office, this is back at RCM, it was maddening for a young analyst. The dollar was weakening, emerging markets were falling, and I asked her, is a strong currency or a weak currency good or bad for emerging markets?

• 40:52Speaker 00

  And she just said, depends on why, which was a deeply unsatisfying answer for someone that still believed that the answers were in the spreadsheet. I wanted to put something into a model. What I actually realized many years later, and this is probably why this answer from her has stuck around for 20-plus years, is that my question was wrong. That's where I'm thinking a lot about today. Are we asking the right questions about markets? Markets have indeed changed, and all of those risks that I mentioned now describe any country in the world, not just emerging markets and developed markets, or somehow the bastions of the opposite of all of those things. Should we be thinking about the whole structure of markets differently? What does that mean for portfolio construction?

• 41:34Speaker 02

  What is the right question to be asking you, public markets-focused institutional allocator, on where the opportunity is going to lie in the short to medium term?

• 41:47Speaker 00

  You have to start with, all we are is changing. Once you accept that everything that we know and build our careers on is changing right now, you're going to start looking into different parts of the world and trying to find that answer. We found managers that invest in quality. We found managers that were managing disruption risk and was important in their process. That started to guide us into a certain set of managers.

• 42:14Speaker 02

  What are the disruption risks that those managers are identifying and leaning into?

• 42:20Speaker 00

  Technology is the obvious one. What's happened with technology, it's accelerated in this last year as AI is apparently going to eat the world. It's technology risk, it's everything that I mentioned is a risk. How are they thinking of regulatory risk? How are they thinking of macro uncertainty? One of the things I learned the most from technical analysis was the risk of curve-fitting, the risk of over-adapting to the past. One of the things we let go of is biases. We're questioning our biases, we're focused on what we need relative to what we want. Trying to think of the portfolio in a dynamic way, rather than a checklist way of, we need this much of each asset class, and this is how

• 43:01Speaker 00

  you build a portfolio. Thinking of it dynamically and questioning ourselves, that's made the difference. In terms of the managers and the risks, it's disruption risk in terms of technology, it's disruption risk in terms of regulatory, government intervention, policy risk, geopolitical risk now, value chain risk. Are managers spending the time to understand the tech stack of a firm across the world? It's no longer about tech versus the rest of the world. Old economy names are now going to differentiate themselves based on how they apply tech.

• 43:33Speaker 02

  Even starting as early as your childhood and your upbringing and early interests, through the entirety of your career, it's such an elegant combination of these experiences and skill sets that inform the seat you're in today. It's almost like a match made in heaven, where you're doing these things that have built upon each other throughout your entire journey. Back to Martin, you clearly have a story, and that is wonderful to look back and reflect on, even as we're just having this conversation. Where do you go from here?

• 44:04Speaker 00

  I value my relationship with Anna. One of the best things of working with her is, it's captured in this example. Last year, when we sat for my review, she essentially asked me, what do you want to do for the next five years? My answer was pretty simple. I said, I want to work with you, which, by the way, she agreed, thankfully. That was a good starting point. Second of all, I'd said, I want to be an excellent director of public equities. I want to look at the world differently than others, innovate what we do, think differently, come up with different answers. The curiosity of continuing to attack this. When I studied economics, I had this moment where I wanted to be an econ teacher. The dream was alive for about five minutes, until I talked to one economics professor

• 44:47Speaker 00

  that told me not to be an economics professor. The one thing I would love to do someday, after all this is said and done, is to work with people that are sitting in my seat, as a mentor, as a coach in some way, because I've been really gifted with all these experiences and a certain trajectory to my career, that while you can't necessarily replicate it, you can build strategies around that, of how to get to that final point, how to get to the learnings that I've been able to build over those years.

• 45:15Speaker 02

  Luis, that's excellent. Would love to turn to some closing questions to wrap up. First, what is your favorite hobby or activity outside of work and family?

• 45:27Speaker 00

  I've recently gotten into Formula One. We travel a lot for business. Anna wants us to meet managers, and we enjoy meeting managers face to face. I was on a flight, the movie F1 with Brad Pitt kept popping up. I kept passing on and passing on, and finally, I watched it and I loved it. I used to think Formula One was just a bunch of cars driving around in a circle. It's so much more than that. Once I got it, it was about strategy, psychology, these team dynamics that I didn't realize existed, these split-second decisions that these drivers have to make. Once I watched it, I was hooked. I binge-drive to survive. I've watched now documentaries on legendary drivers. I've got a book list going that I've built together with AI. What really grabbed me, it wasn't the cars, I

• 46:12Speaker 00

  enjoy the cars, but it's the drivers, their personalities, the strategies. And in fact, the other day, Anna, who's a fan of F1, it was probably Sunday morning, nine in the morning after the Monaco race ended, I actually sent her a side-by-side comparison of two legendary drivers, Ayrton Senna and Alan Pross, and was comparing their driving histories when they were both drivers for McLaren, they had 32 races. I used all of the statistics and the language that we use to analyze investment managers, and I had basically compared them to investment managers, which is probably about as nerdy as it gets.

• 46:49Speaker 02

  You have definitely graduated from hobby to obsession.

• 46:52Speaker 00

  It's definitely there, and it's bad enough, because my nephew heard about it, and he sent me his Xbox. And I am not a video gamer, but I have to tell you, in our living room now, I have a wheel, pedals, and I even bought the seat, and now I'm learning how to drive these things.

• 47:06Speaker 02

  Maybe your answer to the question on what's next in the future is an F1 driver. Never say never. All right, next question. Your biggest investment pet peeve?

• 47:15Speaker 00

  This comes back to my time when I used to market. It's the overuse of buzzwords and jargon. Jargon, less so, because in jargon, what it feels like sometimes, it's a secret handshake. I get it's very industry-specific language. It's buzzwords that do something worse. And I think they actually do a disservice to both the speaker and the listener. I was thinking about this the other day, the word quality, it's clearly a word that we all, as allocators here, especially public equity, a lot. It's very unfortunate, because the minute a manager comes in and tells you that they invest in quality compounds, the part that we all don't realize is they've ceded control of the conversation now to the listener.

• 47:57Speaker 00

  When you use a buzzword like that, the listener is going to fill the gap in on what quality means, based on their experience, based on their interpretation. Quality is a spectrum. It's not a fixed point. The worst case that happens, that a manager uses the word quality, and then another part of their process that they're describing doesn't align with that interpretation of quality for the LP. Suddenly, the LP is now working backwards from a contradiction that they picked up. LPs have a very limited amount of time. If there's anything that doesn't align well in that first meeting, you might not get a second shot at it. It would be really unfortunate for a great GP and a great LP to not end up pardoning just because of some misunderstanding in the conversation.

• 48:43Speaker 02

  All right, Luis, last one. What advice would you give to a young allocator that you wish you knew earlier?

• 48:50Speaker 00

  I may have done this, but not deliberately. Make it your own. Model everyone that you meet. Learn how every investor you encounter thinks. Study their philosophies, their frameworks, their process. This is the important piece. When you meet a lot of managers, they'll start quoting Buffett, and you see that they try and invest like Buffett. It's important to model parts of different investors, but never really adhere to their model wholesale, because that's them. That's like a suit that's tailor-made for that person. We're all different. This is what makes great PMs, coherence. Their investment strategy aligns with how

• 49:32Speaker 00

  they think, their emotional makeup. That's the most important thing we look for with a manager, is their alignment between their strategy and how they think. You borrow that process from someone else, or you overborrow a model from somebody, you're adhering to something. It's not something that's internalized to you. It's more than just when we're evaluating manager. I think it applies to how you build your own frameworks in your life. Your edge as an allocator is yours and yours alone. Let it reflect how you think. Maybe if I had to can all this into like one little catchphrase, it was borrow freely and liberally from others, but in the end, make it your own.

• 50:09Speaker 02

  I love it. Luis, so grateful for your perspectives and for the conversation today.

• 50:15Speaker 00

  Thank you. Thank you very much for having me, Hank. This was great. I enjoyed this.

• 50:19Speaker 02

  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.

• 50:35Speaker 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 in securities discussed on this podcast.