YouSaid · the spoken record

Chris Ailman

lines on the record: 101
first: 2019-02-11
most recent: 2019-02-11
sittings or episodes: 1
sources: podcast

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“fearful, but it is so poisonous to your health and your soul when you stay in a bad situation. People always want to stay in and change it. And I try and have that dialogue, you know, like any company, I've got about five to eight percent of the staff that's not happy. I don't want them to leave, but I always say them for your own sake. Find something you enjoy more. It's try to say follow your passion, but I really think that's what people have to do because your work will be easier. It's still going to be work, not a hobby. We don't get paid for our hobbies. It's work, and that's why they have to pay us to do it. But if you find something you actually enjoy, you'll probably more than likely be a huge success at it.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“This is always a tough question because I hear it so often from people which is take more risk earlier in life, and that would be my answer. I don't know how I could convince myself to do that back then. As always, once you're toward the end of your journey, I'm sixty now, so I'm getting toward the end of my journey and I can look back with that. Part of it is the comfort of I made it to the end of the journey. It was unknown back when you were in your 20s. But I'm pleased to say, for instance, my youngest daughter and her husband are about to take a leave of absence and go to Europe for three months. That's the kind of thing I think that absolutely makes sense to explore and reach and consider this day and age is such a challenge with the fast pace of technology, the fast pace of change. I also would say if I could give that advice back to myself, is don't ever stay in a job you don't like. It is so hard to change jobs and so forth.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Their number one was to give more than you take, whether that's to an organization or to society in whole is to definitely give back more than you take in.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“One's easy. Actually, the Daily Bible, I start every day by reading that. On the investment side, I'm a big fan of institutional investor. I was sad when they stopped doing the print magazine. I've got old copies back into the 80s. But CIO and definitely pension and investments, that really is the daily website and then also the magazine because it really helps them keep track of what my peers are doing and thinking. And then I'll use that to reach out to them and get into a dialogue about something.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Think my biggest investment pet peeve is when people fall in love with their investment idea. And it is easy and it happens. But so often people mistake, and I'll hear this phrase, well, that person's a nice person, or I like that person. And my point is, you don't actually have to like the people that manage our money. They just have to make us money. In fact, if we don't like them, it's a little bit easier because we're a little bit more objective. So it's a constant challenge. And you've seen that with analysts on Wall Street that fall in love with a company. I've seen that with investment officers that fall in love with an asset manager or fall in love with an idea trying to be objective and remain unemotional. Investment sadly, money is emotional, but we have to be absolutely unemotional as much as we can.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“You know, I think part of the biggest challenge to me, as you probably caught earlier in the cast, I'm a planner, so it's hard for me to be spontaneous. My wife likes joke that at one point we lived in the state of Washington where you never know when it's going to be sunny or rainy, so she would tell me to plan on being spontaneous. I was okay with that.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“My staff often loves to talk about it because it was two days before our business meeting in July, I caught my pedal on a corner and actually smacked my head and knocked myself out for five hours with a concussion. So my wife is still mad that nobody was missing me after about three hours. The separated shoulder scars all over my shoulders because I'm trying to protect my head now. So no, you will, as you said. It's not a question of if, it's will. So, yeah, road rash comes with the territory, and that's the downside.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Cycling. And that's actually a family activity. My wife is a very active bike rider cyclist. She's on three different clubs. I'm only loosely on one. But for health and for happiness, we love to bike ride. So we'll do rides. California is a beautiful place. Sacramento is a blessing with some great bike trails and then the Sierra Foothills to ride in. But yeah, we've had the chance to ride in Tuscany and other places. It's a blast.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Those papers are on the 300club.org website. People can have access to them. We just redid the website, so it's much more user-friendly and easier to see. The North America chapter is growing slowly and surely, but CIOs that listen to the podcast are more than willing to contact me. And we're constantly taking members. The challenge is to get CIOs to write white papers. It takes time suddenly to be an author.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Is the reduction in the number of publicly traded companies? What's the long-term impact of that? What does that mean to the public investor? What does that mean to the private investor? I've often raised the question of these dark trading pools. Is that a positive or is that a negative? Clearly coming off the fraction system to the decimal system makes a lot of sense. But trading inside of a microsecond, is that efficient? Did that actually add liquidity or does it hurt? Those are good academic questions that went out of the time to research, but we can put out there for people to question.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“I certainly don't have the abs to be part of the Spartans. So ambitious name, and we're only about 40 strong. So it's not that we're up to 300. But it has really been one of the few global groups that has come together where you have a European chapter and North American chapter, CIOs from public funds, from corporates, universities, from money managers who get together and just talk about markets and things that are important to them and then write white papers and we publish them out there so that it's not necessarily a firm taking a position, but an individual saying, you know, I see something and it seems kind of strange. And it's really helpful to discuss the academic side of it. And that's what I'm really trying to push in our North America chapter is teaming up with universities to give them practical research ideas. We get a lot of good theoretical research out on investments, but we need some practical research.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“My mandates for my board, it's in my duty statement, is to be industry figure, to be a global CIO. And I'm involved in a couple of groups, one called CCC and another which had been around for a while called the 300 Club, which was really founded by Hermes as a way because they felt that in the O eight crisis, we heard a lot from Wall Street, we heard a lot from the banks and the brokers, but we didn't hear from investors. And so they wanted to create a voice where institutional investors could in essence be sort of the canary in the coal mine we could speak up when we thought there might be a danger or a risk out there in the market. They came up with a clever name of the 300 club, the 300 Spartans. I joined, but I made it clear I wasn't just going to risk my life for the markets.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“I'll show my A chair. I went through my Rolodex. I went through my Outlook file and called on a number of peers and got five firms to meet. Harvard was nice enough to host us again at the business school. We really touched a nerf and these people were willing to form a group, write these, vet it. We spent the summer going around the country trying to get other institutional investors to sign on and finally went public here in November. Now they're live on the web and we're actually already gathering firms. Somebody signed up just yesterday. So we're going to gather other institutional owners to engage with these companies. And I have found when the CEOs are focused on this issue, they're absolutely willing to listen and they want help. And this is an answer. This is not divestment. Don't turn your back and ignore the problem. Let's actually engage and make it better.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's been a blessing, I think, due to our name recognition, our brand image, which we've worked very hard, culture in the inside the investment office is very important to me, and I think that's what drives us. The brand image of Calsters, and I would say the fact that I've stayed there a long, long time has built up a good reputation in the industry so that when we call on people, they know we're serious about it. We'll put our effort.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“and really go out there and engage with the entire distribution manufacturing chain to say, look, Let's take a responsible view. And my best analogy, because this has been a hot button for some people, but my best analogy is when people started to talk about seatbelts, the auto manufacturers absolutely fought it. They felt that a seatbelt in a car would make people think their cars were unsafe. Today we wouldn't even give it a second thought. We'd probably be absolutely upset if we got in a car that didn't have seatbelts. So we think that this is a product that needs some responsibility, needs some protection around it. the technology is already there. Good Lord. We unlock our phones with our thumb. It's not that hard.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“were tiny. We'd just been around a long time, so we have an important voice, but we're tiny. So trying to bring about those kinds of changes, I think what we can do as institutional investors is really try to be proactive, set a standard, a framework for that discussion. But then when the social media kicks in, then companies will pay attention. Our most active example right now has been firearms. We took a position after Sandy Hook to Divesta Firearm manufacturers that made weapons that were illegal in California. And those companies would not even engage with us. They wouldn't even take a meeting to talk to us as shareholders. So we were left with no choice but to divest because the board felt that was too high of a risk. But we're concerned about the entire manufacturing change, particularly retail, finance, distribution. So we teamed up with a total of five trillion dollars of institutional asset to develop firearm principles.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“When this country wakes up and cares in social media, boys CEOs pay attention quickly and respond. So for us, it's been more about engagement, a dialogue, building a network with other investors around the world, because then companies will listen to us. But you mentioned about our size. Yes, we're big. We're the number two fund in the USA, a largest education only fund in the world. But when you look at long-term capital, we don't even rank in the top 20. And I can't point out enough to people that the world is awash with long-term capital. It's just not in the United States. It's mostly outside the borders overseas. You've got Norway, Japan, several of the sovereign wealth funds, over a trillion dollars of assets. So it's not like these funds are 10% or 20% bigger than us. They are seven times our size. So when I go to mini conferences,”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Our long term in nature versus important issues that arise from time to time. So most recently we've been in the press, the discussion about private prisons. It's no surprise that most of the people in America were absolutely up in arms with the immigration policy, and now the current immigration crisis in San Diego and Tijuana. So those kind of issues just really get people's attention. And that's where the debate becomes of what's the best way to bring about social change. And I'm very loud and clear that divestment is not the answer. Divestment is an investment decision that you don't want to be exposed to a company because you think it has too much risk in a particular area. We have proven time and again for the last 20 years that development does not bring about any social change. And people have to realize boycotts are generally ineffective unless you can get everybody involved in them. And what I'm impressed with is the power.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's a constant challenge, I would say, when you look at ES and G, the governance issues have been around a long, long time and they still remain. They seem to reoccur executive comp, board diversification. And you look at the environment issues. Those are right in front of us. Climate change is a current near-term issue. The social issues really do ebb and flow. And it is often difficult to figure out where they're going to come from. I did not have construction firms and a border wall on my agenda four years ago and wasn't even on my mind as something to worry about. And yet now we have people asking us, well, why do you own those construction companies? Well, they weren't involved in this before that, and they have been around 100 years. We end up having to really drop a lot of things and focus in on those. So it's a balance of when you think about climate change or governance, those are critical things.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“strategy. So it's really a way of looking at forward looking at it. So it's ingrained into our DNA. It's part of who we are. Yes, we are very vocal in the world because we think it needs to be other investors. The CFA Institute's already making that part of their curriculum. There's no question in, I'd say, Australia, the UK, Canada. People understand it and in Europe very much and they integrate it. The USA is probably being the most stubborn. Even here on Mizuno, my good friend, that runs GPIF, the $1.4 trillion plan in Japan, constantly talks about being a universal owner. It doesn't good to pay a pension check to somebody forty years from now if the earth is scorched and they can't live on it.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Every investment manager knows our concerns about ESG risks and we want them to be looking at those and thinking about those. I often point out that if you look at the typical financial analysis, it looks at the balance sheet income statement, working capital. Those are all backward-looking documents. The real information is in the management discussion, the MDNA. Those are forward-looking statements. And when you think about ESNG, those are really forward-looking risks. And management does talk about them. Unfortunately, it's too much boilerplate. We're trying to get them to disclose that better. But I can tell you talking to CEOs, they do look at those, but they call them operational business risks. And the words get too much in the way. But credit managers, private equity firms, insurance companies, absolutely pay attention to those long-term operational business risks. And that's what we're trying to focus into.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I always try to point out to people we're the teachers of California and teachers really do care about social issues. And it's the nature of our board all the way back to the seventies they have cared passionately about social issues and actually had a social investment policy back that far before other people talked about ES&G. And when you look at the three things we've been at governance since the early 80s and had a very strong corporate governance unit. It's now 15 people, a budget of about $3 million a year that we spend on corporate governance. We got involved, as I said, in social issues back in the 70s, but then again in 2000. The board really took some strong social concerns into the portfolio. And then environmental really started up in about 03. And so it's been part of our investment process. In the older periods, it was primarily exclusion-based, but going forward, it's been more of a risk and return, an opportunity and risk-based strategy. So we actually integrate ESG into all of our investment decisions. Every part of the team.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's really our risk budget. We are not going to try and achieve that every year in some years. We're actually going to be breaking even, but that gives us a risk tolerance about what we would do. But yeah, sizing the trades, it also is always a matter of conviction. For instance, I was very concerned about this U.S. equity market dating all the way back to last June. And so we started actually taking some profits out of the market and hedging it a bit by July. That hedge obviously proved very painful. So we reduced it a bit, but we kept some of it on. Now we're thankful for that.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“So we're looking at that negative cash flow for the next year and planning ahead. Teachers work in the summer, as has been pointed out to me, but most of the time not being teachers. And so we actually have a dry period in the summer where we pay out benefits and don't get a lot of money in. And it's just a matter of planning ahead for environments like that. And so that's where we'll use the hedging and the portfolio and the overlay of the portfolio.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“And so, what we'll do is, particularly a good example you would think of is Brexit, where we have a natural constant exposure to the British pound and to the euro. We have a currency team, but within that, should we hedge the overall plan at the plan level to protect against that? Do we want to be at a plan level overweight equity, overweight US or overweight non-US or underweight a particular region? So we're not trying to do very detailed trades. What we're trying to really do is do overlay trades that adjust and balance the risk of the plan. We recognize we can't time the market. So what we're trying to do is add about five to ten basis points a year to the plan of adding value, which is a large dollar amount. But when you're looking at $200 billion plan, many times, as I said, we have a negative cash flow. So we're an average net seller, not an average cost buyer. Therefore, we want to be a smart seller.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Overlay really is an outshoot of that, as I described, that asset allocation process. The board picks the long-term asset allocation. We've got interim targets, but we've realized that we really need to have a team that can look more intermediate near term and make decisions about within the ranges of the asset allocation, where do we want to tilt the portfolio? Should we be risk on? Should we be risk off? Back to my analogy of an ocean liner. As I said, should it be full sale, full speed ahead and party on the decks or should it be batten down the hatches and tie down the luggage? And that is our tactical asset allocation team, our tact team that meets at least monthly but as needed. We get external advice from a number of our different managers. One of the blessings at Cal Stair is because of our size. We do business with some of the smartest people in the world. And we tap into that to get their ideas and their thoughts about where they feel about risk on, risk off, different markets.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“And it's more complex than that. And I realize it can add value. And we have staff that are firm believers in it and other staff that are not as strong believers. So we didn't throw in the towel. We're still test driving it and seeing how it works. And these kind of volatility periods actually help us decide. It is an interesting debate. I've seen plans that have ramped it up and it has helped them. And it's compelling when you look at if you can soften your downtrops, those negative periods, if you can just make them a little less negative, you compound faster and the end result over time is dramatic. Think about in life. If the bad times are just a little less bad, life would be wonderful.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“I've often argued that I used to go on the speaking circuit and say that risk parity was like, gee, I scuba-dive. I take a lot of risk scuba diving. Maybe I'll take up parachuting to help diversify my life-threatening wrist.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“We've given ourselves a three year time period to really decide Fisher Cut Bait, but not surprising we're human beings it's been hard to stick to that three-year time period because you grow something three years isn't necessarily in this day and age a market cycle and you get to that end of the time period and you're still not sure if it works or not. So we debated and decided to get a three-year extension and see if it works again. That one thing that's on my mind all the time is risk parity. We've now been at it for five years and had some results. We see the math. We know it adds a lot of value as a part of the portfolio, but it's struggled in this environment. And so a good example of something because, again, add our size to do something where it moves the needle you're talking about, $10,000, $20 billion like you would any kind of a major purchase. You want to test drive it. You want to see if this really works for you.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yes, absolutely. That's why, as you said, it's 1 to 2% of our asset allocation so that we can put capital to work at size and really then scale things up if we think it makes sense.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Without question, Lova equities, which they test drove with the equity team, that's where you can team them up with different units as the research arm, people that have an interest in it, but just not the time. We looked very heavily at option overriding, and I've seen that covered call writing many times in and out of the portfolio. That didn't scale up. We did a little bit, but then scaled it back. Global macro is another example of something that, yeah, we had test driven initially and then added it not huge amount, but ramped it up into the plan.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Because we'll get phone calls from people That has actually been pretty helpful. But literally, we actually did a presentation once where they came up to the board with their lab coats and safety goggles because it really drove home the point. They're out there test driving all kinds of ideas. And in many cases, the goal is, one, does it reduce the risk of the plan? Two, does it increase the return of the plan? The panacea is a product that would increase our return and reduce our risk. But I've said that's the golden goose, and we'd all know about it if something like that was out there. And most of the time when they studied something, they're already figuring out where it belongs in the portfolio because their job is to incubate something, test drive it, build it on a platform that if we want to build it out, we can. If it really does work at our size and structure, then to hand it off to an asset class to add it into the portfolio.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I would point out microfinance, which has ebbed and flowed, but it was all the rage at one point, and then it became that some of the microfinance firms were really causing social stress. And that maybe it wasn't the panacea that people thought it would be. And we knew that at our size, it was going to be incredibly inefficient. But it's an area now we have a decade-long research file on it. So as it comes back, we'll take a hard look at it. Another area is life settlements. That has ebbed and flowed. Very interesting business that's good, but no thank you. We don't really want to be investing in it. But we've done the research. We took a deep dive look at gold. Is it a commodity? Is it an inflation hedge? Is it a currency hedge? What the heck is it? And came back with a lot. And unfortunately, the answer is for us, it wasn't any of those, but some of our peers have bought it. So a number of things that they've delved into that I don't want to discuss on the air.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“In our governmental structure and rules. So let's test drive it ourselves. And that's exactly what this group does, is they do deep dive research on a variety of topics, everything from microfinance to global macro and everything in between. And some of the best decisions they've made, in my view, are the ones where they've come to us and said, no, we shouldn't pursue that at all. And then sure enough, nine months later or a year later, some horrible thing happens and it blows up.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Those are kind of the way that we try to manage the portfolio. So innovation was something that way back before 2008, it was the recognition that my staff is so busy managing the assets because we're very lean. We try to run a very efficient operation. We didn't have the time to study new ideas. Plus it was also the recognition back then that we're seeing opportunities that landed in between the asset classes. It wasn't quite equity, I often point out convertible bonds have been around forever, but they're not quite debt. They're not quite equity. Who looks at them? And so I realized I needed to create an innovation team, somebody that could really sit around and put on lab coats and be the 3M lab to try stuff out. Does it work as advertised on TV? Wall Street is famous for selling us all kinds of fancy news fangled things. And what I want to know is, okay, that's great. It might work at Harvard, might work for David Swinson at Yale, but does it work for our side?”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“So two of the more interesting line items you have in your reporting are tiny allocations, but worth talking about. One is overlay and the other is innovation. Don't you talk a little bit about each of those”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“In our case, it's actually fairly narrow. I have studied that for a number of years and been a strong believer that really you want to be a large bite-sized with a few people. Some funds, particularly near us and then here on the East Coast, have decided to take the index method and invest it with hundreds of partnerships. And what you find is you get the average return out of private equity, which is actually below public equity. So with us, it's actually a fairly concentrated portfolio. We have 70 core relationships. We probably have about 200 in total, but many of those are not growing or fairly static. But I would often say we have about 70 core, and that's why it's difficult. We really aren't trying to add to that number. So when we see a new opportunity, it's a question of where are we going to clean up the portfolio and not re-up in some of the funds and which ones do we want to re-up with?”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Thousand companies in it. Now you're somewhere just barely north of 3,000. We're fueling that. The pension industry long-term investment group because we're trying to take companies private. There's a balance there. Is that good for the public markets? Is that good for the public? They're staying private because the cost of going public is a lot. We've had a lot to do with the cost of going public of our demands on corporate governance. So life is full of tensions. We're living those and debating those all the time and trying to make the best decisions we can about how to invest in private equity, how to invest in public equity. Where should the portfolio be balanced? We recognize that both of those is exposure to GDP growth. And so it's just different business forms and different structures you're going after.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“So it's a question of investing over time. We are not going to ramp up dramatically and just throw money at this market as some have. We're looking at for us new ways beyond partnerships. And that's why we've developed this year the Calsters collaborative model, which is to find ways to collaborate with our peers who do have direct investment programs. I'm not going to create one. We realize that's where my business model is too flawed. I'm smart enough to know. I can't do that in-house, but maybe I can team up with somebody who can. We're going to try and collaborate with also private equity firms and with other asset managers to see if there are better ways to build a buy-in hold portfolio. Right now, today in America, there is a huge amount of capital going to work in private companies, and there's been a lot of debate about the fact that the number of public companies has shrunk in half. I remember when the Wilshire five thousand actually had seven.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“2015, sixteen, seventeen, eighteen, maybe even the nineteen vintage year may not be great returns because the price multiple is so high, and we have told our private equity firms to be patient. They're sitting on a huge amount of committed capital that's not invested yet, dry powder. And we're okay with that. It's frustrating, but we're okay with that because we don't want them to pay up at these prices. We know it's very hard to grow a company when you're buying it at 10, 11 times earnings. I'd rather see them down at a more reasonable EBITDA multiple.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Antids An Aspirin Particularly a lot of aspirin, a lot of painkillers, ibuprofen. It's been a constant challenge. It's been frustrating because the compression on the returns. And so you're investing now and you knowing that money is going to go to workforce somewhere out Lara, 2025 and you won't know until then whether this was a good decision or not. And that is inherent in the challenge. And we are having constant active debates internal and with the board about whether that is going to pay off. And I'm sure that's going to be one of the big discussions going into the asset allocation because we have some people who firmly believe it is and then others who believe it's not. And you know what the public markets are giving you. So it's going to be an interesting challenge. The dynamic now is we're going to stay consistent investor. We do want to pay attention to pricing, to the EBITDA multiple, and recognize that probably the”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“So you have all these tensions. You'd like to have more in private equity, the costs are high, and pricing is getting higher, but at the same time you want to be long-term and you want to be a consistent player. How do you balance all of those challenges and decide today, here's what we're going to do?”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, it's not just us, it's the Canadians, the sovereign wealth funds in Asia and in the Middle East that are constantly looking at ways to create products that will do that. Some of the Canadians have done that by building their in-house direct teams. But even then, you find that challenge is that it's great to own a company for 20 years. But the team that found it or the team that managed it wants compensation. How do you monetize and how do you reward people? It's great for a family that might own their own private business because the founder can look and build the wealth and pass it on to the kids and you don't have to necessarily go to the bank and cash it out. But the investors want some way to cash that out. And I think even the Canadians are finding that's an interesting challenge on a 20, 30-year investment.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“forty percent of the profits, that's awfully expensive for asset management. You're not going to break that model. That's just been out there 30 years. But what you're going to see is more people come in and disintermediate that market and offer a compelling product because it's got to be compelling that's at a lower cost structure and a more efficient model. Because even within private equity, I would argue it's actually a little bit short term. Private equity has a five-year investment cycle or four-year And what we're finding is they're selling a private firm and it's another private equity fund that's buying it. I don't need that transaction cost. I can own something for twenty years or thirty years.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“commit about six billion a year into private equity. We started back at about $3 billion in 2010, 11, 12, and now we're ramping up. Our goal actually would be to be about 13% in private equity. So we're constantly searching the secondary market, but prices are just too high to be buying in. We think that it's a very valuable area. It's a long-term investment. The question is, are you going to get a premium over the public markets? Back when I started in private equity in the 90s, you could get 500 over the public markets. Then it narrowed to about 300. And now the debate today is at 150 net of cost. And we're really dissecting that cost more and more and reporting it. And people are realizing that with an 80-20 carried infrastructure and the fees on private equity for committed capital, you're probably paying somewhere around 25% of the profits to maybe as much as 30 or in some cases.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“French always said it's the hierarchy of size and it's a challenge when it gets bigger, not an efficiency, because you're suddenly just exposed to the mega buyouts dominate your portfolio. You can invest in venture, but you can't really get enough of it to really move the needle very much. So for us, it's a consistent budget of investing over time. How do we get there? We started at about 2% and 4%, built that portfolio consistently over time. Like most pension plans, we invested too much in 050607 because we could. That was suddenly the dawn of the $10 billion funds and you could write a big check. And so with more money being put to work then and then obviously 0809 nobody even raised a fund. It was very hard to put money to work. You suddenly have this bulge, a pig in the python. And now we're all finally working through that to where you're a steady state.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“The challenge within private equity is that it is such a long time to build up that portfolio. There is a secondary market, but it's not that deep and it's not of significant size. So within private equity, you actually, I think, have to be as a stable investor over time. You can't time the market. You can't pick your EBITDA multiples because you're investing in partnerships, which then have their own five-year investment period. And so I've worked at two funds that have had fairly large private equity portfolios, and it's not so much the percentage of the fund. I think it's literally a dollar amount you can put to work efficiently in private equity. If you've got a billion dollar private equity portfolio, you can be really nimble. You can be very focused on venture. You could do middle market buyouts. When you get into the 20 and 30 and 40 billion dollar private equity portfolios, you're just going to be exposed to megabytes. A good friend bond friend.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“that replicate those, but we want to look at different ways that we can potentially do those things at a lower cost structure.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Oh, Lord, they're expensive. One is obviously we can use our size to negotiate very aggressively. I have said for probably over five years that 2 and 20 is gone, and that's been broken. Unfortunately, small plans still have to pay that, but larger plans have gone through that. And we, I think, we're coming into the market at a very good time when everybody else is getting out of the market. So many people had rushed into, quote, hedge funds as an asset class and then been immensely disappointed while they were moving out of these. And I always like to point out to teachers, we're not going into hedge funds. I don't consider that an asset class. It's just a business model structure. It's 22 odd strategies. We're using two specific strategies. So I think our size was an advantage. We've also looked at some of these, particularly things like trend following. Can we build some of those formulas in-house? Can we do some of those things in-house? There aren't pure passive strategies.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“The biggest chunk of them actually is 30 year U.S. treasury bonds because that is the flight to quality. The next largest chunk is also of equal size is CTAs, which are trend following managers. So it's a trading strategy. They've got the whole world to trade in, but they're going to be looking at movements and momentum and shifting, therefore, away from U.S. equities or global equities at different sequences. We put a little bit of global macro in there, which obviously is really you're trusting on people's talents. But what we found is while they tend to react a little bit late to declines like that in the market, they actually give you some upside. So they reduce the cost of the insurance. And then the smallest slice of it is risk premium strategies. And we're just starting to deploy that.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source