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Charles Van Vleet

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78
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2022-11-28
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2022-11-28
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  1. “So we didn't want to eight shares, we didn't want any red chips. We want as much as possible somebody who's reflecting the local economy. And so that's a lot of health care and fintech. These areas that China is way behind on. So it is not the Alibabas in the 10 cents. It is going to be more domestic focused and it's been rough. I mean, the currency alone has been rough over the last year. On the fixing”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “Staking the ground in China, I think you can't afford not to be in China. Somebody said to me the other day, they said, Charles, it's immoral to buy China. I said, immoral. What a word to use for us capitalists. But anyway, I think we are all best served to educate and get up the learning curve in China as quickly as we can. And”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “Two economists in two markets, Ted. We have the US here and we have China over here. And in between, we have a museum. If you want a latte at the Louvre, it's a great place, but there's not a lot to buy there. I mean, there just really isn't. So Europe tends to be very, very heavy into banks, insurance companies. There's a couple of great pharmas. Now, part of the problem isn't their making. Part of the problem is any technology upstart that starts in Germany or starts in Berlin or starts in the US steals it away. Same thing with Israel. Same thing with. So when they're looking for seed capital, they're looking for round B around C of capital. Somebody in Silicon Valley says, great idea. I got $100 million for you, but you have to move the company and the team to California. So it isn't that Europe's not capable. It's just the U.S. will steal those industries time and time again. But we have very little in Europe. We have a”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “Everything's through external managers. And your typical micro, mega captain, value to growth to benchmark agnostic to more benchmark aware to a couple of managers who are very focused, for example. We've always had a dedicated allocation to, my team's going to hate me when I hate to say this. I call it our cat stocks, chocolate, alcohol, tobacco, because I consume all three and I will pay any price.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “auditors to ENY, ENEY's can look to say, well, is that a realistic number? Frank, how do you back this up? And he's going to, well, Charles has provided me with all these public benchmarks. And so we took fixed income and out of the equity risk premium and we added an international premium and we added a default assumption. And so here's how we think that this is a realistic number. Frank doesn't care about that. I don't care about benchmarks. EY does because it goes into the GAP accounting. I know it drives the average asset manager crazy when we scratch our head and say, I don't know where I'm going to put this. Convertible bonds, where do I put it? CEO of equity, where would I put it? I know they hate their conversation. The only reason it's important is because of a gap requirement for this ROA.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “Yes, we don't have any consultants. I'm not a big believer in consultants. I've been doing this for 40 plus years. To be honest, it's a back of an envelope and a pencil. I just need to be in the ballpark. What is how you're going to act like in a drawdown like this? It's acting just like you would have modeled. What does a BDC going to act like in a drawdown? It's just like it's modeled. What does a reconna act like? You know, no surprise here by any of this. I don't like to spend a lot of time thinking about where stuff gets put in the portfolio, but here's why that's important, at least for corporate plan sponsors. The CFO asked me every year to come to him with a recommendation about what next year's expected rate return is. It's a corporate requirement for gap purposes that he has a EROA and he's allowed them to accrue at that state at EROA. And at the end of the year, he'll do a cancel revise on that accrue. So when we take that, we're going to probably target seven and a quarter again this year. He's going to take that to our internal.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “That's real estate. Public REITs are not real estate. On any given day, it's equity. And converbal bonds, surprise, surprise, are not bonds. It's equity. It is fine. Controvertible bond is a 0.8 S&P and a ret is a 0.9 S&P, and high yield is, we call it a 0.4 S&P. Everything's going to have an S&P beta to it. But just because it's labeled that way, I don't care what it's labeled. I care what it acts like. What does it look like? So our CLO equity. I call it a 2x Brussel 3000. It has that kind of volatility.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “Start with an asset allocation structure, and that's as set by the committee. We're in 30% alternatives, which is private equity, real estate primarily, a couple of hedge funds, but mostly real estate private equity, 30% fixed income and the balance in public equity. Now, public equity is US and international. And then the committee gives me very wide bands around that, and I aggressively play within those bands. Let me give you an example. The committee has decided that we have a 3% allocation to high yield in the benchmark. Well, I look at that, Ted and say, well, what the committee is telling you is that they are comfortable with non-investment grade securities and with somewhat okay liquidity. I don't have to put high yield in a high yield bucket. So what do I put in there? I put converts in there. I put BDCs in there. I put fallen angels in there. The benchmark is to me to suggest what kind of risk expectations and liquidity expectations they have in the portfolio just because it has a label. I'll be honest, there's nothing in a public”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “Talking about smoothing, you know, last year we exceeded by three times, and this will underperform by three times. And so yes, it's over an average. I think the holy grail quest is what gives you 110 up and only 90 down? Not many things have a skew like that. It's going to be something that has kind of an optionality to it. So what things give you S&P like upside, but none of the downside, call options will do that on the S&P. Pretty expensive. So you say, okay, what is the least expensive thing I can buy that'll give me some type of skew in that pattern return? A really easy place to fall back that we have consistently is we just remain overweight US dollar. We have a standing long dollar with a short versus yen, Aussie, and Euro. And it's a positive carry. We do it unfunded, so it's levered. It's a 5% position. And it pays off handsomely times like this because the dollar is still a risk-off currency. And that's exactly what's happening here yet again. So I'm looking for things.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “CIOs take the marketing order from the CFO. So the CFO he or she will give the marching orders about I am concerned about balance sheet volatility. I'm worried about contribution volatility. I'm worried about PBGC premiums, variable premiums. So it's a CFO that really is giving the marching orders to the CIO. The CFO at Textron, Frank Connor, I think has been brilliant in the markets and brilliant in foresight and his instructions to me are pretty simple. If you get me good returns seven, seven and a half percent every year, all problems go away. The fund will be fully funded. The contribution volatility drops off. The balance sheet volatility drops off. And in effect, that's been the path we pursued. So we're about 116% funded and we still remain growth focused. We do not have it LDI focused plan.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “So, when you've tackled this at Textron, you've got to generate returns to help support this liability over time. How does it work with how you create your investment program in alignment with the company?”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “Assets to achieve 80% hedging, and I'll use the other half my assets to remain invest in the stock market. The way you do that is two ways. One is you what's called a key rate duration mismatch. If I have a bunch of tenure liabilities, I say, ah, that's not important. I will replicate the duration value of that with 30-year security. So I'm duration yield curve mismatch. That's a common way. The other common way, as we've experienced in the UK, where the UK, of course, has gone through a meltdown because they were using derivatives. They were leveraging. So they were only using 50% of their assets levered to be hedged and the other 50% still remaining in growth assets.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “In two thousand six was a watershed legislation called the PPA Act, Pension Protection Act. And it's at that time when they changed the smoothing rules for the asset returns of a corporate pension to materially shorter. If you have a 20-year smoothing, I guarantee you over 20 years, stocks will outperform bonds. You know how I know that? Because if stocks don't outperform bonds, we're going to have much bigger problems. So stocks will not perform bonds over 20 years. So if your smoothing is 20 years, then you're comfortable saying I have a bond-like liability, but I have an equity-like asset. And I know over time the asset will outperform that liability. In 2006, by significantly shortening that smoothing period, there was a rush to say, gee, maybe we should act more like an insurance company and cash flow match our mortality tables with a cash flow bond that matures in the same year. So it's been a slippery slope since that time. But often people like to have their cake in two. So they said, well, I will only use half of my...”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “Everything we have in our portfolio, we assign an equity beta to it. And I know it's all bad math. Like I said, we assign a 0.4 to high yield. Sometimes it trades like a 0.2, sometimes I could 0.8. I think I'm in the bad math ballpark with a 0.4. So everything in the portfolio will roll up. And I'm not saying anything brave here. I think probably if we had the BlackRock Aladdin system or one of these, one of the bar systems, it would probably do the same kind of thing. But we assign beta so that just because I have a bunch of money in high yield, I don't call it a bond. It's not a bond. It comes out on average right now about 0.6 S&P. So it means that I'm overweight that portion of the S&P or else I need to take out of my equity portfolio. That's my philosophy and how that's very different to my peer group.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “Well, you know, I thought Ted, that we have all these artificial constructs. You know, we have one person doing private equity and another person doing public equity and go, well, that's ridiculous, so I'll just equity. We've created these artificial constructs about what we call asset classes. And so I've tried to break away from that a little bit. I really only think there's two asset classes. There's rates, as in government rates, and there's equity. Then there's equity proxies called spreads. So High Yield is just an equity proxy with a 0.4 and BDCs are an equity proxy with a 1.2 beta. And spreads is just an equity proxy. And I'd even go so far to say real estate really is just a spread product. It's a bond. It's a fixed income. The building itself is worth nothing if it doesn't have tenants. Real estate's really just a fixed income portfolio of credits and the credits are the tenants. And the building is your residual value, just like an investment grade bond.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “Well, Robin, I think very differently about the market, so there's nothing at all similar about that. I think I'm a kind of a unique beast in Siba that I came from a Wall Street background. And her fear about bringing in a Wall Street person, which is a legitimate fear, is that they tend to be too transactional because as a PM of a bond portfolio at Putnam or Credit Suisse, or you're making hundreds of trades a year, you come to an allocator site, you're making three, three things because they're much bigger and more expensive and moving around a large amount of capital. That was a concern of hers and I had to be watchful of my tendency to overtrade, overtransact.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “So when you came into the seat, how did you take the lessons you learned, both those types of leadership lessons from Robin and then portfolio structure lessons and start thinking about how you frame out the challenge of investing texture?”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  18. “And to be going to his office for 10 days. And the other, and she looks out at me, you give him the limit. And he would think and respond from his gut. And she said, so I had an entirely different diversity from two tall white males. And that is the goal. And I thought, you know, good for her. Good for her to say don't necessarily conflate the two. They may be related. They may not, but that's really what the goal is.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  19. “Was just something I'd always wanted to do. Robin's very young and bright and energetic. I always teas her she could go on to get on the board of any Fortune 500 company she wanted, but she loves where she is. And I'm just hitting that glass ceiling. You know, she's also out there to embrace the DEI cause. She is very strongly embracing. I heard her the other day. There was in an audience of 300 and she was up there speaking about her work with diversity, the DEI diversity inclusion. And at the end of this talk, she kind of saw me out in the audience. She said, but let me caution everyone here. The objective is diversity. Diversity of thinking. And we shouldn't necessarily conflate diversity of thinking with diversity of gender, race, or color. They may go together. They may not. She goes, she looked at me and she said, 10 years ago, I had two tall white males working for me. They couldn't be more opposite. One, if you give them, you know, a question to answer he needed 10,000 gigabits of data.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  20. “In other words, we just make stuff up similar product just in a different package doesn't make it a bad package, but we really do, I had somebody coming in yesterday pitching infrastructure, and I said, what is infrastructure? I don't understand what this is. They said, well, it's an airport or bridge or a road. I said, well, oh, it's just real estate. They said, no, no, it's infrastructure. I said, well, it's real estate with some unique patterns, but it's really just you got this asset. If you don't have a tenant for it, it's worth nothing. And so you get a cash flow off of that, and you might get to increase your rent with inflation if it's a bridge. But we just make stuff up. It's just real estate.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  21. “In particular, I think it makes me think of a great line Paul Volcker, somebody said, you know, Mr. Volcker, all these amazing financial innovation that the United States has come up with from CLOs to CDOs to CDO squareds to knock out options to what do you think was the most exciting great financial development that you've experienced in your 40-year career? And he kind of scratched his head and he said, no, the automatic cash machine?”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  22. “So refreshing. The broker dealer side of the business is, you know, you get up to go for a long weekend and you come back, you're not sure your chair is still going to be there. It is really that cutthroat. And for that reason, probably that's why it pays so very well because there is less security certainly than there is on the allocator side.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  23. “Allowed to use swear words. Of course. You know what's the great thing about the allocator side? There's like a sign over the door that says, no assholes allowed. It's just”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  24. “Get too smart for yourself and don't get married or your trades are we going to see the end of Japan and Yokur control as you know it's highly rumored can they extract themselves without again breaking something perhaps even breaking the U.S. treasury market $45 billion in currency intervention that money had to come from somewhere it came from US treasuries so it'll be interesting if Japan can extract themselves without something breaking here”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  25. “Of course, I was 2021 at the time. I was finishing up my last year at UC Berkeley and remembering we were always burning an effigy of somebody out in the middle of Sprout Hull. And it was Paul Vorker and I remember looking saying, I don't know who that guy is, but that seems a little rough, you know. So he was not afraid to be an enemy of the party, as they say. So experiencing his years along with the years into Greenspan, it's been a one-way ride after all, from 1982, the collapse of rates to where we perhaps have seen a turn what we're seeing unravel, you know, here even today is when you lift rates from a negative one and a half reel to a positive one and a half real, stuff just breaks because you would spend so many years with no volatility in rates that almost has broken the country of the UK and now it's breaking the whole crypto because people aren't going to put up with earning zero on their crypto when I can get 4% in a T-bill. So it's phenomenal to see this happening.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  26. “That trading background, I went into the buy side of Brown Brothers Harran, done on Ten Wall, and from there a succession of other asset management firms, mostly with a fixed income focus, Lion's Capital, Plutton Investments, Credit Suisse Asset Management. At the end of Credit Suisse Asset Management, at the end of my, I had a handcuff period. I came over to the planned sponsor side in 2005, and that was with Robin Diamanti, who is still there. And again, I owe her that opportunity to be invited to the buy side. So I've been on all three sides of the business. I call the broker-dealer side, the asset management side, and the allocator side.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  27. “That'd be in 1979. I went to work for Mitsue Bank in San Francisco selling certificates of deposit at 18%. These were in the early Volker years. And then having worked at the Japanese bank, my first then true career was at Nomora Securities in Tokyo. I had spoken a bit of Japanese. I had some financial background. I went off to Tokyo for three years in a training program and was a JGB trader between Tokyo and New York. JGB, you know, they call it the widowmaker, right? Because you're short of the 4%, shorter again to 3%, short again, 2%. This is ridiculous. And rates go to zero and you get fired.”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source

  28. “My guest on today's show is Charles Van Vleet, the chief investment officer of Textron, where he manages $10 billion in defined benefit assets and $5 billion of defined contribution assets. Charles joined Textron a decade ago after eight years at the pension fund of United Technologies and is widely respected as one of the most thoughtful and outspoken CIOs in the space. Our conversation covers Charles' background and turns to the objectives of corporate pension funds, Textron's strategic asset allocation, and Charles's creative implementation of value-added opportunities across asset classes. Along the way, he shares a host of opinions about what works and doesn't for institutional investors. Before we get going, the holidays are fast approaching, and just like learning from investment grades, we've got you covered. It just so happens that my wife”

    2022-11-28 · Capital Allocators · Charles Van Vleet – Thinking Differently with Pensions at Textron (Capital Allocators, EP. 283) · IDENTIFIED FROM THE TRANSCRIPT · source