S1 | Wealth Management

Ashraf Rizvi: Digitizing Gold | SALT Talks #254

“Gold has acted as a tremendous store of value for thousands of years. The problem is it hasn’t been functional. Gilded takes physical gold and makes it mobile, digital and usable.”

Ashraf Rizvi is the CEO and Founder of Gilded. Ashraf is responsible for the strategic direction and day to day running of Gilded. He has over 20 years of executive experience as Founder, Managing Partner and Global Business Head. Prior to founding Gilded, Ashraf was the Co-Founder and Managing Partner of SummerHaven Investment Management, a commodities management firm overseeing nearly $2 billion in assets for retail and institutional clients including endowments, foundations, and family offices. For over 13 years, Ashraf was a senior leader at UBS holding a variety of roles in New York and London including Global Head of Commodities Trading, Global Head of Metals, Global Head of Emerging Markets FX and Global Head of Credit Repo. Previously, he was Head of FX Options Trading in New York for Credit Suisse.

As a second generation immigrant, Ashraf Rizvi discusses how childhood experiences like seeing the fees and inefficiencies associated with remittance payments influenced the creation of Gilded. Rizvi explains the process of moving physical gold to the blockchain and the vast benefits it offers. He describes the current wave of tokenization and blockchain-enabled finance as the fourth revolution, noting its global impact because of the mobile devices’ ubiquity.

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MODERATOR

SPEAKER

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Ashraf Rizvi

Chief Executive Officer & Founder

Gilded

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

TIMESTAMPS

0:00 – Intro and background

4:38 – Founding Gilded

8:10 – Moving physical gold to the blockchain

10:22 – History and value of gold

14:31 – Mechanics of Gilded

20:10 – Crypto vs. gold

22:30 – Gilded for Good and its positive impact

25:35 – Sustainability and lower environmental impact

28:10 – Tokenization of asset classes

32:10 – Gold’s performance and the fourth revolution

36:11 – Conclusion

EPISODE TRANSCRIPT

John Darsie: (00:12)
Hello everyone. And welcome back to SALT talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology and public policy. SALT talks are a digital interview series with leading investors, creators, and thinkers. And our goal on these talks is the same as our goal at our SALT conferences, which we're excited to resume in September of 2021, September 13th to the 15th here in our home city of New York for the first time.

John Darsie: (00:44)
But our goal on these talks and the goal that we have on these conference series is to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. And we're very excited today to bring you a SALT talk with Ashraf Rizvi. Ashraf is the founder and CEO of Gilded and is responsible for the strategic direction and day to day running of the firm. He has over 20 years of executive experience as founder, managing partner and global business head.

John Darsie: (01:15)
Prior to founding Gilded, Ashraf was the co-founder and managing partner of SummerHaven Investment Management, a commodities management firm overseeing nearly 2 billion in assets for retail and institutional clients, including endowments, foundations and family offices. For more than 13 years, Ashraf was the senior leader at UBS, holding a variety of roles in New York and London, including global head of commodities trading, global head of metals, global head of emerging markets FX and global head of credit repo.

John Darsie: (01:45)
Previously he was the head of FX Options Trading in New York for Credit Suisse. And prior to that, he was a senior trader at Susquehanna Investment Group. Ashraf earned a Bachelor of Science in economics from the Wharton School at the University of Pennsylvania. He also served more than 15 years on the undergraduate board and the Europe, middle east and Africa board at the Wharton school.

John Darsie: (02:06)
Hosting today's talk is Anthony Scaramucci, who is the founder in managing partner of SkyBridge Capital, which is a global alternative investment firm. Anthony is also the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:17)
Through all these SALT talks, I'm surprised you haven't mispronounced my name once, just to give it to me a little Darsie.

John Darsie: (02:25)
Tony Scaramucci. I'll go with that one next time.

Anthony Scaramucci: (02:27)
You're going to do something like that, okay.

Anthony Scaramucci: (02:30)
Ashraf, you got an amazing career. So I want to start there. Let's go to the amazing career. You come out of school, what's the first thing you do?

Ashraf Rizvi: (02:40)
Well first, I'd like to say thanks a lot for having me on Anthony and John. I'm looking forward to the conversation. So, undergrad out of Wharton. Decided to start my first business venture right out of school with a number of colleagues. We started trading in Philadelphia, grew to New York, Chicago over the years, and it was a great learning experience. We were trading FX derivatives. It was a phenomenal time in the marketplace and we had a great opportunity to learn and grow as individuals.

Ashraf Rizvi: (03:12)
And then ultimately, ended up at Susquehanna where we got the opportunity to trade in a bigger environment over the counter. Was involved in the early days of the ERM breakup. And of course, the demise of Sterling on Black Monday as well. So it was a great learning experience and a great opportunity to learn what it was like to be an entrepreneur.

Anthony Scaramucci: (03:32)
Okay. So I'm going to stop you there because you got a lot of young listeners. When you say the ERM breakup, what you're referring to is the exchange rate mechanism that dissolved in 1992. There were short positions put on. One of the most famous ones was Stanley Druckenmiller and George Soros, where they were shorting the pound, because they knew that the Brits wouldn't be able to support the pounds valuation and they would have to accept some level of devaluation.

Anthony Scaramucci: (04:02)
I think it's a good point because you have a lot of history with this. We've been devaluing our Fiat currency since 1971, August of 1971. The US government under Richard Nixon's orders took the US dollar off the gold standard, $35 an ounce. Today, I guess it's around $1700 or so.

Anthony Scaramucci: (04:23)
And tell us why all of these things are important and how they lead up to and are the precursor to you being the founder of Gilded.

Ashraf Rizvi: (04:37)
So I think the story really starts at that, I view it as my entire life. I feel like I was getting ready to do something like Gilded. And I point to maybe a few things. So one, the extensive experience in the financial markets. So having lived through that breakup of ERM, Black Monday, being involved in the financial markets, whether it was dealing with central banks, high net worth clients, family offices, institutional clients who want good money management, all of these, I think, contributed to what I've been able to do.

Ashraf Rizvi: (05:16)
I think also the other part that was very important is that I had the opportunity to start two different companies that were successful. One right out of school that we just touched on. Another that was started during the great financial crisis, that grew to manage a few billion dollars in commodity assets. And then there's also a personal touch to it. So I'm a second generation immigrant. My parents are originally from India. They moved in the 60's. I grew up in a small town in Iowa, so classic Americana. And I still remember, my parents used to send money back home to their family and help them be successful in difficult economic times in the 70's. And I remember my dad telling me about the fact that the gold price was, as you touched on, $35 an ounce back then. The rupee was seven and a half to the dollar. Today it's 74.

Ashraf Rizvi: (06:10)
And so, what we're looking at is a world where we've seen currency debasement. The dollar has become less valuable. The rupee has become less valuable. All currencies have become less valuable. Their purchasing power has shrunk tremendously. From 1971 on, the dollar has lost 95% of its purchasing power. And you know that, we all know this. If you go to the store and you buy eggs or milk or anything, you know that it costs a lot more than it used to.

Ashraf Rizvi: (06:41)
And so I think this is really what's driving the push now more than ever for things, assets like gold, which has served as a tremendous and a historic store of value for thousands of years. The problem is, it hasn't been functional. And so what Gilded really does, is we take physical gold and we make it digital, mobile and usable, which is really about making it functional. How can we make it operate like money without all the negatives of money, which is that, there's the general currency debasement across the world, the big issuance of debt and spending, which ultimately is going to be hard to pay back. And so here's something that we can use that's stable, supportable and something that can hold its value over the long term.

Anthony Scaramucci: (07:32)
So let me rephrase it, just so as I know that I have it, and maybe John could also help me with this. You are basically a warehousing gold. And so you're going to then digitize it over the blockchain so that people can own portions of the gold that you're warehousing. They're buying it from you. Do you think that that goal then would trade differently than just spot price gold in the marketplace? Or do you think that the fact that it's been enhanced by a digitalization or the digital model, the blockchain, makes it more valuable?

Ashraf Rizvi: (08:11)
That's a really good point, Anthony. So I think it makes it much more valuable, in the sense that it becomes functional. And so by that what I mean is, that you get all the benefits of owning the physical asset. So first, what's the benefit. One is that it's your title and it's your property. And so if we think about the fractional reserve banking system, you don't have that. When you deposit money, when any of us deposit money in a bank account, it's no longer your money, it the bank's money, and they give you an IOU.

Ashraf Rizvi: (08:40)
When you have securities or other assets often that you hold, they become the custody of some other party at the end of the day. And you have counterparty risk. Let's think about the great financial crisis. You might have securities at an institution that could go under. In our case, in Gilded, it's not us who are the custodians, it's your property, it's your title. It's sitting in a Brink's vault, fully insured, audited, both for the quality of gold, but also that it's audited that you are holding is immutably stored on the blockchain.

Ashraf Rizvi: (09:10)
So you get all of those features, but you also get the additional feature of the fact that we can make it functional. So in certain countries such as India and middle east and Turkey, we already have product where you can send it to someone else instantaneously. You can own the entire bar. You can own a partial bar and it's still your property, your title. We aim to launch in the US soon. We have to get some regulatory approvals that allow us to be able to do the send functions, but we'll be able to at least allow you to be able to buy and hold and store, so that you have a better store value. So that's really where I think the value proposition is, is that it's your asset, but it's a functional asset, rather than what a lot of people remember it to be as a very expensive paperweight.

Anthony Scaramucci: (09:57)
Okay. So the non-Bitcoiners out there, the Bitcoin skeptics or the crypto asset skeptics, they should like this, right? They're getting the best of both worlds. They're getting a material money, hard currency. However you want to describe what gold has traditionally been over the last 5,000 years. And they're getting the convenience and the portability and the transferability of the blockchain.

Ashraf Rizvi: (10:22)
Exactly. So I think our core vision is about freedom from Fiat. And as you know, Anthony, gold has served as freedom from Fiat for 3000 plus years. It was the original money. It served as the foundation for money for thousands of years. And up until 1971, it backed pretty much all the currencies through the US dollar, which ultimately was tied or pegged to various other countries currencies. Since then of course, we've really floated freely. So, that I think is an important part of it.

Ashraf Rizvi: (10:57)
Of course, the vision is to make it digital, mobile and usable, as we've talked about, and really make it functional. And so I think for investors, I like to think of it as freedom of choice. Depending on what it is that you want, if you want that physical asset, as well as the digital component, I think we're a great place for you to go. I think it's all also valuable in the sense that we know that gold is pretty stable. The price isn't moving a lot on a day to day basis. It's it's not a get rich, quick, fast. It's about stay rich quick for a long period of time. And protect your wealth, store your wealth. And do it in a safe, secure way, but also have the ease of use where we can use a mobile device to be able to access the marketplace and to have the benefit of the liquidity of the entire gold market, which is huge. On a daily basis, trading close to $200 billion a day, which makes it roughly the fifth largest currency in the world.

Anthony Scaramucci: (11:58)
And listen, I'm a Bitcoiner, but I'm also, have a huge amount of respect for gold. I think you've had 5,500 years of history, if not longer. If you go back to the tombs, Egyptian tombs are all layered in gold. So obviously it's had value. It's held value throughout generations, throughout world history. So tell us how you're going to create demand for this. What is the audience that Gilded is going to be attracting?

Ashraf Rizvi: (12:29)
So I think the great thing about this product is that, I think the audience is everyone. So whether you're an individual, investor, whether you're a hedge fund asset manager, pension fund, institutional client, corporate, or even a government, you're a target audience for us at the end of the day.

Ashraf Rizvi: (12:47)
Why? One, store of value. Everybody's looking for better stores of value. Gold is a great store of value. It has served that purpose, as you just mentioned for thousands of years. And people know it, they trust it and it's quite stable. So that's most important, is, let's take that store of value that we know and let's make it functional. Let's make it do things that you can't do with it if you just buy the brick and put it in your safe deposit box or in your house. Let's make it movable.

Ashraf Rizvi: (13:22)
So in other words, let's offer the ability to send it to other people. And so in the US, we hope to be able to offer that in the coming months once we have regulatory approval. We're already doing it in other countries. Let's make it possible to earn a yield, yield enhancement product. Let's tie it perhaps to a credit card or debit card. Let's make it possible to take a loan against that physical gold. It's your property, it's your asset. So you can take a much higher loan than for example you can with the securities markets for an ETF or something like that. Let's make it pledgable as collateral. So if we can make it pledgable as part of repo or other factors that, other mechanisms that can allow you to access liquidity. All of these become possible when we digitize that asset, which are not possible when it's just a physical asset, as has been for thousands of years.

Anthony Scaramucci: (14:20)
And tell us about the fees. And how do you get access first of all? Do you need to go through your digital app or are you going to be on people's platforms? And then what are the fees?

Ashraf Rizvi: (14:31)
So the fee, there's really three layers of fees and it depends on what you use. So first the fee is for onboarding. So you buy the asset and now you've got it in the vault and you get all the benefits of having that. So there's a small fee for that, typically 1%. And now you own that physical asset at the end of the day.

Ashraf Rizvi: (14:53)
A second fee is if for the storing, the validation, the audit of both the gold, the blockchain of your respective ownership, and that's typically 50 to a hundred basis points, depending on the size of your holdings. And so here, it's applicable, as I said, for the retail client all the way to a corporate or government. And the nice thing is, if you're sending gold to another party, it's free. So you can think of it as a super highway, in that, once you're on the highway and you have access to the asset, now you can and move it freely, 24/7 [inaudible 00:15:33] So those are the two primary fees.

Ashraf Rizvi: (15:37)
A third fee is, in the event we offer you a premium type of service or additional service such as a loan or a yield enhancement product, or a ability to pledge as collateral, then we may do a revenue share with the party who helps us facilitate that. But for typical, for most people, it'll be the purchase and then the storage and validation. And I'd like to just point out Anthony, which I think is very important is that, compared to if you did this yourself, or you did it online or bought the physical asset yourself, these fees tend to be considerably cheaper than what you would be paying if you're doing it by yourself.

Anthony Scaramucci: (16:21)
Okay, very informative. How is the gold secured from a physical and cybersecurity perspective?

Ashraf Rizvi: (16:29)
So that's something of course that's very important to every investor. And you know this Anthony, from what you do is that, safety of the assets for the clients is paramount. And so we do a number of things here. So one, first of all, the asset itself is sitting in a Brink's vault. Brink's has more vaults than any other facility in the world. They have them everywhere. We have Swiss based Brink's vaults. We can also store in New York, London, various other cities and countries around the world.

Ashraf Rizvi: (17:01)
Fully insured by Lloyds of London. Audited, physically the gold is audited within the vault, that it exists and it's the real thing. And of course, auditing of your holdings and the blockchain in which it's kept, which is Hyperledger. So it's a permission blockchain. So full KYC/AML compliance. So we're very sensitive toward the regulatory side.

Ashraf Rizvi: (17:25)
And then from a cyber security perspective, we're leveraging Microsoft Azure, AWS major cloud service providers, which have built in significant cybersecurity. And then we're also focusing on it through other vendors. And also on protecting your PII, where we segregate that and split that from anything we store in the blockchain. So your personal information is retained completely separately.

Ashraf Rizvi: (17:51)
And so all of these things are very, very important. But of course, one of the most important things here is, you own the physical asset. Somebody can't steal your digital part, and then that's it. You still always have the physical asset and you also have the right and the ability to take physical delivery if you want.

Anthony Scaramucci: (18:10)
When are you launching in the US, Ashraf?

Ashraf Rizvi: (18:13)
So we're hoping to go live here on beta, early beta, here in the next few weeks through the Apple store and through Google Play. And I believe that by SALT we'll be in the marketplace. And then we're waiting for a approval from regulators for cross border activity. And so what that means is, that we have to get certain money transmission license, et cetera, which we've already in the process of applying for. And that will allow us to make it possible for party A to send to party B instantaneously, 24/7.

Ashraf Rizvi: (18:48)
We do have that ability to all already do that in India and various other countries that we're operating in. I'll just point out that the US is a little more complicated because that activity is governed on a state by state level. And so you have to tackle each state independently. There's no way to do it at the country level. And some other places you're able to do that.

Anthony Scaramucci: (19:15)
Before I let you go, I got to ask a question. John Darsie's going to take over here in a second. He's going to, of course, try to outshine me. And the good news is, I know he is at his house right now, and I only live two miles from him. If he tries to outshine me Ashraf, I'm going to run him over with my car sometime this afternoon. So that's just a threat, John. So you can report that to the local police.

Anthony Scaramucci: (19:39)
But before I bring John in, who will ask [inaudible 00:19:43] questions, of course, what do you say to the crypto people? What do you say to Bitcoiners, people in the space of Ethereum? What's your reaction as a advisor, as a business person? Should they be selling their crypto to own Gilded and gold? Should they own some of it? Both? What do you say?

Ashraf Rizvi: (20:11)
Well, first I'll start by saying, we're not crypto, and we're not a stable coin, and we're not part of the Frank [inaudible 00:20:18] banking system. So that's first thing, in that, we're providing you the ability to own that physical asset, and then making it digital, mobile and usable. That's item one. And the second thing I think I would say is that, we're about freedom of choice. People have an interest in non Fiat assets. And I think gold has been the original non Fiat asset for thousands of years. And I believe it'll continue to exist. And we can make it more functional than it has ever been before. And that's what the objective Gilded it is.

Ashraf Rizvi: (20:58)
I think for all investors, whether it's individuals, hedge funds, asset managers, pension funds, governments, they need to have a variety of assets in their portfolio. And I think there's a place for all sorts of different assets, whether it's stocks or bonds or gold, or digital gold in our case, or crypto. And that's ultimately up to the users. But at think we occupy a different space. I don't think we have conflict with crypto or, stablecoin or Fiat for the matter. I think we just offer a different solution that can be helpful to people, help ultimately in their store of value, protect their life savings and be non-correlated assets to stocks and bonds, which when they tend to sell off, gold tends to shine very brightly. And so there's a very important place that it serves. And I think we can make it more functional than it has ever been before. And that's the whole mission behind Gilded.

Anthony Scaramucci: (22:07)
It's a great message and a great product. I'm going to turn it over to John.

John Darsie: (22:14)
Ashraf, it's great to have you on here. We look forward to having you at SALT as well. What is Gilded for good? And how do you see that part of your business or the initiatives that you work on? How do you see that developing over the next five to 10 years?

Ashraf Rizvi: (22:30)
So Gilded for good is something I'm really excited about. I think it's an opportunity for me, after having done so many things in Wall Street to really, to do something that can make a positive impact on society. And so how can we do that? So I think there's many ways. So one, let's look at my own personal case of my parents sending money back home. Remittances, $600 billion market average fee that people are paying is 6% to send money back home to their loved ones. We can make that cost at least less than 50% of that. And so here's an opportunity where we can have a positive impact.

Ashraf Rizvi: (23:09)
Second, is think about the billion people on the planet who are unbanked. The financial system has not served them well. We're already in conversations with various firms that, how can we allow these folks to be able to complete the KYC/AML process and able to hold that asset that they want, which gives them store value and be able to plan for their financial future.

Ashraf Rizvi: (23:38)
Third. The hundred dollar bill is the most laundered instrument in the world. Gold is second and art is third. By holding that gold in a vault and having it digitized and traced, it means we can take a certain amount of that asset out of the system where it can't be laundered. And we know exactly who's got it, where they're keeping it. And that's good, whether it's from a CRS or FACTA perspective, but it's good from a government regulation perspective as well.

Ashraf Rizvi: (24:11)
And we can also make an impact on the environment. Most of the gold that exists in the world, 200,000 tons is already been taken out of the ground. That's 80% of all the gold there is in the world. That only leaves 20%. 1% comes out per year. So we by re-refining existing gold or using gold that's already in a vault, we can reduce the burden on the environment by not moving it. We're not consuming hydrocarbons. We're not putting it on a plane or on a truck. It's just moving from, let's say, me, to Anthony, or it's staying in our possession, it's staying in a vault. Very low energy usage. And so I think all of these are ways that we can have a positive impact on society.

John Darsie: (24:57)
The sustainability piece was another interesting piece to me. There's a lot that's been made in the cryptocurrency world about Bitcoin, the energy that goes into Bitcoin mining. Oftentimes Bitcoiners, they retort to those accusations as well. Mining precious metals and transporting precious metals and the entire security ecosystem that exists around safeguarding fiscal assets, that uses a lot of energy as well. How do you think that Gilded and these types of technologies are going to disrupt sustainability questions around gold and precious metals, and what's your view on that sustainability piece?

Ashraf Rizvi: (25:33)
I think that's a great question, John. I think the key here is that there's a big [inaudible 00:25:40] cost. As I said, 80% of the gold is already out of the ground. And it's sitting in really, three or four places. Really three main places, but four in aggregate. So one, half of it is in jewelry. 25% is in bars and coins. And 20% is in central banks. And then the balance is basically in functional applications, like yours and my iPhones or Samsung devices or laptops, computers, various other in industrial applications.

Ashraf Rizvi: (26:15)
And so that's already out of the ground and we've already paid the cost of that. We don't need to pay an additional cost. Now we're just storing it at the end of the day. And that's a relatively low cost to exercise. And as I said, relatively small amount of the gold comes out. That part is a dirty business. And I think the mining companies are doing a better job of addressing that, but it's not something that we have to maintain on an ongoing basis. Once you take it out, you put it in a vault and stays there. So I think that's very important.

Ashraf Rizvi: (26:45)
And I think the other thing is, there is a benefit to society if we can cut down on illicit and [inaudible 00:26:51] activity. That's positive for society. And so whether it's the hundred dollar bill, or a bar of gold, or art that's [inaudible 00:27:00] illicit, anything that reduces that, or can reduce things like human trafficking or child labor, all of these, these are all often associated with various instruments that people are using in order to be able to get paid so that they can't be traced. And so this is something that we can clearly cut down on, and I think that's a positive from a social good.

John Darsie: (27:24)
So your career that I read at the beginning of this SALT talk, you're steeped in financial markets. You've been involved in FX markets, commodities markets, you're a markets guy. And we had another group on for a SALT talk recently. The CEO was talking about how he thinks of eventually, there's a world of crypto, there's a world of FX, there's commodities, there's the traditional stock market today. He thinks that with the rise of blockchain and other technologies, that those markets, that the lines between them are going to blur.

John Darsie: (27:57)
Would you agree with that sentiment, that you think that eventually there's going to be tokenization blockchain technology that applies across all kinds of different asset classes? And what do you think the implications of that are for how financial markets operate?

Ashraf Rizvi: (28:10)
So first I think is, about asset classes. And so I agree with you and your previous speaker that, I think lots of asset classes are relevant to any portfolio. That's modern portfolio theory, goes back to in the 1950s, Harry Markowitz. And so what do we want? We want asset classes that generate positive returns that are non-correlated. That's the goal of every, whether it's a hedge fund manager, pension fund, individual, everybody desires that. Well, I think whether it's stocks or bonds or gold, they all fit that bill, in that they generate positive returns, non-correlated. And I suspect your prior speakers touching on the same point with crypto, or even whether it's wine or art, think there are many assets that fit these bills. So they're relevant from that modern portfolio perspective. So I would agree with that.

Ashraf Rizvi: (29:12)
The second part of the question is related to blockchain. So I have to admit I'm a huge fan of it. And I suspect you and Anthony are as well for a lot of reasons in that, we both share this common experience of managing money as a fiduciary for other people. And we've all had to deal with the fact that we have data, whether it's about our individual trades or managers, et cetera, that we have to retain. And then our auditor has that data. And then the exchange has that data. And our administrator has that data.

Ashraf Rizvi: (29:46)
So all these different parties have to get this data in order to perform their function. And so I remember that this was an enormous exercise. You have to validate it, you have to reconcile it. With blockchain, we all have the one set of data, which is the source of truth. And we can all share that. What a powerful solution that is for any financial firm and for anybody that, whether it's my data, my auditors can have it, other parties that I work with have it. And we all know have the exact same thing. I think that's a really powerful thing, and it's going to be huge in the financial markets.

John Darsie: (30:28)
The last question before we let you go. Over the last decade or so, obviously cryptocurrencies have been on fire. If you look at percentage appreciation of those assets, from very fringe pieces of technology, to now somewhat mainstream, especially if you look at things like Bitcoin and Ethereum. Gold during that period hasn't performed as well. Anthony actually did a recent debate with Peter Schiff on gold versus cryptocurrencies. As Anthony said, he's not a gold bear per se, but it was just an intellectual conversation around the future of alternative stores of value.

John Darsie: (30:58)
But I think gold in the context of something like cryptocurrency obviously doesn't feel as technologically forward or advanced as this new world of blockchain digital assets. Do you think companies like Gilded are going to help transform the image of gold and potentially help gold rebrand itself and potentially drive better performance over the next decade? Or do you think it's more of something you're just trying and get people access to what you think is a very stable store of value and insurance against a lot of craziness that happens in the world?

Anthony Scaramucci: (31:29)
But Ashraf, just to iterate, before you answer the question. In that debate with Peter Schiff, I was just talking about the virtue of Bitcoin. He thinks Bitcoin is worthless. And so I'm just saying to him, it's not worthless. Here are the properties of why it isn't worthless, but I have a tremendous amount of respect for gold. I'm trained as an economist like you, and I understand the value that gold has had in our civilization for millennium. And, and so therefore I have a tremendous amount of respect for gold. It's not a debate with me, whether about gold is going to exist or not. I think it's more about will Bitcoin be here. I believe it will be. But go ahead. Answer the question.

Ashraf Rizvi: (32:08)
I agree. Let's start at the basic level. So first it has been a store of value for thousands of years and has been a good store of value since it's really been separated from government control, which really starts in 1971. And as I said, 8% a year for the last 50 years. And I think you touched on and a key point there, John, which is that, that doesn't mean you get 8% every year. It doesn't mean you get three quarters of percent every month. It's not a financial instrument, like a T-bill or a T-bond, or a corporate bond at the end of the day. Of course, there you take a different kind of risk. Maybe you don't get paid at all. And they default.

Ashraf Rizvi: (32:47)
So you get the asset, you get the return from the asset over long periods of time. But over shorter periods of time, there may not be any return or it could even go down. So it's similar to currencies, for example. And so I think the last 10 years we've seen that. It has been pretty flat. But if we look at the last 20 years, since the beginning of the millennium, gold has rallied 9% per year, and it's done better than stocks and bonds. Also, if we look at the bigger picture, 1980s, 1987, dot-com bubble, great financial crisis, 2020 COVID, in each of these cases, these were stress events where stocks and other risky assets fell tremendously. In most cases, 30, 40, even 50%. Gold in all of those cases went up. This is part of portfolio exercise. And this is part of more modern portfolio theory. And this is why people should own the asset.

Ashraf Rizvi: (33:47)
With regards to the other thing that you touched on, which is bringing it into the 21st century, I think we're living in the fourth revolution. That's where we're at. The first one is really about the UK. And the second one of course is about Detroit and mass production. And the third one is largely about Silicon Valley and technology. This fourth one, I think most people believe is a global phenomenon.

Ashraf Rizvi: (34:20)
And so here's an opportunity where we can impact people on a global basis by leveraging technology and leveraging that most ubiquitous devices, which is a smart phone or a mobile phone, which most people on the planet who are over 10 years old, possess. And so now we're making it possible for them to access this store of value that they'd like to have, own it, as their property, their title, and have it stored way in a safe, secure way, and be able to do it from their mobile phone. And they can log in, create account and make a purchase in just in a matter of minutes from anywhere. That I think is about bringing it to 21st century. And that's, I think, where the world is headed is, that more solutions and products will be all about ease of use and access to what people desire and want. And here we're making it digital, mobile and usable.

John Darsie: (35:16)
Well Ashraf, it's a pleasure to have you on. What you've built is a fascinating innovation. Again, that you just touched on, that it's bringing something that's been a store of value for thousands of years into the fourth revolution that's going on here with digital assets. So congratulations on all you've built and continue to build. We look forward to seeing you very soon at the SALT conference in New York. We're very excited. In the New York post, we have Eric Adams, the mayor of New York confirmed his attendance recently, reaching an olive branch to the business community in New York, as new Yorkers are very excited about that. And everything related to the conference. We have a great lineup, including yourself. So thanks for joining us. Look forward to seeing you soon.

John Darsie: (35:55)
Anthony, you have anything for Ashraf before we let him go?

Anthony Scaramucci: (35:57)
I'm just letting you know, I'm going to invite you back on SALT Talks if you digitize those Muhammad Ali signed gloves behind you, and you offer me them up in an NFT, which I'll gladly purchase. Those are some hot gloves Ashraf.

Ashraf Rizvi: (36:11)
Well, look, John and Anthony, thanks so much for your time. I really enjoyed the opportunity to have the conversation. Again, just wrapping it up. Gilded, where it's all about making physical gold digital, mobile and usable. And really making that asset functional like money and being able to offer all the different services that people want and desire. Whether it's being able to borrow against it, create a return, be able to do it on a easy to use mobile application. And so that's what we're really excited about. Our vision of course, is about freedom from Fiat. And I want to thank you for your time and I really enjoyed the conversation. And I'm looking forward to participating in SALT.

John Darsie: (36:51)
Thank you Ashraf. Thank you everybody for tuning in to today's SALT talk with Ashraf Rizvi from Gilded. Just a reminder, if you missed any part of this talk, or any of our previous SALT talks, you can access them on our website at salt.org to view all of these episodes that we've done over the last 18 months on demand.

John Darsie: (37:07)
We're also on social media, @SALTConference on Twitter is where we are most active. We're also on LinkedIn, Instagram and Facebook as well. And please spread the word about these SALT Talks. Again, we love educating people about innovative companies, innovative ideas and Gilded is certainly on the frontier of FinTech innovation with what they're doing around gold.

John Darsie: (37:27)
But on behalf of Anthony and the entire SALT team, this is John Darsie signing off from SALT Talks for today. We hope to see you back here again soon.

Matt Brown: Alternative Investments for All | SALT Talks #253

“Financial advisors won’t access alternatives just because it’s easy if they don’t understand the products, how to implement the strategy, or how talk to their clients about it… It’s really about education first and that’s why we started leading with learning.”

CAIS founder and CEO Matt Brown details his early career as a financial advisor before embarking on an entrepreneurial career that led to CAIS’s creation. Brown explains the massive opportunity that existed in the independent wealth management space and how CAIS was designed to connect independent financial advisors and alternative investments. He describes the game-changing nature of CAIS IQ, an AI-powered learning platform that delivers a customized education experience for advisors. The pandemic only accelerated CAIS’s growth as advisors leaned on virtual solutions and Brown expects significant progress over the next decade.

Matt has spent over 30 years at the intersection of wealth management, alternative investments, and platform design. He began his career as a financial advisor at Shearson Lehman Brothers and Smith Barney. In 2009, Matt founded CAIS, the first truly open marketplace for alternative investments, where financial advisors and asset managers can engage and transact directly on a massive scale. Financial advisors, the professionals we designate to oversee our economic futures, do not have the same access to alternative investments in comparison to large institutions. CAIS is changing that. Matt believes entrepreneurship is the major driver of economic and social change. He’s spent the better part of two decades working with Endeavor, the world’s leading organization for high impact entrepreneurs.

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MODERATOR

SPEAKER

Headshot - Cropped.jpg

Matt Brown

Founder, Chief Executive Officer & Chairman

CAIS

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

TIMESTAMPS

0:00 – Intro and background

5:05 – Becoming an entrepreneur

8:12 – Founding CAIS

15:39 – CAIS IQ financial education platform

17:37 – The next ten years for CAIS

23:15 – Scaling financial education with CAIS IQ

27:15 – Evolving wealth management environment

31:20 – Educating financial advisors on crypto

33:36 – Competitive landscape

36:24 – Pandemic effects on CAIS

EPISODE TRANSCRIPT

John Darsie: (00:13)
Hello everyone and welcome back to SALT Talks. My name is John Darcy, I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology and public policy. SALT Talks are a digital interview series with leading investors, creators and thinkers. And our goal on these talks is the same as our goal at our SALT conferences, which we're excited to resume here in September of 2021 with our great partner that we're having on here on today's SALT talk but our goal is to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. And I will say that today's guests share a value set with us at SkyBridge, which is around democratizing access to alternative investments, as well as education around those alternative investments as well.

John Darsie: (01:01)
His name is Matt Brown. He is the founder, CEO and chairman of CAIS. He spent over 30 years at the intersection of wealth management, alternative investments and platform design. He began his career as a financial advisor at Shearson Lehman Brothers and Smith Barney. And in 2009, Matt founded CAIS, the first truly open marketplace for alternative investments, where financial advisors and asset managers can engage and transact on a large scale. He spent the better part of two decades working with Endeavor, the world's leading organization for high impact entrepreneurs. During his tenure at Endeavor, he had the opportunity to mentor dozens of entrepreneurs from around the world, including Africa, Latin America and the Middle East. Matt is honored to have been Endeavor's South African and Turkish boards, to sit on those boards, which ultimately led to the position on the global board of directors for Endeavor.

John Darsie: (01:52)
It's Matt's personal mission to ensure that anyone with a dream and the drive to achieve it, have an equal opportunity to make it happen. Hosting today's talk is, Anthony Scaramucci, who's the founder and managing partner of SkyBridge capital, which is a global alternative investment firm. Anthony is also the chairman of SALT. And with that, I'll turn it over to him for the interview.

Matt Brown: (02:12)
Thanks John.

Anthony Scaramucci: (02:13)
I'm looking at Matt's office and I'm seeing my own office there, John. Matt and I share the same location just on different floors in the same building.

Matt Brown: (02:23)
Yeah.

Anthony Scaramucci: (02:23)
You have good taste in real estate, Matt Brown.

Matt Brown: (02:25)
Yeah. I'm earning my way up, one of these days I'm going to be on a higher floor [inaudible 00:02:29].

Anthony Scaramucci: (02:31)
No, you're just using ... You're probably on a lower floor because you're more cost conscious and more commercial and entrepreneurially more successful but I want to go way back, let's go to Shearson Lehman Brothers.

Matt Brown: (02:40)
Yeah.

Anthony Scaramucci: (02:41)
Why'd you start there? What did you do there? Where were you? Were you down at 55 Water? Where were you?

Matt Brown: (02:48)
Yeah. No, actually San Francisco. I would describe myself very much as the accidental financial advisor. I graduated liberal arts degree, I was put in touch with a potential interview opportunity with a firm I had never heard of, for a job I didn't understand. I sat with the interview at Shearson Lehman Brothers to be a financial advisor. I met with a guy who literally looked like he was at a central casting for Wall Street, walked out of there, thinking, "Boy, that was a big waste of time."

Matt Brown: (03:26)
And the next day, the phone rang and they offered me a position. And back in the day Anthony, we weren't as picky about getting jobs as maybe this generation is. And so thought well, I was just excited to be offered a job out of college. I said yes immediately. Probably didn't even know what I was signing up for but I'll tell you the story there, which I think you'll find interesting. A year into it, I asked him, the gentleman that interviewed me who since became a good friend and mentor of mine, "But why would you take a risk on a kid with a liberal arts degree?"

Matt Brown: (03:58)
Didn't have a finance degree, didn't have an economic degree. And he said, "Because when I interviewed you, we spoke for two hours and I can teach people math but I can't teach people how to communicate and communication's key."

Matt Brown: (04:13)
And that really was a lesson for me. And the first moment of, "Oh. I get it, that business and finance is about personal relationships, trust."

Matt Brown: (04:23)
And also of course, the numbers and the spreadsheets but you really have to have both sides of it. I was a financial advisor for five, six years before starting my first company in the mid 90s, which is in the alternative investment space.

Anthony Scaramucci: (04:35)
You do well at Lehman. You can catch the wave of the bull market at that time, I experienced that as well. If you and I could only go back Matt, because we didn't realize in our youth how easy things were and we probably took for granted those 25, 30% sparkling returns but why'd you leave? Why would you take a risk? You had a great job working for a great firm, why do you leave?

Matt Brown: (05:04)
I think it's a couple of reasons. When you're young ... I was in my 20s, I had always had that entrepreneurial bug. Started a business in college. I had an idea. I had an idea to strike out on my own and talked to a number of people I respected. And I think the same answer came back, which is, "If you think you can do it and give it a shot, do it now because Shearson Lehman will be there if you need to on the way back in but if you're going to strike out, do it young, fail fast and you got your options."

Matt Brown: (05:41)
That's what I did, the only difference there is that I never really ever back to the big company game and just always wanted to be in the seat of an entrepreneur.

Anthony Scaramucci: (05:51)
Okay. You leave, what do you start when you first leave? What's the first business startup?

Matt Brown: (05:56)
First business was a fund that was investing in technology and healthcare companies. And it was really an exciting time. This was the late 90s, we were investing in private companies privately. We were investing in public companies privately. It's also the window of time that I probably have my biggest business regret, which is that I was negotiating with a small, struggling technology company in the Silicon Valley in the late 90s. They wanted a $20 million private placement. And we had the upper hand, they were a little bit in a distress situation. I was probably a little too young to hold back, probably asking for too much. They didn't end up doing the deal with us and I missed the opportunity. And that company was Apple computer, you may have heard of it. And that $20 million would be worth over 15 billion today, so lesson learned there. Always make sure you do a fair deal. You never know who you're negotiating with, could be the next Apple computer.

Anthony Scaramucci: (07:10)
You and I both know there was a lot going on right, because Apple ... At one point, Michael Dell, when they had asked him what Steve Jobs should do upon his return to Apple, he said, "Give the cash back to the shareholders."

Anthony Scaramucci: (07:25)
Of course, that upset Steve. And Steve famously, when Apple crossed the market cap of Dell, he sent out that public statement.

Matt Brown: (07:33)
Yeah, yeah.

Anthony Scaramucci: (07:34)
You never know what's going to happen in life. Of course, you're looking at a person that had the opportunity invest in something called Uber at a $25 million valuation. And I looked at these guys like, "I'm not going to put my daughter in a black car and no one knows who the hell the person is."

Anthony Scaramucci: (07:50)
And if you look at my American Express receipts Matthew, you'll see that my daughter's all over the place in these Ubers and I got that thing ridiculously wrong but got a lot of things right. One of the things you got right is CAIS. It's a FinTech company that you founded, you've run it for more than a decade. For those people that are listening and that don't know anything about CAIS, tell us what CAIS is.

Matt Brown: (08:12)
Yeah. CAIS is a technology platform that connects alternative asset managers, firms like you, SkyBridge, to this highly fragmented community of independent wealth advisors and financial advisors across America. A lot of people don't know that wealth management really is ... It's a story of two cities. You have big firms like Morgan Stanley and Merrill and Goldman wealth management. And there's a dozen of those firms and they control about 50% of the wealth, little over 10 trillion but there's also 10 trillion dollars in independent wealth. And that's tens of thousands of smaller firms that are entrepreneurs, that have built other own wealth management practices, many of which have come out of big firms to start their own. And they lack the infrastructure to really, in many ways, service their clients with the right products and information.

Matt Brown: (09:11)
We thought, I like to call it a bit of a David and Goliath story, I'm always up for a good fight there, "Why don't we build a platform that is a bit like a JP Morgan, Morgan Stanley platform for third party asset managers but why don't we do it in the independent channel and give them a chance to have the same platform experience and the same access to product and education around alternative investments?"

Matt Brown: (09:36)
And early on, it was a slug. There's no shortcuts in building a business but I got to say, in the last few years, especially with COVID now really kicking in, we've been able to just change the behavior of advisors to really use platforms.

Anthony Scaramucci: (09:53)
And so let's describe that to a lay person. Use the platform. And so basically, you have alternative investment managers that you vetted. They're on your platform. Advisors can then click on the technology that you've created to access easily the paperwork and to create the transaction and all of the detailed paperwork and paper trail, if you will, with your help. Is that fair to describe it?

Matt Brown: (10:26)
Yeah, that's definitely part of it. There's a lot more that is important there. We serve two communities. We serve financial advisors that on our platform but we also serve the asset managers that list their products on our platform. When we think about the user experience or the value brought for both sides of our community, financial advisors and asset managers ... I'll start with the financial advisor. Well, what do they need? What problems are we solving for them? Well, alternative investment funds are hard to access, big minimums. We reduce those minimums down to a hundred thousand dollars, 250, $250,000. They're challenging to understand, so we've invested a ... Made a huge commitment to education, scalable education on these products and asset classes. They are challenging to due diligence. And we partnered with Mercer, the global leader in operational investment due diligence to vet all of these funds.

Matt Brown: (11:32)
And then when you finally understand them and how to implement them in a client portfolio, you want to go buy them. They're very cumbersome to buy. We've digitized the entire process to make it really as close to buying a mutual fund as you possibly can get at this stage of the game. A little spoiler alert, there's a lot of change coming and innovation coming, which we can talk about in the industry but yeah, we really have built the entire end to end workflow for that.

Anthony Scaramucci: (11:58)
Seems to be a big shift taking place. It seems like the investment world, the financial advisors becoming more independent. They're leveraging technologies like the ones at CAIS and other vendors. It seems like the wire houses, which would include some of the large investment banks that have huge brokerage teams and FA teams, are losing their grip a little bit on the business. Do I have that wrong? Are there more independent RAs today and is CAIS helping those independent RAs?

Matt Brown: (12:30)
The independent wealth community, the RA community, is absolutely growing. The wire house community, the large firms are also growing. Wealth is growing overall. We are a key player in the mosaic of service providers that will help an independent RIA compete with a more established wealth management firm that may in this case, have access to an alternative investment platform. There's many, many different service providers out there that are trying to in one way, shape or form, recreate the infrastructure access or education that a wealth advisor needs to best serve their client. Yes, we're really trying to champion that on behalf of the wealth advisor.

Anthony Scaramucci: (13:16)
Okay. Explain the CAIS value propositions on both sides, for the alternative investment manager or the private equity person or long-only and the FA. Tell us what the benefits are.

Matt Brown: (13:30)
On the FA side, as I just mentioned, it's the user experience. It's making information and product accessible. And it's streamlined execution, which was very cumbersome in the past. And that package, that turnkey if you will, is really allowing alternatives to be accessible and investible in end client portfolios. The value prop to the asset manager, whether you're a private equity manager or a hedge fund manager or real estate manager, crypto, private credit venture, all things alternative, they're looking at the CAIS platform and saying, "Wait a second. There's a multi-trillion dollar pool of capital out there in the independent wealth space that have allocation rates of less than 2% in alternative investments. Not because they don't want alternatives but they lack the access to them."

Matt Brown: (14:24)
And the CAIS platform has a very efficient way to deliver those new investors. If I'm an asset management firm and I want to grow and diversify my shareholder base in a channel of investor that I don't normally spend time in, we're a very efficient way to be able to do that. In many ways Anthony, these two communities have for so long wanted to meet, that the resistance isn't around alternative asset managers wanting wealth management as shareholders or investors or wealth advisors wanting alternatives, it's the mechanisms in the industry structure that prevented it and we're ironing that out.

Anthony Scaramucci: (15:08)
Makes total sense to me. And I think it's a very exciting time in our industry because technology like yours is making for greater independence, greater freedom, also broader choice and ease of use. It's a combination of these things that makes the CAIS platform so valuable. You've made some big investments in education technology in addition to the core investment platform.

Matt Brown: (15:34)
Yeah.

Anthony Scaramucci: (15:34)
What's your vision for what you're calling CAIS Q?

Matt Brown: (15:39)
CAIS IQ, our educational platform ... Yeah, we are investing a lot in education. I think this 10 year journey that we've been on, we started where I think many other platform forms have started. Some have stopped there as well, which is, "Hey, if we make it easier or a little more seamless, we're going to be able to make this transaction flow increase over time."

Matt Brown: (16:03)
And that's not incorrect, it's just not the full story. Financial advisors will access alternatives if it's made easier but they're certainly not going to access alternatives just because it's easy, if they don't understand the products or they don't understand how to implement the strategies or they don't understand how to talk to their clients about the strategies. When we realized that, and that was a real turning point for CAIS, that this is really about education first. And that's when we started to really lead with learning, not lead with product, not lead with a wealth tech solution to make subscription documents faster. This is really about educating financial advisors, bringing knowledge and information around strategies, around fund and product and doing it in a scalable way. CAIS IQ is the leading AI powered, artificial intelligence powered, learning platform that uses machine learning and light AI to understand on a one on one basis how the financial advisor is learning and then delivering information to them around these strategies over a period of time.

Anthony Scaramucci: (17:13)
Makes total sense, I love it. You start in '09, the world is totally different. The phone that we have is way more powerful. We had a pandemic, so now we're talking the way George Jetson talked to his wife, "Here we are together."

Anthony Scaramucci: (17:29)
Big differences in the last 10 or 12 years. Tell us what the next 10 years are going to look like.

Matt Brown: (17:38)
As it relates to CAIS specifically, the next decade is very exciting. I think a lot of entrepreneurs probably believe they were early on ideas. I don't think that's an uncommon thing to hear from an entrepreneur or a founder. I can say without doubt, we were very early on this idea, things needed to catch up. I do remember having conversations in 2011 and 12, 13 with big asset management firms. And we were talking about delivering the independent wealth channel to them as investors. They were scratching their head, saying, "Why would we ever do that?"

Matt Brown: (18:15)
Now, it seems you can't speak to an alternative asset manager without them saying, "Wealth is our number one channel priority."

Matt Brown: (18:22)
Just look at Blackstone, look at Carlyle and KKR. We were early on that. We really feel momentum in the flywheel. COVID has just absolutely accelerated platform adoption. And the reason is, is because the average age of a financial advisor is 56 years old and technology and building their business with tech has not always been a priority but when the pandemic came and it forced a change in behavior, it forced an adoption of technology. And we were right there for that. We really feel like this is an exciting time, as you said. A lot of great tailwinds around regulatory environment, structural environment to make this go. What you're going to see, is I think two things. CAIS continuing our mission to democratize access, fill in the blank. It's not going to stop at just what you and I would call alternative investment funds. There's more out there. Anywhere that we can level the playing field for every financial advisor and maybe even beyond to the end investor.

Matt Brown: (19:21)
15 years ago, there was only a fraction of the investment information out there, and you usually went to a financial advisor to learn. Today, individual investors are getting information everywhere. This is the day of Robin hood, this is the day of betterment. We got to think about that end investor in a different way. New products and democratization for sure but the real change here is going to be what you're talking about, this impact that really, forward technology is a going to make on all industries, including ours.

Matt Brown: (19:54)
Anthony, you and I today can go to JK Airport. We can cut the line with TSA because someone told them that at some point, we're actually not bad guys. And that seems to be good enough for us to get on an airplane but if I want to invest in Blackstone's real estate fund, I have to photo my driver's license and send it to them and manually fill out a form. That's ridiculous. With blockchain, with other technologies, it's not about, as we say, putting landlines in faster, it's about skipping two steps and going straight to mobile. It's not about making sub docs more efficient or subscription processes more efficient, it's about eliminating them completely.

Matt Brown: (20:40)
And you're going to see that change happen and when it does, it's going to have a massive impact on the way advisors allocate because if you can start to buy alternatives, like you buy an ETF with a CUSIP and accreditation rules for end investors are changing to include an educational requirement, not just a high net worth requirement, you're going to see a massive change. What's happening today, is that alternatives are replacing active management and that's a sea change of allocation.

Anthony Scaramucci: (21:13)
It makes sense. I got to turn it over to the erstwhile John Darsie, who dressed up for this occasion, didn't realize that he was going to be with two old timers that were dressing like millennials. Now, he's dressed like the old timer.

Matt Brown: (21:29)
You got .hoodie and I got a vest.

Anthony Scaramucci: (21:29)
He's got questions for you and it would be remiss of me not to include him.

Matt Brown: (21:33)
That's really funny though because you're wearing a hoodie, trying to look cool. I got this vest on, trying to ... And [inaudible 00:21:40].

Anthony Scaramucci: (21:40)
You even got great product placement. I'm placing product for Ralph Lauren. I got to get a SkyBridge or a CAIS hoodie going next time.

Matt Brown: (21:48)
I'll send you a CAIS vest.

John Darsie: (21:50)
And at least Matt embraces his distinguished salt and pepper hair, whereas you have too much shoe polish in there. It's very visible on the camera, Anthony. I'm just saying. He's going to ignore that one. But Matt ...

Anthony Scaramucci: (22:05)
[inaudible 00:22:05] why I'm ignoring that. I'm going to tell you why I'm ignoring that, okay. It's not shoe polish, okay. This is very terrific permanent dye and I also put a little bit of a glaze on it. I was experimenting with a glaze prior to the SALT conference, okay. It's not quite what he's saying, okay but go ahead. Keep going, Darsie.

Matt Brown: (22:22)
Yeah.

Anthony Scaramucci: (22:22)
When he needs the shoe polish, he'll be calling me because I'm an expert on hair color, okay but go ahead. Keep going, John.

John Darsie: (22:30)
I want to start with a little plug about our partnership related to SALT. You talked about CAIS IQ and one of the things ... And I was very familiar with CAIS going into our partnership but didn't fully appreciate what you guys have built with CAIS IQ and how important that is to the educational process for both advisors and helping investment managers that are on your platform communicate their unique value proposition to your distribution partners but we have a SALT learning center that we're partnered with CAIS on for the conference, where we are enhancing some of that education that we are both passionate about. It's why we launched SALT, it's why you guys launched CAIS IQ. And it's part of your mission with CAIS. Could you talk about the thinking again, behind CAIS IQ and the SALT learning so center and what we're doing for the conference?

Matt Brown: (23:12)
Yeah, really important. Let's just take a half step back. I'm a former financial advisor and I know a lot of financial advisors and have throughout my entire life. And I can tell you one thing, financial advisors do not talk about things they don't understand. They have that special role, they are the advisor, consultant to their client. They are to a large degree, expected to know a lot about a lot of different things. If you don't understand as a financial advisor, a hedge fund or a private equity strategy or a crypto strategy, there's a very good chance it's not going to come up in a conversation and certainly not going to end up in a portfolio. We wanted to understand, "How can we get education on this out and broad?"

Matt Brown: (23:59)
... but there is no real method. White papers, seminars, all manual, no one reads them, PowerPoints, forget COVID even attending anything. We needed a modern approach to learning. And I met an individual named Andrew Smith Lewis, who spent his entire career at the intersection of AI, machine learning. And he built an amazing platform and I made him an offer he couldn't refuse. I said, "Let's go transform education and wealth management."

Matt Brown: (24:31)
We built at CAIS, the most modern learning application, where we gamify learning in a way and measure impact of that learning through data for each individual advisor. Fully scalable, it's on an app on a desktop and what we're finding now, is that many, many of our advisory firms, whether big or small, are really wanting their advisors or in some cases, mandating their advisors to interact with CAIS IQ before they make their investments on behalf of their clients. And it's really making a difference. Advisors are feeling more armed with information, having better client conversations. And we're doing what we want to do, which is lead with learning and transform this industry.

John Darsie: (25:18)
Yeah. I think you hit the nail on the head with all of that. At SkyBridge, one of the things and one of the reasons why we've been so successful in distributing our fund to funds product into the financial advisory community, is that focus on education and engaging with the advisor and engaging with their clients to help them understand what they're investing in. Like you said, the advisor likes to be able to sound intelligent and be educated on products that they're putting their clients in. And if they're not, they're not going to transact.

Matt Brown: (25:45)
Yeah.

John Darsie: (25:45)
And so I think what you guys have built is amazing, the way you've gamified it. Talk about potential regulation in the pipeline around an education standard, rather than a wealth standard.

Matt Brown: (25:54)
Yeah.

John Darsie: (25:54)
You're allocating to alternatives. I think you guys are laying the groundwork for that and we're very excited to integrate it with SALT for SALT New York, which we're again, excited to partner with CAIS on in September. We're excited about that and having a lot of advisors that are in your community attending the conference, both in person and virtually and al lot of the funds that are on your platform participating as well.

Matt Brown: (26:14)
Yeah. And I have to say, the reception from the advisor side that we've been able to invite has just been overwhelming. We're at capacity and we are at a waiting list right now. It seems like the SALT conference is really ... It's getting a lot of traction and I'm happy to open it up to the RA community. It's great.

John Darsie: (26:35)
Yeah, absolutely. And you guys are a great partner on that. You talked a little earlier about some structural changes that you're seeing in the industry, that are paving the way for greater democratization of alternative investments. We've already seen several FinTech companies that are popping up, that are in their earlier stages. You guys are much more mature and robust in your offering and your business tackling the technology side but there are structural barriers. There are structural opportunities around things like minimums and things of that nature. There's regulatory barriers, there's tech and data barriers. How are you guys addressing those and what are those trends that you're seeing, if you could just explain those again to the audience?

Matt Brown: (27:14)
Yeah, sure. There's just a tremendous amount of tailwinds when it comes to the intersection of wealth management, alternative investments, technology, FinTech. And obviously, we're not the only platform that is benefiting from that. Some platforms that are very close to what we're doing, are doing great. Others that are in adjacent businesses are feeling that but again, our view is, anyone who's contributing to the narrative, to the impact of changing the industry is welcome. We very much believe that like every other aspect of Wall Street and also wealth management, this is not a one market or one platform business. You're going to have a handful of winners, just like there's a handful of custodians, a handful of reporting providers that are doing great work. And that innovation and competition is critical.

Matt Brown: (28:07)
Some of the bigger trends ... I'll just take the regulatory trend for a second. For some reason, it's taken a long time but our government finally realized that just because you're wealthy, doesn't make you smart. And I think that's great because if I went to a great school and decided to get my degree in business or finance and then decided I wanted to spend my time in the nonprofit community and not earn a lot of money but yet I understand complex investments or alternative investments, up until recently, I wasn't able to invest in them because I wasn't wealthy enough but at the same time, there could be an individual who may not know anything about alternative investing but inherits lots of money or maybe they sold a business. And so wealth is not equal capability and that's actually a huge step forward in democratization of access for all, which is a big and important theme. That's the regulatory side.

Matt Brown: (29:05)
The other side of it of course, is just structural. We are seeing more and more innovation right now than we've ever seen before with asset managers creating more wealth friendly investment structures to deliver their strategies to the wealth community. And when I say wealth friendly, what do I mean? Investment minimums that can be scaled across their entire book of business, investment structures that do address lower investment minimums and also accreditation requirements, reporting that's been made easier and faster. There's real structural change at work here. And I think there's a complete adoption happening on the wealth side at scale, as a result of that.

John Darsie: (29:54)
Right.

Matt Brown: (29:54)
Of course, you're also seeing technology play an enormous role, as we talked about. Look at what Apollo just did and their announcement with ... I believe it was Figure, a blockchain company to tokenize funds. We can talk about that for two or three hours but when you start thinking about a world where there's no longer a need for a fund structure, right and you're still able to replicate the rules base of that or legal base of that, that's a game changer.

John Darsie: (30:28)
Yeah. Figure is a fascinating company. We had the president of Figure, Asiff Hirji, on SALT Talks and what they're doing, taking blockchain technology tokenization and bringing it into the institutional world, it's certainly fascinating. I got a question about crypto digital assets. You guys have a Bitcoin fund on your platform, Galaxy. We're great friends with Mike Novogratz, great fans of what they're doing over there. As you guys look at an asset class, I don't need your opinion on whether Bitcoin's going to a hundred thousand or a million dollars a coin but as you guys look at a new asset class and how to onboard those types of products onto your platform, how to educate people around that, how do you guys think about that? Are you more cautious? Are you more responding to customer demand on the product side? Or how did you tackle that decision about whether to include crypto on your platform and how to educate advisors around that?

Matt Brown: (31:20)
Yeah. Everything we do at CAIS, we're a marketplace. We want to take the feedback that we're hearing from the community of investors or financial advisors and make sure that our platform is responsive on what they're interested in. We started crypto, not with the product on our platform but with just educational opportunities, "Let's learn about crypto. Let's start getting a little more fluent on what this means. What is blockchain? What is Bitcoin? How does it work?"

Matt Brown: (31:52)
We found that the topic broadly of blockchain and crypto, has from an engagement score level on our platform, the highest content engagement scores by far. Now, it could be because it's the most popular and least understood but more and more advisors are wanting to learn more and more. We wanted to make sure that we heard our audience and then they started saying, "Well, if we want to take the next step and start to get exposure, how do we do that?"

Matt Brown: (32:23)
And that's when we started looking at the field of players out there, we bring in our partner Mercer, who does the due diligence. And we got very comfortable with Galaxy, with Mike Novogratz's firm and fund and we started there. And we will be always pushing the envelope to a large degree on newer strategies. It's good to have your core basic four food groups right, on the shelf but you also have to have a few other things that are a little bit more satellite and that's what we're doing with crypto and we're going to continue to do with other things.

John Darsie: (32:57)
And I know Andrew Smith Lewis is very crypto enlightened and we're excited to have a conversation with him and Mike Novogratz on the CAIS alternatives track at SALT. Very much looking forward to that one.

Matt Brown: (33:07)
Yeah, that's going to be a [inaudible 00:33:08] conversation.

John Darsie: (33:08)
As you look out ... Yeah, it's going to be fantastic but as you look out on the competitive landscape for CAIS, what do you see as the competitive landscape for CAIS? Obviously, like I was saying, there's a lot of firms that are iterating around FinTech, alternative investments are certainly an area that's hot in terms of companies trying to create solutions to democratize access and go either direct to consumer or through advisor channels but what do you view as the competitive landscape?

Matt Brown: (33:36)
The competitive landscape is evolving. There are more and more platforms coming to market in different ways, trying to maybe put a different spin on approach. There's a couple of very large players who are at least today, dominating. And we think that's fine. The real competitive forces though however, have nothing to do with any of these other platforms. We can call ourselves competitors, we can feel that we might actually in some cases be competing but when you have a 10 trillion dollar market in the independent wealth, with 2% allocation rates to alternatives and then platforms like CAIS are only getting a small fraction of that, what we're really competing against is changing the behavior of financial advisors to use platforms. And I liken that to how an Amazon has changed the behavior of how people shop.

Matt Brown: (34:43)
Anthony, me and you and John, we will literally go and buy something on Amazon that we know is in a store less than a mile away from our house. Why? Because we've now changed how we go shopping. We like Amazon, it's easier, it's faster and we are just not going to hop in the car and go to CVS anymore. And that's changed the behavior. There are more transactions happening in alternative investments by a huge multiple. The old fashioned way of an advisor finding it themselves, doing their own due diligence, maybe filling out cumbersome paperwork, than are happening on platform. When I think about the competitive landscape, I cheer anyone who's competing and adding value that's a quasi competitor because what I think they're doing, is educating the market for us. Really, what we have to be doing is capturing all the transactions out there by convincing financial advisors that the single best way to be able to allocate to alternatives is on an end to end platform like CAIS, where there's education, product menu, due diligence and transactional ease of use.

John Darsie: (35:53)
The pandemic has had a profound impact on a lot of different types of businesses in different ways. It's had a profoundly positive impact on FinTech companies and on any technology driven business. And I'm curious what you guys observed as the impact on the CAIS platform, on funds that you work with on your platform, on advisors that you work with on your platform, how they dealt with the dislocation that took place during March of 2020, at the onset of the pandemic but what's been the overall impact to your business and how you guys think about your business from the pandemic?

Matt Brown: (36:25)
Yeah. Speaking of changing a behavior, the pandemic ... Obviously, not all businesses did well and we always are grateful to be in the category that as a technology platform, we were in the category that was positively impacted by that. What the pandemic did, is it was the true catalyst to change behavior, as we just talked about. As I mentioned, the average age of a financial advisor is in their mid to late 50s. They did not grow up being digitally savvy in many cases. They built their relationships on handshakes, spending time with their clients, so all manual. And we all are creatures of habit and we resist change.

Matt Brown: (37:15)
What happened in the pandemic, because the world did change, we no longer met with our clients face to face, has been a complete shift and adoption of technology across the board, whether it's them meeting now for the first time, truly e-signature capabilities to sign documents, to video technology, to financial advisors no longer needing to meet people to make investment decisions, or asset managers or their teams. As a result of that, people really said, "Okay. This is my time to really take a step forward, be a little more digitally savvy, adopt technology in a big way. I need to do it for my business."

Matt Brown: (37:57)
And CAIS was one of many, many firms that fit that profile. As a result, our adoption rates of a business have skyrocketed, volumes have skyrocketed. And we're feeling like this trend is not going to reverse back the old way, fortunately.

John Darsie: (38:14)
Right. Well Matt, it's been a pleasure to have you on SALT Talks. We're so excited for the partnership, both at New York in September and going forward. We think given our shared values, given the overlaps in some of the ways we look at business and democratization of alternatives, we're excited for that partnership hopefully going forward for many years. Thank you so much for joining us. Anthony, you have a final word for Matt before we let him go.

Anthony Scaramucci: (38:38)
No listen, I think ... Listen, as a fellow entrepreneur who started out as an FA, I get the struggle. And I think what you built is an amazing platform. And I'm super excited to see how CAIS unfolds over the next decade because I think it's going to be your best decade. And so for these young timers that are listening to the call or some of which they're participating on the call, I know that your and my best decade is ahead of ourselves.

Matt Brown: (39:05)
Thanks so much. And I know you're right. And thanks so much for the time. Look forward to SALT. Send me the name of the shoe polish, I could use it.

John Darsie: (39:15)
Oh, I like your look. I like your look.

Anthony Scaramucci: (39:15)
You could use a little bit of so replacement, too. I'm going to work on you though. Don't worry, okay. When I'm done with you Matt, your wife's going to be very happy, okay.

Matt Brown: (39:23)
If I look like you, I'll be in good shape. Take care, cheers.

John Darsie: (39:27)
All right. Well, thank you again, Matt. And thank you everybody for tuning into today's SALT Talk with Matt Brown, the CEO of CAIS. Just a reminder, if you missed any part of this SALT talk or any of our previous talks, you can access them on demand on our website at SALT.org\talks or on our YouTube channel, which is called SALT Tube. We're also on social media. Twitter is where we're most active, @saltconference is our handle but we're also on LinkedIn, Instagram and Facebook as well. But on behalf of Anthony and the entire SALT team, this is John Darsie, signing off from SALT Talks for today. We hope to see you back here again soon.

Andrew Steel: ESG Investment Principles | SALT Talks #250

“You need to understand that the expectations of investors in the future will be that you have ESG information available and it won’t be acceptable to say, ‘We don’t really know what our carbon footprint is.’”

Andrew Steel discusses the growth of ESG investing and how Fitch Ratings provides analysis and credit ratings based on ESG metrics. He lays out some of the challenges faced by a lack of standardization around data companies and investors use to inform decision-making. Ultimately, Steel predicts investing will evolve to the point where companies and institutions will integrate ESG information and evaluation into every decision.

Andrew is responsible for developing and implementing Fitch's sustainable finance strategy, across ratings and the broader Fitch group. His group is based in London, New York, and Hong Kong. In 2019 Fitch Ratings rolled out an integrated cross-asset scoring system for credit ratings to display how environmental, social and governance factors impact individual credit rating decisions. Prior to his current role Andrew held several senior management positions for Fitch in EMEA and Asia. Andrew joined Fitch 17 years ago with a background in project finance, private equity, LBO’s and M&A from investment banking and equity investments. Andrew is currently an advisory committee member of the UN PRI credit ratings initiative, and during the early 2000’s was an independent expert for the UN ECE advising on risk issues and sustainable energy development.

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MODERATOR

SPEAKER

Andrew Steel.jpeg

Andrew Steel

Global Head of Sustainable Finance

Fitch Ratings

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

TIMESTAMPS

0:00 - Intro

3:00 - Growth of ESG

4:56 - How to produce ESG insights

9:50 - Evaluating credit risks and working with regulators

13:42 - Data analysis challenges

16:23 - Modern ESG practices

18:17 - Concerns around greenwashing social-washing

20:21 - ESG prevalence

22:35 - Governance in ESG

28:35 - Evaluating climate risks

32:49 - ESG integration and need for labeling

35:35 - Evaluating EV proliferation

40:21 - Needed pace of ESG growth

EPISODE TRANSCRIPT

John Darsie: (00:12)
Hello everyone and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology and public policy. SALT Talks are a digital interview series that we started in 2020 with leading investors, creators and thinkers. And our goal on these talks is the same as our goal at our SALT conferences, which we're excited to resume this fall at our home city of New York. But that goal is to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. In the investment world today, there's no bigger idea shaping the future we think than ESG sustainability and there's no greater expert on that than Fitch. So we're excited to welcome Andrew Steel from Fitch to SALT Talks.

John Darsie: (01:02)
Andrew is responsible for developing and implementing Fitch's sustainable finance strategy across ratings and the broader Fitch group. His group is based in London, which he's outside of London today, New York and in Hong Kong. In 2019, Fitch Ratings rolled out an integrated cross asset scoring system for credit ratings to display how environmental, social and governance factors impact individual credit rating decisions. Prior to his current role, Andrew held several senior management positions for Fitch in EMEA and Asia. Andrew joined Fitch 17 years ago with a background in project finance, private equity, LBOs and M&A from investment banking and equity investments. Andrew is currently on the advisory committee for the UNPRI Credit Ratings Initiative. And during the early 2000s, he was an independent expert for the UN ECE advising on risk issues and sustainable energy development. Andrew graduated from Bristol University with a degree in psychology and as a postgraduate diploma from INSEAD in global management. Hosting today's talk is Anthony Scaramucci who's the managing partner of SkyBridge Capital, which is a global alternative investment firm. Anthony is also the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:19)
Andrew, once in a while, John Darsie allows me to do these interviews. So I want to be grateful to you John. I just want to personally thank you. So let's get right into it Andrew and in 2015, you said since 2015 investors have been calling on credit agencies and credit rating companies to get involved in the ESG story and to help investors, institutional investors figure out which companies are adapting sort of ESG practices. Where are we now, sir?

Andrew Steel: (02:57)
Thanks Anthony and thanks John for intro. Yeah, that is something which very much came to the fore in 2015, but I think there's background to it. It's important to remember that ES&G risk issues are not new. They've always been around. And in fact, we have seen investors doing ethical investing for hundreds of years already so the fact that this became far more prominent from 2015 onwards was largely around I think most of the issues that have risen to the fore in terms of climate change. I think there was also a desire amongst financial institutions to try and do some image rebuilding post the global financial crisis and to try and sort of demonstrate that not only were they doing well, but they could also do good at the same time. And so from that sort of 2015 point onwards where we had the social development goals, sort of the standard development goals from the UN being launched and increasing news content around climate change, we saw a real focus on environmental issues.

Andrew Steel: (04:05)
I think the pandemic since then has also caused there to be a heightened interest in social issues. And we'll perhaps come on to talk about that. And it's been a lot of asset owners, I think in general stakeholders in across many industries, in fact, that have been keen to be able to demonstrate how they are also helping to solve some of these issues. And that's really moved from a sort of exclusion policy for investors through now to something which is far more integrated and much more part of the normal process of investment or a fund.

Anthony Scaramucci: (04:40)
Take us through the steps, Andrew, meaning your firm, you have analysts, you have research, you have outreach. Take us through the steps of Fitch in terms of how you synthesize product.

Andrew Steel: (04:56)
Oh and this is quite a journey that we've been on since sort of the early 2018 period particularly as regards ESG. And I think our initial focus with this ask from investors to provide more granularity and transparency around the influence of ESG was very much, we started off by looking at our bread and butter, which is providing independent insight and opinion around credit and credit profiles of entities. And so what we did was we actually started looking at this maybe slightly differently to how others had looked at it in the market to that point. And we said, okay, if we are saying that as an agency, this stuff isn't new and that it's always been there, then how can we extract it and how can we display the ES&G risks as a separate category of risks? And so what we did was we spent a lot of time working with our credit analysts to help adjust the focus of that credit lens that they view everything through.

Andrew Steel: (06:02)
And so we spent time identifying the credit aspects that were relevant for environmental, social and governance factors across each different industry sector and asset class. And it was clear as we did that that this was something that really needed integration into the analysis that we did. So it was a seamless process. So the external parties could see how much of the credit decision we were making was being influenced by this particular sub category of risks. And as we did that, it was clearly very credit focused. It was focused on the credit rating horizons and forecasts that we look at, but it also became apparent to us that you kind of needed to go beyond that. So we needed to look at producing more research around some of the themes and the issues of how they would develop.

Andrew Steel: (06:47)
And so we refocused some of our research team. We created a dedicated research team and we also started doing scenario analysis, particularly when it came to environmental risks because a lot of the crystallization of the cost aspects of environmental risks are over a much longer term. And with that in mind, we've also been working in the background in the last year or so doing a lot of product development and looking at how we can maybe expand also into pure ESG analysis as well.

Anthony Scaramucci: (07:19)
Is it working Andrew? People are picking it up, adopting it? They're using it as a portfolio mechanism and it's influencing the management teams of these companies?

Andrew Steel: (07:33)
I think the short answer to that is yes. And it's not just what we're doing, it's what others are doing in the market as well. I mean, it is interesting when you look at the market as a whole, you see a lot of people who've developed niche solutions to particular individual problems that investors have come across or the market's been been interested in. But I think the unique thing about what we did was we looked at how we perform financial analysis and it's larger... It's a mix of quantitative and qualitative. We then looked at ESG as a subcategory and said does that neatly map to an individual aspect of quantitative analysis for a particular issue or a particular sector? And as we went through the process of trying to extract these ES&G risks from our credit criteria to display them separately, what we discovered is actually as a risk category, it's not very well aligned with an individual area of qualitative analysis or individual area of quantitative analysis.

Andrew Steel: (08:33)
What you find is that individual aspects of environmental, social, governance risks tend to end up spanning several different areas of quantitative and qualitative analysis and influencing those if they materialize and crystallize. And so what we try to do is, and I think we've been pretty successful in doing, and that's why it's started to be quite popular is to be very transparent and granular about how that happens. So it's not a sort of sector based approach, but it's a very specific entity and transaction based approach. Now that is highly technical. And it is also just a portion of the overall equation for an ESG investor. It's the very specific credit portion.

Anthony Scaramucci: (09:18)
It make sense. I guess what I'm very impressed by is the combination of different forces, but how big a role Fitch is playing in actually moving the boulder down the hill. You do have situations where your credit centric scale will sometimes weigh heavily polluting fossil fuel producers, similarly to somebody that's in the renewable business. Is that something you can discuss and why that happens?

Andrew Steel: (09:50)
Yeah, sure. I mean, it is very much the case and that is because we are purely, with our credit ratings and the ESG relevant scores that we produce as an integral part of that, we are purely looking at the credit risk aspects. And so we're not looking at the good or the bad. We're only looking at carbon emissions increasing if there's a credit consequence to that. And a good example that we like to use there is just because you are, say an electricity generation company that only produces electricity from wind turbines, just because you're a neutral energy entity doesn't mean that your credit profile is stronger. If you are a renewable energy entity and the wind turbine electricity that you produce is sold under a feed in tariff and it gets priority of dispatch, then yes, your credit profile is going to be much better.

Andrew Steel: (10:47)
If you actually having to sell into a merchant market and you're a price taker with no priority of dispatch, then actually you're going to have a really poor credit profile. And there was a lot of confusion in the market up until we started to produce this stuff around about the beginning of 2019 where people were saying, oh yeah, yeah, yeah. But because it's a renewable business, it should have a really strong credit rating. And the answer is credit is not the same as ESG. There is a credit component to ESG and isolating that is extremely important. And it's part of the overall analysis toolkit that's required for investors to be able to do their job properly in this space.

Anthony Scaramucci: (11:28)
And how do you guys intersect with the regulators from the various global community of regulators?

Andrew Steel: (11:37)
Yeah, that's a very good and a very interesting question. There is a lot of increased interest from regulators in ESG. The interesting thing about ESG relevant schools that we've produced is they are produced by our regulated business. And so they are fully under the [inaudible 00:11:53] of regulators such as AZMA and the SEC. It's just an integral part of the credit ratings process. That means, in terms of our doing that, it was tough. It was granular. We had to meet very stringent standards. When you look beyond that pure credit aspect, which I was talking about earlier, and you start to look at the bigger picture, pure ESG analysis. So you start to look at that good or bad contribution to social goals and the longer term, you look at preparedness for decarbonization in an industry, then actually there's a lot more subjectivity in that.

Andrew Steel: (12:34)
There's a lot of issues that I think we'll come to talk about around standardization of data, what metrics you should be looking at. And in that respect, it's very much an evolving market. And so from a regulatory perspective, when the regulators are looking at what's going on in ESG at the moment, I think they're starting to become more and more interested because they see more and more influence particularly where you have things like sustainability linked bonds with coupons that are linked to ESG ratings from ESG service providers. And that really, I think, was the trigger point some sort of 18 months or so ago for increased regulatory interest. As the regulators start to look at this and they say, well, hang on a second, we've got pricing triggers occurring in the market from opinion providers who are completely unregulated. And that to my mind is what will mainly drive regulation fairly quickly into this market. Particularly as we've seen sustainability linked claims, increasing a lot in activity recently.

Anthony Scaramucci: (13:33)
Andrew you're also in the data business. Data is super important to make this analysis. Tell us what some of the challenges are there.

Andrew Steel: (13:42)
Well, the challenges have to be a huge, and I'm sure you're aware of that. Most of the most of the listeners are going to be aware of that as well. They're all very big challenges, but then on the positive side, there are a lot of initiatives going on to try and tackle these challenges. And the biggest challenges really are standardization and harmonization of information. I mean, particularly for us as an agency that's largely focused on financial analysis to date, we're used to seeing fairly clear and understandable standards. IFRS, et cetera, where there is a way to report information. There are clear metrics surrounding the reporting of that information. It's easy for financial auditors to conduct an audit on the information that a company provides and be very clear about how compliant that company is or isn't. When it comes to ESG, that sort of stuff is still very much in the early days.

Andrew Steel: (14:43)
And that's very, very problematic actually for most of the companies in the industry sectors that we look at and the investors want to invest in, because what it means is if you're a company and you're being asked for ESG data, if there are no clear standards, there's no harmonization, then it's very difficult for you to know what data you should be gathering internally, how you should be producing metrics to demonstrate your compliance with targets around that data and therefore what can be audited and what you can provide to the market in terms of standardized information. And so that sort of pushing and pulling that's going on between should we set the standards first or let the market decide what the standards are? That's causing huge, huge problems. There is a lot of momentum behind trying to resolve that. And we're seeing people like IFR are starting to get interested in it. And I think that's helping. As well as we're seeing quite substantial initiatives between different countries and regions. So there's a very big initiative at the moment between the EU, the UK and China on standards harmonization. Also the US is starting to sort of pick up the ball on this and the sort of increasing interest at the federal level in the US is definitely going to help push all of this forward, I think.

Anthony Scaramucci: (16:05)
What would you say to a company that is behind the curve as it relates to their carbon footprint or their longterm strategy to get into the acceptability standards of ESG? What type of advice would you give them, Andrew?

Andrew Steel: (16:24)
Well, that's a good question to Anthony and it's one where I have to say we are not allowed to provide advice as a regulated rating agency so I can't provide advice. I can comment on what perhaps are some of the issues for companies. I think there is mounting evidence the over time, no matter what you do, no matter what asset class you're looking at, no matter what sector you are in, there is evidence that reporting on your ESG credentials will just become an integral part of what you need to do to be eligible for investors. And to the extent you don't do that, there'll be liquidity issues going forwards. Now that'll happen over time. And I think what we'll see is that governance tends to be reasonably well reported on.

Andrew Steel: (17:23)
Environmental standards or are appearing for that much more quickly. Social is going to be very difficult. But if you're an entity, then you need to understand that the expectation of investors in the future will be that you have this information available and that it won't be acceptable to say, well, actually we don't really know what our carbon footprint is. And so, in a sense, you don't need it immediately now, but if you're not starting to look at how you gather that information, if you're not keeping up with your competitors in the space, then you will disadvantage yourself over time.

Anthony Scaramucci: (18:01)
Let me ask a different question. Is it possible for people to game the system or is the system so transparent now from an ESG perspective that they can't do that?

Andrew Steel: (18:16)
No, they can definitely game the system. I mean, this is an evolving market and I think we were chatting just before we started this session about green washing, we're also seeing some social washing as well where people are sort of claiming social benefits from activities which are really much more geared to sort of build client basis and a clearly commercial rather than social in nature. But again, the sort of change in mindset for people of the need to report on this and the need to think about it is an important step forward even if we do see some green washing and some social washing along the way. I mean, for some big financial institutions, for instance, it's very easy for them to reclassify parcels of assets into being either environmentally friendly or socially friendly, but they weren't created in the first place for that purpose.

Andrew Steel: (19:15)
They were created because they were commercially viable. But the interesting thing is once you start to label and you start to define your portfolios like that, when it comes up for refinancing or renewal, then actually you do have to think about it. You can't substitute it with whatever assets are going to be the most commercially viable at the time. You will have moved your mindset into one that says, well, actually hang on this as a green activity that we do, or this is a social activity that we do. So whilst a lot of people get excited about it, I actually think it's going to happen. And actually there are positives to it as well because it does help change mindsets amongst management.

Anthony Scaramucci: (19:56)
Got it. I'm going to get John Darsie in here in a second. And just remember before we started Andrew, John said that us as baby boomers destroyed the planet. I just want to make sure you know that it's you and me against him. But before we [crosstalk 00:20:09]

John Darsie: (20:08)
I will confirm those comments.

Anthony Scaramucci: (20:10)
Where is ESG really taking hold and in finance? Is it just in Wall Street or is it very widespread?

Andrew Steel: (20:20)
It's very widespread. It certainly isn't. I think Wall Street tends to react to the challenges that are posed to it. It's good at innovation. It's good at coming up with products to meet needs, but the real push from this has come from a mix, I mean, it depends where you are on the world, but it's coming from a mixture of public opinion, some science around climate change and it's very much been driven by asset owners wanting to start to see what is actually happening with the funds that they're providing for asset managers to invest. And so you've got asset managers, owners and the stakeholders starting to say, well, yeah, I do want a return on my investment, but I want to ensure that I'm not doing harm. So maybe it may be Anthony, you and I can sort of come back at John and say, well, we're helping to drive the change in how funds are applied because we're the ones who are sitting on the cash. It may be people like John and his generation who need to come up with the clever, innovative ideas but.

Anthony Scaramucci: (21:31)
Yeah. You better be careful. We're sitting on the cash. Okay? So you better be careful and respectfully ask these questions Mr. Darsie. Go ahead Mr. Darsie.

John Darsie: (21:41)
All right. Well, I'll do my best despite all the damage you guys have done to the world. I'll leave Andrew out of it because I think he seems like a responsible guy but Anthony with his Lamborghini and his Bentley [crosstalk 00:21:55]

Anthony Scaramucci: (21:55)
Oh my god, here we go. Okay. This guy's living on like a seven acre estate. He has a carbon footprint the size of Belgium. Okay. John Darsie. Okay. So what are you talking about? Go ahead. Go ahead Darsie.

John Darsie: (22:08)
So the E, the S and the G, they're grouped together, but they're very different in a lot of ways and when you look at it from a credit perspective, my understanding is that governance is probably the dominant factor when it comes to credit quality. How important is the G and how are the E and the S becoming more important in analysis and the way people are running their portfolios?

Andrew Steel: (22:35)
So, I mean, I think governance has always been recognized and analyzed in a lot of detail and it's not likely to decrease in importance. The way in which companies are run, the way in which operational practices are implemented, it's always going to be important, it's always going to be integral to the performance of any entity. Now, trying to balance that with achieving environmental social goals is perhaps a lot harder to do. And you were talking earlier about the sort of green washing and the social washing and ultimately it's easy to say what you're going to do when it comes to environmental and social aspects, but actually the hard implementation of that and the measurement of the impact of that is much more difficult to achieve. And if we're being candid about it, we've had a huge amount of statements from both entities and governments around the world about achieving net zero but very little detail about exactly how they're going to do that.

Andrew Steel: (23:44)
And one of reasons why ESG relevant scores, which remember that pure credit component, one of the reasons why those show governance as the most dominant factor impacting credit profiles is because in a lot of sectors and a lot of jurisdictions around the world, environmental issues just don't bite in terms of credit profiles. You're seeing. A good example would be electric utilities in Europe. You do see it biting and you see it biting because of carbon pricing and de-carbonization requirements, requirements to shut down coal fire plants. And that has a clear and obvious impact on credit profiles. Even if you compare Europe with the US, you see much lower impact in the US. You compare the US with Asia, you see even lower impact in a lot of Asian economies. And so a lot of this gets driven by a very complex equation. It gets driven by clarity around the path to net zero or decarbonization targets. If you're an entity in a sector, which is going to decarbonize at some point between now and 2050, if you make your product twice as expensive as the next person 10 years before you're required to do that under whatever pathway the government has determined, there is a strong chance that you'll actually damage your business by doing that.

Andrew Steel: (25:12)
And so it's a very difficult and complex equation and at the moment, I think a lot of politicians have got the issue and I think, I can kind of wax lyrical about this for a long time, but I think the biggest issue is we over-consume. Around the globe, everybody over-consumes. And ultimately the only way that all of this works is that everybody gives up a lot of the things that they take for granted or that they see as luxuries. Things like bread, meat should become much less affordable. Travel will become very elite. And if you think about that from a politician's perspective, if I make the decision to say, well, actually only the very wealthiest people can take a foreign holiday because air fares are gonna increase exponentially, I'm likely to get voted out by the populace.

Andrew Steel: (26:01)
So there's this very difficult balance going on. And there was a lot of rhetoric initially around saying you can have your cake and eat it too. But I think John, probably your generation are maybe starting to recognize a little bit more that that isn't the case. And certainly I see my daughters buying secondhand clothes rather because they'd rather do that to be environmentally friendly than buy newer, cheaper off the shelf stuff from department stores. So it's kind of interesting-

Anthony Scaramucci: (26:34)
Trust me Andrew, John is buying secondhand clothes. Okay. Trust me on that. Okay. Just want to make sure you know. Go ahead Darsie.

Andrew Steel: (26:40)
I didn't like to come in, but.

Anthony Scaramucci: (26:43)
It's obvious. It's obvious.

John Darsie: (26:45)
Well, I mean, as it relates to food, it's certainly a trend that we are invested in ourselves on the asset management side of our business is there's GMO, the idea of genetically modified food is sort of a dirty word, but you have all these companies now that are using programmable biology basically to create different synthetic foods that imitate and meats that provide certain nutrients that you'd get naturally from food and proteins in particular. And there's a lot of companies doing really exciting things in the space that I think are getting increasing attention from ESG minded sovereign wealth funds and other asset owners who are looking for alternatives to... You can only farm so much land on the planet to produce the type of red meat that we need to feed a more affluent population. So it's certainly a fascinating time.

Andrew Steel: (27:32)
And arguably government should be directing more funds towards that type of innovation than towards trying to sustain unsustainable practices. But of course there's huge amount of lobbying and there's a lot of money involved and you see that everywhere around the world. It's not unique to any one particular country. I don't think so.

John Darsie: (27:54)
Yep. It's one way that capitalism, obviously we think is the best system. It's the worst system except for all the rest. But it's the best system, but it also has its flaws as it relates to special interests and the way capital flows. When you talk about longer term climate risks, how do those factor into credit ratings? Is it a factor related to regulation as you were talking about in Europe and other places where there's more restrictions being put on energy producers and things like that? Is greater weight placed on near-term risks or how do you think about sort of the different spectrum of short-term to long-term climate risks and how it affects credit ratings?

Andrew Steel: (28:33)
Sure. I mean, it's a good question and it very much relates as well to unfold back into one that was mentioned earlier about regulation and regulation not only around ESG factors, but regulation of ourselves on our credit ratings business side. I guess the regulated activities on the credit rating side that we perform, they're all subject to back testing, default testing in order to be consistent and accurate over time. And therefore they tend to be based on shorter term forecasts. So typically a credit rating forecast is that sort of three to five years for a corporate and the analysts look at that and they'll track and monitor on a rolling basis. So it'll get reviewed at least annually. And so it's a relatively short horizon in terms of a financial forecast when you're thinking about something like climate change. And again, that's one of the reasons why within the credit ratings, you don't see a huge impact, but accurately predicting the impact of these longer term effects without knowing what the policies are going to be and the timeframe for policy implementation is almost impossible.

Andrew Steel: (29:44)
So what we... But it's a great question and it's one that we had a lot of investors asking us after we produced this credit portion. They said, well, that's fine. That tells us what's within your credit ratings and it is forward-looking, that's nice, but ultimately, should I be still investing in coal bonds in China in five years time or does China look like Europe in five years time? And so what we started to do is we started to do some scenario based analysis because we said, look, in the short term, there are too many different uncertainties to be able to predict what the impact will be now of something that's going to occur in 20 years time. But we can look at the pathways that take us there and we can look at what we think will be the influences based on what we've seen previously and what we understand will be the situation going forward.

Andrew Steel: (30:38)
And so we picked the UNPRI's inevitable policy response scenario. That maybe won't surprise you because if you remember what I was talking about before is that policy action and timeframe from governments very much determines how costs crystallize in different industry sectors when you're actually forced to do something so that you don't get fined or penalized or your product becomes redundant or you don't meet the standards anymore required to sell into a market. And that scenario that we worked on with you, NPR and pivot economics is very much looking at how that occurs in different countries all the way around the world through to 2050. So we took that and we've started developing what we call vulnerability schools, which is looking at five-year time periods from 2025 through to 2050. And for those, marking how the risk exposure to environmental regulation changes over that time and under different sectors.

Andrew Steel: (31:36)
And what you see immediately is you see, for instance, that in places like China and India, where there's heavy reliance on coal for electricity generation, you see that the credit risk profile of entities in those jurisdictions doesn't reach the same level as we currently see in Europe until somewhere around 2035, 2037. And that's actually quite important if you're an investor. Here's what it tells you is that's a market that will transition, but isn't doing it now. It's an earlier stage. You can look at a market that's gone to a later stage and you can think about, okay, maybe I can get a better return from investing in coal and not just excluding it completely. And maybe what I can do is I can actually support the transition because I can [inaudible 00:32:21] terms and conditions around my investment that ensure that that transition part is met or it's locked to certain aspects of it are locked in. And so there's kind of a double opportunity to do good and do well from that.

John Darsie: (32:34)
Right. Could you see a future and how far away is that future we're potentially all bonds or green or sustainable bonds? And is there still going to be a place in the world in 10, 20 years for non green bonds?

Andrew Steel: (32:49)
Yeah. It's an interesting question which are kind of turn around because I think ultimately, you won't need to label things green or sustainable because investors will want to know about those aspects of the risk for everything. And so I kind of view it that we at the moment, we've got a big sort of momentum behind green bonds, blue bonds, social bonds, sustainability linked bonds. And I think that's starting to drive the early stages, but as the integration of ESG analysis becomes more embedded in investment processes, the need to do that will decline, but the requirement to have the information to demonstrate that will increase. And so you may see some green and social bonds in the future, but there'll be very, very specifically targeted instruments and for the majority of the other instruments, what you'll see is not a pricing benefit for labeling yourself green or social, but what you'll see is a liquidity penalty if you're not able to demonstrate your credentials. So fewer and fewer investors over time will want to invest in something where they can't assess that subcategory of risks.

Andrew Steel: (34:05)
And so I kind of agree with your premise, but I think the way it will evolve will be different. I think we'll see a surge in labeling then a fall off in labeling, but the fall off won't be because people aren't interested in the labels, it will be because it's just part of the everyday investment work. So a conventional bond will be expected to have certain characteristics. In terms of timeframe, wow, if I can guess that, I'll be a very rich man. I suspect it's going to take longer than people anticipate. So I think you're looking at, on the integration side, that standardization and harmonization of data is very, very important. I think you're probably looking at at least eight to 10 years from now until we see that becoming much more of the norm.

John Darsie: (34:54)
Right? When you look at industry trends like electric vehicles, obviously Tesla is the poster child for that, but you see a proliferation of electric vehicle manufacturers in China and the US and Europe. Renewable energy, there's obviously a huge focus there. How much is ESG and ESG standards related to credit ratings and investments driving those trends? Is it more of a consumer trend? How do you look at why those trends are so explosive right now? And also how does ESG investment principles feed into sort of the commodity super cycle? Do they stimulate it? Do they deter that market? How do you look at that?

Andrew Steel: (35:34)
Sure. We definitely look at, and we've produced research on things like the cost of decarbonizing sectors such as, or manufacturing processes such as steel, cement, fertilizers. And we've looked at what that means for companies in those sectors and also companies in different countries. So for instance, when we look at something like steel, you see that the US has a much higher proportion of arc furnaces for steel already, which are largely electric based. And that actually puts them in a much better cost position for de-carbonization going forward because the cost of changing the manufacturing process is far less. And so we do a lot of work around that and we think about how that impacts commodity pricing. We work with an entity called CIU very closely. We have a partnership with them where we look at commodity impacts over time. So we do spend a lot of time thinking about that. Can you just remind me the first part of your question? Sorry.

John Darsie: (36:39)
Yeah. Just about how much ESG factors related to investment decisions is driving this proliferation of electric vehicle companies and renewable energy companies that are seeing just massive waves of investment. Again, Tesla [crosstalk 00:36:56]

Andrew Steel: (36:56)
I mean, it's interesting. I think a lot of that gets driven by politics and political statements and that undoubtedly results in what you're talking about, which is a rush to invest in this stuff. It's seen as being up coming. You kind of need to get on the bandwagon to be in there towards the beginning. A lot of people connect to some of the sort of tech bubble that occurred where some aspects of the tech bubble back in the late 1990s proved to be very lucrative and very good as investments, but an awful lot of them really didn't perform well over the long term, but everybody felt they needed to invest in it at the time. There is a danger we go that way. And I think your example of electric vehicles is a really good one, because there's a huge amount of momentum for changing vehicle fleets in countries to all electric, but the infrastructure is just not there to support it and it really won't be there for quite a long time. And you're talking about a massive infrastructure spend for people to be able to travel in a similar way to how they travel with combustion engines.

Andrew Steel: (38:11)
And if you start to think about the logistics of that, then actually, if you can solve the hydrogen production cost, then the infrastructure that exists already is very easily adaptable to compress hydrogen. And so you would think spending a lot more money on hydrogen fuel cell development where the only byproduct is water, where you can refuel quickly is likely to be a much bigger long-term benefit. But of course, if you're a politician, you can't show short-term gains. You can't say, oh, we've, we've banned electric vehicle or we've banned combustion engine vehicles by 2030. I mean, that's all very well, but if you've no charging infrastructure and in the UK where we've got tiny proportion of electric vehicles and we're already seeing a lot of people experiencing problems in not being able to charge their vehicles or failing to get to their destination, because the weather is cold than they expected and so the battery range is lower. So there's lots and lots of problems. And I think it's unfortunate. It is progress, but again, it's not a long-term strategically thought-out plan and that really is where we need to spend more time. Certainly we will be at COP26 this year in November in Glasgow in the UK and we'll very much be pushing for people to think more strategically and long-term about this stuff.

John Darsie: (39:39)
All right. Amen. The last question I want to ask you is sort of a meta question around ESG. There's a lot of people that are very enthusiastic about ESG. There's a lot of people that shake their head and say that it's just executives paying lip service because it's something they have to talk about now because of pressure from asset owners. How much are we really building towards something that's going to have an impact on the planet, that's going to have an impact on the social situation in various countries around the world? And to what extent do you think true ESG investment principles are going to dictate who gets money in 2021, 2022, 2023 and who doesn't get the money?

Andrew Steel: (40:21)
Yeah, I think there's already some evidence to show that it is affecting the flow of funds. The slightly unfortunate thing is there still a surplus liquidity globally, despite going through the financial crisis. And so if you look at, we saw a great example a couple of years ago where a lot of traditional bank lenders were pulling out of lending to coal projects in Australia. And I think they thought this is going to make a difference. Kind of help to force a transition. And all that happened was a range of Asian and mainly Chinese bank stepped in to do the lending instead. And so, it's going to be difficult. There are going to be problems and issues along the way.

Andrew Steel: (41:11)
Unfortunately, and I suspect this may be what you're angling towards with this John is that we seem to still be at an early stage of exerting any real sort of influence and to still be at an early stage after what is now several years of talk to bait, target setting, lots of grandstanding and still not seeing much in terms of carbon reduction overall or nothing like the pathways that were being talked about 5, 10 years ago, really isn't good news. And what it means is that problem is being stored up and the timeframe to solve it in is starting to shrink. And from a credit perspective, this is our biggest single concern over the long run is we think that the less action that's taken now, the more extreme action needs to be taken in a shorter timeframe. And companies generally, and institutions, are good at adapting to change that's flagged in advance because they can work out that position, they can work out the impact, they know when that's going to happen.

Andrew Steel: (42:22)
But as that timeframe shrinks and the action that needs to be taking grows in severity, it becomes much harder and you're going to get a lot more shocks that occur if that happens. And from a credit perspective, that's bad news because companies struggle to react to big changes in short timeframes. We've seen a little bit of that with things like sugar tax in position in Europe to do with carbonated soft drinks, for instance, after a public outcry obesity. But that sort of thing I think is just the beginning of it. So I would like to be able to say yes, it's making a huge impact to make a really big difference. I think it's started. It's helping to change mindsets, but the practical reality is there is some change, but nothing like what needs to be done to meet these agendas that have been put out there.

John Darsie: (43:12)
We have a friend named Ketan Patel. He works at a firm called Greater Pacific Capital in London. He's working with the UN on a project called capital as a force for good where they're studying the volume of investment that's going to need to go green and go into these sort of UN sustainable development goals to really achieve the outcomes that we need. And that's numbers in the tens of trillions at this point. So hopefully people like yourself who are educating people around the realities of ESG can be a part of that and we're hopeful. But Andrew, it's been a pleasure to have you on. We hope to see you sometime in person when we're able to get back over to London or when you're able to get over here back to see your team in New York. But thanks so much for joining us.

Andrew Steel: (43:57)
Thanks John. Thanks Anthony.

Anthony Scaramucci: (44:00)
Super insightful stuff Andrew. Thank you again.

John Darsie: (44:04)
And thank you everybody for tuning into today's SALT Talk with Andrew Steel of Fitch. Again, please spread the word about these types of SALT Talks. We think these are really important ambitious goals that we need to get the planet and to get the global society where we want it. But we think education around these topics will help us get there. So please spread the word. Now, just a reminder, if you missed any part of this talk or any of our previous SALT talks, you can access them on our website on demand at salt.org/talks or on our YouTube channel, which is called SALTTube. We're also on social media. Twitter is where we're most active @SALTConference, but we're also on LinkedIn, Instagram and Facebook as well. And on behalf of Anthony and the entire SALT team, this is John Darsie, signing off from SALT Talks for today. We hope to see you back here again soon.

Kevin Carter: Emerging Market ETFs | SALT Talks #247

“[In emerging markets,] smartphones bring a computer to the world for the first time and the Internet with it. That’s a very, very important part of what I think is the fastest growing sector in the world.”

Kevin Carter is the Founder & Chief Investment Officer of EMQQ. In this episode, Kevin shares is introduction to emerging markets where he’s a leader in the space. He analyzes the exposure to Chinese state-owned companies within ETFs and potential risks. He explains the unique advantages emerging markets enjoy due to the lack of legacy tech infrastructure seen in more advanced countries like the United States. Carter offers his investment outlook in India and Latin America, and lays out his approach to measuring a company’s growth.

While he considers himself an active “value” investor first and foremost, he has collaborated with Princeton economist and indexing legend, Dr. Burton Malkiel, for more than 20 years. Their work together began in 1999 with the development of eInvesting, a pioneer firm in fractional share brokerage that was acquired by ETRADE in 2000. In 2002 they founded Active Index Advisors, a pioneer in so-called “direct indexing” that was acquired by Natixis Asset Management in 2005. In 2006, their efforts turned to China and Emerging Markets with Dr. Malkiel’s publishing of “Investment Strategies to Exploit Economic Growth in China” and the subsequent book From Wall Street to the Great Wall. Working with Guggenheim Partners, they launched several China focused ETFs on the NYSE.

LISTEN AND SUBSCRIBE

MODERATOR

SPEAKER

Kevin Carter.jpg

Kevin Carter

Founder & Chief Investment Officer

EMQQ

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

TIMESTAMPS

0:00 - Intro and background

5:45 - Emerging markets

7:48 - Advice to young investors

10:27 - Exposure to emerging markets through US companies

12:52 - State-owned companies in ETF’s

17:00 - Smartphones in emerging markets

20:25 - Technological leapfrogging in emerging markets

23:20 - Super apps

28:26 - Chinese government crackdowns and investor concerns

42:15 - Investing in India

44:48 - Investing in Latin America

48:12 - Measuring growth

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone, and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology and public policy. SALT Talks are a digital interview series that we started in 2020 with leading investors, creators and thinkers. And our goal on these talks is the same as our goal at our SALT conferences, which we're excited to resume this fall in our home city of New York, but that's to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. And we're very excited today to welcome Kevin T. Carter to SALT Talks.

John Darsie: (00:48)
Kevin is the founder and chief investment officer of EMQQ, which is a leading emerging market ETF. While he considers himself an active value investor, first and foremost, he has collaborated with Princeton economist and indexing legend, Dr. Burton Malkiel for more than 20 years. I know Dr. Malkiel is also a big influence on Anthony with his great book, A Random Walk Down Wall Street. Their work together began in 1999 with the development of E-Investing, a pioneer firm in fractional share brokerage that was acquired by E-Trade in the year 2000. In 2002, they founded Active Index Advisors, a pioneer in so-called direct indexing, which is a trend that has taken over the wealth management world in the subsequent two decades. And that was acquired by Natixis Asset Management in 2005.

John Darsie: (01:35)
In 2006, their efforts turned to China and emerging markets with Dr. Malkiel's publishing of Investment Strategies to Exploit Economic Growth in China and the subsequent book, From Wall Street to the Great Wall. Working with Guggenheim Partners, they launched several China focused ETFs on the New York stock exchange. Kevin launched EMQQ in 2014 after noticing how the advent of the smartphone was changing his personal consumption habits and thus his projections on how it was going to change consumer behavior in emerging markets. He now lives in Lafayette, California with his wife and three lovely children. Hosting today's talk is Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. Anthony is also the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:22)
Well, Kevin, first off, I want to thank you for getting the memo and dressing appropriately for this event. Unlike John Darsie that's trying to outshine us with his stupid sports jacket on, so thank you for that. I want to jump right into Burton Malkiel, Dean Malkiel, and I'll just tell you a quick story, which I think I have shared with John. I was about to be interviewed by the Goldman people. I'm at the Harvard Business School. I crossed the river. I was a Harvard Law School graduate, but I'm over at the business school, and somebody handed me a Dr. Malkiel's book. This is 1987, A Random Walk on Wall Street. I read the entire book waiting in the waiting room prior to the interview, and I'm absolutely confident that it helped me get through that interview and get me my first job. So tell us about his influence and Warren Buffett's influence on you.

Kevin T. Carter: (03:15)
Okay. Well, I didn't know the details of your experience with that book, but I did know there was some overlap. So, I graduated from college in 1991. And in January of 1992, I had my first interview with a firm called Robertson and Stephens Company, which you may remember, which my interview lasted about 20 minutes. And the first 19 minutes we talked about college basketball and then I got a one-minute overview of the investment business. And then the guy that was interviewing me said, "You can start Monday." And I said, "Well, how can I possibly start Monday? I don't know anything about investing." And he said, "Well, go buy this book and read it over the weekend." And he wrote down, A Random Walk Down Wall Street on a piece of paper.

Kevin T. Carter: (04:11)
I went to the bookstore and bought it and read it and showed up to work on Monday. And as you know, it's a book that's all about efficient markets and indexing, and one of the Seminole pieces in the modern investing world and Burt, the author is a longtime Vanguard board member and one of the founding fathers of indexing, but I very quickly gravitated towards Omaha and began to read all the Berkshire Hathaway annual reports and anything I could read that Warren Buffett or Charlie Munger had said.

Kevin T. Carter: (04:49)
So that's, I pray towards Omaha but in 1998, I met Burton over the telephone during the dot com bubble. And a year later when I started my first company, I asked if he would be an advisor. And he agreed after I flew out to Princeton for a three-hour lunch with him. And so we've been business partners in one way, shape or form since 1999, and so I've got one foot in the active world and one foot in the indexing world, and along the way, Burton dragged me into China and emerging markets more broadly.

Anthony Scaramucci: (05:27)
I would say it's an amazing story, congratulations, you're leading in emerging market ETF EMQQ. So tell us about that, what constitutes an emerging market, and what's the difference in groups like MSCI and the FTSE?

Kevin T. Carter: (05:44)
Sure. Well, when we talk about emerging markets, foundationally and fundamentally, we're really talking about the world. It's 85% of the world's people. It's about 90% of the world's future as measured by younger people under the age of 30. And it starts with China, but it's, if you include frontier markets, which are the junior emerging markets, it's about 50 different countries with China being the largest in pretty much every measure, India, Brazil, Russia, and then the frontier markets are things like Nigeria and other parts of Africa and South America. So that's what we're talking about.

Kevin T. Carter: (06:34)
There's no official list of what an emerging market is. MSCI really created the category. It used to be called third world countries, but in a stroke of genius by the marketing people, they've renamed third world countries, emerging markets. And MSCI did that. And so their list is really the default standard. But there are some discrepancies in the indexing world. The FTSE people which have their own index and Vanguard tracks, they don't have the exact same list, so the biggest difference there is Korea, which FTSE considers developed and MSCI does not. So if you own the iShares version of emerging markets, you own Korea, and if you own the Vanguard version you don't, which is a meaningful difference, but not huge.

Anthony Scaramucci: (07:27)
If you were starting out today, with all the knowledge that you have of the world of investing, would you be where you are right now? And what would you recommend to a student embarking upon his career? A 100 ETFs, indexes, active indexes, what would your messaging be?

Kevin T. Carter: (07:49)
Okay, that's a great question and one I think about quite a bit, because I have a relatively young team of colleagues. And in thinking about their 401k plan, for example, I'm forced to think about that exact question. And I think that first and foremost, the miracle of compounding is the most important part of this whole thing. And whether it's buying the index or buying individual stocks, you got to buy and hold, and buy and hold, and buy and hold and repeat that. And that would be the first thing I would say.

Kevin T. Carter: (08:32)
And then for those that are industrious and want to try to figure out how to pick the best stocks to be active, I would have them study moats and what a moat is in the business palettes in the Buffet and Munger terminology, and then I'd tell them to learn about valuation. And the PEG ratio to me is the most important thing to look at if you're evaluating buying equity in a company. So moats, the PEG ratio and the miracle of compounding, I think, are the things I would suggest they study. And I think they should also study, I suppose, Bill Sharpe's piece, The Arithmetic of Active Investing, which most concisely details the mathematical fact that the Vanguard index fund is going to continue to beat all of the other actively managed versions of investing by simple basis of lower fees.

Anthony Scaramucci: (09:51)
Fee savings is a big issue for Dean Malkiel, big issue for Mr. Buffet. One of the things Mr. Buffet has said, often, I want you to react to this, is that he's gotten his international exposure through American-based companies as a result of their gap accounting and him being able to understand that you guys seem to have for rate off the course of America, what would you say to this xenophobic American centric investors as to why they need to be in products like yours?

Kevin T. Carter: (10:26)
Well, first of all, absolutely you can get exposure to emerging markets and China through US companies. In fact, one of the first China strategies that Burt and I organized was sort of, we lift it from Abby Cohen, which was, we called it China for chickens. So if you didn't feel comfortable buying Chinese equities, you'd buy companies like Yum! Brands, which while based in Kentucky, had the vast majority of its revenue coming from China. So you can absolutely get that sort of indirect exposure.

Kevin T. Carter: (11:07)
The reality is that, for the last decade plus investors that have diversified internationally, either into international developed markets, the IFA countries, Europe, Australia, Japan, Canada, et cetera, they've underperformed the S&P. And investors in emerging markets have done terrible over the last a decade or even the 14-year return for the MSCI emerging markets index is zero. And you just got back to zero, you were underwater for almost all of those 14 years. So people have been disappointed by investing in emerging markets in particular. And I understand why, because the indexes are terrible. They don't really capture the growth in emerging markets.

Kevin T. Carter: (11:52)
So I think investors should, and can't find returns internationally, but they have to get a little bit more targeted in their approach. And in emerging markets, it's pretty clear to me that that's in the category of consumption. You want exposure to the growth of the consumer in emerging markets. And what we've put together is, is what I think is the tip of the spear of that growth, which is the smartphone enabled emerging market consumer that is getting access to the internet for the first time, getting their first computer in form of an Android-based smartphone. And in many ways, these people are even more digital than we are.

Anthony Scaramucci: (12:34)
Yeah. And it begs the question then about China and the state-owned enterprises in China, a lot of the ETFs of the indexes, et cetera, represent some of that. What's your opinion about allocating to state-owned enterprises?

Kevin T. Carter: (12:52)
Well, I think it's a horrible idea, and this is why indexing is broken in emerging markets. And I tell people that the way I got involved with China 16 years ago, or 50 years ago, was when my partner Burt was asked to give a talk at Google about investing in China. I had become a default investment advisor to several of the earliest Google people right after they went public in 2004, and Burt published a paper about investing in China, and the Google people found out about it and called me and said, "Hey, can Burt come talk about investing in China?" And I organized that to happen. And Burton gave his talk about investing in China. And then all these people at Google looked at me and said, "We want to invest in China." And at that point, I had never been to China. I read Burton's paper, but I didn't really know what that even meant to invest in China.

Kevin T. Carter: (13:51)
And after that talk, we drove back to San Francisco and I asked our portfolio managers for a list of all the companies in the China ETF from my shares, because I assumed these Google people, to give them exposure to China, we would just buy the ETF. And I wanted to see what was inside of it because, with my Omaha brand, I like to see not just what the title of the ETF is, but what are the actual companies? And before they gave me the list, Burton pulled me aside and he said, "Look, when you look at the China ETF, you're going to see that the vast majority of the companies are Chinese state-owned enterprises and government-owned banks and oil companies."

Kevin T. Carter: (14:32)
And I said, "Yeah, I've heard about this," and a little skeptically, and he went on to give me an example. And the example was, you've got a Chinese manufacturing plant with 15,000 employees that's woefully inefficient, and it's been losing money for a decade, and it's about to run out of money again. And it goes across town to the Chinese-state owned bank and says, "We need more money." And where a normal banker would say, "No, you can't have any more money, you're bankrupt." The state-owned bank is conflicted and says, "Well, if you run out of money, then you'll have 15,000 people out in the streets protesting, and we can't have that sort of civil unrest."

Kevin T. Carter: (15:10)
And when Burt gave me that example, I literally got nauseous inside because with my simple Omaha brain, what gives companies value is earnings, and it's the growth of those earnings that is the growth of the value. And if the people that run those companies don't care about that, why would you invest in them at all? And so this was something I encountered in the first five minutes, and it's just become more and more clear in the case of China and the FXI, which is the ticker for that product, it was about 80% state-owned enterprises. And in the broader indexes, it's about a third, and this is why you can't expect to make any money in the broad indexes, because these companies are, in addition to being inefficient, their management is terrible. And there's lots of corruption, and you've got people going to jail, like the last two presidents of Brazil, the former president, a pariah, went to jail for corruption. So state-owned enterprises are a real big problem and they're the reason you should absolutely not use traditional approaches to emerging markets.

Anthony Scaramucci: (16:23)
Right. I love the sentiment. I totally agree with you on all of that. And I've seen you make these presentations before, which I think are very important, particularly for the young people, Kevin. Let's go to the iPhone for a second. It comes out just before the Barack Obama administration, let's call it a 13 or 14 years old. I still see it as an emerging technology, but it transformed your way of thinking about investing. Tell us about how it did that? And how is smartphone penetration in emerging markets affecting consumer behavior?

Kevin T. Carter: (16:59)
Well, I think you're absolutely right. The smartphone is a pretty new thing, and I think we already take it for granted. But I remember my first encounter with an iPhone, one of my friends who was the first guy to get new stuff, had an iPhone, and he showed it to me and talked about apps. And I remember thinking, "Wow, an app." It was an abstract idea to me, what exactly is an app? And I wasn't sure I'd ever actually be involved with apps. And that was 11 or so years ago.

Kevin T. Carter: (17:33)
But when I got my first smartphone, my iPhone, I saw how it was changing my family's consumption. And back then, my family was going to the Target store four times a week, which is only a few miles away and easy to get to, but all of a sudden the trips to the Target store started going down, and the UPS man was starting to come to my house a couple of times a week. And that just intensified very quickly. And pretty soon my family had stopped going to the Target store and the UPS driver and other drivers were at my house 20 times a week. So I saw, eight or nine years ago, how the smartphone was changing my family's consumption.

Kevin T. Carter: (18:17)
And we all know this. This isn't really a secret, and you've also seen it in the stock market, is the FANG stocks, the Big Tech stocks, the platform companies have taken over the world basically. And I saw that happening in my own life. And as somebody that was trying to capture the growth of the emerging market consumer, I started to see how it was playing out in the emerging markets. And I could see that it was even a bigger deal in emerging markets because these people, they weren't getting their first smartphone, they were getting their first computer ever, and it wasn't on their desk, it was in their pocket. And most of them aren't iPhones. They don't have an Apple logo because we're talking about 50, 60, $80 android-based smartphones that are bringing the computer the world for the first time and also bringing the internet with it for the first time. So that's a very, very important, part of what I think is the fastest growing sector in the world.

Anthony Scaramucci: (19:17)
The reason I'm hesitating here is I want to frame this question appropriately. Larry Summers said it to me best. He said that sometimes advanced country is hurt by their advancement. Meaning we built our airports in the 1920s. And then we layered upon those airports more infrastructure and airports, but our airports look like third world countries now here in the United States. And yet there are airports in Dubai and places like China that are pristine and brand new.

Anthony Scaramucci: (19:49)
Moreover, we started with copper wire in the ground or on telephone poles, and yet you can go to places in China now where they don't have any of that. It's just full wireless technology at 5G switch speeds and rates. And so I want to ask you this question as an experienced investor, how disadvantaged are countries that are developed versus countries that are able to start new with the technologies that we have in the present time?

Kevin T. Carter: (20:25)
Well, this is a very good and important point, and I have to try to think about it in real time about the advantages or disadvantages. But there's no doubt that, I guess, the main advantage is you have new stuff and you have state-of-the-art stuff. And certainly that involves infrastructure like airports, and in the case of China, high-speed rail network that's very, very important to that country's economic growth that connect the, well over a billion people physically via high-speed rail. So it's a big advantage. And it's an advantage, I think, for investors. And that we've seen very clearly what's happened in our lives and in our stock market with the FANG stocks, but in the developing world and emerging and frontier markets, they're leapfrogging lots of things. They're leapfrogging the bank account and the debit card in everybody's pocket, they're leapfrogging the physical wires and getting connected via mobile broadband without the telephone poles.

Kevin T. Carter: (21:38)
So that's a big advantage and it's what makes the emerging market internet companies, I think, even more exciting because they're not competing with the strip malls, they're not competing with, well, they're competing with the traditional banks, but they're winning quite handily. And it's sort of a paradox. You would think people like you and I, that are in a prosperous country and in a prosperous industry, and I'm right here in the heart, basically of Silicon valley, I should be on the cutting edge of things like mobile banking, but it's not us. It's Africa paradoxically that is the most advanced in terms of mobile payments. So it's an advantage for the consumers and the consumption story as they leapfrog some of the legacy consumption infrastructure that we take for granted.

Anthony Scaramucci: (22:34)
Very well said. I'm going to turn it over to John in a second, because he did put the sports code on Kevin, and so, as a result of which I've got to allow him to ask some of these questions. But I want to go to the mobile super apps for a second. They exist in several jurisdictions and they cover everything from e-commerce to payments, to entertainment and social networking. What are some of your favorite super app investments? And then we'll let Mr. Darsie, but just do me a favor, when Darsie is asking questions, don't say great question or anything like that, okay? Let's go to the super apps first and then we'll go to Darsie.

Kevin T. Carter: (23:10)
Your questions are a bit good, but I sure John's will be superior, he's got the coat. He's got the coat.

Anthony Scaramucci: (23:17)
Oh my God. It hurts me, Kevin.

Kevin T. Carter: (23:20)
So, the two biggest super apps in the world are basically Alibaba and Tencent, WeChat platform. Everybody knows Alibaba, and people I don't think quite realize that in these two companies, these aren't really technology companies. They've been put in the technology box, but they're consumer companies and they're digitizing all parts of consumption. And so, that's e-commerce, that's the social networks, but it's also healthcare, it's entertainment, it's food. Alibaba's Hema market is the most amazing thing I've ever seen in China. And so these super apps are a really big deal. And we don't really have anything like them here. And we've always told people the way to think about Tencent is that it's the Facebook of China. That's true. WeChat is the social network, and it's how I talk to my Chinese friends and colleagues, but you can't call Facebook the Tencent of anything because these companies don't really have a US equivalent.

Kevin T. Carter: (24:31)
And you're seeing that spread. There's a lot of super apps now. And again, these are apps that combine lots of different things that we get from discreet, separate apps, but Southeast Asia is where a lot of these super apps are coming together. Sea Limited which trades in the US on the NYC with the ticker SE, is probably the one that's done the best. I think it might be the single best performing stock in the world over the last several years. But this is as a Singapore-listed company or based company operating all over Southeast Asia. And it's a mashup of gaming, of e-commerce and payments. And the FinTech sub story in emerging markets e-commerce is the most powerful as all these people skip the bank account. And it starts with payments. And once you get the money on the phone, then you can get into all sorts of financial services, including investment products, including insurance, and including banking and credit products.

Kevin T. Carter: (25:35)
And because things like Sea Limited sprouted with their gaming business in a place where people didn't have bank accounts, they end up creating their own payments platform, and it becomes the payments platform for these people's entire lives. So Sea Limited is one example. Also in Southeast Asia, you have a fascinating company that's called GoTo, which is a merger of the Indonesian Uber, Gojek and the Indonesian Amazon, Tokopedia. So these two companies, Gojek and Tokopedia are merging, and so you've got the Uber plus the Amazon plus the PayPal, all in one single app. And that's another example.

Kevin T. Carter: (26:24)
And you've got, all over the world, these stories happening. And I was, one of the best examples is last year when the super app of Kazakhstan, COSBY, went public in London. So the smartphone story is happening all over the world. But again, because these people in these markets lack the traditional consumption infrastructure, you're seeing these super apps come together, and it almost always involves some form of a payments application and FinTech.

Anthony Scaramucci: (26:58)
John Darsie, with your beautiful sports jacket, go ahead.

John Darsie: (27:02)
Thank you very much. I want to talk about China for a second, Kevin, because I think you have an incredibly deep understanding and nuanced understanding of what's taking place in China. Obviously recently, the headlines have been around China's crack down on their own technology sector, on Alibaba and Jack ma and Ant Group on Tencent, on DiDi, which went public with their listing, despite warnings from China about issues related to data. But Ray Dalio, somebody who I think also has probably a more nuanced and deeper understanding of China than anybody else out there in the marketplace, and he wrote a great piece recently about how, if you truly understand the way China thinks about capitalism and the way they're running their domestic economy, then you can actually understand the pattern of behavior in terms of how they are pushing tech companies in different directions.

John Darsie: (27:52)
So, on one hand, certain people think, "Wow, China, all these crackdowns, they've taken on Chinese tech companies makes it impossible to invest in China with any expectation of what they're going to do with the next great tech company that comes along." But if you really understand the way they operate, maybe you can glean some patterns from their behavior. Could you explain to people who are less familiar with China's thinking, just about why they've made these decisions with the Tencents, the Alibabas of the world, with DiDi, and the way that can inform your investment decisions going forward as it relates to China?

Kevin T. Carter: (28:25)
Sure. Well, I follow Ray's thoughts on China closely. And I'd like to think he's right, because I think they're much more eloquently expressed version of how I feel about this. And I guess, importantly, one thing that I've experienced over the last 16 years focused on China, is that people in the United States, investors that I talk to, have this fear that they've had from the beginning, [inaudible 00:28:59] China time, that the Chinese government is somehow going to essentially steal their money or otherwise cause them to lose whatever they've invested in Chinese companies. And some people have a more detailed fear about the VIE structure, and whether or not that could be canceled, but it's just a general fear, that somehow the Chinese government's going to make me lose all my money because they're communist and they can do that. They can take over Alibaba, they can take over Tencent, and Xi Jinping can make himself the CEO and steal all the money.

Kevin T. Carter: (29:35)
And that fear has been part of my life for 16 years. And I think it's totally unfounded. I think the Chinese government understands capitalism. They've done it and experienced it for the last 30 years to their great benefit. They've benefited from capitalism more than anybody else in the world, probably, for the last 30 years. And, and they're smart people, and many of their leaders went to our best colleges, and some of them taught at our best colleges, and I think they understand that.

Kevin T. Carter: (30:09)
And I think that's, when I listened to Charlie Munger or Ray, talk about this, that's the one thing that I think sort of the commonality, that these people aren't out to steal all your money. Now, they do have to regulate, and this is not a China issue, this is a global issue of governments grappling with big technology. And it's on the front page of our newspapers pretty much every week. And last month you had the CEO of Apple, in a courtroom, six miles over my shoulder defending potential monopoly practices. You've got Google seemingly under assault from everybody and paying fines left and right of hundreds of millions and billions of dollars.

Kevin T. Carter: (30:55)
So all over the world, governments are battling to regulate technology for the benefit of their people and to make sure laws are being enforced. And that's the same thing that's happening in China. But China has one I think important difference, which I think is an advantage, but unfortunately it leads to people in the United States, investors in the United States looking at it as, "Oh, my gosh, my worst fears are coming true. The Chinese government is going to steal all my money and make my stock worthless."

Kevin T. Carter: (31:28)
And that advantage is speed. And if you look at the way they handled the antitrust issues and the FinTech rules at Alibaba, I think they did the right thing. And I think they had to do what they did. And it wasn't surprising particularly on the anti-monopoly issues because Alibaba and Tencent have blatantly done things that are anti-competitive. And you have to put this in perspective though. We've had antitrust laws in the United States for 120 years, and they've been refined a few times along the way, but China's had them for 13 years and Alibaba and Tencent were well into their lives and operating before they even had regulations.

Kevin T. Carter: (32:13)
So I think, those first two, because really in this series of the crackdown on the Chinese tech companies, it started in November with the Ant Group IPO pull, and the subsequent week they announced the anti-monopoly issues. And both of those issues got basically dealt with in April. And there's some follow-up and some fines they'll get paid and some rules changed, but the speed with which they were able to address both the FinTech rules and the banking part of that in particular, with Alibaba and antitrust rules, they did that in five months. They basically pulled the emergency brake, and did their repairs, and then push the start button and off they went. And in the United States that would have taken years, and had lobbying, and special interest groups, and hearings. And so I think that the first two parts of the regulatory story I thought was good. And actually to me showed some of the advantages they have.

Kevin T. Carter: (33:16)
What happened in July was sort of a debacle and China has got egg on its face. The regulators do just as the DiDi management does and the investment bankers that took them public. And I think that the biggest and most jarring part of the July happenings was when they basically pushed the nuclear button and the turn, or said that the for-profit education-

John Darsie: (33:45)
They deleted it from the app store.

Kevin T. Carter: (33:47)
Well, they pulled DiDi from the app store, that wasn't so troubling, but the canceling of the for-profit education sector, that was the first time in 16 years, that this fear that people had, that China's going to steal my money or otherwise I'm going to lose the value of my equity because of the Chinese government, it happened and, or at least the closest thing to it happened with New Oriental and the education companies. And so the panic that followed was not surprising to me, but I think all of it and all of the fear is way overdone at this point.

John Darsie: (34:27)
Why did they make that decision related to for-profit education, and there are other sectors or areas that you can learn from that decision that they made to avoid those types of situations in the future?

Kevin T. Carter: (34:39)
Well, the reason they addressed it is because it was a real problem, and the people, it was a pain point for the people of China. The Chinese government serves the people of China and there are so many problems with what was going on there with a for-profit education. And just the Chinese culture has revered education for thousands of years, going back to the time of Confucius. And there's a reason why our top universities are heavily populated by Chinese students, that have gotten very good grades and test scores. It's because they study and they study in a competitive way basically. And you've got 75% of the Chinese school children are doing school after they get home from school, and doing school on the weekends, and extra tutoring, and it's expensive. And again, we have a student debt problem here, and China's people were taking on debt to fund this education on top of education.

Kevin T. Carter: (35:48)
And one of the things that demographically that is important to understand about the school-aged children in China today, is there's an incredible amount of pressure that's multi-generational on them, because these children, they have four grandparents, two sets, they have two parents, and then they're the hope of the future and the embodiment of all of the dreams of all of these six people above them from the two previous generations. And how they do on the college exam, the Gaokao, it's their whole lives. And they spend years plotting it, and planning for it, and testing, and studying. And then they take that test, and then their lives largely will be shaped by how well they do, and do they get into college?

Kevin T. Carter: (36:41)
And it's become unhealthy, and it's become, with the Chinese citizen, a very significant pain point. And that pain boiled over last year, when there was a woman in Shandan who took the test 16 years ago. And she was actually one of two children in her family, but her parents, people don't always understand that in China, you can have two children, even during the one child policy, but only one of them can go to school and get other social services. And this particular woman was the child of farmers. And she had an older brother, but they had decided that did she ought to get the education because she was more academically inclined. And so four years, her parents and grandparents supported her education. And she sat for the exam 16 years ago, hoping to go to Shandan Tech. And she took the test and waited for the results. And back then, if you were accepted at the university, you got an acceptance letter, but if you failed the test and didn't get accepted, you didn't get a rejection letter. And she waited for her letter.

Kevin T. Carter: (37:54)
And through the summer, it never came and dejected. In the fall, she left and as a disappointment to her whole clan and went to the city and became a waitress. And 16 years later, she decided she should get some adult education at the functional equivalent of a community college in which she went to register, and they said, "Well, you've already graduated from Shandan Tech 12 years ago." And she said, no, I didn't. And they said, "Yes, you did. You're right here in the computer." And it turned out that she had in fact been accepted, but that somebody with more money had stolen her identity and stolen her acceptance letter at the post office. And she was one of hundreds of children whose lives had been basically stolen from them by people with more money. And that was a big problem. This particular episode, really highlighted what was wrong.

Kevin T. Carter: (38:51)
And this shouldn't have been too big, a surprise. She himself in March talked about the problems in this online education, private tutoring business. So I was surprised that they pushed the button and made them non-profit at least for the core curriculum. And I understand why that embodied everybody's worst fears about China. And that's why we had the market activity, we had a couple weeks ago on Tuesday when everybody was running around with their hair on fire. So I understand the fear.

Kevin T. Carter: (39:25)
In terms of damage, we have 0.05% exposure to the online education business. So it crushed the price, but the fundamentals were largely unaffected by really any of these regulatory issues.

John Darsie: (39:42)
So when it comes to China, obviously in financial markets, you have to pay for growth, something we'll talk about in a second, but these macro worries from people with a less nuanced understanding of why China's doing the things they're doing within their tech sector have made valuation certainly cheaper. Is there some type of max pain signal that you're looking at in China to potentially ramp up incremental allocations to Chinese companies?

Kevin T. Carter: (40:09)
Well, we buy and hold all of the emerging market internet companies, and that happens to be heavily weighted towards China. And in terms of the max fear point, the max pain point, I'm not sure when that will be, but I think it may have been Tuesday of the week before last, when I had never, in my 28 years, other than the Lehman period, which was a problem for the whole world in the real economy, I had never seen as much fear as I did on, I think, July 27th. And it was the morning after, the day after Stephen Roach had said he was concerned as a long time bull, he was even worried about China. And people were running around with their hair on fire.

Kevin T. Carter: (40:59)
And even before I read A Random Walk Down Wall Street, people told me, buy fear and sell greed. And I had never seen as much fear as I did that last week of July. And it could get worse, I suppose, maybe Xi Jinping really does want to steal the internet and maybe Jack Ma is missing, but I don't think that's true. And so I think you're supposed to buy fear and we still haven't, maybe it'll get more intense. But the 27th of July felt like the most intense fear I've ever felt, not myself, but around me.

John Darsie: (41:38)
Yeah, exactly. I want to go away from China and a little bit around the world. India is a country that fairly soon, it'll overtake China in terms of the leader in global population, but it doesn't get nearly as much fanfare. It doesn't have nearly the weight, in your ETF, for example, as China does. But there are some very exciting companies in India, both private that are in the IPO Pipeline and public companies now. What's the investment climate today in India? What's the pace of innovation? And what are some Indian companies that you're most excited about investing in?

Kevin T. Carter: (42:15)
Sure. Well, just to put it in perspective, we invest in all emerging and frontier markets. China is, in every way, the most advanced economy in the world digitally, and its e-commerce market is more than half of the Globe's e-commerce market. And that's why it's the largest weight in our offering. And if you look at it, the Chinese e-commerce market is four times as large as every other emerging markets internet market combined. So it is well above everything else.

Kevin T. Carter: (42:53)
Now, the next frontier of the emerging markets internet space is India. Certainly the largest part of that. And that's where the growth opportunity is the greatest. And they're coming, but it'll never catch China. China is so far ahead that certainly not in my lifetime will India catch China, but the growth rate there will be the highest. And there's a huge pipeline of Indian IPO's and they're coming fast. We had Zomato, the food delivery app come public last week. We've got Paytm, which is the Berkshire Hathaway backs FinTech leader in India getting ready to come public. We've got Flipkart, which Walmart controls. That's the largest e-commerce company in India. It will come public. And then perhaps next year we'll have Reliance Industries IPO, their geo digital super app business, which I think, if I was going to bet, that will be the dominant super app in India.

Kevin T. Carter: (43:54)
So India has got a ton of opportunity. It's got a lot of companies coming public, and the next 18 months could see as many as 15 or 20 Indian internet companies come public. And people should be excited about it, because it's coming off of a very low base with a large population. You still have 900 million people in India that don't have a smartphone, which means you have 900 million people without a computer or the internet, but that's changing very fast.

John Darsie: (44:24)
Right. Let's go to Latin America for a second. So you talked about a company like Mercado Libre that's been on fire over the last several years in Latin America, different characteristics than places like Southeast Asia or a place like India. What is the climate there right now for investing, and particularly in technology, which is an area that you're keenly focused on? And what does the IPO Pipeline look like in Latin America?

Kevin T. Carter: (44:48)
Well, it looks good. And Latin America's e-commerce penetration rates are a fraction of Asia's, and Mercado Libre is the leader. Mercado Libre technically, it's an Argentinian company, so on fact sheets and other things you'll see Argentina listed. But it really dominates both e-commerce and payments in every country, from Mexico all the way down through Argentina, with Brazil being the largest market followed by Mexico. And, in particular, it was a great example of the FinTech story. And it's what really drove the stocks incredible returns of the last several years, it was the strength of their FinTech business. And it's also a company that's a good example of another problem with traditional indexing. Mercado Libre is not in the Vanguard or iShares emerging market fund. And about half of these companies are not included. So you get, if you buy a, the traditional approach to indexing in emerging markets, you get Petrobras, the Brazilian corrupt oil company twice, but you don't get the Brazilian e-commerce leader, Mercado Libre. So that's the biggest of the companies.

Kevin T. Carter: (46:04)
But you've got Uruguay has a public company now, dLocal, that we'll add in our next rebalance. You've got the world's biggest online bank in Brazil, Nubank, which will come public likely in the next year. They just raised $500 million from my heroes in Omaha, Berkshire Hathaway. And that's an online only bank that now is half the size account wise as Wells Fargo. And Berkshire Hathaway is also an investor in StoneCo, which is a NASDAQ listed FinTech company out of Brazil. So there's a lot of entrepreneurs in that part of the world and the US institutional investors are backing them, including, as mentioned Berkshire Hathaway. So lots going on there.

Kevin T. Carter: (46:55)
And, I guess the other thing I would say when we talk about South America and having just talked about China and the China regulatory risks, everything's relative in the world. And you say, "Okay, well, I don't trust the Chinese government, so, okay, well, what else do we have in emerging markets?" You've got Putin in Russia, you've got the last two presidents of Brazil went to prison for basically stealing your money if you're investing in the broad indexes. So everything's relative in the world, and these other regions have political risk as well, and they also have regulatory risks. But China just happens to be a bit more advanced in all things.

John Darsie: (47:31)
Right. Switching gears a little bit, I talked about, a core tenet of investing is that you have to pay for growth. Things like P/E ratios and I know you look at something like the PEG ratio, which is looking at price to earnings in the context of growth rate, but you talked about how China's e-commerce and internet-based economy is much more robust than it is in places like India or Latin America or elsewhere in emerging markets, but how expensive is the growth that you're paying for generally in emerging markets right now, relative to what you're seeing in the US or developed markets? And in which markets are you able to most inexpensively access what you deem to be really exciting growth?

Kevin T. Carter: (48:13)
Well, I think you're absolutely right. The only ratio I care about is the P/E versus the growth rate. And I like to use the revenue growth rate for a couple of reasons. A, it's your purest form of growth. You can grow earnings with declining revenue by share, buybacks and so forth. And also you have what's now widely accepted model, which is to get big and not worry about profits until you're really, really big, all of Amazon. So I look at the P/E over the revenue growth. And the valuations right now at this particular group of companies, the EMQQ index has a PEG ratio of about 0.68, 0.69, and that's half the PEG ratio of the US tech leaders. And it's about a third the PEG ratio of the S&P 500. And so, after this big decline, I'm pounding the table. I think valuations are very reasonable.

Kevin T. Carter: (49:14)
The Chinese part of that story, which is the largest part, is the cheapest right now for obvious reasons. The fear has led to very, I think, attractive multiple. So I think that China's probably the cheapest part right now. But the non-China part, the next frontier, which is the 35% that's India, Brazil, Nigeria, et cetera, it's PEG ratio is about, one, it's growth rates higher, but the PEG ratios are, I think, quite attractive. And I launched this, EMQQ, seven years ago. I did it when a friend of mine asked me what was the best emerging markets ETF for her daughter's college fund. So a three-year-olds, 15-year time horizon, and I thought based on the valuations that this sector was the best way to get that exposure. And even after our big decline, we're still number one by a decent amount out of everybody in the emerging markets.

Kevin T. Carter: (50:22)
And right now with valuations, I think that we'll be in the same place five years from now because the PEG ratio is very attractive. And I think that the valuations will take a permanent hit from the current recent debacle, enough people will run away and not come back. But in the short term, as we say in Omaha, the market's a voting machine, but in the long-term, it's a scale. And what goes on the scale is the cash in the cash register at the end of the day.

John Darsie: (50:53)
Amen. Well, that's a good place for us to finish. Again, thank you for coming on Kevin T. Carter of EMQQ. Again, it's the number one emerging markets ETF over both a three and five-year time horizon out of, I believe around 57 funds over the shorter timeframe and about 46 that have been around over a five-year timeframe, focused on innovation in internet and e-commerce primarily. Again, EMQQ, Kevin, thanks so much for joining us. Anthony, do you have a final word for Kevin before we let him go?

Anthony Scaramucci: (51:21)
No, listen, I only wish I had met Kevin 20 years ago. I wanted to be in the room where it happened in the meeting with him and Dean Malkiel, putting this thing together. So congratulations to you, Kevin, and I'm looking forward to the next 20 years. I'm hoping that we can do a lot of fun things together.

Kevin T. Carter: (51:39)
I share your sentiments, lovely to meet you guys, both.

John Darsie: (51:43)
And Kevin, we're also excited to have you at our in-person SALT Conference this fall, which we're looking forward to you giving this presentation to our community in person, which we're thrilled to be bringing those events back. So look forward to seeing you then. And thank you everybody who is both attending SALT this fall, and everybody who tuned into this SALT Talk. Just a reminder, if you missed any part of this episode, you can access an on-demand on our website. It's salt.org/talks, and on our YouTube channel, which is called SALT too.

John Darsie: (52:12)
We're also on social media. Twitter is where we're most active at SALT Conference, but we're also on LinkedIn, Instagram and Facebook as well, streaming some of these episodes there. And please spread the word about these SALT Talks. We think, especially with the recent drawdown that we've seen in China and emerging markets, we don't give investment recommendations, but it's certainly a compelling time to look at continuing to diversify your portfolio, and as Kevin mentioned, some of the valuations in emerging markets in terms of what you're paying for growth are particularly attractive right now.

John Darsie: (52:40)
But on behalf of Anthony and the entire salt team, this is John Darsie signing off from SALT Talks for today. We hope to see you back here again soon.

Ronald Cohen: Driving Change with Impact Investing | SALT Talks #246

“The force of impact transparency through technology and big data is going to shift our economies from creating problems our governments try to solve with taxes to businesses delivering solutions while making profits.”

Sir Ronald Cohen is Chairman of the Global Steering Group for Impact Investment and The Portland Trust. He is a co-founder director of Social Finance UK, USA, and Israel, and co-founder Chair of Bridges Fund Management and Big Society Capital.

He is the author of 'IMPACT: Reshaping capitalism to drive real change,’ published by Penguin Random House in 2020, which became a Wall Street Journal Bestseller. His previous book 'The Second Bounce of the Ball,' published in 2007, was described by the Financial Times as “one of the best books written on entrepreneurship in recent years.״

In this episode, Sir Ronald Cohen discusses the growth of ESG and impact investing and its role in addressing some of the world’s biggest challenges. He explains how technology and big data enable impact transparency so consumers and investors can understand the full scope of a company’s ESG impact. Cohen envisions more business models where economic efficiencies align with maximum positive impact. 

LISTEN AND SUBSCRIBE

MODERATOR

SPEAKER

Headshot.png

Sir Ronald Cohen

Chairman

Global Steering Group for Impact Investment

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

TIMESTAMPS

0:00 - Intro

2:49 - Growth of ESG

5:44 - Measuring impact investments

9:38 - Investing transformations among younger generations

11:07 - Impact transparency via technology and big data

14:30 - Addressing intractable global conflict via impact investing

16:17 - Impact investing and climate change

19:02 - Impact unicorns

21:57 - Pressure on fossil fuel companies from institutional investors

23:14 - Aligning impact with economic efficiency

25:27 - Long-term effects of COVID

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello, everyone. And welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT, which is a global Thought Leadership Forum and networking platform at the intersection of finance, technology and public policy. SALT Talks are a digital interview series that we started in 2020 with leading investors, creators and thinkers. And our goal on these talks is the same as our goal at our SALT Conferences, which is to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. And there's no bigger idea in our opinion, in the investment management world today than the idea of ESG investing, which can take on many forms. But our guest today is going to talk in-depth about concrete steps that we can take to measure and implement both social and environmental friendly investing and business operations as well.

John Darsie: (01:02)
And our guest is Sir Ronald Cohen. He's a pioneering philanthropist, a venture capitalist, private equity investor and social innovator. He serves today as the Chairman of the Global Steering Group for Impact Investment, which is the Impact-Weighted Accounts Initiative at Harvard Business School and the Portland Trust. He is a co-founder and the former executive chairman of Apax Partners worldwide, which is a global private equity firm. He's also a co-founder of Social Finance UK, USA and Israel. And co-founder and chair of Bridges Fund Management, and the former co-founding chair of Big Society Capital.

John Darsie: (01:39)
Ronnie was born in Egypt, but left as a refugee at the age of 11 when his family came to the UK. Today, he's based in Tel Aviv, London and New York. He's also the author of a fantastic book called, Impact: Reshaping Capitalism to Drive Real Change, which was published in 2020 by Penguin Random House. And it's also a Wall Street Journal bestseller.

John Darsie: (02:01)
Hosting today's talk is Anthony Scaramucci, who's the Founder and Managing Partner at SkyBridge Capital, which is a global alternative investment firm. Anthony's also the Chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:14)
Ron, thank you so much for being on with us. I know John's got a series of questions for you as well. I'm going to start with something that troubles me philosophically, and maybe you can help me through it. And it's related to the government and the private sector, recognizing that there is a problem and yet, for some reason we are not coordinated as a group to solve the problem. And so, how can we tap the financial markets to harness innovation and steer social change, which is the premise of what you're writing about?

Sir Ronald Cohen: (02:49)
So, Anthony, it's great pleasure to be here with you. And John, you come from the financial business and you understand it deeply. The financial capital markets have already cottoned on that the world is changing. We have $40 to $70 trillion of environmental, social and governance capital. That's flowing to achieve more than just profit. We've never had that before in history. We're talking of something that's equivalent to half or more of all professionally managed assets in the world.

Sir Ronald Cohen: (03:36)
And it is this flow of capital which was spurred into action by the changing preferences of consumers and [inaudible 00:03:45] to longer wanted to buy the products of companies that are polluting or to work for them. That got investors to shape investment flows and put pressure now on governments, through their regulators, to bring transparency to the impacts that investments create. So that is how the link between government and the private market is going to happen.

Anthony Scaramucci: (04:19)
I don't want to sound pessimistic. But I feel somewhat pessimistic about all of this because we all know what the problems are. And yet we don't see that linkage. So, where is the catalyst for that?

Sir Ronald Cohen: (04:36)
Okay. So the catalyst is this coming from the valuations that are being placed on stock exchanges. If you look at the Harvard data that I have been involved in putting together at the Impact-Weighted Accounts Initiative at Harvard Business School, you can already see, Anthony, a correlation between higher levels of pollution and lower stock market values within several sectors. So investors are shunning the companies that are creating big environmental issues today. And that is what is driving this change. That's why you are seeing companies now beginning to take this whole issue of impact seriously.

Anthony Scaramucci: (05:31)
So tell somebody that's not familiar with the term common impact accounting and those reporting standards. Tell them, or tell all of us what they are.

Sir Ronald Cohen: (05:44)
Okay. So we've all assumed that we can measure very little in the environmental or social area. And that we can't measure impacts in the way that we measure profit. The world's changed, Anthony. That was true a decade ago, but it's no longer true. With the massive data that is available now, that companies have made public about their carbon emissions, their water usage, their employment practices. And with the ability of computing to gather and sort through this data.

Sir Ronald Cohen: (06:24)
We can now take the tons of carbon that a company puts into the atmosphere as a result of its operations. And we can see on the Harvard Business School site, 3,000 companies' environmental impact. For the first time, you can see that 450 of these companies create more environmental damage than profits. That 1000 of them create environmental damage equivalent to a quarter of their profit. That together they create $4 trillion worth of environmental damage in a single year, right? And this is putting a completely different perspective on making investment decisions. Because if the level of damage is going to affect the stock market valuation of the company, then management's going to want to deal with it.

Sir Ronald Cohen: (07:22)
And what is also a major breakthrough, Anthony, in answering your question, is our ability to measure the employment impact of companies. We will soon be publishing 2000 companies' employment impact in dollar terms. You'll be able to look at the cost of diversity to the excluded communities. You'll be able to look at Apple's wage bill of 7 billion and say there's a $2.7 billion negative charge because of lack of diversity. And if you compare it with Costco, while Costco employs twice as many people, 160,000, but it only has $1 billion negative charge.

Sir Ronald Cohen: (08:09)
So when you then add to that [inaudible 00:08:14] and you can measure the sugar content of a product, then you can quantify the impact on health, process a lot of science about it, and express it in dollar terms. Or, you can measure the fiber content and you can put the positive value that that has in terms of health. You can begin to see that is a whole form of impact accounting now, which is going to be based on impact accounting principles like the GAAP accounting, that we're all used to in doing financial markets, and these numbers are going to be audited like financial numbers.

Anthony Scaramucci: (08:55)
Okay. It's very helpful. And it's also very encouraging. I have millennial children. And my very popular co-anchor here, John Darsie, happens to be a millennial. And some people pick on the millennials. They talk down to them, but not me. I actually think that these are some of the brightest people. And I think this is a very encouraging generation.

Anthony Scaramucci: (09:20)
And what influence do you think they're going to have in terms of allocating capital, the transparency issue that you talk about, the impact transparency, where we can see what companies are doing? How do you think the younger people and the millennials in particular are going to drive change or create [crosstalk 00:09:37]?

Sir Ronald Cohen: (09:38)
So, like the tech revolution, the impact revolution was started by millennials and then Gen Z that follows them. So they were the ones who started [crosstalk 00:09:49].

Anthony Scaramucci: (09:48)
I have some of those too, Ronnie. I have a couple of Gen Z or [inaudible 00:09:51] kids too. I got a whole collection.

Sir Ronald Cohen: (09:54)
People don't realize that millennials and Gen Z today represent 60%, 6, 0% of the US workforce. This is no longer the minority view, the views of millennials. And they're the ones who stopped buying certain products from certain companies. And they're also the ones who are going to inherit a ton of money, which was made by their parents. And that they are beginning to influence the investment market, having influenced the market for product. And so, I think the values of this generation is one of the three major forces that are transforming our world for the better.

Anthony Scaramucci: (10:46)
You've been working on this a long time. And you've seen a lot of things over the course of your career, and it's impossible to predict the future. But I want you to make a case for 2031. It's 10 years from now in our civilization, what does it look like, sir?

Sir Ronald Cohen: (11:07)
So we're going to find the different shopping. We're going to be using an app which gives us the environmental and social impact of the product we are buying and the company that brought it to our shelves.

Sir Ronald Cohen: (11:25)
If we're sitting in the boardroom, we're going to be managing our business according to the profit we make and the impact that we deliver. We're going to realize that if we're delivering negative impact and negative profit, we're done for. But if we're delivering profit and negative impact, we're going to be done for too. Because investors aren't going to buy our shares.

Sir Ronald Cohen: (11:58)
And so I believe that this force of changing values, the force of technology that enables us to deliver impact through artificial intelligence, machine learning, augmented reality, the genome and computing coming together and finally, the force of impact transparency through technology and big data. Those forces are going to shift our whole economies, Anthony, from creating problems that governments then trying to solve by taxing everyone, to bringing business to deliver solutions as it delivers profits.

Anthony Scaramucci: (12:43)
When you think about ESG and the focus effectively is on eliminating harmful outcomes, what would it mean to you to actively focus on creating good outcomes? So we have two things going on at once. How do you create the second?

Sir Ronald Cohen: (13:05)
Excellent question. The answer is impact transparency. If governments through their regulators, because they want every investor to get the same price sensitive information at the same time on their comparable basis, mandate that every company starting 3 years from now must publish impact-weighted financial accounts, which are audited like financial accounts are, it will enable investors to distinguish between those that are minimizing the harm they do and those that are bringing solutions to the big problems we face. And the money at the end of the day, is going to go to those who know how to deliver the maximum profit and positive impact at the same time.

Anthony Scaramucci: (13:58)
Let's talk about global conflict for a second. We've got the hotspots still in the world, in the middle east parts of Africa, and there's also major pockets of poverty still in our societies. How can we solve those intractable issues, which would include the Israeli-Palestinian conflict, but also extremism that we find in Africa?

Sir Ronald Cohen: (14:30)
It's a very big question. And every conflict obviously is different in kind. But if you look at the Irish conflict, it gives you the beginning of an answer for conflicts like the Israeli-Palestinian one and many others. The solution that brought Ireland to the Good Friday Agreement involved cutting the flow of money to the terrorists and inverted commas, "from the other side's point of view," terrorist organizations, so that they no longer had the supply of arms. It also involved a rising economic path. Because of Ireland entry into the European union, which made the Northern Irish look less suspiciously at the Southern Irish. All of a sudden they were prospered. There is an economic interest in cooperation. There was less fear that they were trying to grab what you've got. And so I think the simple answer to your question is we have to work on three dimensions of every conflict. Not just the political one and the security one, but the economic one, too.

Anthony Scaramucci: (15:58)
We're starting to see more technology in the impetus to remove carbon from the atmosphere. That's happening. How promising is the recent innovations addressing climate change? And are we seeing a willingness for energy companies to focus on these issues?

Sir Ronald Cohen: (16:15)
Two very important questions. We're certainly seeing a huge amount of money going into clean fuel technologies or carbon absorption technologies. And the phase of technological innovation is accelerating all the time. So our ability to bring solutions is vastly greater than it was three decades ago when the tech revolution was getting underway.

Sir Ronald Cohen: (16:50)
But what is going to drive the push for technology is the pressure on the incumbents today to shift their models. For instance, look at fossil fuel. If you look at the Harvard Business Group data, you can see that ExxonMobil delivers $39 billion of environmental damage in a year from its operations. Its environmental footprint, as it's called. You can compare it with Shell, the figure's 23 billion a year. You compare it with BP, it's 14 billion a year. So you already see leaders and laggards within the same sector. And so at the same time, ExxonMobil's share price falls by 2/3 in three years. You look across the way of Tesla, which is trying to shift us away from pollution through electric vehicles, and the share price multiply seven times in a single year.

Sir Ronald Cohen: (17:56)
So the power of financial markets today to drive technological advance both by the incumbents and through the venture capital industry and entrepreneurship, is going to be, what's going to bring this second disruption, this impact disruption. This time aided by technology to change the business models of many industries in the way that Tesla has changed the business model of the automobile industry.

Anthony Scaramucci: (18:30)
This is an impossible question. But this will be my last one before I turn it over to John Darsie who has a series of questions as well. And it's about the unicorns of the future.

Anthony Scaramucci: (18:41)
What are we going to see as investors in terms of emerging technologies related to impact investing? Is there a Uber or a Google, a SpaceX out there that's in the process of being formulated today that we need to be aware of or keep our eyes on?

Sir Ronald Cohen: (19:02)
There definitely are. My definition of impact unicorn in my book is a venture that is worth $1 billion, and improves the lives of 1 billion people. And I think that's what the millennial and Gen Z, the generations are looking for. Whether they're working for a big business or whether they are entrepreneurs.

Sir Ronald Cohen: (19:31)
You look at fields like education today. Our ability to educate people by digital means enables us in essence, to give some people, a free education that they pay for after their earnings, when they've got into their job, after they'd been educated. They're going to be models like that. There're already are some startups like that, that they've got going. And they're arising by the way, everywhere or across the world. They're going to revolutionize our approach to education.

Sir Ronald Cohen: (20:11)
Telehealth. I don't need to tell you how Telehealth has grown the impact of COVID. We are going to see remote diagnosis. We're going to see remote treatment. We're going to see new technologies come in to give us much faster testing. We've learned our lesson with testing, through COVID in difficulty in getting testing going fast enough. It's something we can't afford to do when there's another epidemic. So, we're going to begin to see giant opportunities in many sectors coming from this delivery of risk, return and impact.

Anthony Scaramucci: (21:01)
John Darsie, what do you got to say?

John Darsie: (21:04)
You asked a lot of great questions, Anthony. But I have a couple of follow-ups. Sir Ronnie, if you don't mind? You talked about Exxon...

Anthony Scaramucci: (21:11)
Sir Ron, if he asks a good question, I don't want you to say, "Good question," though, okay? I want you to just stay... I had the good questions. Okay. Go ahead, Darsie.

John Darsie: (21:20)
You talked about Exxon, Sir Ronnie, which I think is a fascinating case where Engine No.1, it's a small hedge fund that we have a relationship with, and we're looking forward to welcoming on SALT Talk soon. They won a proxy fight with a very modest amount of resources with Exxon trying to drive more urgency around their climate issues. Do you think you'll see more activism and more pressure put on these energy companies from whether it's hedge funds or government entities or things like that to accelerate what they're doing in terms of carbon capture and limiting their environmental impact?

Sir Ronald Cohen: (21:59)
Undoubtedly, John. Undoubtedly. The conversations I've been having suggest that there're already 200 motions have been tabled on both environmental and social issues. For shareholders, the meeting's coming up. Activist funds are getting, going. But they're not doing it alone in the ExxonMobil case. BlackRock came in alongside Engine No.1 as you well know. And so it is part of the pressure that is being exercised by investors today that is transforming itself into this open impact revolution that I write about.

John Darsie: (22:41)
Right. And you talk a lot in your books and in your commentary about how the idea of profit and impact are not mutually exclusive, that actually investing in impact drives returns. What are some concrete ways? And you talk about this in your book in a very, I think lucid way, that with a business, whether it's a manufacturing business or a services business, what are ways specifically that investing for impact actually does drive enhance productivity and enhance efficiency within the business?

Sir Ronald Cohen: (23:14)
So I gave you an example in the area of education. That you have a model where you're enabling people in remote corners of the world to get qualifications as coders or other vocational areas, or even university degrees, and they're only paying for it afterwards. And you make a profit out of that. The more impact you deliver, the more profit you deliver. If you look at FinTech platforms that begin to assess the credit worthiness of a potential borrower for a consumer loan, on the basis of their usage of their firm, instead of looking at their bank account. Because they don't have one. The more credits you deliver, the more profit you will make.

Sir Ronald Cohen: (24:07)
If you look at pharmaceutical companies, it's great to have a breakthrough cancer treatment. But if it costs $300,000 a year to administer, how many people could afford it? And so you only invested in a company which has a cancer treatment, that costs $20,000 or less. And so I think what's going to become the rule, John, is these great impact business models are going to involve distributing products very widely, at lower prices to help more vulnerable populations. And it gives you a bigger market and potentially a bigger profit than if you stay at the premium high price end of the market with a very narrow client base.

John Darsie: (25:01)
Right. And let's talk about COVID-19 for a second. So we've seen a short-term impact on emissions, for example, because of reduced business travel, reduced commuting into offices and things like that, do you think there's going to be a long-term benefit or impact from COVID-19 in terms of emissions that we can sort of build off of as we sort of remake the way we operate business and operate our societies?

Sir Ronald Cohen: (25:27)
I certainly think that COVID has shaken up a lot of our beliefs and habits, John. And we'll get back to some of them. We're not going to go back to others, or at least not in the same extent. And the question that you asked about travel is a very important one. Here we are having a perfectly intelligible interview to thousands of people, or could be hundreds of thousands of people. And neither of us has had to jump on a plane in order for us to have this conversation. We're going to see that replicated.

Sir Ronald Cohen: (26:10)
But I think COVID is going to have a much deeper effect too. It's somehow strengthened the feeling that we're all in the same boat. We can't live this COVID crisis by just looking at ourselves and our neighborhoods, nor as our cities only, nor are countries now, or even our continents. And I think that feeling of greater solidarity connects with the millennial and Gen Z values that we were talking about.

Sir Ronald Cohen: (26:44)
And so I think COVID will have strengthened hugely the attraction of impact investing and will hopefully bring our governments, whether it be the US, so Biden Administration or the EU or the British Government to realize that impact transparency is now a human rights. We all have the right to know, not just what profit companies are making, but what good and what harm they're creating. And governments owe it to us to provide this transparency because investors, apart from anything else, investors are demanding it and they're not getting it today.

John Darsie: (27:33)
We're going to leave it right there on a positive note. That we can turn this unfortunate situation with all the suffering and death that we've experienced around the world from COVID and try to turn it into a positive and come together to solve some of these intractable issues that you write so eloquently about in your book, Sir Ronnie, and in all of your commentary. Keep up the good fight. Thank you for everything that you're doing, and hopefully we get to see you in person. It's great to see you on Zoom, but we'd love to see you in person soon.

Sir Ronald Cohen: (28:00)
Likewise, thank you very much, John and Anthony, of course.

Anthony Scaramucci: (28:01)
Thank you, Ron.

John Darsie: (28:06)
Thank you everybody for tuning into today's SALT Talk with the great Sir Ronald Cohen. Just a reminder, if you missed any part of this SALT Talk or any of our previous SALT Talks, you can access them on our website on demand@SALT.org/talks or on our YouTube channel, which is called SALT Tube. Please also follow us on social media. We're most active on Twitter @SALTConference, but we're also on LinkedIn, Instagram and Facebook as well. And please spread the word about these SALT Talks. On behalf of Anthony and the entire SALT Team, this is John Darsie signing off from SALT Talks for today. We hope to see you back here again soon.

Eric Gleacher: Risk. Reward. Repeat. | SALT Talks #242

“[When starting my company,] I figured you wanted to own equity, be a partner. You wanted to wake up in the morning and it be your business… To have that culture where people own equity is critical.”

Eric Gleacher is a man with a compelling story. He has always been determined to excel in all that he attempts and has never failed to exceed the very high expectations he sets for himself. His autobiography is the story of a tournament-winning amateur golfer; an officer in the Marine Corps; an investment banker who became one of the half-dozen who dominated the M&A and takeover business that changed Wall Street and American business in the latter part of the last century; and a man who had the courage to leave a position as a senior partner at a famous and immensely successful investment bank to establish his own firm. It's as stirring and interesting as when we lived it. You won't want to stop reading until the last page.

Eric discusses his winding and eclectic career with time in amateur golf, the Marines, Lehman Brothers and Morgan Stanley where he transformed the M&A industry, before starting his own firm. He describes the formative impact amateur golf played in his life and how lessons learned helped in business. When starting his own firm Gleacher & Company, he explains the importance of offering equity to employees in developing a thriving culture.

LISTEN AND SUBSCRIBE

MODERATOR

SPEAKER

Headshot+-+Woo,+Willy+-+Cropped.jpeg

Eric Gleacher

Author

Risk. Reward. Repeat.

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

TIMESTAMPS

0:00 - Intro

3:54 - Supporting women on Wall Street

6:00 - Winding career path and taking smart risks

13:50 - Time at Lehman Brothers and Morgan Stanley

19:16 - Revlon M&A

24:20 - Impact and lessons from golf

35:22 - Building a culture at Gleacher & Company

38:21 - Writing his book

42:29 - Favorite golf courses

EPISODE TRANSCRIPT

John Darsie: (00:06)
Hello everyone, and welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology, and public policy. SALT Talks are a digital interview series with leading investors, creators, and thinkers. And our goal on these talks is the same as our goal at our SALT conferences, which is to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future.

John Darsie: (00:39)
We're very excited today to welcome Eric Gleacher to SALT Talks. And Eric is a man with a extremely compelling story. He's always been determined to excel in all the attempts and has never failed to exceed the very high expectations that he sets for himself.

John Darsie: (00:55)
His autobiography, which we're going to talk about today, is the story of a tournament winning amateur golfer, an officer in the Marine Corps, an investment banker who became one of the half dozen who dominated the M&A and takeover business that changed Wall Street and American business in the latter part of the last century, and a man who had the courage to leave a position as a senior partner at a famous and immensely successful investment bank to establish his own firm that he ran for almost 25 years.

John Darsie: (01:24)
Hosting today's talk is Anthony Scaramucci, who is the Founder and Managing Partner of SkyBridge Capital, a global alternative investment firm. Anthony is also the chairman of SALT. Anthony is successful in business, but he can't golf a link, but we won't hold that against him, Eric. But I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (01:40)
Why don't you tell Eric I got fired from the White House while you're at it? You might as well [crosstalk 00:01:44].

John Darsie: (01:43)
There's only one slight-

Anthony Scaramucci: (01:43)
It's not like he doesn't know that, but go ahead, John.

John Darsie: (01:47)
There's only one slight per introduction, it's either the fact that you're terrible at golf or the fact you got fired from the White House.

Anthony Scaramucci: (01:53)
That could be a compliment to my buddies that don't play golf. You don't know that.

Eric Gleacher: (01:56)
It's a badge of honor.

Anthony Scaramucci: (01:58)
Well, listen, Eric, first of all, it is a pleasure to do this with you. And you wrote a legendary book. I read a lot, John will tell you that. I've tried to read 60 books a year. This book came to me from my lawyer, Ed Herlihy, who worked on our M&A deal for SkyBridge, another phenomenal world class person. But, I mean, the book is just chock full of great stories and lessons and principles.

Anthony Scaramucci: (02:29)
And so, it's called Risk. Reward. Repeat.: How I Succeeded and You Can Too. John always prints out a script for me for these things, because he's keen to at least give me a few questions that he thinks are thoughtful, Eric, because he gets all the praise for asking the thoughtful questions. But I read your book, and one of the things that came out of the book for me is you're a cutting edge thinker. You're somebody that saw the future in our industry and a number of different trends. But I think you've done an amazing amount for a lot of different types of people.

Anthony Scaramucci: (03:08)
There are women in our industry that say that you were the great equalizer, that you brought them to the table, and that many places there were glass ceilings for them but you broke... You didn't write that in your book, by the way, you wouldn't give yourself that self praise. But this is actually coming from friends of mine that worked for you, that you mentored, and that you trained, but you also pushed them through the glass ceiling. I want to start there, sir, and then I'm going to go back to other things.

Anthony Scaramucci: (03:38)
What was it about these women that you saw? What was it about these women that were drawn to you as they were breaking into what you and I both know, at those times on Wall Street it was a little bit different culture than it is even today?

Eric Gleacher: (03:53)
What it was about these women is that they were very smart. They were tireless, and they wanted it, but they didn't know how to get there. And to me that was a challenge because I...

Eric Gleacher: (04:13)
One thing I learned at the beginning of my life experience, and what I mean by that was, when I was done with college and I chose to enlist in the Marine Corps that's when I really started learning things. And one of the things I learned very quickly is the power of delegating. And so with these women what I did was I put them in situations that were really ahead of where they were in terms of their development in the business. And, of course, they excelled. And that led to other things and other successes.

Eric Gleacher: (04:54)
And there's a lot of them I could pick out. For example, there's one who was a Chinese studies major at Radcliffe or Wellesley. And she was from the West Coast up in Seattle. And she spent her junior year in China. And she knew nothing about business, and yet she picked it up so fast that within a year she was the top analyst that I had in the M&A department at Morgan Stanley. So that just impressed me. And I enjoyed it. There weren't that many women there, but to give a few of them an opportunity to excel and hear feedback like you got, that's a home run as far as I'm concerned.

Anthony Scaramucci: (05:45)
Look, it's a tribute to you, because it was a different culture and a different time, sir. So tell us about the journey though. Tell us about the journey from high school into the Marine Corps out to Wall Street. Why was that your career arc?

Eric Gleacher: (06:00)
Well, I had an unusual journey because I was born in 1940. My father, obviously, I met him when I was an infant, but before you knew it he was off in the war. He was gone. And he was a CB, which are the Navy construction battalions. And he was working in the Marianas out in the Pacific building the airfields for the bombers to go to Tokyo and back without having to refuel.

Eric Gleacher: (06:29)
And when the war ended he didn't come home for a couple of years. He got jobs outside the country. And the reason I tell you that is because when he did come home I was seven years old, so I was just getting to know him. And he never once would talk to me about what went on. So, it was a very unusual experience for a young kid. But then we found that we started playing golf together when I was 12, and lucky enough I could get up and I could hit the ball and I kind of had an aptitude for it. And we became very close. And so I ended up with a real happy ending in my childhood.

Eric Gleacher: (07:18)
But my dad was a construction engineer. That's what he was doing in the Navy, and that's what he did for the rest of his career. And we moved around. I went to 10 different schools. There'd be a job, and it would end, and he'd find another one, and it didn't matter where it is, and we went there. So when I got to college really I didn't know a lot, it opened my eyes about people and how other people live and things I didn't know. And I didn't know anything about business.

Eric Gleacher: (07:54)
And when I graduated from college back in those days you either had to keep going to school or you had to do military service, and so I decided to do that, and I decided to go into Marine Corps because it seemed to me it would be the most challenging thing I could do and that's what I wanted to do. And that was a great decision, because right away there were all kinds of challenges, and the book goes through them.

Eric Gleacher: (08:23)
And to successfully navigate my way through that was the first thing I ever did in my life, except win a golf tournament, that was really a success, and that's really got me going. I acquired self confidence and went on from there. And I learned a tremendous amount being in the Marine Corps.

Eric Gleacher: (08:46)
You talk about women, I was a rifle platoon commander in the infantry, so I had 45 men. Most of them did not have a high school education, but I found out that plenty of them were smart as hell. And that's where I learned to delegate and to give people an opportunity. And you'd be amazed in terms of what they can do. And so I enjoyed it a lot. I was in for three and a half years and ready to go to school when I get out.

Eric Gleacher: (09:23)
I decided to go to business school because I didn't know anything about business. The one thing I wanted to do, which was a function of what I went through growing up, was I wanted to make money because my family never had any extra money. And so I decided to go to business school because I didn't know anything about business, and fortunately, I got interested in finance at the University of Chicago, which is a great financially oriented school. And I found my way to Lehman Brothers. So that's-

Anthony Scaramucci: (09:56)
Well-

Eric Gleacher: (09:56)
... how it evolved.

Anthony Scaramucci: (09:57)
... I want to get to Lehman in a second, but you place a particular emphasis in the book on taking smart risks. So I want you to analyze that decision. You're coming out of business school, you're going to work on Wall Street, you choose Lehman. Take us through that thought process.

Eric Gleacher: (10:13)
Well, the first smart risk I took was since I was going to go into the military I was going to do something that was real, that had some significance. And back in those days there were lots of six months reserver's programs, you could go into Air Force reserve and so forth, and I didn't want to do that, so I said, okay, I'm going to go into Marine Corps and really see what it's all about. And I learned so much. It affected my life so much, and that wouldn't have happened if I wasn't willing to take that risk and sign up for three and a half years instead of some six month reserver's program. And it started there.

Eric Gleacher: (10:57)
And I've said it in the book and I really believe it to the core of my being, is that the world belongs to the aggressive, and you can't just sit back. I have trouble politically with what's going on now because the politicians want to give people things, and most people I know don't want to be given things, they want to earn things, they want to have a job, they want to have self respect, they want to have a home, they want to have a kid, they want to send the kid to school.

Eric Gleacher: (11:31)
And so those values, all those things, I think, I accumulated by how I started. And like I said, deciding to do it right in terms of going into military rather than take the easy way out. And by the way, I can understand why it all changed after Vietnam and why the military establishment wanted to have a volunteer force. But boy, we left a lot on the table doing that. I think that we'd have a very different situation in Chicago, just to pick an example, with what's going on here how if you had compulsory military service at least for men when they turned 18. So, the way I look at it I was lucky to be able to go through it.

Anthony Scaramucci: (12:26)
Well, let me take it one step further though, the compulsory service, you would have taken a lot of kids off the street, they would have gotten trained, they would have learned some discipline, but they would also have been in esprit de corps and some civic virtue to all of that that would have probably binded the country more closely together. Is that fair to say?

Eric Gleacher: (12:44)
Not only that, it's absolutely fair, but a lot of them would acquire an occupation. I talked to a young guy this week who's going into Marine Corps, he's going to train as an aircraft mechanic, and when he gets out he's going to have that trade. And that was true way back when I was in it. There were opportunities like that. And you're right, if you have an 18 year old kid who all of a sudden he's part of a group, and there is esprit de corps and so forth, and he's bright and motivated, he can take advantage of things like that, whereas now that opportunity does not exist.

Anthony Scaramucci: (13:29)
So let, and you and I agree on that, let's shift gears for second, let's talk about Lehman. [inaudible 00:13:35] book many, many years ago, there was a battle there between Lew Glucksman and Pete Peterson. And there was a lot of very smart people in that room, yourself, Steve Schwarzman, etc. Tell us about Lehman Brothers while you were there.

Eric Gleacher: (13:51)
Lehman Brothers was full of really talented people, but in those days it lacked a cultural backbone. And the people, the senior people at Lehman, the partners, were basically competing with each other rather than pulling together. And so you had various fiefdoms and the firm had its ups and downs. It was a place that did well, it went on for many, many years, but everybody knows what the ending was.

Eric Gleacher: (14:33)
And, to some degree, the end was a function of the beginning. But there was just tremendous infighting at Lehman, you had Peterson and people that were with him and Glucksman and Jim Glanville and others that were another group. And it was good for somebody like me because you could move at your own speed there. It wasn't stratified. When I got there I was the 15th guy in the, what they call the industrial department, which would have been the corporate finance department.

Eric Gleacher: (15:10)
There was no M&A. M&A really didn't exist then. And you could move at your own speed. There wasn't a lot of management. When I got there I was 27 years old, and I had a wife and a kid, and I felt the world was leaving me behind because I'd been in the military and I've been to business school, and I could really move, and I did. So there was good and bad, the place survived.

Eric Gleacher: (15:45)
Peterson was good to some degree, he was very smart, he was a great salesman, and Glucksman was a tremendous fixed income guy. He built up a very profitable fixed income business there. But then the whole thing fell apart and they were acquired by American Express. And that didn't work, and then they were spun out. And then Dick Fuld ran it and did a creditable job until the end when somehow he didn't figure out how to get a merger done and let the place survive, and then it caused a lot of problems and was very tough on him and his reputation.

Anthony Scaramucci: (16:26)
Yeah, I had sold my business to Neuberger Berman, and then it got bought by Lehman, so I knew Dick. I worked for him for three years. I still have a, I would say a close relationship with him.

Anthony Scaramucci: (16:38)
But when I was at Goldman, I spent the first seven years of my life at Goldman, and the legendary John Weinberg, who had such great aphorisms, one of them was some people grow, Eric, but other people swell, make sure you're not a person that swells and that you're growing, keep your head on straight. But he said something about Goldman's culture, and I want to transition over to Morgan Stanley for a second, he said, "So my job is to train you to take your six shooters and point them out and shoot out. I don't want you turning these six shooters on each other and shooting at each other and turning yourselves on each other. I want there to be esprit de corps."

Anthony Scaramucci: (17:19)
And you describe Lehman differently than that, what about Morgan Stanley? What was the culture like at Morgan Stanley, as you reference in the book?

Eric Gleacher: (17:28)
It was a great culture. It was teamwork from top to bottom, and it was more homogeneous than Lehman. Lehman was eclectic, it had lots of different kinds of people, which also is a big advantage if you can use it correctly, which Lehman really didn't. But they had a tremendous talent pool.

Eric Gleacher: (17:52)
And Morgan Stanley was a little homogeneous. I was the third person that came in from the outside as a partner back in those days. And you can imagine that you had this firm and we're only three people that came in from the outside. And one of the reasons why I think I succeeded there was because I wasn't a captive of the homogeneity. I didn't grow up there. I'd been in Lehman almost 16 years, and I was, by that time, I was who I was. And I came into Morgan Stanley and I did things a little differently.

Eric Gleacher: (18:36)
And Bob Greenhill, who's running an investment bank was a tremendous influence on the M&A business at Morgan Stanley. And after I was there for a few months he told me he wanted me to run M&A, and so I did, and I did it differently, and I did it aggressively. And did things like I brought Ronald Perelman in as the client for the Revlon deal.

Anthony Scaramucci: (19:05)
You mention that in the book. And that was a unorthodox client for Morgan Stanley at the time, so tell us why that was and tell us why you recruited him in.

Eric Gleacher: (19:16)
Well, I had gotten to know him on other transactions, and Revlon was basically a conglomerate. It had the cosmetics business and then it had three or four healthcare businesses. And the CEO at the time, Michel Bergerac, he was unhappy with the lack of enthusiasm in the stock price and he decided that he wanted to do a management buyout, but unfortunately for him he didn't know what he was doing and he started to approach various companies and see if they're interested in purchasing the healthcare subsidiaries. And two or three of them came to Morgan Stanley and told us what was going on, and I knew right away that there'd be a transaction here and that it was not going to be the one that he had in mind.

Eric Gleacher: (20:12)
So I decided that Ronald Perelman would be a guy who would stick in there and be aggressive enough to try to get this done because he would be interested in cosmetics business. And we did the numbers, and we told him that we thought if it all worked out that he could buy the company, sell the healthcare businesses, and end up with the cosmetics business for nothing. And, in fact, that's exactly what happened.

Eric Gleacher: (20:45)
But I do have it in the book, it was a scary thing for Morgan Stanley. He was definitely unlike any other client that they'd ever been involved in something that was big and highly publicized. And when the executive committee was thinking about whether they wanted to do this, Parker Gilbert, who was the chairman, called me in, and he said, "Eric, we're going to go along with you because I trust you, " he said, "but please don't embarrass the firm." And my life went past my eyes and I said, "All right. I'm a risk taker, and I'm in, but I'm betting my career."

Eric Gleacher: (21:29)
And it turned out that I was right about Perelman. The deal was very tough. He hung in there. Everybody finally gave up, he bought the company. We sold the subsidiaries at the prices or higher, slightly higher than we had estimated, and he made a tremendous deal. And he's owned Revlon for the last, I don't know, 25 or 30 years.

Anthony Scaramucci: (21:54)
Yeah. 30 plus years according to the book.

Eric Gleacher: (21:57)
Yeah. But a lot of people wouldn't have done that. They wouldn't have played their cards like that at Morgan Stanley. But I just did what I believed. And I figured if I stumbled I'd pick myself up and I'd figure out something else to do.

Anthony Scaramucci: (22:15)
Well, I think that's the real message of the book. I mean, the risk, reward, repeat, because sometimes you take risks and it doesn't work out 100% but you got to get back up on your feet, which you demonstrate.

Anthony Scaramucci: (22:25)
Byron Wien was a colleague of yours at Morgan Stanley. I have built a relationship with Byron. He talks about how every person in their adolescence they find something that shapes their approach to life. In his case he was collecting things and he decided that he was going to turn that collection, that stamp collection and a few other things, into stock collecting. And he often asks young people, "Well, what was it from 11 to 18 that you were doing that you were passionate about that you ended up doing for the rest of your life?" What was that for you, Eric? Is that business, golf? [crosstalk 00:23:05].

Eric Gleacher: (23:05)
That was golf, for sure.

Anthony Scaramucci: (23:07)
It was golf. And so golf, that would have been my guess and answered based on the book. So tell us about how golf, in your mind, transformed your business relationships. And this is a question that John Darsie is loving right now, Eric, because all he does is play golf. So tell us about the benefit of it.

Eric Gleacher: (23:30)
John Darsie, when the moment is right, tell your boss that Ed Herlihy, who's your boss's lawyer, spends more time on the golf course than any lawyer in the United States.

Anthony Scaramucci: (23:45)
There's no doubt about that.

Eric Gleacher: (23:47)
Yet many people are convinced that he's the most prominent lawyer in the United States. So there's an argument. Now in my case-

Anthony Scaramucci: (23:55)
Not to interrupt you, sir, he is also the most ethical, has the highest integrity, and I'll say something about Ed which he has said about you, which is obvious, that he loves people. And I think that's something, when you ask people that have worked for Eric Gleacher, what do they say about you, and you can see it here in the books, sir, that you love people. I didn't mean to interrupt you, let's go to the golf question though. Tell us about golf.

Eric Gleacher: (24:20)
Well, like I said, I've moved around a lot. When I was a kid I played baseball. Trouble is you make the baseball team and then you move and the baseball team means nothing. But when I started playing golf when I was 12 I liked it right away. And then when I was 13 I played in my first tournament. And we had moved. I started, we were living in Nebraska, and we moved to Norfolk, Virginia. And I played in a tournament, it was for 13 and under, and I won it, and I still have the sterling silver cup.

Eric Gleacher: (24:56)
And when you're 13 and you have an experience like that you want more. So then about a month or so later I played in the Virginia championship for 13 and under and I won it. And so I got a jumpstart in terms of playing golf, and that's what I did. You talk about 11, 18, I started when I was 12, but I played golf. You learn things about playing golf, you learn about competition, and hopefully, you learn about playing by the rules, you learn the satisfaction of doing something right, winning a tournament, and playing by the rules, and that's something that I think I've brought with me for the rest of my life.

Eric Gleacher: (25:42)
But I won a lot of golf tournaments, a lot of junior tournaments, and I would have never gotten myself into Northwestern where I went to college if I hadn't been a really good golfer. I went, my first year of college, to Western Illinois University in a little town in Central Illinois, and we won the national championship. It was called the NAIA. If you're familiar with sports you'll know what the NAIA is. It's a big deal. There's hundreds of smaller colleges around this country.

Eric Gleacher: (26:13)
So I was 18, we were national champions. That was an experience that I've cherished from then on. I had a great coach. But I decided that if I stayed there I was going to be a golf pro. And I was pretty decent player, but there were others who were better, Jack Nicklaus and a few others. And I said if I can't be in the top echelon I'm not interested. So I got myself into Northwestern, and they took me because they wanted me to play golf there. So, golf had a huge influence.

Eric Gleacher: (26:46)
In business, Anthony, I didn't play business golf. There's a difference. Ed Herlihy doesn't go around knocking on doors saying, "Hey, let's go play golf." But most people play golf. And if you get a relationship with somebody you get to be friends, invariably, you're going to spend time together. You might be skiing or you might go out on a yacht in the Mediterranean or go to art galleries or play golf.

Eric Gleacher: (27:15)
And so, in terms of relationships it's a wonderful thing. I've done it all my life. My wife and I compete all the time. We play even. She's a tremendous player. So it's brought a lot of joy in my life. We play for 10 bucks, and we pay right there on the 18th Green. And so it's good. It's a great thing, and it's had a big influence on me and I met a lot of people.

Eric Gleacher: (27:43)
And when I say reward in the title of the book it means reward those who've helped you. So in the case of Western Illinois University they had a nine hole course and I built the other nine so they'd have an 18 year old course. And we named it for my coach when I was there. And repeat means to be philanthropic and hope that others will follow what you did and repeat it. And those things with me, those were not conscious things, they just evolved. The things I did, it just seemed like the right thing to do.

Eric Gleacher: (28:21)
University of Chicago came to me in the mid '90s and they were building a downtown Chicago business school building and I gave them most of the money for the building. And it was a no brainer, because they had affected my life so much. And so that's the way I've lived, and I wouldn't do it any differently.

Anthony Scaramucci: (28:47)
John, I'm going to turn it over to you. I know you've got a series of questions for Eric too. But I want to hold up the book one more time, because it's a phenomenal book, Risk. Reward. Repeat.: How I Succeeded and You Can Too. But the elemental thing in this book, Eric, that I got out of it is integrity, is to remain true to yourself, be anchored to your core principles, don't waver. Even if you're taking risks you don't want to shade anything in your life, you just want to go straight forward. And you can see it in everything that you've done, sir.

Anthony Scaramucci: (29:20)
You're a big role model for all of us. And I congratulate you on the book. And I know John's got a series of questions as well.

John Darsie: (29:28)
We'll stay on golf for a second just because that's the most fun to talk about. Eric, as a fellow golfer you know that's where we want to stay. But you were a great golfer in your own right, but you also rubbed elbows with some of the greatest golfers in history. You played in all these events with these elite performers. What did you learn about the mentality of great athletes and great golfers in this instance about what it takes to maintain an edge, whether it's on the golf course, in the military, or in business?

Eric Gleacher: (29:57)
Well, the first thing you learn is that they are sticklers for the rules. I give you a really good example, is, I'm a good friend of Raymond Floyd, who's... he won five or six majors, famous golfer. And he won the US Open in 1986, I believe, at Shinnecock. The week before he was playing in the PGA Tour event at Westchester Country Club and he was in contention. He was right up there at the lead and he hit a pot, it didn't go in and it was on the edge of the hole and he just back handed it to knock it in and he missed it.

Eric Gleacher: (30:39)
And nobody saw, you couldn't really tell he did it, but he immediately called a penalty on himself and he lost the tournament by a stroke. But the next week he won the US Open. If he had somehow not done the right thing with the little pot I don't think he would have won the US Open, because it would have bothered him.

Eric Gleacher: (31:05)
The other things I've seen from the pros, and I sure have played with a lot of great ones, particularly Luke Donald is a fellow Northwestern alum, number one in the world for 56 weeks, it's a work ethic, it's a talent, the talent level, the eye-hand coordination is off the charts. And it's just the seriousness of the way they take it, the physical conditioning, the way they play, the way they deal with their fellow competitors. It's very impressive. The PGA Tour is a very, very high level ethical, professional operation.

John Darsie: (31:56)
Yeah, they say you can learn a lot about somebody's character and personality on the golf course. If somebody, it's something so trivial at golf, cuts corners, it certainly tells you something alarming about being in business with him for sure. But I want to transition back to your business career a little bit first, maybe we'll finish with a couple of golf questions. But you led M&A at Lehman and Morgan Stanley, you were almost a pioneer in some ways of this now, what we deem as just normal M&A activity where M&A is just a huge part of corporate strategy to grow.

John Darsie: (32:34)
How has M&A evolved from when you started in the business to what it is today in terms of how frequent and how aggressive people are with M&A versus when you started your career?

Eric Gleacher: (32:46)
That's a really good question, and I've thought about it a lot. Back when, and we're talking about the mid '70s, the Business Roundtable was an important group, all the big CEOs were remembers, and they had an unwritten deal, which was, we're never going to try to take over each other's companies. The world changed, and Morgan Stanley represented a Canadian company, made a bid for an American company, it was very shocking. And at that point I was at Lehman and I had sold and bought some smaller companies.

Eric Gleacher: (33:35)
And my premise was that American businessmen are aggressive, and if they want to build their companies as fast as they can they want to make them as strong as they can, and they want the stocks to do really well. And the way they were going to get there fastest was by acquisition. And I believe that was going to happen, and that's why I founded the M&A department at Lehman, so we'd have a specialized group that could deal with companies. And that all came to fruition, and that was really accelerated in the '80s by Mike Milken in the Milken years.

Eric Gleacher: (34:18)
And the section in the book that talks about the big deals during that period, I put that in there because it's never really been published, the inside story about those deals I think is pretty interesting. And that was a period in American business that had a big effect that goes forward today. And so the M&A business evolved for the basic reasons, I believe, that I said to you that I saw at the beginning, that businessmen want to succeed and they're going to do whatever it takes.

John Darsie: (34:53)
Right. And we talked about culture at the different firms that you worked at earlier. You talked about Lehman, it was sort of the eat what you kill type of environment, but there was maybe a little bit more diversity of people. At Morgan Stanley it was more homogeneous but a more team collaborative environment. If you were to design a culture from scratch for an organization what elements of each of those cultures and other places that you worked or observed, what's that culture that you would look to create?

Eric Gleacher: (35:22)
Well, that's why we had Gleacher & Company. We had this culture, first of all, everybody, when I say everybody, everybody that was with any kind of seniority at Gleacher & Company owned some equity. My secretary owned 1% of the firm. She's still my assistant after 40 years. But everybody did. Not a brand new associate, not an analyst, but a guy who was a vice president above everybody had equity, because that's what I wanted when I started.

Eric Gleacher: (35:59)
I figured I didn't know much about investment banking, but I figured you wanted to own equity, you wanted to be a partner, you want to wake up in the morning and it was your business. So everybody had equity. We had an eclectic group, not a homogeneous group. I didn't think that the homogeneity was necessary to have a teamwork culture. But we had an eclectic group. They were equity owners.

Eric Gleacher: (36:27)
And there's not a single guy that didn't tell me how much different this was than working for a big firm, how great it was to come into work and know it's your business. And that's the way it worked. And it was highly successful. The hardest part, I will say this for me and for any of these boutiques, is succession. It's very tough. And you'll see. Some people have done it right, they've changed their business, but it's really tough. But to have that kind of culture where people own equity, I think, is really critical.

Eric Gleacher: (37:04)
And one of the funniest quotes, Steve Schwarzman and Bruce Wasserstein and I were having a drink one night at a party at Wasserstein's house. And I love Bruce, and he said, "I really like you guys." He says, "I don't understand why everybody hates everybody else at Lehman." And Schwarzman, without hesitation, said, "Bruce, if you were there we'd hate you too." And that was a very perceptive comment about the culture at Lehman. So, you want to have diversity, you want to have women succeeding and so forth, but you don't have to have homogeneity.

John Darsie: (37:48)
Right. And I think a credit to your career is how many people that you helped achieve success on their own terms and inspired them to be great. I want to talk about, before we wrap up with some quick hitter questions, you decided to write this book early in the pandemic, from what I understand, your son helped you edit the manuscript, could you just talk about the process of writing and taking all that life experience and putting it into these pages and really pouring yourself into that project that you wanted to do before you started winding down your career?

Eric Gleacher: (38:21)
Well, I certainly was apprehensive because I had never done anything like that. But I had given lots of talks, at business schools particularly, but elsewhere too. And at the end of whether it was teaching a case or talking about RJR Nabisco or whatever it was, the question was, what did you do to succeed and what do I have to do to succeed? And it's the obvious question. People always ask that. And I thought that I had some interesting things to say and in a narrative.

Eric Gleacher: (38:57)
Some people might get some value out of it. And the books that I always like to read are books like Shoe Dog, Elon Musk biography, which tells what he did. And I'm not comparing what I did to those guys at all, I mean, don't get me wrong. But I think that narratives about business and a person's life and the moves they made, the choices they made, when you say what did you do to succeed, that's the answer. And in a narrative I think a narrative is way more effective than a professorial book based on some kind of research. So that's one of the reasons I wanted to write this book.

Eric Gleacher: (39:38)
So what I did, and my son taught me, he's published four novels and written a movie, and he said he's got to discipline himself, that he cleans his house on Thursday morning and does his laundry and whatever. He said, "You've got to have a schedule."

Eric Gleacher: (39:59)
So I made up my schedule, and that was every day I had to take out my laptop, open it up, and I had to write something. I didn't cure if it was one sentence, I had to write something. And I got into it, and I just... it all came out of me, just poured out of me. I didn't have any notes, I don't have any diaries, but fortunately my long term memory is still pretty good, not my short term memory, my long term memory is good. And I could write this.

Eric Gleacher: (40:27)
And then, of course, with Google search you can do all the facts checking. Anyway, it just poured out of me and then I edited it with Jimmy and we had a ball. And then I found that the editing took as much time as the writing. So it was a good experience for me. It was like a bonus experience. I was so happy I did it.

John Darsie: (40:49)
Yeah. My wife's grandfather is also a great golfer, around your age, routinely shoots his age, he can recall every shot he hit in a member guest or a club championship from the age of 14 to 60, but he can't remember what his wife told him about an hour prior.

Eric Gleacher: (41:09)
Well, that's par for the course.

John Darsie: (41:11)
Yeah, exactly. No pun intended. I want to finish with a couple fun ones related to golf because, yeah, I'm a lover of golf as well, not nearly at the level that you are, but I'm at least in sort of mid single digits. But, what's the best round you ever shot, doesn't have to be score, but where was it, when was it, and what were the circumstances?

Eric Gleacher: (41:34)
Well, that's a question I haven't ever... People ask me what my favorite hole is or whatever, I never have an answer for them.

John Darsie: (41:42)
We'll get to that.

Eric Gleacher: (41:47)
I don't know. I don't have one that sticks out.

John Darsie: (41:52)
No problem.

Eric Gleacher: (41:52)
I hate to give you a non answer, but I really don't have one.

John Darsie: (41:58)
No problem.

Eric Gleacher: (41:59)
I've had a lot of good ones, but there's not one that jumps out.

John Darsie: (42:03)
All right. There's no club championship where you shot 64 and stuffed it in somebody's face?

Eric Gleacher: (42:09)
No.

John Darsie: (42:12)
No problem.

Eric Gleacher: (42:14)
I mean, I've won a lot of them. They're all match play. John, I hate to disappoint you really. That's not the way my mind works with respect to golf.

John Darsie: (42:25)
There you go. Well, what's your favorite hole and/or your favorite golf course?

Eric Gleacher: (42:29)
Well, I have three favorite courses. I get this question a lot. One is the National Golf Links out here, one is Seminole down in Florida, and one is Muirfield in Scotland. Those are my favorite courses.

Eric Gleacher: (42:45)
I will say this, that I did have one experience which was one of the things that Nick Faldo thought it was one of the coolest things he ever heard. I took three of my friends to Muirfield in Scotland, and the daylight over there in summer months is pretty phenomenal because you're way, way up north. And it's light until close to 10:30 at night. So we played 72 holes in one day. We played the British Open in one day. And he won the British Open at Muirfield. So he's very, very partial to it. And he thought it was pretty cool.

Eric Gleacher: (43:27)
And I will say that we had a lot of bets. It was very painful. If somebody quit they had to pay a lot of money to the other three. Nobody quit. But anyway, I shot 69 the fourth round. And that one I do remember. It wasn't a meaningful tournament or anything, but it was a pretty cool experience.

John Darsie: (43:50)
There you go. That sounds like a heck of a day. How many holes in one did you have?

Eric Gleacher: (43:54)
Eight.

John Darsie: (43:55)
Eight? Wow. That's pretty good. There's a lot of guys on tour that don't have eight.

Eric Gleacher: (43:59)
If you play from age 12 to age 81 you get a lot of shots at it.

John Darsie: (44:04)
There you go. Well, Eric, we'll let you go there. It's been a pleasure to have you on. You're an absolute legend, both on Wall Street, in the golf world, and just among your friends. Everybody speaks so highly of you. And Anthony, obviously, has a lot more mutual friends than me, but every time we come across somebody and your name comes up they speak in glowing terms. So, it's an honor to have you on. Anthony, you have a final word for Eric before we let him go?

Anthony Scaramucci: (44:29)
Listen, I mean, among everything, Eric, I just think the way you help the younger people in your career, and you talk about repeat, I hope by and I hope John can pay that forward to a continual stream of people that come into our industry. I often think about that in terms of our summer program and how we can help people that are coming up underneath us, and you were a shining example of that, so I just want to thank you for that.

Eric Gleacher: (44:58)
Well, I want to thank you guys very much for inviting me. You've got a terrific business. I love the SALT portfolio that I looked at, and I know SkyBridge is doing well, and I look forward to meeting you both. My wife and I are still hoping we can go to Scotland for a month in September, but if we don't go I will definitely come to the Javits Center when you guys are doing that.

Anthony Scaramucci: (45:25)
We'd love to have you there. We find a lot of stuff. It's the unfortunate 20th anniversary of the 9/11 tragedy and Jimmy Dunn has agreed to be one of our keynote speakers to talk with us there. So, of course, it would be a big honor for us to have you, sir.

Eric Gleacher: (45:46)
Well, great. Yeah. Now, I need to figure out if I'm going to buy some Bitcoin or not, so anyway.

Anthony Scaramucci: (45:52)
But we got Byron on the bandwagon, okay, he listens to our Wednesday Bitcoin review. And so, as he says, he's a lot younger than Warren Buffett, so I don't think he thinks [inaudible 00:46:03] he's a junior kid compared to Warren.

Eric Gleacher: (46:07)
Yeah. Well, you guys are great, so thanks a lot. I've enjoyed this, and maybe I'll see you in September. If not I'll create some time.

Anthony Scaramucci: (46:16)
And honestly, I hope you go get to play golf, because that's your dream stuff, but maybe October, but if it is September we would love to have you. If you can't make it to Scotland we would love to have you.

Eric Gleacher: (46:25)
Right. Okay.

John Darsie: (46:27)
Eric, thanks again for joining us. Again, everyone, the book is Risk. Reward. Repeat.: How I Succeeded and You Can Too, a fantastic book talking about Eric's career and all the lessons embedded in that career that was so filled with integrity and empowering other people, as Anthony mentioned. But, thanks also for tuning into today's SALT talk with Eric. We love spreading the word about inspiring entrepreneurs like him.

John Darsie: (46:52)
And just a reminder, if you missed any part of this talk or any of our previous SALT Talks you can access them all on our website at salt.org\talks, or on our YouTube channel, which is called SALT Tube. We're also on social media. Twitter is where we're most active at Salt Conference. But we're also on LinkedIn, Instagram, and Facebook as well and ramping up our activity there. But on behalf of Anthony and the entire SALT team, this is John Darsie signing off from SALT Talks for today. We hope to see you back here again soon.

Valerie Mosley: Financial Wellness | SALT Talks #216

“I’m very interested in compounding compassion and compounding interest. If you widen your lens just a little, then you’ll learn things like the median cost for a payday loan, at a time when interest rates are zero, is 391%. That’s unconscionable.”

Valerie Mosley created Valmo Ventures to advise and invest in companies that add value to both investors and society. She recently founded BrightUp, a FinTech company focused on democratizing wealth building and wellbeing. Mosley sits on several boards including Eaton Vance’s family of mutual funds, DraftKings, Groupon and Envestnet. Previously, she was an SVP, partner, portfolio manager and investment strategist at Wellington Management Company, a $1 trillion money management firm. Mosley was named UK’s Powerlist International Person of the Year 2017, and one of the 50 Most Powerful Women in Business and one of the Top 75 African Americans on Wall Street by Black Enterprise Magazine.

Valerie Mosley has always sought to bring people together in order to share different perspectives and build understanding. As a freshman at Duke University in the 1970s, she put together talks on race relations after learning she was the first black person many of her white classmates had met. She left a successful career at Wellington Management Company to pursue a more impact-oriented career focused on wealth building and wellbeing. Mosley cites the stagnation of wages among the bottom 80% of earners and its negative effect in the face of rapidly rising costs in health care, housing and education. Teaching financial literacy to the underserved is designed to have a compounding effect on both wealth and quality of life.

LISTEN AND SUBSCRIBE

SPEAKER

Val Mosley.jpeg

Valerie Mosley

Founder & CEO

Valmo Ventures

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

TIMESTAMPS

0:00 - Intro

3:25 - Leading race relations groups as a college freshman

7:13 - Importance of financial education in bettering society

17:36 - Democratizing wealth and well-being amid growing inequality

24:45 - Wealth disparities between white and black families

31:40 - Policy lessons learned and shifting generational trends

43:05 - Investing trends around technology, crypto and ESG

EPISODE TRANSCRIPT

John Darcie: (00:07)
Hello everyone. And welcome back to salt talks. My name is John Darcie. I'm the managing director of salt, which is a global thought leadership forum and networking platform at the intersection of finance technology and public policy. Salt talks are a digital interview series with leading investors, creators, and thinkers. And our goal on these salt talks the same as our goal at our salt conferences, which is to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. And we're very excited today to welcome a great investor who is investing in a lot of those big ideas that we love to focus on here at salt and that's Valerie Mosley. Uh, Val created Velma ventures to advise and invest in companies that add value, both to investors and to society.

John Darcie: (00:56)
She also recently founded bright up, which is a FinTech company focused on democratizing wealth building and wellbeing. She currently serves on several boards, including Eaton. Vance has family of mutual funds, DraftKings, Groupon, and invest net. Uh, previously she was a senior vice president partner portfolio manager and investment strategist at Wellington management company, which if you're not familiar and you're in the industry, there are about a $1 trillion global money management firm. Uh, Val is also on the board of new profit, which is a philanthropic, uh, venture capital firm. Valerie was named UK is powerless international person of the year in 2017 and also one of the 50 most powerful women in business. And one of the top 75 African Americans on wall street by black enterprise magazine hosting, today's talk is Anthony Scaramucci. He was the founder and managing partner of SkyBridge capital, which is a global alternative investment firm. Anthony is also the chairman of salt. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (01:59)
Well, Valerie, it is great to have you on we very much so appreciated. And so what John didn't say is that we get ratings on smalltalk talk because of him. So that was, he was tried as it was, it was a subtle undercurrent of that's totally fine, but you are a contemporary of mine. I'm counting on you to have a two on one sort of combated relationship here during this salt talk. But before we get there, tell me something that we wouldn't know about Val Mosley. If we didn't, you know, let's say you've got everything you can think of on Google Wikipedia. What would we not know about Val Mosley? It's the old fashioned question away from social media now,

Valerie Mosley: (02:44)
Right? I'm a lover of life. I'm, I'm a grateful giver. I'm the youngest of four from Tuskegee, Alabama. I lived in Germany. I studied Kenya. I lived in a dung hut. I taught financial literacy and Roxbury and Dorchester. And, uh, I think those are some of the things and I love leading and giving. And so things that might not show up, I brought together when I was at duke university as a freshman conversations between white and black, because so many people told me I was the first black person that they had ever met. And so I decided to have this conversation, I put signs up everyone, race relations. And I did that when I was 18. That's not on the resume. I just like bringing people together to talk and have different views. What

Anthony Scaramucci: (03:51)
Did you learn from that? But you know, you know, so you're 18, you are working on race relations. And so what did you learn from that?

Valerie Mosley: (04:00)
I learned that everyone at the end of the day, once the same thing and they have different perspectives and the perspective is not necessarily fact, it's a narrative and it's important to make sure that we have conversations so that generalizations are taken away and people can connect with the person. So in the middle of this crazy talk, there was a gentleman who didn't really like the fact that I was having it. Do you know what he says? He happens to be, African-American happened to be from a rough part of town. This is a long time ago. He said something crazy. Like if I had a gun right now, I would shoot every white person in this large circle. I'm 18, I'm a freshmen. And I said, wow, you know what? It's probably, I'm glad you had the, you felt like you could share how you feel. It's good that you're able to share how you feel. It's also good that people know that not everyone that looks like him feels the same thing and vice versa. So it's like the markets, there's a bid in the ask and there are people it's like, the markets are politics, there are different views. And what we have to do is just keep our spirit and our ears open enough to be able to hear somebody's view and still be very centered in your own. And I was really surprised that we're still having these conversations today.

Anthony Scaramucci: (05:24)
You thought it was going to be better when you were a kid at 18. You're like, all right, there's some racial tension here, but you know, X number of years later, it's going to be a lot better. I didn't want to date. I didn't want to date you or I, because I'm lying to people about my age vows. I didn't want to date how far back that was. So, but

Valerie Mosley: (05:42)
It was a long time ago and you do look like a baby, but,

Anthony Scaramucci: (05:46)
Well, I mean, thanks. I want to just, firstly, thank my dermatologist and all the Botox injections that he's given me over the years. Yes, exactly. At

Valerie Mosley: (05:55)
That time, I didn't sense that there tension. It was just that somebody didn't know, they said that I was the only black person that they had met outside of their nanny. And I thought, wow, this is duke. This is a long time ago. This is 1970s, late seventies. Um, and I thought let's just get together and talk so we can get to know each other

Anthony Scaramucci: (06:15)
Worse today from those talks, race relations better or worse today.

Valerie Mosley: (06:21)
I think, I think better yet. Economically in some cases it's worse, but better. I would say better.

Anthony Scaramucci: (06:33)
Well, I mean, you know, we had Don lemon, he's a very good friend of mine on, uh, the CNN anchor. Uh, he feels it's better. Uh, and he wrote, he wrote a very fascinating best-selling book about it. Um, he said that in a weird way, Trump has exposed a lot of stuff that was going on and perhaps that could even make it better. Um, before I get into my other questions. So I want to go to Roxbury, Massachusetts, because that's the south side of Boston, primarily African American community. I went to Tufts, my roommate, Raul Silva, uh, was from Roxbury, Massachusetts. So I know a lot about Roxbury. How did you end up in Roxbury, Massachusetts?

Valerie Mosley: (07:14)
I believe that to whom much is given much is required. And I just feel like I've been so blessed in my life. And I realize that education is power. And you asked me earlier, what's different about me. What somebody would know is that the first part of my life, I grew up in inner city Philly until I was 12. And the second part, my father was in the service, uh, in the army. And when he came out of Vietnam and service as a major, he was given some stock options to become the head of security at the Franklin mint in Philadelphia. And those stock options went up in value and that gave him the opportunity to move his family of four with his wife to another area, which is still Philadelphia, but surrounded by grass instead of cement. And that exposure made all the difference in the world, um, to me, because it started planting seeds of what was possible.

Valerie Mosley: (08:09)
So I felt like I've been really blessed. I'm at Wellington, I'm a partner on Manny, but managing billions of dollars. Let me make sure that I share what I wish I had learned. And I met some teachers and they told me about their class. And so my son and I went over and just started teaching financial literacy. And we started showing, showing the power of compounding interest. How much could you make? Like literally somebody that's 16, you'll appreciate this. We're in Roxbury, we're in the class. I say, how much can you make during the summer? And I asked two different classes and they said, oh, we can. I said, and safe. They thought, um, $1,200 at the time. I said that a hundred dollars a month. Let's let's, let's, let's push this out a hundred dollars a month. Can you make $25 a week? You put that in the calculator at 16, a hundred dollars a month by the time.

Valerie Mosley: (08:59)
I mean, and by the time they would retire, I know it's a long time if they just did that. And they never changed that they would've saved roughly $80,000 and they would have made $725,000. And they're being able to see what was free. Money was really impactful. And suddenly they understood compounding. They understood convexity. They understood things that help them with their math. And so we, we worked with the federal reserve and started teaching the teachers how to teach the kids, the em, and money and the math behind the magic of growing money. And that's what brought me there. It was fun

Anthony Scaramucci: (09:38)
Since fat is fascinating. I always tell the kids about the magic penny. You know, remember that conversation. If I gave you a $10,000 a day for 30 days or a magic penny that doubles every day for 30 days, while you start out not doing so well. Well, you're you get $10.8 million at the end of the 30 days, if you have the penny, uh, which sort of reinforces it for kids. Yes. So let me go back to why leave Wellington, you have this fabulous career you're doing amazingly well there so wildly. Well, it didn't strike out on your own. That's a really,

Valerie Mosley: (10:12)
Really good question. I love Wellington. It's a phenomenal firm. It's has a it's it's a trillion dollar plus asset management firm. I still have a very good relationship there. I believe that to whom much is given, we talked about this before much is required. And, and, and I just felt like I loved what I was doing. I'm adding value to portfolios, but I, and for clients, but I felt like my wingspan was a little bigger and I wanted to add value to society and to life. And sometimes you, you can get put in a box in a farm. And I just, if you're an investor, you you're betting all day, you have a view and you take a bet and I just want it to bet on me. You live this life once. And there are other things that I felt like I can do, and I just wanted the time to do it and try it.

Valerie Mosley: (11:01)
And you know what happened? I had this conversation with my daughter and I said, you know what? I'm very spiritual. I said, my instincts have never led me wrong. And I said, in something tells me I'm supposed to leave. And I said, but I have three children. I'm a single mom. You guys are about to two were in college. You're about to go to college. And she says to me, in the morning, you trust your instincts either you trusted or you don't. And I just started laughing as I, she left to go onto to, uh, she was leaving to go to, to a high school. And I told her later that it's one thing. If you're walking across, I told her this too, if you're walking across, uh, uh, I said, let's say that we're at the, um, the grand canyon and you've got to walk across it on a rather narrow and you practice it all the time, but it's a narrow bore that you're walking past.

Valerie Mosley: (11:52)
And, and I said, and if you, if it's over the grand canyon, the risks are different. And so you have to have risk adjusted returns. And her Quip at the time was either you trust instincts. So you doubt mom. And I just felt like most people who are upset at the end of their life, there's a study that was done for people who are in their nineties and their eighties. What do they regret? They don't regret what they tried. They don't regret what they tried and failed. They regret what they never got to try. And I knew that there was some things inside of me that I just wanted to try, and I couldn't do it while I was at Wellington. And one of the things I wanted to do is to take my kids on this trip around the world at a time when they could at three and a half years apart. So the day after I left Wellington, Wellington, um, gifted part of it, I took them on this trip around the world because I want to, to expose them to things.

Anthony Scaramucci: (12:41)
What was the most fascinating place in the world that you traveled to with your kids? You get, you get high marks for Italy, by the way, I'm just going to point that out, but you don't necessarily say Italy, although you could name one of the grandkids, Anthony, you're just pointing that out as well. What, what was the, what was the best place?

Valerie Mosley: (13:04)
The middle east in general was just fascinating because we were in Jordan during Ramadan, we went to Israel. The tension in Israel was just incredible between the different groups and you can't read about it. We heard about Palestinian saying that they don't get water during the middle of the week, and we don't hear about that. And then we went to, um, uh, um, uh, a traditional, um, dinner on Friday and skipping the name. Um, we were in the, we went to a Hasidic Jews, families dinner, and the family members there didn't know what was happening either. So it was, for me, it was just fascinating to be in the small place like Israel, which was just beautiful, that those who were there felt very strongly about certain things, but they were unaware of what I was hearing from the workers who happened to be Palestinian around the rationing of the water.

Valerie Mosley: (14:05)
That was fascinating. Um, and Jordan, we went to the, uh, my friend was, uh, Stu Jones went to duke and he was the ambassador to Jordan. And we got to go to the refugee camps and see the technology where people were using the irises as a way of identifying who's who, so who should get funding or not. So the technology in the middle east, and we just loved, I just loved the pyramids. It's just a really fast, it's the only of their seven original wonders of the world that remain an order of magnitude. And so my kids in terms of structure, they enjoy that in terms of the people, um, they enjoyed, they, they enjoyed, I should ask them, they enjoy Trinidad and they enjoyed meeting people that knew each other from college at this dinner in Jordan. And that was sort of interesting to see how small the world can be. Um,

Anthony Scaramucci: (15:09)
Great it's great stuff. And the, you know, the Israelis, obviously a dispute that with the Palestinians, but the Palestinians, if you go into their territory, they have those big black water vessels on their rooftops to protect themselves because they are getting their municipal water from the, uh, the state of Israel. So I don't know, it's a hard, it's a hard issue. I'll tell you, I, you know, you would love to see these people get along because they're descendants of each other, you know, but it's the same thing with the, uh, blacks and whites. There's really only one human. There's really only one race. It's the human race. We, we have to try to figure out a way to do this. Yeah,

Valerie Mosley: (15:48)
It is. It is one race. And, and as someone, as you, as, as a, as an investor, right, there is a bid, there's an ask, there's a viewpoint that says, how do you value this? But everyone wants the same thing. So when we were driving around with this Christian, Palestinian, he was pointing out the green parts on the roof. And he says, this roof shows that that's suggests that they're getting water regularly. We don't get water regularly. And I said, that, can't be, I just thought that can't be. And then when we were in this very nice hotel, I decided to ask some of the workers and they said, yeah, it's true. And I was surprised by that. And then when I asked the people who were living in Israel, they didn't know. I found that just really fascinating. Um, it's a separate issue. It's complicated issue, it's a charged issue. Um, and I personally found that interesting, but my son studied in Spain and we got a chance to, and so instead of that goes to, and we got to meet with his mother and father and his family and some of the people he studied with. And that, that was a highlight as well.

Anthony Scaramucci: (16:53)
So you've got this social conscience, you've got this purpose in your life. You've obviously done amazingly well. And you're starting a company now called you've started it. Of course, you founded the company called bright up, which is aimed at democratizing wealth and building people's wellbeing. And you're also trying to bring financial wellness to underserved populations. So tell us about how it's going, tell us about your vision for this and how you're going to execute. Thank you very much.

Valerie Mosley: (17:27)
It's a B to B to C company again. Yes. Democratizing. Well, well building and wellbeing. What we know is that stress is the number one cause of the costs that companies have related outside of benefit costs. It's it's, it's it's stress-related and the number one source of stress is financially related. And one of the things that I did at Wellington is that I chaired the firms industry strategy group. And you can imagine that a long time ago, the high yield group was not talking to the small cap manager, even though there was a lot of information in the fixed income markets regarding credit default swaps, it wasn't altogether obvious or within the consideration of equity investors. And so post telecom debacle, when analysts were still saying by, at and T over sprint, the CEO and my boss said, you know what? I think we need an industry strategy group.

Valerie Mosley: (18:31)
And so we put this together and it was great where for the first time people who were investing in silos got together, and we decided to have a longer term view strategically thinking about what are headwinds that are facing some industries and tailwinds propelling others. So when I left, it did the same thing. And if you look at wealth, I think that there are a couple of challenges out there. We have, we have, uh, we have additional pandemics. Um, Anthony, I think it's, uh, low self-worth and low net worth. So I started peeling apart. What are some of the challenges around building the wealth? And it's pretty amazing that right now, 69% of all Americans struggle to make a thousand dollar unexpected expenditure, 69%. It's not a small issue. Then I started to look a little more closely, and I found out that if you look at the income growth, real wages over the long run, the top 20% of earners have had a healthy increase in income, the bottom 80%. So let's talk about what is underserved the bottom 80%, like both has been really quite marginal and

Anthony Scaramucci: (19:41)
I can think syrup, but why do you think that is though? Why is there an income differential and why, why have we seen one group growing and the other one stagnating,

Valerie Mosley: (19:53)
I think it has to do with information and access. And so I talked to you a little bit about my story and growing from, um, sort of a gang infested Philly to a space where you have more opportunity. There's more information, it's information, there's trust, there's education, there's the costs. And so let's, let's double click on that for a second. If the revenue is growing really rapidly for the top 20% of earners, and it's, um, I'll give you some numbers. The top 1% had a growth over the last 40 years of 345%. That's the top 0.1%. The top 1% real wage growth over the last 40 years has been 160%. The bottom 90% has grown 26% over the last 40% and real wages. Now that's using the regular CPI. If we look at the components of the CPI, the components of the CPI for, um, medical care is only 8.9%, but the medical care costs have grown over a hundred percent and since 2000.

Valerie Mosley: (21:01)
So if you were to take what people are experiencing, the medical costs, the housing costs and the educational costs, it's sword. So on a usage of justice basis, the earnings of the bottom 90% of Americans has actually been pretty mild at. And, and, and, and you asked me another question that something that you might not know, I'm the youngest of four. My brother was four years, excuse me, 10 years, my senior, Jamie Carlson Mosley called him Jamie. He loved me and I adored him. My sister is nine years. My senior, she went to Villanova while I'm at Wellington, doing quite well, just figuring out strategy stuff and investing in loving it. I learned that my brother is unbanked and I heard about the unbanked. He went to school and then he left for reasons unique to our family and, um, and his situation. And he struggled a bit financially and he's such a good person.

Valerie Mosley: (22:03)
So his current level of, well shouldn't define his worth or his worthiness to learn how to become more financially healthy. So I say, come on, Jamie, let's get banked. And he gets banked and he's so conscientious. He's so conscientious. And then he doesn't realize though that if his, if his income goes below a certain amount, they start charging fees. And so he had thought he had money in the bank, spent it not very much. I think it was $25. And he had an overdraw and that overdraw drawn fee was quite high. I think it was 30 or $35. He was devastated the whole weekend. He's like, ah, something's really wrong. I go downtown. And I find out that my children I'm at the bank, my three children are not nearly as conscientious. They're late teenagers. And their account was a tied to mine that they overdrew. And they were not nearly as conscientious. And I say, all my man, I've got to talk to my children. I'm telling my banker this. And she's like, no problem, click. And she erases it. And these fees, each one of them had some of them. And so the fees are approaching $200. She said, yes, female

Anthony Scaramucci: (23:08)
Adapt my children by the way, because I get hit with this, I would say twice a week. So when I drop them off, I'll drop off my adult children at your home later today, come on. Hopefully I'll have a wooden spoon in there somewhere where you're going to whack them. Exactly.

Valerie Mosley: (23:25)
I said, I'm going to talk to these kids. And she says, no problem. She wipes it out because I'm perceived as a profitable client. Right. And what happens is because the asset management, the wealth management industry, nothing's wrong with the wealth management industry, they get paid a percentage of the assets that they manage. So they focus on people who already have assets and the top 10% of asset owners, stocks, and bonds, um, own 84% of the, of those assets. And so naturally they're going to focus on those who have the assets. I get it

Anthony Scaramucci: (23:58)
Because I was saying this the other day, you know, I remember this when I was in school, I was at Harvard law school. I was like, you guys think you're that much smarter than the kids in my neighborhood. You're actually not. Okay. I've got buddies of mine putting in sheet rock and clamming out and oyster bay that are as smart as you. They just didn't have access to the same environment or through luck and trial and tribulation. They didn't end up like me dropping into that environment. Some of it was accidental. Some of it was providential, you know? So I, I agree with you widening the widening. The access is super important. Yeah.

Valerie Mosley: (24:33)
And access and information. And now technology is a game changer. So I'm on the board of Envestnet investments, a great firm. They, they, they fuel and support a third of the independent registered investment advisors. So the $4 trillion on the asset management platform. And I shared with the CEO, this, um, the color of wealth study by the Boston fed, what do you think the median wealth might be for white families in the Boston

Anthony Scaramucci: (25:04)
Net worth, but so, well, I would say 700,000 probably way off.

Valerie Mosley: (25:11)
Okay. But it's okay. It's a guess. Um, they over index and this is your, your, your response is common actually. Uh, because they over-index to national average. And when this report came out as 250,000. Okay. And that's higher than the national average, what do you, what do you think it might be? Is it, they did a study of, it's kind of rare. One, one in Boston, one in Los Angeles. What do you think the net worth would be for African-American families? Just to use it as an example?

Anthony Scaramucci: (25:44)
Well, you know, I'm going to say something and then it's probably going to reflect poorly on me for saying, but I think it's very low, probably 10,000 less. No.

Valerie Mosley: (25:51)
And actually you're in the right direction. So it doesn't reflect negatively on you. It's just an unfortunate fact. The answer was $8, $8. Okay. 250,000 to $8. And I didn't know that either. I said, you've got to be kidding me. Let me

Anthony Scaramucci: (26:06)
Just say something. It's very obvious to you and obvious to me. So that, that creates some anger. You know, I mean, we w I, you don't have to go to 16, 19 and go through the whole story of racial injustice in the United States for 400 years, you can just look at the current economic situation and look at the access and the information, and look at the, you know, the institutions that we've set up, that they benefit certain people that don't benefit other people. And that would create naturally some level of dissatisfaction. Is that fair to say

Valerie Mosley: (26:39)
A hundred percent. That's, it's fair to say. Um, and I think I'm pretty analytical. I like to think about, as you say, what causes these things, sometimes it's trust it's information, it's access to education. Um, and, but there's some things that are changing right now that leave me really optimistic. And again, everyone wants to be able to earn a livable wage and be able to take care of their families. And it's more challenging for some more than others. And one of the things that I'm really excited about, we talked about, um, right up, I believe that we can give more people access to wealth, building strategies, and so bright up as a platform that offers a suite of services and make it avail. And we make it available to communities and corporations. So B to B to C is, is, is, is, is, is really business to, to, to, to business corporations, but also organizations, because you want to trust people.

Valerie Mosley: (27:42)
And most people don't have access to investment advisors because of how the pricing structure works. And we think we can change that, bring in advisors, bring in fairly price capital, and bring in education and information. And so we're really excited about that. And you asked the question about the ROI, how does that benefit? The employer? One we think is going to help with turnover and that's lower turnover. There's the business round table where 183 companies said that they aren't going to operate just for the benefit of their shareholders. They care about stakeholders. And two of the five statements they're referenced their employees. If you care about your employees, all of your employees, why not bring them benefits that will help them on the financial side. They don't get a lot of support. You don't get, as you mentioned, you don't get financial literacy in school and you don't get financial support outside of school.

Valerie Mosley: (28:40)
For the most part, if you're in a certain wealth bracket, and I'm saying the bottom 80% of well, um, creators and earners, and, and one other thing I wanted to bring up to you, I don't know if you wanted to bring this up. I love studying the markets and where people and where you get the biggest returns is. If you can go do your app, your research, if you can go where others aren't. So Mike Milkin bless his soul was brilliant at the time. And I know some people have different views about Mike. I think he's a genius. In many ways, Mike Milken identified that there was an opportunity because banks wouldn't lend to companies that were re rated below triple B. So I did some research and discovered a $3 billion case study $3 billion in conjunction with a top five bank for lending, for credit.

Valerie Mosley: (29:38)
Um, for debt consolidation, corporations can reduce their debt, comfy countries reduce their costs of debt. Why can't individuals. We do so their cost of debt. And for many people, if they have any debt on their FICO scores, which is very unforgiving, you can't get access to fairly priced capital. So there's a company that put $3 billion to work in conjunction with a top five bank, $3 billion, 50% of those loans. The bank said no to 650 scores and below, no, we aren't going to lend to, but this, this, this algorithm, the analytics said that they could separate the willingness to pay from the ability to pay. And so that these guys were ranked crime, they went ahead and gave the loans. And the loan losses were less than 3%. That's exciting. This is for debt consolidation. So if you have somebody has 27% credit card debt, and you want to refinance it at 12%, you just free up a lot of capital. And the lenders, um, had less than 3% loss. So I think that that is a huge opportunity.

Anthony Scaramucci: (30:50)
All right. So you're going to disintermediate this space and you're going to help people that are under-banked or perhaps lopsided in the, in the credit card area. Um, I, uh, I have to turn it over to this erstwhile millennials shortly. So I want to ask you a boomer question if it's okay. Cause we're both baby boomers. Um, did we screw things up because you know, when you go back to what you said about yourself at 18, or when I was 18, I had this impression of us as a generation that we were going to make things better. When I look upon the society. Now, I think that the debt that we took on and the way the politicians over promise and overspent and the fracture that we have in our society, that we make things better as baby boomers, or we make things worse.

Valerie Mosley: (31:42)
That's an interesting question, Anthony. I think that we're imperfect beings. So there's some things we did well, and there's some things we didn't do so well, I look at John Dorsey

Anthony Scaramucci: (31:53)
When you're saying that, does he look imperfect to you look at John Dorsey with that shocking blonde hair and that big spot, does he look like perfect?

Valerie Mosley: (32:00)
He does not look perfect at all, but no, I think, I think that, um, we we've made some mistakes, but I don't think we mess it up. I don't think there's a lot that we get from blaming and instead the mirror image of a crisis as an opportunity. And so where we've missed up, we have the opportunity to learn. And, and, and that's what I'm excited about. I'm actually really optimistic. You mentioned, you mentioned Trump. One of my fellow partners said, you know what I think Trump is as, as is one of the best things that could have happened to this country.

Anthony Scaramucci: (32:36)
Well, Don and Don lemon believes that. Yeah. Tell us what

Valerie Mosley: (32:40)
Well, things that were hidden are now have now surfaced and, and in any process, it's, it starts with, let's just be honest with where we are.

Anthony Scaramucci: (32:55)
Yeah.

Valerie Mosley: (32:56)
We have insights on so many different levels about in the

Anthony Scaramucci: (32:59)
Past, you're given a pass to our generation. You're saying we're okay. We didn't, we didn't, you know, $27 trillion of debt, but it's no problem. And, you know, we have this wealth and income disparity in the country, which really started in the Reagan era and has been exacerbated over 40 years. Well, you're not, you're giving us a policy fast and you're giving us a

Valerie Mosley: (33:24)
No, I wouldn't say that. That's fair.

Anthony Scaramucci: (33:27)
All right. So tell me, tell me what is fair. I want to be fair. Okay.

Valerie Mosley: (33:34)
Um, I have a tendency and a bias to give people the benefit of the doubt in general. And so I think that people tend to react to their world. And if you were in your bubble, you are so unaware of what's happening elsewhere. And if you're unaware, you don't respond. So what I'm very interested in is compounding compassion and compounding interests and teaching other people to do that. But compound compassion, because if you widen your lens just a little bit, then you will see and learn that the median things like the median costs for a payday loan at a time when interest rates are zero is 391% that's unconscionable. And that's only if somebody pays it back in two weeks. And if they don't, it's 521%, that's the rate, the APR that people who need access to cash the most don't get it. And so if you widen the aperture and you see that, wow, 90% of Americans over the last 40 years, their wages that will wage both has only been 26%, but mine, because I'm in the top 1% has been a hundred.

Valerie Mosley: (34:44)
And you know, when you know that, then you're less likely to be judgmental and say, oh, they just didn't get it together. If you do the analytics and say, oh, but the cost of education is increasingly beyond their reach or the cost of healthcare and, and, and, and medical care costs is, is just exorbitant. There's a reason why this happened. So I think that we are often as strong as our weakest link. So it behooves all of us to pay attention to this broader challenge. Um, for sure. And so I believe that we can, and that my call out would be to anybody who has been successful and you've profited. Now we can go from profit to purpose. And what do you do to make a difference? And I don't think it's rocket science, we just need the minds and, and, and, and, and then, and, and the intelligence and, and will to make a difference for a broader swath of people. And by the way, the person, well, I have another view, but I'll stop there.

Anthony Scaramucci: (35:45)
No, listen, I think it's very, I think it's very well said, but you have another view, please share it. Um,

Valerie Mosley: (35:54)
The person who's struggling and the Appalachian mountains are struggling with some of the same thing as individuals that might be in inner city that are struggling at the end of the day, they need to have an income that's livable, and they want to provide for their families. Now there's some other things that are going on that might give people advantages, but I believe that your current level of wealth does not define and determine your worth or your worthiness to become more financially healthy. And I think that the capital markets can really offer, um, some results. For example, if we find some creative ways, I used to buy these structures where there's a first loss. So if there's catalytic capital and there's foundation dollars, just put up a first loss of 5% or 10% against fairly priced loans. So the capital markets can come in and offer attractive returns and an environment where yields are so low, globally in a space where ESG trends are increasing at a time where there aren't very many impactful, attractive returns being offered in the fixed income space. So I think we can create win-win win solutions using catalytic and competitive capital.

Anthony Scaramucci: (37:16)
All of a sudden, I, I, I, not only do I agree with you, the other thing that often offends me is when people tell me, well, the people that are looking for jobs cause they were getting welfare. And so therefore it's more cost-effective to stay at home. There might be a fraction of those people. I'm not suggesting otherwise we have millions of people in our society, but I grew up in a blue collar neighborhood. People, my neighbor wanted to work, they got the work. And so when I hear somebody giving me that nonsense spiel, that's usually someone that has a platinum spoon in their mouth that never had an hourly job or w or live with people that had hourly wages. So, uh, but I doing, and I, and I agree with you. I get to turn it over to John and let him, let him ask some questions. There is sitting there looking perfect, but they have, and everything you can see it says, Val called you perfect. You know, that's going to bother me after this salt dog is over. Okay. You know that, you know,

Valerie Mosley: (38:10)
Thank you, Anthony. And, and one other thing that we talked about, so you grew up in a blue collar collar area. My, my sister is a nurse. She went to Villanova. She goes to get a car and I say, oh, what's your interest rate? And he said, it's a three year used car, 13%, 13%. Are you kidding me at a time? I get on the phone. I say, triple C rated companies don't have returns. Aren't getting offers like this. Like the next day he comes back to her and says, oh, we'll do it at 9%. So we need more people that are advocating for hardworking Americans. I believe.

Anthony Scaramucci: (38:44)
Well, 9% is still high for that low.

Valerie Mosley: (38:47)
It's still high, especially

Anthony Scaramucci: (38:49)
When they've got the security of the car. And they've probably got a personal guarantee from your cyst. Who's got a, who's got a full-time job, but this is the reason why a lot of these neobanks are working. Why SkyBridge, frankly, as an investor and a lot of these banks, because they're going to, dis-intermediate all that nonsense. You're going to help them do it. But go ahead, Darcie. I know you're dying. Ask the questions here, go ahead. Look at those teeth coming. Now, go ahead. Doors, fire away.

John Darcie: (39:14)
We'll since you're so focused on the generational aspects, Anthony, I'll start there. You talked about your brother, the differences in terms of the way he views the financial system versus your kids. Potentially. What differences do you observe generationally and what trends are you seeing among younger people and the way they think about financial wellbeing, that might be different from an older generation.

Valerie Mosley: (39:36)
Wow. Oh, that's a really good question. And so many different ways. One, um, I love this younger generation. They still don't trust. They don't trust the larger, um, financial institutions. Uh, crypto is leveling playing fields. We haven't even talked about crypto, but I believe that the younger generation is willing to take more risks. And I love that. And I believe that there are calculated risk. I think that the younger generations, they care a lot about what matters and, and they're less likely to want to walk the straight line and say, I'm going to do what I was told to do. But they think outside of the line and they're independent thinkers and say, no, I don't want to do that. My daughter, my daughter wants said, mom, I don't, this guy said I work so that I can live. Who wants to do that? Why don't you live?

Valerie Mosley: (40:35)
So you can work at something you really love. So this notion that why don't you try to find something that you enjoy and how do you give back, comes up over and over and over again. And naturally you have, I mean, I, I came in the, but anyway, this younger generation, I find one, they, um, they're more open. They've seen more things. Think about the, you asked the question earlier, Anthony did that, did our generation get it completely wrong? We were just closed and very narrow, like the number of gay and lesbian acceptance conversations that happen with the millennials. Centene seems to be much greater than they happened during our day. The millennials are much more diverse and they're a much more accepting of interracial marriages. Thank God,

Anthony Scaramucci: (41:30)
Thank God for that.

Valerie Mosley: (41:31)
Exactly. Then we just, then we have they care and they want to buy from companies that are doing things that, um, the right way, they care about the environment. They're a force to be reckoned with even something like tattoos. I'm not a fan just to be clear of tattoos, but if you are going to work with the younger generation, you have to keep your mind open because the majority have, or will have something on their body. So

John Darcie: (42:05)
I'll try to return expectations. Val, I want to dig into that a little bit more. So there's, there's all kinds of memes that go around on social media about, you know, investment returns and millennials and gen Z. You know, there's these, these massive price appreciation events that are taking place within cryptocurrencies, within technology companies, FinTech companies, a lot of different sectors. And it's almost like this, this old way of investing, uh, and even index investing that was in Vogue, you know, for a lot of the two thousands, um, seems to be going out the window because people are chasing these massive returns, you know, because maybe largely an environment created by easy money, low interest rates. Do you think, you know, first of all, what do you think return expectations for investors should be going forward? And do you think this era of outsized returns among technology stocks among cryptocurrencies and other speculative assets, do you think that will continue for a longer period of time? Or do you think maybe that younger generation is in for a expensive education here at some point?

Valerie Mosley: (43:05)
That's a very good question for one. I think that, um, I think that the stock market is overvalued and we're going to see a major correction. So if millennials, can we

Anthony Scaramucci: (43:15)
Record this and every time I ask a question, can you say it's a very good question.

Valerie Mosley: (43:20)
Yes, we can do that. Yeah, absolutely. Keep

Anthony Scaramucci: (43:22)
Going. And that's okay. It's just part of the job, Darcie Anthony Scaramucci comedy act. Okay. Keep going. I'm sorry.

Valerie Mosley: (43:29)
Um, yes, equity. I think that equity valuations are extended. Let's think about the, the basic asset classes. Bonds have come down so low. It's not a great place to be. And going forward, the returns are likely to be negative. Stocks are overvalued. There's going to be a correction. I do believe that the economy is going to get a big boost. So there may be a near term rally, but we're going to have some changes in the tax. This is my philosophy. We're going to have changes in the tax law. That's going to weigh heavily on, excuse me, the earnings. And as earnings go, prices typically go. And so I think we're going to have a correction. The multiples are still quite high. Interest rates are going higher. So we're going to have a correction. Crypto markets is still quite nascent and corporations are starting to move into the crypto world.

Valerie Mosley: (44:30)
I think as assets go, that's going to be a really attractive one. I think real estate is going to continue to be attractive. One outside of the commercial because many companies are we thinking who's going to come back and do we really need this space? And so what I think is really interesting and I'm excited about than the younger generation is that they're curious, and they're getting involved with investments and in the crypto world, I E Ethereum and Bitcoin, it gives much more access to people who would not ordinarily have access to have some upside. And I happen to believe that it's not just an, um, a gamble. I think that there's going to, I think that both will have some legs. It's

John Darcie: (45:17)
Literally taking the crypto a little bit more. You think that there's, there's upside to be had in Bitcoin and Ethereum are the two sort of bellwether, uh, players. Now in the crypto world, you have a lot of speculative crypto assets that are also performing well, uh, at various times around them. Uh, but you think this is part of a larger movement. Why do you think this is part of a larger movement? And, and, you know, let's say five or 10 years down the road, do you think we're going to see a major disintermediation of the entire financial system and the traditional banking system? I don't think it will.

Valerie Mosley: (45:47)
I don't think it will be a major disintermediation. I think that, I think that it is a significant force that people are ignoring and not taking the time to learn. And yet millennials and more diverse communities are paying attention to it's, it's, it's sort of like a freedom project for some, um, again, because it's global because, uh, um, because it's easy to get access to, you don't have to have a certain income level to be able to invest and to get outsize returns. It's getting attention. I do think that there's going to be a correction there as well. It does every so often there's going to be a sell off and that sell off, I think is an opportunity to buy. I do believe that, um, Bitcoin has, um, legs and I think it's DRM and polka dot and other, uh, the other other platforms where you can build on some functionality has a place in our investment world and we'll have a place in, um, um, in practical use. It's actually pretty fascinating. Well,

John Darcie: (46:51)
You've obviously done your homework on the crypto space, uh, talking about a few of those protocols and projects, um, that we're very interested in this space, as well as you may know, of having invested a significant amount of amount of money in a Bitcoin, uh, w with potentially other projects in the pipeline that I can't talk in a more concrete way about, uh, I'll

Valerie Mosley: (47:09)
Name, a few that you should probably pay attention to rally, I think is really fascinating because of the way that it empowers the creators. I think Falcon X is really sweet because Falcon X is giving the institutional answer to Coinbase. And it's just a matter of time before more start to pay attention to it. Yep. I know of some, yeah, I, I do think that there is a world in crypto. And if you think about the fact that there's been so much money supply, sometimes I hear people talk about the money supply and the fact that we put a lot of money into the, into the economy. And therefore we're going to have inflation that didn't happen during the financial crisis. So money, uh, money coming into the system does not necessarily translate into inflation. You've got to have the demand, you've got people who want to spend, and I think that that's going to happen now. So when you think about inflation and you think about where the stock market is, and you think about where the bond market is right now, you aren't likely to get very attractive, real returns in stocks or bonds, but I do think you'll get it in this store of value of Bitcoin. And I do think that real estate residential real estate will continue to rally. So that's why I liked that as an asset class. And what I love about the younger generation is that they're open to learning about and, uh, supporting

John Darcie: (48:32)
All right value. You're an enlightened boomer that that's great to have, uh, you know, people like you on the show. Cause again, we're, we're very sort of bullish on the asset class. Uh, last question. It's, it's another question about macro investment trends. So you're a professional investor with one of the most famous and, and high-performing groups, Wellington on the planet. And so you've obviously in addition to all the, all the work you're doing, sort of on the impact side, you're, you're trained as an investor. What other macro investment trends you talked about, the fact that you think the stock market at large is somewhat overvalued, but are there any other investment trends outside of crypto that you're particularly bullish on? For example, you know, we also really liked the FinTech sector more generally outside of even crypto. We've invested in some Neo banking businesses, as Anthony mentioned, like a chime, um, that's, that's creating a better experience for, especially if people are on the, on the lower income threshold, uh, we've invested in Klarna, which is in the buy now pay later space, which is re-imagining credit in a way that's less destructive for the average consumer.

John Darcie: (49:35)
Uh, we've also, uh, very bullish on the life sciences sector and, uh, raising a fund to invest in early stage, uh, sort of pre programmable biology is the general theme. But what areas of the market from a macro perspective are you most bullish on,

Valerie Mosley: (49:48)
I love the FinTech space, which is why I'm going into it. You guys should invest in us after we go for our next round. We had a, um, yeah, we were oversubscribed, um, for our seed round. So we'll come back to you when we execute. Um, um, I think AI is going to be pretty interesting. Um, the, if you talk to technologists, uh, the CEOs of companies they've talked about it, but they haven't done anything. It's only about a third of companies that have talked about it, have actually put it into practice. And so I think being thoughtful about, um, how that AI is used from a customer engagement perspective is sort of interesting. Um, I think that, I think that you don't do a lot in the real estate space, but I do think that there's a lot of, I think there's a lot going to happen there and in the creative real estate.

Valerie Mosley: (50:45)
So this is a little early, but, um, I think that 3d printing is going to be a really fascinating area because some housing costs have gotten too crazy and there's some creative ways to create green structures that are also affordable. Um, other broader trends. I think that what's, what's, what's, what's driven the stock market recently is we're going to see a shift from tech to value within the space. Um, longer-term macro trends. I think you're in it. It's it's for me, it's FinTech, it's ESG. So he takes something like a Bombus people care about the fact that the socks that you buy a sock and it's going to go to a homeless, then it's going to be underwear and then it's going to be other. And so because women and millennials care about companies that are compassionate, they care about companies that are going to help the green space or help with social SDG and E S and G I think is going to be all the rage going forward in terms of broader trends.

Valerie Mosley: (52:08)
One of the things that we did at Wellington is identify the greening of America long before this happened. We called out the fact that the auto sector was likely to implode because the world was getting increasingly flat and no one was paying attention to the OPEB liabilities. I think that's a huge trend. I think that, um, this wealth inequality is going to show up in a lot of places, which is why the FinTech, these FinTech neobanks are, are thriving because millennials and others were thinking about, I don't want to do things the old way and I want to try to invest. So I love that space. Um, another really space that I'm really excited about is, is, uh, cyber cyber security from a macro space. There's a, there's a, there's a technology out there called quantum, um, physics where the keys on the end of the, um, lock on the end of the chains instead of being math based so that it can be tackled by quantum computing, that it can be protected using physics. And I find that really fascinating. So there's going to be a real need for the crypto space. So who's out there. Who's innovating, I think is, is, is important. Well,

John Darcie: (53:26)
Val, it's been an absolute pleasure to have you on salt talks. Anthony, I want to kick it to you. If you have a final word for, for Val before

Anthony Scaramucci: (53:32)
We let her go. I think it was, I think it was fabulous. It's uh, it's, uh, I hope we get you to our conference, Val, and I hope we can, uh, hang out together when the pandemic ends. I really enjoyed it and I wish you a great success in what you're working on. Hopefully John and I and the SkyBridge team and the Saul team will find ways to help.

Valerie Mosley: (53:51)
Yeah, that's great. I love what you're doing and you know, what else I like, I like that you admit your mistakes

Anthony Scaramucci: (53:58)
Well would be, you don't have enough time for my mistakes. Okay.

Valerie Mosley: (54:02)
Nope. I heard you on clubhouse. Oh, that's the other thing I would say another trend that I didn't mention is that the two really important trends is that create a platform where you allow creators to earn money. So what's great about clubhouse is that I heard you on clubhouse. You were great, actually, you were great. You know, what made you great is that you are authentic and you were being honest about your mistakes. Um, not only with Trump, but your mistakes in life and, and, and, and, and then with your, with your marriage and your relationships, and what really matters at the end of the day, individuals matter and how you behave matters and being self-aware and saying I'm wrong. Or I made a mistake, or I have the view, but just being authentically you is a beautiful thing. And so I'd love to go to the conference as well. And I just want to say, listen, I,

Anthony Scaramucci: (54:51)
I try to do that. And, you know, as John could tell you, I went through a very rough spot. Uh, but without that kind of level of knowledge and not authenticity, you're not getting through it. So that's, that's my message. As a younger people. Now I know, I know you're like that as well. I

Valerie Mosley: (55:07)
Am. And the other thing that I didn't say, one thing I love about the millennials, I think millennials are more willing to be just open. Like we were like close, we didn't acknowledge, oh, I've got an issue here. Mental health is a big issue. This is mental health month. That's a trend, that's a trend invest in companies that are going to help more people acknowledge that they struggled. And then, and how do they get to the other side? I like what we're doing. And we're trying to bring the financial planners together with the users like Uber, rising financial wellness. Um, I like that. And I think that's, excuse me.

Anthony Scaramucci: (55:41)
No, I think it's brilliant. I think it's brilliant.

Valerie Mosley: (55:45)
And, and just because, and that's the other thing, it just, because I, I just think that we have to move forward with this notion that just because people have a different view doesn't mean they aren't good people. They just have a different view and the more confident we are and who we are, we can say, I get it. You are whatever label you want to put on it. That's your view. It doesn't mean that you're a bad person. We just have to learn and be compassionate with yourself along the way.

Anthony Scaramucci: (56:10)
Totally. With you on that. All right. Well, we'll see you soon. Thank you again. And thank

John Darcie: (56:15)
You everybody for tuning in to today's salt. Talk with Valerie Mosley. Just a reminder. If you missed any part of this talk or any of our previous salt talks, you can access them on our website. It's salt.org backslash talks or on our YouTube channel, which is called salt tube. We're also on social media. Twitter is where we're most active at salt conference, but we're also on LinkedIn, Instagram, and Facebook as well. And please spread the word about these salt talks. We love, especially when we focus on these concepts around impact investing FinTech in ways that we can create greater equity in our society, uh, through technology and through, uh, deployment of capital. We love educating people on those subjects, uh, but on behalf of Anthony and the entire salt team, this is John Darcie signing off from salt talks for today. We hope to see you back here against them.

Scott Sperling: Middle Market Growth | SALT Talks #213

“The need to increase productivity, allow employees to see their compensation levels rise and also to be able to produce products at prices that do not create significant inflation can only be solved with increasing automation.”

Scott M. Sperling is the co-CEO of Thomas H. Lee Partners, a private equity firm specializing in middle market growth companies. His current and past directorships include Thermo Fisher Scientific, Madison Square Garden Company, iHeartMedia, Wyndham Hotels and many others. Sperling is also chairman of Mass General Brigham, the Parent of the Harvard teaching hospitals, Massachusetts General Hospital and Brigham & Women’s Hospital.

Sperling discusses the shift away from investments in consumer retail and towards technology companies focused on automation. He explains how automation is necessary in driving efficiency and increasing workers’ wages while also keeping product prices low in the face of inflation concerns. Sperling discusses the major growth opportunities in healthcare, biotech and pharma. He explains the role scientific breakthroughs like genetic sequencing and mRNA technology will play in tackling some of the world’s most devastating diseases.

LISTEN AND SUBSCRIBE

SPEAKER

Scott M. Sperling.jpeg

Scott Sperling

Co-Chief Executive Officer

Thomas H. Lee Partners

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darcie: (00:07)
Hello everyone. And welcome back to salt talks. My name is John Darcie. I'm the managing director of salt, which is a global thought leadership forum and networking platform at the intersection of finance technology and public policy. Salt talks are a digital interview series with leading investors, creators, and thinkers. And our goal on these salt talks the same as our goal at our salt conferences, which we're excited to resume here in September of 2021 in our home city of New York. Uh, but our goal at the conferences and on these talks is to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. And we're very excited today to welcome Scott Sperling to salt talks. Uh, Scott is the co CEO of Thomas H. Lee partners and a member of the firm's management and investment committees.

John Darcie: (00:55)
Uh, Mr. Sperling's current and prior directorships include Thermo Fisher scientific Corp, uh, the Madison square garden company, Experian Warner music group huffed and Mifflin Univision communications, iHeart media, the learning company, Wyndham hotels, and many, many more private companies prior to joining Thomas H. Lee partners. Mr. Sperling was a managing partner and of the affiliate of Harvard management company that managed all alternative asset classes for Harvard university's endowment fund. Uh, he is the chairman of mass general Brigham the parent of the Harvard teaching hospitals, uh, Massachusetts general hospital and Brigham and women's hospital, as well as a number of leading specialty and community hospitals and physicians practice groups. Uh, he's a chairman emeritus of the city center for performing arts and Wang theater is also a member of each of Harvard business school, board of Dean's advisors. Um, uh, the Harvard university committee on university resources and the Harvard business school's rock center for entrepreneurship. He holds an MBA from Harvard business school and a bachelor's degree from Purdue university and hosting today's talk is Anthony Scaramucci. Who's the founder and managing partner of SkyBridge capital, which is a global alternative investment firm. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:12)
Well, first of all, it's a, it's a great pleasure to have you on with us, Scott. I apologize for my attire. I feel like I don't have the standard uniform on, uh, maybe, maybe, uh, next time, although I probably can't fit into my suit anymore. I didn't get COVID 19 scat, but I got the 19 pounds. I got the, I got the 19 pounds associated with COVID-19. Um, so you had this amazing career, um, and for congratulations, but I want you, if you don't mind, we have a lot of young listeners and I want you to go back to the early days of what you were thinking about before your career started, and then how did it manifest itself pursuant to that arc of your plans and how did it deviate? Well, I would say

Scott Sperling: (02:57)
That, you know, one that I found to be a useful characteristic personally, and I know other people have a different view on this is I don't really plan ahead very much. And so it's hard to get disappointed. Uh, and I would have to say that, um, you know, I was very fortunate, uh, to, um, find some really interesting, interesting opportunities with, uh, great leaders, uh, early in my career. Uh, and that really helped guide me to where I am today. Um, I haven't worked for very many firms in my life, uh, so it's, I will acknowledge it to small sample set, but, um, uh, I started off coming out of business school BCG, which was a great experience in days when strategy consulting was still very young. This was 40 years ago. Uh, and then, uh, I was given the opportunity at a young age to, um, to start and then manage all of the alternative asset classes for the firm that manages Harvard's endowment fund and, uh, you know, being involved in venture capital and buyouts and, uh, real estate and commodities back in the mid, early eighties, all the way through the mid nineties was, uh, you know, uh, an opportunity to see a lot of really smart, uh, and energetic people do some amazing things in areas that had not yet been exploited.

Scott Sperling: (04:19)
And then for the last, uh, 26, 27 years, uh, to, uh, lead a organization like THL has been, uh, a real blessing. So it's been a very fortunate set of circumstances,

Anthony Scaramucci: (04:34)
Your portfolio, like everybody's got impacted by COVID-19. So tell us what happened, tell us what you guys did to adapt and pivot and tell us what your outlook is during this recovery. So

Scott Sperling: (04:49)
We we've been fortunate that our strategy involves identifying very specific sub sectors within three broad areas, financial services and FinTech, uh, uh, healthcare and what we call technology and business solutions that have a very strong secular growth drivers to them. And there are a lot of people out there doing similar sorts of things, of what, you know, maybe called thematic investing. We try to drill down and just become incredibly expert in a few handful of areas within those three broad sectors. And those areas again are typified by very strong, sustainable, secular growth, interesting, uh, return on invested capital characteristics and, uh, tend to be larger addressable markets. And the benefit of that during the downturn was that we didn't see as much negative impact as, um, you might see with a more broadly constructed portfolio. So we were fortunate in that regard and like many others, we have, um, significant operating capability, resonant our firm.

Scott Sperling: (05:58)
We have a team of operating experts that were able to go to the portfolio companies and help them manage through what could have been a difficult period. So, um, we were generally in a pretty good spot to start with, and as the world, um, got better pretty quickly, as we all know, uh, from a business perspective, even though it has been horrific in terms of the impact on, uh, lots and lots of, um, uh, of people, uh, both in this country and around the world from a business perspective, we saw a very significant growth return reasonably quickly, um, and are fortunate again, to be in areas, um, that are tending to be much stronger growers, uh, then, um, uh, the broad economy,

Anthony Scaramucci: (06:45)
Well, I want you to react to this. Would it be fair to say that private equity now and specifically to T H Lee is focusing more on growth areas and less sort of on what I would call unlocking synergies due to consolidation, or where do you see the vision for your firm and private equity in general, going forward from here?

Scott Sperling: (07:09)
There's definitely been a shift over the course of the last 20 years to growth the spaces. Now, our firm's heritage was always middle market growth. So it fits reasonably well with, with what we're doing, but where there is growth is different. So years ago, we were very big players in consumer and retail, and it was a great space for us. We don't find that same set of strong secular growth drivers in more traditional consumer and retail, uh, anymore. And so the shift has been to more technology-based companies that serve those markets. And I think there are a lot of firms, uh, in our industry that, that, um, have, uh, focused in on those kinds of areas. And we're always trying to look for spaces, um, where there's a dynamic of change that can lead to relatively explosive growth. Uh, so automation is a space that we've been a major player in, uh, for quite a while.

Scott Sperling: (08:06)
Um, you know, it is a space that, that plays to the, um, need of companies in the United States and around the globe to help support their, uh, existing employees take away the more mundane and labor intensive tasks that don't require high skillsets and allow their employees to focus on other areas while increasing productivity. And as we, uh, uh, are in a period where there are projected labor shortages and lots of different places, um, automation is gonna play a key role in bridging the gap between, uh, where we are today and where we might be in terms of the demand for labor that, that can't be met.

Anthony Scaramucci: (08:53)
So, you know, I'm, I'm of the theory that automation and technological innovation is always good long-term for the economy and also for the working class, because you just improve the quality of life and you scale up, it's the same reason why the horseless carriage replacing the people that had labor associated with horses, they seem to have also done better. Uh, am I right about that? Uh, should we be optimistic about the further and some automation or pessimistic?

Scott Sperling: (09:25)
I think you're exactly right about the impact of automation long-term and even in the intermediate term, because, uh, the need to increase productivity and allow employees to see their, um, compensation levels rise, and also be able to produce products or prices that do not create significant inflation can only be solved with increasing automation. And that automation, uh, takes place in lots of different spheres, certainly on the factory floor, in, uh, uh, distribution and warehouse centers. Uh, we've seen a significant bump in the amount of automation that is being utilized again, in most cases, it, it takes the place of that, uh, labor that can't be found in allows existing employees to both get higher hourly wages, as well as focus on higher value added tasks, all of which contribute to productivity, but we're also seeing automation in, uh, offices, uh, in healthcare that allow for much more productive output, uh, that again allows us to manage the cost of providing goods and services in ways, uh, that, uh, can in, uh, avoid inflationary prices as well as come up with many better solutions in areas where the automation actually provides functionality, uh, that doesn't exist or can't exist, um, uh, without it.

Scott Sperling: (10:56)
And so in healthcare, uh, automation, whether it's in, um, surgical robots or in, uh, pathology and radiology will have a significant impact on our ability to come up with better solutions for patients.

John Darcie: (11:14)
So, Scott, I want to follow up on the healthcare piece, cause that's something that we're keenly interested here at salts and at SkyBridge, we we've launched an early stage and not just biotechnology fund, but investing in earlier stages in private healthcare oriented companies. And I know it's something that you guys focus on a lot over there at THL that you mentioned a couple of examples of technology, but how has technology and private investment really accelerated a lot of these advances that we've seen in the healthcare sector coming out of the pandemic and even in the pandemic. And what part of those changes do you think are permanent, uh, that are going to come out of the pandemic? Long-term?

Scott Sperling: (11:50)
So, you know, one of the things that's really crucial, um, in healthcare, um, is, uh, the ability to reduce total medical expense, uh, of the cost of care provision while providing greater access to a patient for patients to advanced therapeutics, uh, to be able to more easily reach their, uh, primary care provider and certainly, um, high specialty care providers, um, things like tele-health the use of digital technologies is one of the obvious things that we've seen. Um, there was an explosion of growth, uh, in that during the pandemic by necessity. I think it's important, uh, that the government continues to support the utilization of those technologies, because it's the way that people want to receive, um, uh, uh, care in many circumstances. Uh, and when you look at the cost of, uh, care overall, it's really people who are, uh, uh, of tertiary or coronary acuity, the really sick patients that cost the system the most.

Scott Sperling: (13:01)
And if we get better compliance, because people can use digital and tele-health, uh, capabilities, uh, that would be a, uh, significant improvement and can hold down the overall cost of total net, uh, of the total medical expense. The other area that you're seeing a growth in science are the, uh, uh, capabilities that you see, whether it's a next generation, uh, sequencing, uh, technologies, lots of technologies that, uh, continue to be developed, uh, in ways that dramatically reduce the cost of drug development and the ability to, um, uh, again, provide therapeutics and diagnostics to patients, uh, at ever lower costs. And you're going to see opportunities, uh, in lots of different ways, um, in order to accomplish, uh, what I've just described, uh, back in the 1990s, um, we knew that science was growing. Um, we weren't sure at THL that we were that good at, at, uh, being able to predict which biotechnology company or which specific therapeutic a pharma, uh, was developing would be a winner, but we knew it was all growing.

Scott Sperling: (14:15)
And so, you know, we, we, um, decided to buy a company called Fisher scientific, which was the largest provider of stuff to the world of science, clinical research, industrial in the world. And we paid, I don't know about a billion and a half dollars for it in those days. And today Thermo Fisher, where I'm still on the board probably has a, uh, enterprise value in excess of $200 billion because it really grew. And it really grew because it brought together a set of technologies and capabilities that really met the needs of its customer base. Today, when you look at private, we're continuing to look for ways to support companies and buy companies that can help, uh, the pharma and biotech innovators do their job better and more effectively. So you've seen, uh, uh, CRS, the clinical, uh, research organizations that do a lot of the testing grow, uh, in terms of, um, revenues, profits, and, um, uh, market caps. Uh, you see a lot of other players who provide tools and capabilities, um, to both healthcare providers, but also to the developers of these, um, uh, therapeutics and diagnostics. And those are opportunities that, uh, you know, uh, really, um, have become very attractive to people in our industry. And that we've been a major player in.

John Darcie: (15:43)
Yeah, we, we had a Walter Isaacson recently on assault talk who wrote the book called the Codebreakers about Jennifer Doudna and her team that developed the CRISPR technology and continues to lead the genomics revolution. So from an investment perspective, and, and maybe it's, it's a comparable, but are you more excited about more of the, the tele-health preventative medicine type trends or more interested in some of those more moonshot oriented goals? And I know you guys are investing a lot in the infrastructure around companies that are supporting, uh, that genomics revolution, but what, what types of companies is it more the pharma biotech oriented companies that you guys get most excited about and in supporting the infrastructure around that? Or is it more of the tele-health and just the remaking of the, uh, you know, the healthcare system? I

Scott Sperling: (16:28)
Would say that we're, you know, we, when we identify these sub sectors within healthcare, um, again, our, uh, focuses on, um, things that can have that strong secular growth. And I'd say you, you've identified two areas that fall into, um, those sub sectors. And so, um, we're really, uh, uh, very active in both spaces. Um, and, you know, we're looking for ways that we can help, uh, providers of care, reduce total medical expense and reduce the cost to the entire system of providing high quality care from birth through, uh, end of life. And there are lots of different opportunities that the industry has, um, uh, been able to, uh, support, uh, in those spaces, uh, again, bringing down the cost of care while, uh, improving access for patients, um, or broadly to that care. Uh, but we're also very interested in, uh, supporting the growth of science broadly defined as it helps develop, uh, better, uh, therapeutics, better diagnostics, uh, better medical devices. And there are lots of different, uh, areas that flow into providing that in ways that allow, uh, the pharma companies and the biotech companies to focus on their most important value added, which is, um, the innovation itself, uh, of these phenomenal, um, uh, therapeutic and diagnostic, uh, drugs and, uh, capabilities.

Anthony Scaramucci: (18:12)
I want to step back, take you up to 30,000 feet for a second. And I want you to think about the next killer technology, the next killer drug. And so, you know, the invention of stat, the introduction of penicillin, the what is next on the horizon? Is it a immunotherapy that can be delivered? Is it a, is it a vaccine like the ones that Walter Isaacson was talking about? And Codebreakers what, in your mind, you sit at an interesting seat, cause you've got private companies, public companies, and you're sitting on the board of a hospital. What, what, what's the next killer app for medicine?

Scott Sperling: (18:53)
So one of the things, um, that, uh, has been great about chairing the board of the mass general bourbon, which is the largest research, uh, uh, system in the country, uh, largest recipient of NIH,

Anthony Scaramucci: (19:07)
John and I are coming to you when we get sick. There you go. I just want to make sure you know, that Scott, that's what we're, we're asking the question, we're digging it. And, and,

Scott Sperling: (19:16)
You know, also because we, you know, are, uh, so, uh, such a large provider of high-end clinical care, you can see not only the, the, the, the flow of basic science that develops in these areas, but I've just been amazed at the translation, you know, what they call the translational research. That's done taking it from those basic ideas to things that actually can work in patients, uh, and the nature of how the care has evolved. And, you know, you've, you've mentioned some key areas, um, cell and gene therapies of all sorts is going to be an enormous space. Um, the, uh, development of these vaccines, um, uh, particularly the MRN based ones, uh, that we've seen from Madonna and Pfizer. And there are a couple of other players out there working on that. Uh, you know, it's not only amazing that they were developed as quickly as they were, but perhaps even more, uh, uh, impressed.

Scott Sperling: (20:18)
I was gonna say more importantly, but I'm not sure you can say more importantly when it came to dealing with the COVID vaccines, but, you know, in terms of longer-term benefit, these are platforms that can be utilized to develop many other, uh, uh, effective vaccines and therapeutics remembering that the original target for most of the MRN, uh, pioneers was cancer. And so we're looking at ways, um, that we can utilize a range of different technologies to deal with some of the most devastating diseases that we have. And so, um, you know, there's the, uh, using the MRI and a platform to help the body, either through vaccine or effectively immunotherapies on things like cancer and a number of other, um, a number of other difficult, uh, uh, conditions. Um, then you have the ability to use other forms of immunotherapies, uh, that are continuing to evolve, uh, in ways that become more effective, uh, longer, um, by bringing cocktails of, uh, capability to bear again against cancers and potentially some other, um, uh, disease states.

Scott Sperling: (21:33)
Uh, and then you have, um, things like car T that again are breakthrough technologies, um, that are going to have a big impact on a number of the, of the most difficult, um, uh, cancers, uh, in terms of the nature of, um, of, uh, treatment, um, uh, out there. And so, you know, I'm very encouraged that the pace of innovation is going to continue to increase, and the nature of what we're innovating is going to continue to have ever greater impact on a number of, um, the most devastating, uh, uh, diseases. Now, um, one of the issues with all of this is that particularly early on the cost of these, uh, particularly therapeutics isn't incredibly high. And so, um, while I'm highly encouraged by the, um, the advent of, uh, and the accelerated, uh, introduction, uh, of, um, new therapeutics, um, you know, as a system, we also have to think about the long-term costs, not necessarily that sticker shock when somebody says, you know, that's a 250,000 or million dollar bill for that solving that particular, uh, uh, disease. Um, and, you know, we saw that with, um, with Hep-C, for example,

Anthony Scaramucci: (22:58)
No, it's fascinating. I want to, I want to shift gears for a second. What I love about th Lee and your work is you're keeping us healthy, and then you're also making us rich through financial services. And so I, now I want to, I want to, now I want to put that hat on for a second, and I want you to talk about the future of financial services. Uh, Jamie diamond recently says, he's worried about Neo banking. He's worried about the FinTech space, uh, you know, the costs associated with FinTech relative to the old school bricks and mortar. Uh, they sort of feel like they're getting assaulted the way book polishing did as an example or other, uh, industries, uh, where do you see financial services going? Where's the puck going? And where's th Lee going to be.

Scott Sperling: (23:44)
So, um, I bring into a couple of different areas. Um, the first is the, um, application of technology, um, uh, you know, the so-called FinTech, um, in many of the traditional banking, um, mortgage servicing mortgage origination spaces. And, you know, as you know, we've been involved, it's publicly known and a number of the leading companies in that space, whether it's FIS, fidelity, national information services, or, uh, black Knight financial and a number of others. Um, and, um, you know, these are companies that, uh, provide, um, uh, a set of services broadly to the industry, um, uh, through, uh, FinTech platforms, uh, that even people like Jamie use because they, um, uh, can do it, uh, uh, at a much lower cost, uh, with greater functionality. And, and you have a number of companies out there, uh, in the industry, you know, these are now large, publicly traded companies that, um, you know, continue to grow reasonably rapidly.

Scott Sperling: (24:54)
Um, you then have other spaces that, uh, have not had that form of technology brought to bear on the value chain as much. I think in insurance, there are lots of opportunities in the insurance industry when you look at that, uh, very in, uh, uh, uh, involved at any evolving, uh, value chain, uh, where you have underwriters and, uh, agents and lots of people in between where you can increase the efficiency and delivery of the service, uh, to both customers, uh, and to, uh, all of the players along that value chain. And so I think there's going to be a lot of opportunities there. You know, you were talking about wealth management, and obviously we've seen evolution, uh, in the wealth management space, somewhat due to regulatory changes, uh, somewhat due to the ability, again, to utilize technology in ways that remove administrative costs and burden from, uh, wealth advisors, uh, and allow them to focus again on the highest value added part of what they do.

Scott Sperling: (26:00)
So I think you're going to continue to see a lot of opportunity, um, in, uh, the financial services sector, uh, to apply technology, uh, all along the various value chains and in ways that, um, uh, you know, will improve, uh, the performance, uh, and delivery of services, uh, to customers and clients. Um, you know, at the same time, you have a lot of other things going on, uh, particularly in the, uh, digital currency world, um, that I'm not sure we've gotten our arms around. Uh, yet I note the commentary from, uh, uh, coming out of the Berkshire annual meeting, um, about, uh, Bitcoin being one of the worst things that ever happened. And, uh, lots of comments about

Anthony Scaramucci: (26:48)
Dosing. It seemed a little angry. I mean, I just, I mean, you know, I, I actually don't know enough just saying Scott. I mean, you know, you know, uh, Charlie Munger wrote a book, poor Charlie's Almanac. He thinks he's reincarnated from Ben Franklin. And in the book, he says, be dispassionate about your investing, but he seems upset about Bitcoin, you know, sort of, sort of, you know, I don't know, but we'll, we'll, we'll, we'll see who's right. There'll be a big tug of war. I'm going to turn it over to John Dorsey, U S questions from our audience, which he's collected. But I want to ask you this question, and I want you to put your evaluation hat on. Um, things seem pretty rich. I mean, now we both know that interest rates are the financial, they're the physical gravity of financial assets. So they're at zero they're propelling assets higher. Uh, but in your expertise, your decades of doing this, um, are they, are the valuations too high? Did they give you pause? Did they give you pause in financial services? I've been in financial services for 30 years, 33 to be exact, I've never seen valuations like this, so are we okay here? Or are you aware?

Scott Sperling: (27:58)
I, you know, I'm always worried, uh, and I've been worried, you know, for six years, I've thought were within a couple of years of

Anthony Scaramucci: (28:05)
A recession, I'm going to call you out on that. You don't really, you're not really that worried Sperling because you would have lost your hair a long time ago. Okay. You can tell that John and I are not that worried, but the truth is that valuations are, are, I mean, I don't know, they seem stratosphere.

Scott Sperling: (28:24)
Yeah. So, you know, we've seen continued increase in valuation now. Um, you know, I would say that in our view, in my view value, valuations need to be tethered on two things. One is what is a sustainable growth rate, and there are lots of businesses in the market has clearly shifted in terms of the, the, uh, proportion of market cap in companies that are growing reasonably fast versus, you know, the slower growing more industrial kind of companies that have had historically made up a larger percentage of the market cap. And so when you look overall, you know, if you can anchor, um, uh, uh, a multiple against first and foremost against sustainable growth rates, you know, that's probably analytically, what, what makes sense? Um, and, uh, it's certainly the case that, um, you know, we have lots of potential fast-growing opportunities in the stock market today.

Scott Sperling: (29:25)
Uh, but it's also true that there are lots of things that are getting valued, uh, well above what would be justified analytically by, uh, true sustainable growth rates. So you have to worry a bit about that. And the second is clearly interest rates because everything has to be tethered to some form of, uh, of, uh, dis uh, discount rate, uh, which, you know, we have been in low, longer than anybody had ever expected. Um, one of the potentially worrisome aspects about, um, the direction that our, um, fiscal policy is going, um, is that, um, you know, that might change, uh, the, uh, interest rate formulation in ways, um, that are, uh, somewhat unpredictable. Um, you know, we all like to believe we can manage the soft landings, uh, as they used to say, or we can manage to a two to two and a half percent inflation rate.

Scott Sperling: (30:22)
Uh, but it's not clear. I mean, I, I have the unfortunate history of, uh, having lived through, uh, in my business career, I think six recessions, and they're all always, you're, you're always taken by surprise, uh, by how bad they can be. Uh, and there is a point in the recession where you're always taken by surprise about how good it could be on, on the way out. We're, um, certainly in that point where, you know, we'd like to believe we can manage any negative that happens including potentially inflation and keep it under control. Um, and I hope that's the case, but, um, you know, one needs to be a little bit wary, I think given, uh, uh, we're in somewhat unprecedented territory here, uh, in terms of, um, fiscal, um, uh, stimulus, uh, um, all of this goes through, um, and, um, you know, we're, we're already seeing, uh, enormous inflation at the basic and intermediate goods level. Um, and, um, that eventually is going to get passed through to, um, uh, to consumers.

Anthony Scaramucci: (31:39)
I'm gonna turn it over to Darcie, but I promise you this, when you turn 97 Sperling, I'm going to be asking you the steri same question. I just want to see how emotional you're going to be when you're 97. And you're a great, great grandfather, man, if I can get to a right now, you use very dispassionate. I was impressed with your very dispassionate analysis, but go ahead, Mr. Dorsey, well,

John Darcie: (32:02)
Using all those advanced therapeutics that, uh, Scott is helping to unlock their, his investing. I think he has a good chance to live to 97 and beyond. And also it looks like he's in great shape. He's taken care of himself. Let's pray. I was born in October of

Scott Sperling: (32:18)
My entire career, the prayer,

John Darcie: (32:21)
Amen. Most important thing. I mean, I was born in October of 1987. So I like to think worrying about financial markets is somehow ingrained in my DNA, given the timing of my birth around that crash. But I want to go back to Bitcoin for a second because, you know, it's something that

Anthony Scaramucci: (32:35)
He just, he just attacked you and me, right? Because Scott know exactly where you were on the 87 crash as DUI. This guy was like in a neonatal facility that was literally a karate that was like he's in the center box on the zoom call. That was like taking a karate chop at both of us at the same time. Go ahead. Dorsey. So definitely so nicely. Come on. I'm on the ground bleeding. Okay. Scott's pamphlets setting. Now, go ahead, Doris.

John Darcie: (33:02)
So, so back in millennial mode, I want to ask you about Bitcoin Scott and you indicated that, that you don't necessarily have huge depth of knowledge in the area. And I think a lot of people have been on a crash course to learn more about it over the last year. And you've seen people like Jamie diamond that Anthony referenced earlier across David Solomon, you named every big bank. CEO has been forced to go from, you know, dismissing this technology to saying so many people are asking for it. We have to figure out what our approach is as a company to delivering these solutions to clients. You mentioned FIS as an investment of yours. They partnered recently with one of our, uh, close friends and partners, NY dig, uh, to basically they're, they're bringing the ability for traditional banks to offer a digital asset integration into their core, uh, custodial offering. So as a firm, what do you guys think about this massive rise that we've seen in Bitcoin most recently, Ethereum and smart contracts have been exploding, uh, at even a faster rate than Bitcoin. What do you guys make of, of the digital asset ecosystem as a firm? And do you think you'll ever make investments into that space or you'll focus more tangentially on firms like FIS that are powering the infrastructure in the same way that you're investing in infrastructure around the biotechnology and pharmaceutical boom.

Scott Sperling: (34:14)
I, I think, uh, the quick answer to your last question is we will focus on the infrastructure pieces. And again, you know, partly because I just don't think we're always smart enough to pick specific winners in some of these other kinds of areas, but, uh, you know, by serving everyone, you, you actually can participate in what is a strong area of dramatic growth. Um, you know, it, again, it, uh, blockchain technology is definitely an important technology and that has application that goes well beyond Bitcoin or any other digital currency. I, uh, you know, I think people wonder about digital currencies because we haven't seen anything like it in the sense that, you know, we're used to sovereigns having control of currency and sovereign does not have control. And, um, when it doesn't have control of, uh, of a currency, um, there are lots of potential, I guess I would call them unintended consequences that can occur.

Scott Sperling: (35:22)
Um, and, um, we've already seen a couple of countries, Turkey, India, for example, basically say, we're going to outlaw this because we can't have that. That is, uh, undercutting our ability to manage, uh, the monetary policy at the very least our economy and maybe, you know, um, beyond. Um, and so I, you know, I wonder at some point, will we have unlimited digital currencies that are posing as alternatives to our sovereign currency. Now that's particularly important for the United States because as you know, one of the reasons we're able to do what, what we can do in terms of borrowing is that we are, uh, the reserve currency of the world. Um, and that's a position that is already going to be under challenged by the Chinese. And I think the European union and they meet, and they, um, will use their own digital technologies, um, in ways that allow them to challenge the status of the United States as the only true reserve currency right now.

Scott Sperling: (36:26)
And so I think we have to watch that carefully, but, um, as Bitcoin becomes more important and, um, it is more important to control, um, the data flow of who owns it and how they're transacting. It may change the underlying value of that. Or perhaps, you know, there is a stroke of the pen risk that says it just has to go away. Certainly when you go to, you know, the, the ones that you know is, um, um, many people have commented on like doge coin, where there is, there is no limit on supply, it was done as a joke, you know, you just wonder, are we in tulip bulb territory with things like that? So, um, you know, again, I'm, I'm, I'm speaking, uh, but I don't know enough to be, uh, to be relied upon on any of those. I'm just raising some of the issues that would occur when you have this kind of situation. Uh, uh, generally, so maybe

John Darcie: (37:25)
That's what Charlie Munger should have said at the Berkshire Hathaway annual meeting, um, and had been a little bit more dispassionate about it, but it's a conversation for another day. So we've talked about some sectors that you're very enthusiastic about things in the healthcare space, certain areas of financial services, automation. Generally, there's been an explosion in, in tons of different asset classes, mostly focused on technology, frankly, but, uh, some that, you know, there's some suspicion from wary investors that, uh, the current rate of growth is not sustainable and that there there's pockets of the market. And we've already seen sort of steep pullbacks and even a lot of public companies that exploded, uh, during the pandemic. But are there any specific sectors or sub-sectors that you're most concerned about that, that as an investor you've come across deals and said, this makes absolutely no sense. And if I, if I could add a mechanism to do it, I would be short this sector. What areas are you most concerned about or skeptical

Scott Sperling: (38:16)
About, uh, you know, the pressure, uh, on, uh, the industrial sector given, again, the move in Rama to the pricing of raw materials and intermediate goods is something that, you know, I, I, I know it's becoming a popular play in the markets now, as we see a return to normalcy from the pandemic, because those areas were most adversely affected. Um, but I, I think it's, it's worth watching what happens to the cost structure and the ability to sustain, um, strong margin, uh, in those areas. Uh, the, uh, you know, again, I, I think, uh, looking at the impact, uh, on their margins because of the increasing, in fact, in many cases, dramatically increase cost of raw materials and intermediate goods, but, you know, offsetting that is the more rapid adoption of automation and software tools that actually reduce overall system, uh, cost in sometimes dramatic ways.

John Darcie: (39:23)
So the last question I have for you is I think people look at the returns for a middle market PE firm and say, man, that looks like fun to, to invest like that and achieve that level of returns, but there's so much operational expertise that goes into the execution of a lot of these business turnarounds and growth investments that you guys make. How important is that and what type of value do you guys offer as investors on an operating capacity to companies that you invest in?

Scott Sperling: (39:49)
So, you know, and we've talked a lot about this publicly over time. Uh, but, um, our strategy has been to be able to provide a significant level of operating expertise that's particularly valuable to middle market companies. And, um, you know, there are a number of, uh, of folks in private equity, um, who are oriented in the same way, um, of being able to provide operating experts onsite at companies in ways that, um, allow us to improve the key business processes of these companies. And we have found that, that, you know, particularly in the world of, of, um, of, uh, rising prices and multiples that that is a very important driver of value. Um, and I think for the industry, uh, the private equity industry, uh, it's an important value added that we bring to the economy. Now, there are some firms that will focus on, um, not growth companies, but areas where there are significant headwinds, uh, and in order to, um, uh, to help reposition companies, whether they're retailers, bricks, and mortar retailers, or other, um, uh, maybe older, uh, industrial type companies, you know, they'll bring their own expertise to bear in those areas.

Scott Sperling: (41:04)
Um, ours is in helping more, uh, rapidly growing companies really be able to, uh, sustain and in fact, increase their growth rates in ways that are sustainable over the longterm.

John Darcie: (41:17)
Right. And, uh, you know, I think a lot of people that aren't as familiar with the industry, they, they hear the word private equity, and they think of Gordon gecko, but you guys are truly, you know, helping to spur innovation and growth, uh, in a way that, that doesn't fit with necessarily some people's archetype of what a private, private equity looks like. So

Scott Sperling: (41:35)
We don't always get it right. Uh, and, um, you know, particularly as you're, uh, you may try to help transform an old economy company into a new one. You know, there been lots of challenges, um, but there's really nobody else stepping up to try to do those things. Um, so, um, you know, I think the industry overall, uh, you know, is, um, trying to, uh, provide value, uh, in ways that are not otherwise available to a broad set of companies that, um, in this very dynamic world are perhaps have been on the wrong side of technological change in innovation, uh, but still have, um, lots of employees and lots of reasons to, um, uh, try to survive. And, uh, and in fact thrive

John Darcie: (42:23)
Well, Scott, congratulations on all the work you guys are doing and all the success you've had. Thanks so much for joining us here on salt talks. Anthony, do you have any final word for Scott before we let him? No.

Anthony Scaramucci: (42:31)
Listen, it's a, it's a pleasure to hear you talk. I'm, uh, I'm coming to you when I get sick. I'm coming to you. What I need to read for a long time. Hopefully not for a lot of them. It comes to you when I re re need to reinvent my financial services business. Uh, you're sort of stuck with us now. Okay. It's too bad. All right. All right. Well, we appreciate it. It was good to have you on and duct. I found the conversation. Fascinating. Thank you again, Scott.

Scott Sperling: (42:58)
Thanks so much. Take care. Thank

John Darcie: (43:00)
You everybody for tuning into today's salt. Talk with Scott Sperling of Thomas H. Lee partners. Just a reminder, if you missed any part of this talk or any of our previous salt talks, you can access them all on our website@sault.org backslash talks or on our YouTube channel, which is called salt tube. We're on social media. Please follow us. If you're on the various channels, Twitter is where we're most active at salt conference is our handle. We're also on LinkedIn, Instagram, and Facebook. And please spread the word about these salt talks. We love educating a broader audience of people, as opposed to just being able to speak to 2000 plus people at our annual conferences that we do in the U S and abroad. Uh, we've really enjoyed this salt talk series. So please spread the word. And on behalf of Anthony and the entire salt team, this is John Darcie signing off from salt talks for today. We hope to see you back here again. So.

Financial Advisors Explain Wealth Management & Financial Literacy | SALT Talks #155

Backed by over 20 years of experience, Stacy works with her clients to understand their goals, define risk, manage liabilities, and proactively plan for their overall financial future. Stacy’s focus on a client-centric wealth management process has spanned her entire career.

Octavius Reid is a Senior Vice President and Wealth Advisor with Morgan Stanley. Over the past 30 years, he has developed an area of focus, working with clients in the sports and entertainment industry. As a Morgan Stanley Global Sports and Entertainment Director, provides financial management services and helps guide many professionals through what can be an incredibly difficult space.

LISTEN AND SUBSCRIBE

SPEAKERS

Stacy L. Robinson.jpeg

Stacy Robinson

Financial Advisor & PIM Portfolio Manager

Wells Fargo

Octavius T. Reid, III.jpeg

Octavius Reid

Senior Vice President

Morgan Stanley

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone, and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology, and public policy. SALT Talks are a digital interview series with leading investors, creators, and thinkers. Our goal on these SALT Talks is the same as our goal at our SALT Conference Series, which is to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. We're very excited today to bring you a talk focused on wealth management with two fantastic guests. Our first guest today is Stacy Robinson. Stacy has been in the investment industry for over 20 years. She joined Wells Fargo Advisors as a financial advisor and PIM portfolio manager in September of 2016. Prior to Wells Fargo Advisors, Stacy was with Morgan Stanley for 17 years.

John Darsie: (01:04)
Stacy's practice is comprised of corporate executives, entrepreneurs, closely held business owners, retirees, athletes, and entertainers. She and her team grow the practice through selective referrals. Her caring, commitment, and attention to detail creates mutually fulfilling, multigenerational relationships. Stacy graduated from Rutgers University with a Bachelor of Arts degree in Economics, and a Wealth Management Certified Professional. She continues to proactively pursue education and knowledge to strategically analyze the evolving landscape to address her clients' interests. We're glad to say that Stacy is a loyal watcher of SALT Talks. We're very grateful for her viewership here on these talks. Octavius Ted Reid the third is a senior vice president and wealth advisor with Morgan Stanley. Over the past 30 years, he has developed an area of focus working with clients in the sports and entertainment industry. As a Morgan Stanley global sports and entertainment director, he provides financial management services and helps guide many professionals through what can be an incredibly difficult space as they start to accumulate significant amounts of wealth.

John Darsie: (02:14)
He serves on the board of the Rhythm and Blues foundation and is a lifetime active member of the Omega Sci-Fi Fraternity. In 2012, he was inducted into the Black Entertainment and Sports Lawyers Association's Hall of Fame for his impact on the organization. He's on the Board of Governors for the National Academy of Recording Arts and Sciences as well. Hosting today's talk is someone with no rhythm or blues, Anthony Scaramucci. He is the founder and managing partner of SkyBridge Capital, a global alternative investment firm. He is also the chairman of SALT. With that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:49)
You are literally the whitest person that I've ever met in my life and you're telling me that I have no rhythm.

John Darsie: (02:54)
Yeah. I've still got better moves than you, Anthony.

Anthony Scaramucci: (02:55)
You've got better moves than me? What are you talking about? After you go in for your breast reduction surgery, we'll see how good your moves are. Okay, Stacy, good to see you. Ted, great to have you guys on.

Stacy Robinson: (03:07)
Thank you.

Anthony Scaramucci: (03:08)
Don't mind the rapport between me and John. That's just typical of us. It's unfortunate, but what can I tell you? We have this young Millennial that we have to keep track of.

John Darsie: (03:20)
I have to get my shots in. The unfortunate thing is that Anthony is also the HR director at SkyBridge, so he might level a complaint on me after this talk.

Anthony Scaramucci: (03:27)
Yes. Well, I keep getting these anonymous complaints into my email box about the harassment that I'm causing inside the firm. Of course, I'm hitting the trash button every time it comes in, John. Give it up. Let's go right into managing wealth for athletes and entertainers. They have sometimes shorter careers, certainly the athletes do. NFL athletes is an example, would be the most vivid example of that because of the high injury rates, and the psychology. Let's just be candid with each other. We're managing divas. There's only one diva on this SALT Talk. I'll let you figure that out at the end of this call. Someone with blonde hair actually. He's the only diva.

John Darsie: (04:11)
Oh, I thought you were being self-aware, Anthony. I was going to admire that quality.

Anthony Scaramucci: (04:14)
No, no. I'm still in denial, my man. I've been in denial for 57 years. I'm going to stay in denial. How do you do it? How do you handle a diva, an egocentric maniac who has a short shelf life that's making a lot of money, and you want to keep them rich for the rest of their lives? Go ahead, Stacy. We'll start with you.

Stacy Robinson: (04:35)
Yeah. Anthony, thanks again for having me. This is an honor. Athletes, like you said, often experience peak earnings relatively in a short duration, early in their life. Entertainers are often contract to contract. There's a lot less predictability around their earnings. They also live with the knowledge that their careers could, like you said, abruptly come to an end. Though there is an understanding that their career could end, there is still always a sense that another opportunity is going to be right around the corner for them. Many feel a duty in support of their family and friends financially. They have that sense of duty because they were included in the support that they had before making this deal. Many, most unfortunately, don't understand that that deal came, and it's going to be a lot less after taxes and the number of fees. Their income can truly be 50% or less than their take home.

Stacy Robinson: (05:40)
They have pursued goals that put them where they are, and they beat a lot of odds. Now they have to consider planning life beyond. That can be daunting for any age. However brief this period is, their peak earnings are typically, and they dwarf typically the average individual who earns in a decade or a lifetime. They still have to establish a reasonable budget that reflects their current reality, along with the longterm needs and goals that they have and the legacy that they'd like to leave behind. Yes, having the come to Jesus moment has a lot to do with getting them to understand that this could be it.

Anthony Scaramucci: (06:27)
Ted, give me the speech. I'm coming in to you. I've got a $25 million a year contract. To Stacy's point, I've come out of probably a lower middle income family. I'm going to have some people that I want to take care of obviously. There's survivor's guilt too, right? We all know that. There's a person that's coming out of that situation. They saw two or three of their friends not make it. Some of them have died perhaps and some of them are just not doing well. Now they're at the top of the food chain, so they want to give some money away, yet you want to keep them wealthy. Go ahead. Give me the speech, Ted. Let me hear the speech.

Octavius Reid, III: (07:06)
I guess the first part is to get them to understand that in both sports and entertainment, they make a lot of money for typically a very, very short period of time, and they're young. That means they're typically going to have to live off of it for a long period of time. The average life for the NFL is 3.6 years, and the NBA almost 4.8 years. To get them to understand that if you start giving away all your money in the beginning, then you're going to run out of money at some point and you're not going to be able to take care of friends and family. I used to call it the MCI program back in the day. For folks that remember that, MCI, friends and family that suddenly come out of the woodwork that come to you. They want you to finance every investment idea they've ever had or help get them out of some financial decisions they may have made.

Octavius Reid, III: (07:59)
Yes, you do want to be able to take care of family. You do want to be able to take care of friends. But if you make the right decisions early, then you're afforded to be able to do that later on in life. It's not something going directly into the draft right away that you just automatically write a check. I think one of the best ways to help out friends and family, one of the things that I recommend to players and artists and actresses and actors that I work with, is while you have this celebrity, take advantage of this celebrity. Everybody wants to get to know you at that moment. Okay, well as you're meeting people in different businesses, introduce them to family members and say, "Hey, they want to learn about your business." Or, "Can they get a job? Can they work with you right now?" It's the old saying, "Teach them how to fish instead of giving them a fish."

Anthony Scaramucci: (08:48)
Let's go back to you, Stacy, for a second. You do a lot of coaching. It's interesting because you're in the psychology business. You're in the coaching business, and you're in the Dr. No business. That's my assessment. Maybe I'm wrong. But literally, someone is calling you. "I want to do this, I want to do that. I want to buy that G-Wagon with the extra mag wheels and you're saying no. You're saying no to somebody that's usually getting what they want, and they had the adulation of fans. They had the adulation of the sort of social network and ecosystem, so go ahead. Tell me what you do. Give me some more tidbits. How do you handle it?

Stacy Robinson: (09:30)
I am not in the business of telling my clients "No," because this is the money that they've created. What they've sacrificed to being able to put themselves in this position. But what I will do is say, "This is not a part of the goals that we initially established. If you remove these resources from what those goals are, how is it going to affect what you said you planned for?" There's always going to be a signee, something somewhere, that somebody is going to bring to them. My goal is to have them understand the process that we've taken, to put them in a position to realize a lot of the things they say they wanted to do. If we do something that's alter to that, how is that going to affect them? If they can understand the longterm effect, again, if this is something you really want to do, then if we remove it, this is how it's going to look based on the goals that you said you already established. Saying no, I don't necessarily say, "No." I say, "This is how it's going to affect you."

Anthony Scaramucci: (10:40)
Okay, that's fair enough. I think that's well said. I mean, obviously you want to be respectful of the fact that they're earning but you're also... One of the things I've tried to do with clients over the years is delay gratification.

Stacy Robinson: (10:53)
Yes.

Anthony Scaramucci: (10:54)
You can delay gratification and teach compounding. What ends up happening is they have a nest egg that grows. Then they can earn money off of the money that they made, which at some point in their careers they're going to need to do. In fact, all of us obviously will need to do that. Ted, let me ask you this question because it comes up all the time. Stock market volatility. There's no wizardry. The four of us know, we're in Wall Street, and there's no panacea. A client calls up and they have the perfect story. It is the uncle's sister's aunt's nieces dog that just invented the next internet sensation, and they want to put a tremendous amount of money into that. Go ahead, Ted. What do you say?

Octavius Reid, III: (11:46)
No, flat out no. Contrary to Stacy, I feel like I am in the business of saying no. I say no all the time. As you mentioned, people come to players every day, whether it's in the locker room, whether it's out in the club in a social atmosphere. For artists, it's in the studio. Everybody is coming up with some new great idea. The first thing that you've got to look at is, I can't recommend that they put money or don't put money into it. But what I start to do is point out the risks. What are the risk involved in this? Let's start. I start teaching them the right questions to ask about this situation so that they begin to understand, hey, maybe this isn't a good investment to begin with.

Octavius Reid, III: (12:38)
The other thing is that for somebody that has a very short lifespan in their career, and once again has to live off of this money for a long time, one of the biggest mistakes that I see people make is that they want to put a large portion of their money into risk assets. Realistically, they can't afford that type of risk. Now, maybe later in their career as they've gotten into their second or third contract where they're seeing significant money. Okay, you can take a percentage, put that money away, and we'll allocate that to higher risk assets and maybe look in the case of a fund or something like that. But I don't know if I would necessarily be going into some of those projects, especially like the one you mentioned.

Anthony Scaramucci: (13:20)
Okay, all right.

Stacy Robinson: (13:20)
I guess mine is not directly saying no. Mine is a motherly way of saying, "Let's think this out because it's not going to be in your best interest. But let's put it all out there to see how this is going to affect you longterm."

Anthony Scaramucci: (13:33)
That's interesting. Ted is saying no, but you're saying, "I want you to get to know on your own." You're trying to coach them. I think it's an interesting thing because you're struggling with all of that. Stacy, how do you manage intergenerational wealth planning for wealthy families that you're doing business with?

Stacy Robinson: (13:53)
Oh, it's a lot about discovery. What's your interest, your values, the passion around that. What you want to leave as a legacy. Analyze what your client's goals are, what their objectives are. I have access to great internal wealth planning where I am. Often we use strategic relationships. It has a broad range of services that includes even things like family dynamics coaching. They also have a team of attornies that help me and my clients drill down on what their transition of wealth looks like for them. Whether it be trust, some kind of giving tools. The best way to do those taxes, gifting estate, even philanthropic concerns. Will they have a share in the findings that we can coordinate with other advisors and make suggestions to their attorneys that can provide actionable ideas and strategies to keep them on that successful wealth plan? And generationally.

Anthony Scaramucci: (14:54)
Ted, anything you want to chime in there?

Octavius Reid, III: (14:57)
I can say that from my standpoint, when I'm talking about generational wealth, part of it is educating kids. I spend a decent amount of time with clients' children talking to them and trying to teach them how the capital markets work, and how to create a budget, and how to focus early so that they learn these habits early. Because ultimately, they're going to be the ones to inherit the money. I'll leave it at that.

Anthony Scaramucci: (15:25)
The stock market took a really hard hit in March of 2020, and then it recovered to a new all time high. Stacy, take us through that. Take us through how you communicate to clients during extreme volatility like that.

Stacy Robinson: (15:43)
I guess keeping just like they did with their coming up and trying to get to where they are ultimately in their professional career. Keep the eye on the ball. Focus on the goal, what the priorities are, what the goals are. It sounds kind of remedial, but it's held true throughout my career through different market cycles. We've seen, and Ted's been around 30 years, I've been 20 years plus, that there's been a lot of different things that have come along to effectively tell where clients feel like, "Should I be in this? Is it time for me to get out?" What I try to do, now if they've been with me a season, they understand that the adjustments to the investments isn't always... it might seem natural, but that's not the natural cause to address these market conditions or what we've experienced in March.

Stacy Robinson: (16:35)
They now are kind of trained to say, "Are my goals intact? Do I need to make any adjustments to my priorities of those goals?" Yeah, communicating during volatility is always on top of mind because we don't know what's going to happen. We can only control what we can control. Addressing it with what their goals are, and maybe making adjustments if that's necessary. But not necessarily going directly after the investments.

Anthony Scaramucci: (17:04)
If you have a high profile client, a demanding personality and always used to the word yes, we were just talking about no. Have you been in a situation where you've had to let a client go? Have you been in a situation where you've had to have a tough talk, Ted? How does it go?

Octavius Reid, III: (17:26)
That happens very often. I had a client many years ago who had a thing for private planes several times a week. Was living a lifestyle that was costing probably close to several hundred thousand dollars a week. Actually, probably a bit more than that. At one point-

Anthony Scaramucci: (17:54)
Does he know my kids, Ted? I mean, it sounds like my kids you're talking about. Do one of my kids happen to be one of your clients? I'm just asking.

Octavius Reid, III: (18:00)
I know your son is in the industry. Probably not any of the people I've seen that he works with, but yeah, he's probably been around them but-

Anthony Scaramucci: (18:10)
He just dropped a killer video with this kid Travis Barker. He's a drummer.

Octavius Reid, III: (18:17)
Yeah, that's cool.

Anthony Scaramucci: (18:17)
And a kid named Poorstacy. I've got to send you the video. It's blowing up right now. I didn't mean to interrupt. Go ahead, so you've got this...

Octavius Reid, III: (18:25)
Yeah, so was spending a tremendous amount of money. We had many, many talks about the spending. Finally it came to a point where... the one thing that I've seen, Stacy I'm sure you can attest to the same thing, is when things go wrong, when that person ends up broke, it's usually the financial advisor's fault. Or at least that's the perspective, is it's the financial advisor's fault. My attitude was, okay, I can only teach you and point you in the right direction. I can't force you what to do. But what I do have the option to be able to do is no longer work with you because I don't want my name attached if you're just going to self destruct. I do my absolute best to try to coach them. I've rarely had that problem because I interview clients from the beginning. I can usually tell who I can help and who I can't right away, but yes, it does happen often. I think that you have to be the no guy.

Octavius Reid, III: (19:28)
One of the things that when I'm going into a new situation with clients, I usually bring that up in advance. I usually in advance say, while everything is good and they're filling out the paperwork to open a new account, that there are going to be times where we are going to disagree. There are going to be times where you are going to want to make some sort of financial decision and I'm going to say it's a bad idea. We may argue about it, but understand this. I'm giving you that from the perspective of someone who started... my first athlete was in 1987. I've been through working with players my entire career, working with artists, working with actors. I've seen this script before. When I'm giving you this advice, just understand whether we agree or disagree that it's purely in your best interest. You can always make a decision to go the other route. But at least understand that I'm not arguing unless I feel that it's in your best interest.

John Darsie: (20:29)
Stacy, I want to jump in with a question for you. We've seen a trend, at least a publicized trend, of some athletes choosing to live off of their endorsement income only and save all the money they earned in terms of their salaries. It seems like there's some enlightenment that's taking place among athletes and entertainers. And more awareness of the fact that they have a short earning span and a long lifespan after their careers are over. What are some other types of habits or guideposts or things like I just mentioned in terms of saving all of your salary income that you offer as tips to athletes and entertainers that you work with?

Stacy Robinson: (21:13)
Again, discovery. Determine what it is that their goals are. It's difficult to think about it when you're that young, but this is the perfect time to try to map out as much as you can. Because like you said John, they've seen the stories of the past athlete or entertainer that had these huge contracts. How could they dispense all that money and have nothing to pay for to it? Having the right advisors around them. Because sometimes, it's because they haven't paid their taxes and they don't have... nowadays, you've got to have even security around understanding that. Having access to those or the resources that can provide the kind of intelligence around their online presence. And things that could diminish or affect their reputational risks. There are so many things that since I started my career need to be addressed today. Because a lot of the athletes and entertainers have become a lot more aware that their resources can disappear, they are taking and receiving recommendations far more thoughtfully than they have maybe in the past where we've seen them, and the resources just replenish quickly.

John Darsie: (22:37)
Ted, do you have any frameworks that you use when you get new clients and they're looking to set some hard and fast habits and rules around how they look at money?

Octavius Reid, III: (22:48)
Part of it is, we start with planning to begin with. As a process with the team, we sit down and talk about, "What are your goals? What are your objectives? What do you plan to do when this is over?" That's the first discussion I always have is, "Okay, when the game is all over, when it's all over, what do you plan to do next? Let's start focusing on that now and creating a budget now." To create that budget, we're going to check in with you every time you go off budget to make sure. It's always about trying to put as much away as you possibly can today so that you're not out there trying to squeeze out another season, or having to take on a tour that you really don't want to take, or take a show that you really don't want to do because you've got to be able to pay the bills.

John Darsie: (23:37)
Right. You've talked about people, you talked earlier on Ted, about this notion that when you become famous, when you get drafted and it's clear that you're going to have a high income at least for several years, there's people that come out of the woodwork. Whether it be distant uncles or your local pastor offering services as a financial advisor. Those horror stories that you see on ESPN 30 for 30 about some of the most egregious cases of people trusting other people with their wealth, and turning around, and all that money being gone the next day. What do you do and how do you counsel people, Ted, on how to control that inner circle and really surround themselves with the right people? Who are those people? A financial advisor obviously is a great step in the right direction. What's the team that you advise these athletes and entertainers to put together? How do you advise them to keep people out that are sort of predatory?

Octavius Reid, III: (24:30)
I think it's the old saying, "It takes a village." It does require having the right team around you. In the really successful situations I've seen, there's the agent, the lawyer, the accountant or business manager, the financial advisor, they all tend to work together. We will tend to have quarterly meetings with the player. Sometimes the player may even have his family there. If you can have all of those people having discussions around each other, it could be a short half hour, hour call. But just to kind of review, this is what our plan is. This is what we're trying to do. It makes it a lot easier for that player. Yes, like you said, people are going to come out of the woodwork. They're going to come out of the woodwork all the time. You can't say yes to everybody.

Octavius Reid, III: (25:26)
One of the analogies I look at, I used to always say just because of the market that I'm in, every time somebody is part of a charity they call me. "Hey, can you call to get an autograph?" Or, "Can you call to get this signed for me or that signed?" Or, "Can you contribute to this salary, I mean to this charity? It's a great cause." Needless to say, if I were to write a check to every charity that called me, I'd probably be broke. Not that I don't support these things, but imagine a ball player or an artist who has got a million followers on Instagram.

Octavius Reid, III: (25:58)
Well, if you send everyone a dollar, after taxes that's almost... you're really running almost $2 million of your net income. Most people can't afford to do that. You've got to make a decision of, okay, what's important? Who do I want to support? What do I want to support? But you can't do everybody. That's the thing you've got to tell them when people call is, "Look, I've got family. I've got close people that I have to take care of. I just am not able to afford to be able to do that right now."

John Darsie: (26:26)
Yeah. One thing, we have some clients, we can't divulge their names, that are athletes and entertainers. It's almost like somebody who has addiction problems. If they go out to the bar, have something ready to say to people who come to you asking for things. Be prepared for that conversation and say, "You know what? I have to take care of so and so. I just can't be giving money to everyone around me." It's very important for them to have that, be armed with that catchphrase or that talking point that they need to fend off people looking for money. Stacy, what's your experience in terms of what an optimal team looks like around you and how you control that team?

Stacy Robinson: (27:05)
Yeah. Beyond the obvious professionals, it's the CPA or the estate and tax attorney or insurance providers, and of course what Ted and I do. Because there are so many discussions now, like you said, now athletes and entertainers are recognizing are recognizing that their likeness and their becoming influencers and content creators, I've got to have a Rolodex. I think maybe I just aged myself. I have a list of contacts that also includes people that do valuation work and could possibly tell you why you should not be involved in this. Whether it be financial or because of reputational risk, because that's just as important as finance today. Reputational risk can ruin a career pretty soon, early as well. Maybe having a business manager. Instead of you telling people, now you can say, "Bring all my requests to this person." They'll be your no person.

Stacy Robinson: (28:10)
Having a central trusted advisor who brings everybody under the tent, like Ted was talking about, when they are having family meetings where you can understand and discuss what the financial situation looks like in that top line that contract was written to. Everybody understands that there's a whole lot more between that line and you getting those resources. When people are all understanding and under that tent working together, then we are all working in concert and not in separate silence.

John Darsie: (28:42)
Yeah. Going back to some of these challenges and the pitfalls that the athletes and entertainers specifically fall into, Ted, what are some of the traps? We've talked about some of them, but what are the most common traps that you see? Maybe not with your clients because of course, you're keeping them from falling into those traps and experiencing a lot of those pitfalls. What are ones you see from the outside when you see cases of some of these athletes or entertainers who really get themselves in trouble?

Octavius Reid, III: (29:08)
Many times, I would say for artists, it's forgetting about paying taxes.

John Darsie: (29:19)
That's a pesky detail.

Octavius Reid, III: (29:21)
Yeah. It's thinking that $1 million is a lot of money, so I can go out and spend what I need. As we say, which over time, if you look at that over a lifetime, it's not. It's, like we said before, the friends and family that come out of the woodwork. It's not viewing it as a business. This is a business, and everybody else looks at you as a business. You should look at yourself as a business. Take the time, I know a lot of times, many creatives go, "Well, I don't understand finance. It's not my thing." Okay, well that's what I'm here for. It's something that I want you to learn. Somebody, if you're hiring a financial person, they should be able to explain it to you in plain English.

Octavius Reid, III: (30:18)
That's one of the biggest problems, is that you come in, people come in, a lot of times especially in the artistic community, people tend to make decisions with their heart. It's, "Well, this is a nice person. Seems like a good person, so I'm going to trust them with my money." It's the old saying, "Trust, but verify." One of the things that I try to do is show them, how do you do your due diligence? What type of questions should you be asking? How can you go online and look this person up before you hand over money to that person and then find out, oh okay, they've been stealing all along? Are they even a real financial advisor? One of the things I direct everybody to is finra.org so that you can go and check out their record, because there's a lot of folks that will hold that title out there.

John Darsie: (31:08)
Right.

Octavius Reid, III: (31:08)
Who have no experience in the investment world. I see people get burned that way.

John Darsie: (31:15)
How about you, Stacy?

Stacy Robinson: (31:19)
I will echo this. You met one of the personalities I deal with, who is kind of larger than life. I find that even though he's larger than life, I will bring him information for him to be able to make supported decisions around. He's thoughtful using that. Now, it may be that I work with more seasoned people in the sports and entertainment industry. They have seen the course of making educated decisions in their careers. But it doesn't change for whomever it is, whether they're just getting into the industry. Making sure that I am providing them as much information and resources to make educated decisions about what their tomorrows will look like after their career ends.

John Darsie: (32:18)
You talked earlier, Ted, about the process of educating even the children of athletes and entertainers that you worked with. And how important that is to set up the next generation to understand the same principles, and maybe even understand them better than their parents did as they entered their careers. What as a society, starting through secondary education up through college, can we do to help prepare these young men and women? Better financial education, better financial literacy. It seems to me college sports, for example, it sets kids up for failure by not offering some level of mediatory financial education. Stacy, I'll start with you on this one. What would you like to see done at an education level up through adulthood in terms of educating people more on financial literacy? Besides everyone tuning into SALT Talk and watching all of our conversations.

Stacy Robinson: (33:12)
Something that was discussed around my dinner table, budgeting and understanding the amount of money that you have, and paying yourself first. Paying everybody else that needs to be paid, including those taxes Ted talks about, but paying yourself first. Because that means that if you put away a nest egg for yourself, then you have the opportunity, the potential, to have something for you when this career ends. What I think they could do better in school is teach people about the compounding of interest, what it means when you invest. Robinhood and what they're doing right now is hopefully making it more democratized in investing. You've got to understand why you should not put your money on margin when you're buying a stock.

John Darsie: (34:04)
You shouldn't buy GameStop on margin when it's like $350 a share?

Stacy Robinson: (34:06)
Yeah, no. I think what schools are missing is just plain education. Even when I was there, I got a degree in economics. It still was theoretical. There was no applicable tools that you really had.

John Darsie: (34:22)
Right.

Stacy Robinson: (34:22)
When I got into the industry, that's when I started learning about why it was important to put away. Although my parents did give me the understanding that savings was important. But sometimes you need to have the application of what that means. Because when it's just out there in the ether, when you're young, it just doesn't make sense to you. Balancing a checkbook, although we don't use checkbooks anymore. Balancing a checkbook, you understand what I'm talking about.

John Darsie: (34:47)
Yeah, exactly. The digital checkbook now, Stacy.

Stacy Robinson: (34:49)
Yeah, the digital kind of checkbook.

John Darsie: (34:49)
We don't think you still use a physical checkbook.

Stacy Robinson: (34:53)
No.

John Darsie: (34:54)
How about you, Ted? What type of resources do you direct people towards, and how can we do a better job societally preparing these young men and women for just understanding basic economics for their household?

Octavius Reid, III: (35:08)
I'll start out by saying we've got to do a better job of teaching financial literacy in schools. I was fortunate. I grew up in Wellingborough, New Jersey, which was a working class area. I had a teacher in eighth grade that brought a game into our classroom called Stocks and Bonds that 3M put out that taught us about the stock market. That's how I ended up getting into this career. That's what made me want to be in the stock market, wanting to invest. That later became I think the stock market game a lot of schools played. I don't think it's in every school. I think it needs to be taught. Financial literacy needs to be taught in every schools. Players, I think that leagues have done a better job now. My firm that I work for created a sports and entertainment division a number of years ago. We go out to universities, to colleges and universities, and teach financial literacy to the athletes.

Octavius Reid, III: (36:06)
I actually used to do it for one of the major leagues. I would go out and talk to players. The thing is, sometimes you'll have these programs where they may two or three times a year talk about financial literacy. It's like this. It's like when you were a little kid, your parents told you to look both ways when you cross the road several times. You can't just have one or two classes and it's over. I think it needs to be consistent.

Stacy Robinson: (36:39)
Yeah, I think consistency is key.

Anthony Scaramucci: (36:43)
Let me chime in for one second because I'm just curious as to how you guys feel about this. This is an age old question. I always get this question asked, and that is financial independence. Do you reverse inquiry your clients? Meaning, do you sit down and say, "Okay, someday your earnings is going to be different. Maybe it'll be better." Certain athletes transition into broadcasting like Tony Romo, and it turns out he has a very lucrative career. But do you do the reverse inquiry in the beginning or the reverse engineering and say, "Okay, this is the number that it'll take for you to live this sort of lifestyle that you want, and this is the targeted way we're going to get there?" Do you guys sit down and do that in the beginning?

Stacy Robinson: (37:33)
Certainly. Yeah, you have to do it early on, like Ted was saying, and often and with consistency. I try to build mine around what's ideal and acceptable. Ideally, this is what we'd like to have. But acceptably, this is a comfortable life that wouldn't diminish what it is that you've created throughout your career. We have to make adjustments along the way. Does it mean that you have to not have exactly what you want ideally? Maybe there's a combination of both ideal and acceptable to get you to a point where this is going to be a source of income that you don't have to necessarily watch deplete over time.

Anthony Scaramucci: (38:24)
I love that. I try to do that with clients. I try to do that with my children. Ted, let me ask you this. Do you have something you know today, through all of your years of experience as a financial advisor, you didn't know it in the beginning of your career but you know it today. For me, what is that? It is to trust the process of compounding. Not to have happy feet in investing. For me, I'm embarrassed to tell you guys that I have owned Amazon. I have owned Google. I have owned Microsoft in mine and my family's accounts over the years. Had I just left things alone, I would've probably done way better than the friction that I created in my own life. That's me, that's my learning observation among many over 33 years. What about you? What is something you wish you knew about your career or your industry day one?

Octavius Reid, III: (39:32)
It's actually kind of what you just said. I just had this conversation just the other day. When I started in the business, we were stock brokers. It was much different. It was about sitting up late at night and analyzing balance sheets and income statements, trying to come up with a hot idea so we could sell as many people to that idea as possible. Today, it's about building wealth for people. What I realized is, and I think about this a lot when I see the current environment, the current news and these stocks that are doubling and tripling in value that have no real valuation over time. In the long run, you buy good quality businesses and hold on to them, and you let the managers do what they do best.

Octavius Reid, III: (40:19)
Back in '89, I shifted a lot of my business over to asset managers as opposed to me sitting there trying to pick, what is the hot idea? I go back to things that we all learned as a kid. A couple things that we learned as a kid was, one, don't put all your eggs in one basket. That was one of the most important things that you learned. You also learned the story of the hare and the tortoise. They don't make up these stories overnight. If you just look at... I've been fortunate that after 10 months I got hired was the crash in '87. Then we had the mini crash, and the collapse in the FSLIC. The jump on scandal, Operation Desert Shield, Desert Storm, 9/11. There was bad news almost every year I've been in this business.

Anthony Scaramucci: (41:06)
You left out David Askin, Ted. Remember Davis Askin? He blew up the goddamn bond market in '94. Remember that?

Octavius Reid, III: (41:12)
Yes, yes, absolutely. There's been so much bad news that would scare anybody, but the bottom line is over time, companies are in business to make money. If you've got a fully diversified portfolio of quality businesses, over time you're going to build wealth. Stop trying to time the market. Stop trying to pick what that hot idea is out there. Just have a purely diversified basket. Now, you might make changes from time to time, but I think that makes a lot more sense than when I first started and all I wanted to do was trade and try to make a quick buck.

Anthony Scaramucci: (41:51)
There's no holy grail. Anybody that's telling you they have a perfect strategy, then you know you've got to run for the woods.

Stacy Robinson: (41:57)
Yeah.

Anthony Scaramucci: (41:57)
That perfect strategy is usually going to lead to that person being in jail at some point.

Stacy Robinson: (42:01)
Right.

Octavius Reid, III: (42:01)
Yes, absolutely.

Anthony Scaramucci: (42:03)
What about you, Stacy? What about you? What is something you wish you had learned and was crystal clear when you first got started?

Stacy Robinson: (42:10)
First got started. Being at a firm that, like Ted is saying, when you got to work, you listened to the [inaudible 00:42:22] and tried to pick the stocks for that day. You heard the analyst pounding the table. That was excitement for me, and that's why I got into the industry. If I could just make sure that my clients had the right stock in their portfolio, and if I don't make the right decision, what am I going to do to this person? As you get time in business, like you say, time in the market, you start to realize it's more about planning and letting either the asset manager make the portfolio changes that are necessary, or in my case, I like using passive investing through indexing and just making sure that there's proper asset allocation for my clients. I include risk as part of their goal.

Stacy Robinson: (43:12)
Most people say they can take a lot of risk, and the moment they hit that risk they're like, "What has happened?" They're like, "We understood that risk was going to happen." I don't want to put them right up against the most amount of risk that they say they're willing to take. There's somewhere in between. The market is going to do what it does, but what we've seen since, as Ted said, he was in the business, the market has gone up. It might have taken some pullbacks in market cycles, but we have seen the market goes up. As long as we have cash available for those short term needs and understand what longterm goals mean, I think we will do the best with whatever the client brings to us and the best in their interest.

Anthony Scaramucci: (43:54)
Quaker Oats, Stacy. Quaker Oats. That was the first stock that I sold to a client. I got on the phone. I said, "The analyst just recommended Quaker Oats." He bought 500 shares from me. I thought I was a kind for the day. I thought I was Bud Fox for the day, Quaker Oats.

Octavius Reid, III: (44:13)
It was Union Carbide for me.

Anthony Scaramucci: (44:15)
Union Carbide. See that?

Octavius Reid, III: (44:17)
Union Carbide and Trans America.

Anthony Scaramucci: (44:19)
See that? Do you remember the first stock that you sold to somebody, Stace? Stacy, sorry.

Stacy Robinson: (44:24)
It might have been GE.

Anthony Scaramucci: (44:28)
GE.

Stacy Robinson: (44:28)
Just because it was a stall word [crosstalk 00:44:31]

Anthony Scaramucci: (44:30)
See that? You're more sophisticated than Ted and I. I was selling oatmeal.

John Darsie: (44:38)
Well, now 60 years after you've made that first recommendation when you were in your 20s Anthony.

Anthony Scaramucci: (44:43)
60.

John Darsie: (44:43)
I eat Quaker Oats still every morning for breakfast. I have my bowl of oatmeal.

Anthony Scaramucci: (44:47)
60 years. Do you see him? 60 years. Next time you see Darsie and he's walking with a limp, you'll know why. That'll be the [crosstalk 00:44:59]

John Darsie: (44:59)
You called our IT department and had them disconnect my internet there so you could get back into the conversation that I was taking over there.

Stacy Robinson: (45:03)
Is that what happened?

Anthony Scaramucci: (45:03)
You noticed that, yeah.

Octavius Reid, III: (45:06)
Is that what happened? I thought you fell asleep.

Anthony Scaramucci: (45:09)
You're a clever Millennial. You figured how to reboot [crosstalk 00:45:14]

John Darsie: (45:13)
Yeah, now I'm tethered to my phone's hotspot. I had to get creative. I think the jackhammer above my head might've had something to do with it. It's suspicious, Anthony, but I'll let this one slide. Thank you, Stacy and Ted, so much for joining us here on SALT Talks. We love bringing these conversations to our audience and allowing people to learn using free resources like SALT Talks. I think there are a lot of free resources out there today that didn't exist five, 10, 20 years ago because of the advent of the internet and just the proliferation of media that's out there today. If people are willing to learn, they have the resources to learn. They just need the right people guiding them like you, Stacy, and Ted do for the clients that you work with, which is why they're so loyal to you. Thank you so much for joining us.

Stacy Robinson: (46:00)
Listen, I want to say thank you as well. I'm in an industry, we're in an industry, that there's not too many people that look like I do that are women and a black woman. I'm acutely aware of that and what it means. We've seen what representation means. It shapes many discussions that we're having up to today. Representation is important. Anthony, I appreciate you recognizing that and using your platform to broaden the brushstroke. I'm [crosstalk 00:46:33] guest, Anthony. This has been a great opportunity. I thank you for welcoming a different voice.

Anthony Scaramucci: (46:38)
I appreciate it. I hope you'll come back. We're always trying to do that, and I'm very grateful for you for the pioneering that you've done frankly, Stacy. You've been a great role model for so many people.

Stacy Robinson: (46:50)
Thank you.

Octavius Reid, III: (46:51)
Stacy, I don't think I could have set it any better. I appreciate you, Anthony and John, for giving us this platform.

Anthony Scaramucci: (46:58)
Ted, I like you a great deal, but you're not getting out of here without a hair joke. I just want to let you know that. You thought you were getting out of the SALT Talk without a hair joke, but I'm just letting you know all those trials and tribulations in the market, I kept my hair, okay?

Octavius Reid, III: (47:14)
Thank you.

Anthony Scaramucci: (47:14)
Just letting you know.

Octavius Reid, III: (47:15)
Well, I had hair until I went and got the vaccine last week.

Anthony Scaramucci: (47:19)
See that? All right, well I'm going to be struggling with COVID-19. You know what I'm saying?

Octavius Reid, III: (47:27)
No, no. Seriously, please everybody get the vaccine, absolutely.

John Darsie: (47:31)
Anthony makes sure to control the camera angle so it doesn't come in from the top. That's all I'm saying.

Stacy Robinson: (47:35)
Oh, so there's the...

Anthony Scaramucci: (47:35)
There's a little bit of an alien landing strip in the back down there. I'm pulling it over. It's fine.

Octavius Reid, III: (47:41)
Did you think for a second that the hair is real?

Anthony Scaramucci: (47:43)
It's fine, okay? This is real hair, but [crosstalk 00:47:46]

John Darsie: (47:45)
The hair is real, but that's not what the real color looks like.

Anthony Scaramucci: (47:48)
In fact, if I needed stat replacement, I'd be going in for it tonight.

Stacy Robinson: (47:52)
Listen, my dad used to say, let's see, "Grass doesn't grow on a busy street."

Anthony Scaramucci: (48:00)
Amen, or on a perfect head.

Stacy Robinson: (48:00)
Or on a perfect head.

John Darsie: (48:03)
Thank you again, everybody, for joining today's SALT Talk with Stacy Robinson, Wells Fargo Advisor, and Ted Reid from Morgan Stanley. We're hoping you were able to glean some important lessons on intergenerational wealth planning, specifically as it pertains to athletes and entertainers. I think a lot of what we talked about today is applicable for a wide variety of individuals who are looking to do longterm wealth planning. Just a reminder, if you've missed any of this talk or any of our previous SALT Talks, you can access them all for free on our website. It's SALT.org/talks. You can access them all on our YouTube channel, which is titled SALTtube. We post all of our episodes there and we livestream them there as well. Please follow us on social media. We're on LinkedIn, Instagram, Twitter is where we're most active. Also, we're on Facebook.

John Darsie: (48:47)
Please tell your friends about SALT Talks. We love growing our community and exposing more and more people to the education that we strive to provide here on these SALT Talks. On behalf of the entire SALT team, this is John Darsie signing off for today. We'll see you back here again soon on SALT Talks.

Philip Bagdasarianz: How to Evaluate Investment Decisions | SALT Talks #104

“Many short-term decisions… are not primarily driven by numbers. It's not a mathematical science. It's a social science.”

For over 18 years Philip Bagdasarianz has been working with wealthy families from Central and Eastern Europe, the Middle East and Asia. This year he joined PWA Private Wealth Advisors AG, a swiss multi-family office boutique as a managing partner.

Our identities play a central role in our personality and it ultimately has a huge effect on how we work and interact professionally and personally. Identity can be categorized into three pillars: DNA, culture and upbringing, and our purpose. Understanding different identities and how they manifest themselves is important to consider when evaluating investment decisions. For example, western societies place more emphasis on individualism. “They are generally the individualists are generally what we call overconfident. Meaning they have the illusion of being in control of what they're doing in the markets.”

LISTEN AND SUBSCRIBE

SPEAKER

Philip Bagdasarianz.jpeg

Philip Bagdasarianz

Managing Partner

Private Wealth Advisors (PWA)

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hi, everyone, and welcome back to SALT Talks. My name is Rachel Pether and I'm a senior advisor to SkyBridge Capital based in Abu Dhabi, as well as being the MC for SALT a thought leadership forum and networking platform that encompasses business technology and politics. SALT Talks as many of you know, is a series of digital interviews with some of the world's foremost investors, creators, and thinkers. And just as we do at our global SALT conference series, we aim to provide our audience a window into the mind of subject matter experts.

Rachel Pether: (00:41)
Now the focus of today's talk is going to be on how a healthy identity leads to better and more sustainable investment decision making. And I'm very excited to be speaking to a dear friend of mine, Philip Bagdasarianz, the Managing Partner at Private Wealth Advisors, a Swiss multifamily office boutique. Philip is a true global citizen. He's lived in Africa, the US and now calls Switzerland home. For over 18 years, he's been working with wealthy families from Central and Eastern Europe, the Middle East and Asia. He's a certified international wealth manager and an expert in financial advisory, and he received his MA in educational science from the University of Zurich. For the last 10 years he's also been on the faculty of the University of St. Gallen's executive MBL program, the sustainable investment decisions.

Rachel Pether: (01:34)
As always, if you have any questions for Philip during today's talk, please just enter them in the Q&A section of your screen. Philip, welcome to SALT Talks.

Philip Bagdasarianz: (01:45)
Thank you, Rachel. Very glad to be on board today.

Rachel Pether: (01:49)
No, we're super excited to have you. And the focus of today's talk is how a healthy identity leads to better and more sustainable investment decisions. So I guess we should start with identity. But before we go into that, and without sounding too psychoanalytical, tell me about you. Who are you really and what's your identity?

Philip Bagdasarianz: (02:13)
Yeah. Well, Rachel, I'm a bit like six feet tall and about 70 kilos, a bit more than 70. Well, no problem, quite a bit more than 70 of course at the moment. But that again, you read my bio and that just tells a bit where I was, what I've done. I told you a little bit of my outside. But that's mainly not enough to say who I really I'm as you said.

Philip Bagdasarianz: (02:43)
My name says a bit more about my background. I'd like to just give you a short overview of where my life story came from, or how that developed, because I think that will give us an idea of the pieces and the complexity that I think is behind each and every person's identity. So born in Switzerland, we left the country to go to Africa just a few weeks after I was born, my father was a medical doctor there, together with my mother, who's American. And unfortunately after already two years that we were in Africa, she was diagnosed with cancer just after my brother's birth. So we went back to the US to her family for treatment. But tragically, she didn't survive for very long. And when I was three and a half, she passed away.

Philip Bagdasarianz: (03:38)
So, grew up with my grandparents, my father, and I'm very lucky that my dad found a wonderful second wife just a couple years later. And after that, when I was seven, we moved to Switzerland for actually the rest of my formal educational life. But you see, I was uprooted in Africa, planted in the US, uprooted again brought to Switzerland. Didn't speak a single word of German, the local language here. And so in the remote mountain village that we landed in, the kids, they didn't, some of them didn't want to be friends with me just because I was different. I wasn't familiar to them. So that was difficult for me to understand why would that be? I played with African kids, I played with Americans. I was the American boy and suddenly in Switzerland, with an Armenian name, which was Russia. So you see I carried the cold war within me during that time.

Philip Bagdasarianz: (04:46)
And that obviously got me thinking about identity. The other thing is now how was it on a relational level? Was I an orphan or not? I never luckily never felt like one. But those are things that do influence personality. But identity is probably even a bit more. As a kid you don't think too much about that. You just cope and try to survive. Maybe remember when we first met Rachel, how I looked. Right?

Rachel Pether: (05:23)
I do remember. Yes. And I was actually very impressed that you still took the meeting because you had just had a bike accident and your lip was so swollen you could barely talk, but I was very impressed at maybe that's the German side of the Swiss. You stick to all your appointments, I was very grateful and happy that you did take the meeting that day. And you bought me Swiss chocolate at the end of it. So I remember-

Philip Bagdasarianz: (05:52)
Correct. So that's again, you see in my very short period of my life, that happens. Sometimes you fall flat on your face. Now with the biker it was my doing. I just was not careful enough would be too fast. But I think many of us, they have their origin, they have their heritage where they come from, which forms a great part of their identity, especially as kids. And we all have bruises. I'm lucky, this healed more or less quite by itself. So our body is a great example that, yes, we do get bruises, but let's get to work. Let's heal it. And so I think I'm really happy to say that many of the scars that I might have taken along from those difficult moments, they did heal. They did heal.

Philip Bagdasarianz: (06:44)
So, the next thing that happened to me was that we were in Switzerland, formal education, and all that. And of course, the older you get, the more your choices start defining more about who you are. It's not just what happens to you. It's also how when you actively choose which direction you want to go for work, how much effort you want to put to your studies and all that. So that's when I think the given identity from the outside becomes a bit more influenced by what we do and see. Yes, please.

Rachel Pether: (07:28)
Sorry, just jump in there. And I want to dive further into the choices and the personality aspects. But I know that one of your passions is you work for a not-for-profit organization that equips leaders, equips decision makers, through identity based leadership. So how do you actually define identity? What are the components that make that up?

Philip Bagdasarianz: (07:53)
Yeah. Well, the components that I try to bring it down to, let's say, three aspects, which makes it a bit easier for everybody to understand. This is an area I'm still exploring myself. So this is not scientifically totally based or anything. But I try to bring this, my passion for the identity or the different personalities that I meet also in my business life and in the organization. And mix it also to understand what's going on on the markets. How do I react? How do my clients react to all these things. So, identity Actually, I believe, has three sides.

Philip Bagdasarianz: (08:39)
One is what's called the inside, which is our DNA as humans, our look. our gender can be different, or it influenced our decision making. Our abilities, our disabilities, our feelings, passions, and I was saying, the coping mechanisms that we develop in life and reactions and reactions. Now, the good thing, what I think is, we do see the inside part of identity shows we have a need for uniqueness, we have a need for control, for decision making it all, for happiness, and generally some inner peace. So, just that's it.

Philip Bagdasarianz: (09:30)
A second side would be towards the out the outside. That is what probably is very strong when we're small kids, the circumstances, our culture, our tribe, and then later on relationships that we choose or that we just have family again. Language as I said can be a very quite defining who you are or even the social status, people define you by the language you speak. American accent or Australian, whatever. And then your life story. And what feeds into there is the need of each of us to belong to a group which gives us security. So those two basic needs are actually rooted in that part of my identity.

Philip Bagdasarianz: (10:16)
And the third side would be the upside. And the upside is, what is my purpose? What is the larger thing that I believe in, or that I aim for? It can be the authorities, truth, things that are outside of me, that I can just manipulate left and right, they're above me. Or, as I said, they can be goals. Businesses would call them the values, their mission statement, things like that. So with those three, I think we can more or less see how complex it is, identity. But also I do want to say that we need all three for healthy identity. And they have to be in balance. So you can't leave anyone out and you can't just overemphasize one or just take one away. I think it really is like a tripod. A tripod always stands straight if the legs are the same strength and same length. So that's a bit how I would see that. Yeah.

Rachel Pether: (11:31)
So I know you just said that you can't take one of those pieces away. But I do actually just want to focus on the last one you mentioned which was the upside. And given your experience and living and working in so many different countries and cultures, obviously, they have very different attitudes politically, philosophically, spiritually, whether it's dictatorships or religious states democracies. What are some of your key learnings from the different cultures that you've worked across in terms of that upside? And then maybe we can talk about how that plays into investing as well.

Philip Bagdasarianz: (12:10)
Right. Well, it's actually quite interesting to see that different cultures, cultures have an identity of their own. I know we know that. That's what we call culture. But when it comes to comparing that with the identity of individuals, it does look very similar. Of course, there are individuals within each of these cultures and societies which are totally different. But in general, there are, let's say, the typical Western investor. Or there is generally a bit more the typical South Asian investor. And they differ. They differ strongly.

Philip Bagdasarianz: (12:53)
And so, also thinking about our talk, I did try to see what defines those cultures? Which of those three elements is maybe overemphasized and which is weathering a bit? So yeah. And it does actually fit into my experience with clients of all these different cultures. You were just saying, one, without being just seeing that everybody would act the same way but if you look at for example, Russia, which actually defined per se, that they did not want to have an up. In the 1920s they said, "We do not want to have anything above the communistic regime." So they expelled religion and anything like that.

Philip Bagdasarianz: (13:48)
What happened, they became a police state and everybody was controlling each other. They tried to replace the up by the community. That's why they're probably called communism. Many, many good ideas for equality, but they missed something. And what happens is many people of that country still now, they are very... It takes them a long time to trust. They don't generally trust because they grew up in a society where you can't trust anything. There's no governing body, you don't know what the decision makers will do. So they're always ready to grab their stuff and run. They always want to... That's just what they are.

Philip Bagdasarianz: (14:34)
And the Westerners, for example, us Westerners, we have a very strong in focus. So that's why we're individualistic society. So of course we have some strengths. The strength of a strong in his creativity. We have invention, diversity, quality, excellence, things like that. But if you miss out on purpose which is an up component or belonging, which is one of those out components, it leads to loneliness. And we have one of the most lonely cultures we've ever had is the West. You have cultural divisions. Short termism. We'll maybe speak about that shortly, as well. And often some emotion based decisions which don't always turn out to be the most sustainable.

Philip Bagdasarianz: (15:29)
So looking at the investor type, they are generally, the individualists are generally what we call overconfident. Meaning they have the illusion of being in control of what they're doing and the markets. And then emotionally driven pride and greed can be very strong drivers. But on the other hand, the Russian for example, if they say I'm going into a very risky asset, that would be a corporate bond. Right? That's really risky. And if you take a Western or let's say the US client, for them a... I mean, the really conservative investment would be a stock one of the S&P 500. So that shows you, this is true. You can generalize it a bit for society and that has to do with their identity. Yeah.

Rachel Pether: (16:26)
So yesterday, we had a really interesting SALT Talk as well. And we were talking a little bit about the anxiety of learning a language and something that's very prevalent in Middle East and parts of Asia and the culture there is this fear of failure or of this desire to save face. So in your experience across these cultures, how do you see that playing out when it comes to investing?

Philip Bagdasarianz: (16:56)
Well, yes. There are probably two groups of what we call shame cultures. I don't know if it's a nice word. But generally, exactly as you described. I think the far East which over emphasize the community, the out. What you do see there, they have lots of strengths again. The unity that they have. They have a very strong output. They have commitment, collaboration, they're very efficient. The Kaizen principle, that everyone from the CEO to the cleaner have the same rights to bring in their ideas to make a process efficient. So, huge, huge benefits and quite stable. You would have a sense of belonging. But if you do miss uniqueness, the person that can be individual or different or purpose, then you start to have uniformity, which is the downside of such a community or can become. You see workaholics that work 24/7 just to reach the bigger goal there they have. Or then rebellion, fight flight patterns, things like that.

Philip Bagdasarianz: (18:20)
And from the investment perspective, what I see in let's say, the far East what we have is, you have some herding patterns. Herding means you just have to follow the crowd and what we call the home of bias. So whatever is familiar with your surroundings, that's where you invest. You find what is familiar to be less risky, and what is not familiar to yourself. So, these are things we all can fall for, but I think I do see a bit more in such community. And South Asia, the GCC where I also do have clients, I think, they are probably I would call it a societies or states that have an emphasize on the up. They have a common goal, Often these are religious states. So they have a common sense of values, a common set of how we do things. So, again, they have a unity which many other countries lack.

Philip Bagdasarianz: (19:34)
Quick decisions can be made. If you have a single leader, for example, a leadership that is lean, quick decision making, you can focus. Many of these countries are very resilient. But on the other hand, if it's overemphasized, you do see suppression of others, you see power struggles, corruption and detachment, double living. They, unfortunately some people, they go abroad to live the life they actually want to live and come back and have to play a game. So you do see things like that happen when the out isn't in balance with the other two. And predominately the investor would be a bit more fear driven. And yes, what we also talk about is they fall for the anchoring bias. So what they hear first, what is putting their mind since kids, that's what they stick with and they tend to diversify less.

Rachel Pether: (20:48)
Yeah. No, we certainly see that playing out in the Middle East with regards to home buyers and things that you're familiar with, like a lot of people are quite over allocated to real estate, for example. But back to your point on, living here at least we are often very grateful we live in a benevolent meritocracy. It definitely has its upside and certain sensors. And when you were speaking about these different cultures, I guess it also ties into the question of, well, what is wealth? Because in some of the cultures you spoke about, wealth and health and so many other things, that's actually part of the community, like you'd be willing to give up your personal wealth for the benefit of the community. So how have you seen that playing out between East and West as well?

Philip Bagdasarianz: (21:42)
Yeah, just to give an example, the Western culture is, again, very individualistic and very focused on ownership. So the banks here, they will always ask, "Who do the assets belong to?" And in the Western culture it's clear, it's my wife's, or it's mine, maybe it's both. But that's as far as it goes. If you go to South Asia, the GCC and they comes at wealth, it's family money. The Western banks, they don't have a concept for that. They just don't know how to handle that. So they say, "Okay, well, is it your money?" "Well, no, it's my uncle's but he gave it to me to..." Well, you have to... Is it the uncle's account? So these concepts sometimes don't fit.

Philip Bagdasarianz: (22:31)
And on the other hand, I mean, this is just the concept of shared wealth. And I think there's a benefit, a huge benefit for shared wealth, I must say, because I think what it helps us understand that maybe I'm not just always an owner of things, but I'm a steward. I'm a steward of the family assets. Even if they're in my name, but I might have kids, I might have a business to run, the family reputation, whatever. And it's not just mine, mine, mine. So I do think that we can learn from the Eastern cultures what it means to be stewards of a larger good that I could share with others. And I think we're starting to understand that, that it's maybe not only just a owning society, but a sharing society, things like that are coming into play just also because they make more sense. They make more sense.

Rachel Pether: (23:33)
Yeah. And when you're looking with all the work that you've done in identity, perhaps you can tie that into, what is the real driver or real drivers behind investment decision making?

Philip Bagdasarianz: (23:50)
So I'll tell you what I learned at school, or what I found to be true in life. Because there is a bit of-

Rachel Pether: (23:58)
Let's go with the truth. We'll, all go with the truth.

Philip Bagdasarianz: (24:00)
Well, I think we all would like to believe that investing is a numbers game. And if we just get the figures right then we have the right decision made. So you'll see number crunching up and down, big data, whatever. The problem is that the more data we get and the more research we do on that data, the more we understand that it's not about the figures. I mean, not only. Long term, yes. Probably. But many short term decision making and prices, which is let's say, the intersection of all the decision makers, the market where you have the buyers and the sellers, that is not primarily driven by numbers. It's not a mathematical science. It's a social science.

Philip Bagdasarianz: (24:58)
So I had to unlearn some of the beliefs that we had and say, "Well, if you just get the figures right then investment decision will be right." And having learned a bit more, I think can help you learn about yourself, and why would I be tending to make a decision in this direction, and someone else would be making exactly the opposite decision. And to balance the decision because in the end I have a bias and I have to make sure that I don't fall for that side. And the social sciences do help to understand the investment decision, which is much more driven by emotions. And behind emotions, obviously, is the way I see the world, the way, am I fear driven? is the next big bang just around the corner? Am I doing profit? Or do I always just see, well, mankind can overcome anything? Everything's rosy. And both exist.

Philip Bagdasarianz: (26:09)
And because both exists, there is a market. If we all would know exactly where the price would be, there'll be no buying or selling of anything. We just all stick with it. So I do see that the identity is not only who we are but also how we view things. So it's become our glasses of how we view the world, how we interpret what's going on in the markets as well.

Rachel Pether: (26:34)
Yeah, I think that's really interesting, especially when you look at, I'm a fan of Tesla, for example, but there are certain people that just have almost godlike status. So people, I'm sure there are a lot of investors in Tesla that don't really know about the financials of Tesla at all but they like and they trust and they've heard of Elon Musk. So they're happy to invest in them, even though maybe sales aren't doing as well, or missing projections or whatever. But we're very driven as well by perceptions of things only.

Philip Bagdasarianz: (27:11)
Perceptions and hope, of course, and sometimes greed. Yeah, it can be. So fear and greed, they do tend to make the markets overreact. But on the other hand, I think it's expectations. Lots of expectations. Where do we think the next big thing will be? We've seen that. Bitcoin is another issue. What is the price of Bitcoin? Nobody can tell. That's just nothing you can put out on a sheet of paper, but still you could have made lots of money with it, or lost lots of money. So there are things and I do believe we're understanding more and more how identity. Which is a bit more than just personality, I think. But identity is a driver for our decisions as well as our investment decisions. Yep.

Rachel Pether: (28:13)
And I've heard you say before that sustainability is the highest possible long term value for all stakeholders. So with this in mind, what are some tips for making highly sustainable investment decisions?

Philip Bagdasarianz: (28:32)
Yes. I think what you said is, the value for all. And, of course, we have to define what that all is. And in the past, I think the definition of all was just cash. A figure. What was the money? And I think that we're coming to a point where we do understand, well, there's more than just the value. You can't count value in money only, it has to be wider than that. So let's say the trend, especially now from Europe, of course, driven by Europe maybe, the trend towards ESG. I am totally committed to personally because I believe it includes more values than just financial values in the evaluation of a company. Because I believe that in the long term, if you do add more valuations to a company or look at it from different perspectives and the company does the same because they do want to please their investors, obviously, the value for a wider range of people will be seen, and that is sustainable.

Philip Bagdasarianz: (29:50)
And sustainable means, what is good for my future. What is good for my future, my future kids. So just having said that, sustainability is clearly a long term goal. It's not bias towards immediate gratification. It's not asking the question, do I feel like doing this right now? It's more like, how will I feel after doing this? Or another question, will my future me or my future self thank me for this? Will my kids thank me? Will the next generation thank me for my decisions now? I think, of course, you can say that's very hypothetical. But if we make our managers focus on the next quarter only, and we pay him for that, no wonder they'll do exactly what we pay him for.

Philip Bagdasarianz: (30:53)
So I like ESG, we generally like family owned businesses because they tend to have the longer term view. Then manager or purely manager driven businesses. And that helps strongly, in my view, yeah.

Rachel Pether: (31:13)
We've actually had a follow up audience question come in related to ESG specifically, and they've asked your team service is a wide constituency of high net worth clients, and individuals. Is ESG a trend you're seeing, particularly when it comes to maybe the next gen wealth transfer and the younger generation? And then maybe from there you could talk a bit more about the differences you see managing money from the younger generation than the older generation?

Philip Bagdasarianz: (31:48)
Yes, there is a difference. I think the older generation, they always tended to be more philanthropic. So they put money out for the good and more gave it away. But their investments were not ESG related per se. They didn't check that. It was... yeah. So they built the hospitals, or the schools or things like that. The younger generation is looking, where's my money coming from? Where's my food coming from? Is it grown healthy? Is there child labor behind it or not? They want to know that. And I think that's something that is really the younger generation is asking those questions. And I think it's right to ask those questions. It's, where we put our money does have an impact. And many of the ESG managers, they don't just exclude companies that are doing bad things, but they try to influence those companies to improve their governance, their social values and so on. So the younger generation, they do focus strongly on that, as I see. Yes.

Rachel Pether: (33:10)
And just before I ask this question, I just want to wonder if any questions are off limits, I.e politics.

Philip Bagdasarianz: (33:21)
No [crosstalk 00:33:22] limits. Forgive me if I'm not... don't say what they really like to hear.

Rachel Pether: (33:30)
So we've had a question come in, looking from where you are in Switzerland towards the USA, what words, this is a two part question. What words would describe how the Swiss have experienced Trump and Trumpism?

Philip Bagdasarianz: (33:47)
Well, I'm going to twist it a bit and bring it back to identity. But let me go around quickly. If you were a business and you need to hire people, do you hire competence or character? And the old way generally was, you hire competence, you go for the best graduate, go for the top schools, whatever, and then you take them on board, you put them in leadership, it doesn't really work often, because they were trained in competence. And then you put them into workshops that should start training their leadership skills or in the end their character. And it doesn't work. So it was interesting for me to, I was at the vet in divorce, that was now two years ago, and to speak to some of their top educational institutions and they say businesses are changing and we need to change our education as well. Businesses are hiring competence. Sorry, they're hiring character and developing competence.

Philip Bagdasarianz: (35:05)
And looking from an outside to America, I think, unfortunately the US with the last president, they hired neither or. They didn't hire a politically competent person. They didn't hire a person of character that would value all three parts that I think needs to be valued. But let me say this, it's not predominantly exactly what Mr. Trump did. In many regards I think he did clean up things that were not correct. That were not in the interests of the US, and it's okay to take care of that. But he did it in a way that he broke down more out, I mean more of the throwning than he really built. There are a few things that he built, especially in the past couple of months as well. But looking at him, I personally couldn't vote for someone whose character is so far away from what I think would be needed for true leadership. Yeah.

Rachel Pether: (36:17)
I think that's a great answer. So thank you so much for sharing those views. Just a few more questions and then I've actually had an invitation come to you from the audience as well. But maybe you could speak a bit about some of the issues that arise when we don't have a very strong sense of identity.

Philip Bagdasarianz: (36:38)
Well, I think we all have a strong sense of identity but the question is, how healthy is? Of course, we might be confused and it's not about self worth only. Self worth is the value that I give myself, or how I see myself. Am I okay with myself? And the problem is, maybe first on that. If we derive our self worth from what others think of me, my appearance, if I derive my wealth, and maybe my self worth or my identity or my possessions or my positions, the problem is that is too dependent on others, or what they think. Now the dilemma is, I can't just derive my self worth from myself alone either. It doesn't work. I can't just say, I'm the greatest. Well, what will smack me in the face is truth. I'm not. It doesn't work that way that I can just talk myself into a healthy identity. I do need to develop it. And that's why, as I said, I think we need to develop all three in the same way.

Philip Bagdasarianz: (37:52)
We have to have a purpose. And the purpose has to guide our decision making strongly. And that can be in the small purpose or a larger purpose. We need to take care of ourselves as an individual. We can take care of our uniqueness. The culture has to take care of uniqueness. You have to be allowed to make mistakes. You have to give yourself the grace to make mistakes, and use them as stepping stones for learning. And we've heard this before, I know, but anyone who's been successful has been unsuccessful 10 times more often than has been successful. But he used that to learn. So I think it's the grace that we need to give ourselves. And in the end, the identity has to be also given from other people to us. This is not something you can construct. It's not a Facebook identity you can just put in whatever you want and that's me. No, it's not. It's not completely me.

Philip Bagdasarianz: (38:55)
And if I may, I just want to share, I have just one example of how someone else can give, put speak identity or call identity out into. Because I think one way would be to surround yourself with people who do exactly that. You give them the authority to speak an identity into you, a uniqueness. And this is a birthday card I got from my daughter. And you see it's a bicycle. So a bit cynical. A few days later, I fell smacking my face. But she said, "Daddy, thank you for the encourager, builder supporter, networker, connector, advisor you are. Thank you for your loving and strong arms dear and thoughtful mind you have. You're certainly the very best that we could wish for. So amazing to see you happy, active and passionate. We're so glad you were born."

Philip Bagdasarianz: (39:56)
Of course that touches the daddy's heart. Unbelievable. And this is only my sunny side. I do have other sides, which are part of my identity. But I really love to see that this is somebody that loves you that speaks identity into you. And I think that's what we owe each other as well. Gather two, three persons that you say, okay, what... They like you the way you are but they don't like you to stay exactly where you are. They love you too much to just leave you there. So if you take two or three people that help you on this throughout, I think that is probably the best step forward because you can't do it alone.

Rachel Pether: (40:42)
That's amazing. Thank you so much for sharing the personal message from inside the card as well. We have time for one more question. I'm actually going to take a question from the audience because I wish I had asked it. But it says, as someone who relocated several times in your formative years, have you found yourself without the need to belong to a group or the opposite? And how has this played into your ability to develop with, say, Westerners versus Russians?

Philip Bagdasarianz: (41:12)
Well, yes, being uprooted I had to learn my roots were very weak. I did have an issue to learn to belong or to be part of, to be recognized as a kid anyway. So I'm really happy that I did have family. And my dad always said, "Stick to us no matter what." So that was important. I developed very good and strong wings. So the roots and wings, which should be in balance, we're not very in balance, I can easily move here and there and adapt and go skiing one day and play at the beach the next. But also in the culture. But yes, that I had to develop and I had to sometimes forced myself to just sit still and contemplate and take time, me time, solitude, silence. And those are traits I learned to love and admire. I couldn't do that my formative years. I was always restless.

Philip Bagdasarianz: (42:22)
So finding that and just making myself and getting into a rhythm of activity, maybe even hyperactivity sometimes, but then also rest and complete, silence and solitude. That helped me balance. But I do think that also helps me understand different cultures and where people come from building some trust that I think they appreciate in our relationship.

Rachel Pether: (42:52)
Excellent. Thank you so much for that. It's been such a pleasure speaking to you today. But before I round things off, I do want to mention that you've actually had an invitation to speak at the 2021 Aspen Ideas Festival from Steven Keenan. So if that is something you'd be willing to do, I will put you in touch and thank you for the invite, Steve, as well.

Philip Bagdasarianz: (43:13)
Well, thank you so much. Yes. It's an honor.

Ruston Smith: How the Pandemic Impacted Pension Funds | SALT Talks #101

“When I look at governments and the amount of spend right now, I see them sort of investing to survive as opposed to the investment that they put in in 2008 and beyond for growth.”

Ruston Smith is the Chair of the Tesco Pension Fund (DB and DC) and Tesco Pension Investment Ltd, Non-Exec Chair of JP Morgan Asset Management (EMEA), Non-Exec Chair of Smart Pension Ltd, Non-Exec Chair of PTL Ltd, Independent Trustee and Chair of the Funding and Investment Committee for the BAE Pension Fund, Governor of the PPI and Chair of GroceryAid (charity for the grocery industry).

Due to the pandemic, pension funds in the UK and Europe were hurt, but are set to return much of their strength as we return to normal. The relative strength of pension plans is due in part to strategic de-risking that started back in 2006. This has involved a significant reduction in equity holdings and an increase in bonds. “The Pensions Regulator is really keen that UK pension funds have a very clear journey plan, which basically is a plan to de-risk so you get to a point of funding where essentially you can have just a low dependency on the employer that supports that pension fund.”

As we approach the end of the pandemic and the vaccine rollouts are near completion, there will be opportunity for a more sustainable recovery. This necessitate investments in areas like infrastructure and job training, important to jumpstart the economy.

LISTEN AND SUBSCRIBE

SPEAKER

Ruston Smith.jpeg

Ruston Smith

Non-Executive Chairman

Tesco Pension Trustees Limited

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hi everyone, and welcome back to SALT Talks. I'm Rachel Pether and I'm a senior advisor to SkyBridge based here in Abu Dhabi.

Rachel Pether: (00:17)
Now, SALT Talks is a series of digital interviews with some of the world's foremost investors, creators and thinkers. And just as we do at our global SALT Conference series, we aim to empower really big important ideas and provide our audience a window into the mind of subject matter experts.

Rachel Pether: (00:36)
The focus of today's talk will be on pension funds and their approach to ESG investor. And who better to discuss this with than Ruston Smith, the chairman of the Tesco Pension Fund and Tesco Pension Investment, the largest corporate pensioner scheme in the UK with over 350,000 members. Now, Ruston wears a number of hats: he's the non-exec chair of JP Morgan Asset Management, EMEA, a non-exec chair of Smart Pension in PTL, an independent trustee and chair of the Funding and Investment Committee; the BAE Pension Fund, governor of the PPI, and chair of GroceryAid, and he's also a former chair of the Pensions and Lifetime Saving Association.

Rachel Pether: (01:20)
I've had the pleasure of knowing Ruston for a few years now and he's an incredibly humble person, but I do want to embarrass him and point out that he recently won Pension Personality of the Year. And it was noted that he is a pension superstar and one of the nicest people in the industry.

Rachel Pether: (01:37)
As always, if you have any questions for Ruston, please just enter them in the Q&A box on your Zoom screen.

Rachel Pether: (01:44)
Ruston, you pension superstar, welcome to SALT Talks.

Ruston Smith: (01:48)
Thanks very much Rachel. By the way, I hear you had a trauma this morning. How's your finger?

Rachel Pether: (01:55)
I did. I cut myself. My nickname when I was growing up was Calamity Rachel. So, no surprises there.

Rachel Pether: (02:03)
But before we begin, obviously we want to do a deep dive today into pensions and ESG investing, but maybe you can tell me a bit about your personal background?

Ruston Smith: (02:14)
Well I am that old, I've been in pension investment now for about 35 years. So, time flies when you're having fun. I've spent 15 of those years as the group pension's director at Tesco. And alongside that, I was also CO of Tesco Pension Investment, which is the in-house STA approved investment firm that we set up in 2012. And I also had some people responsibilities, and I was head of insurer risk as well. And I had a few other jobs along the way, I happened to be a CoSec of a FTSE firm, a FTSE 250. Although I'm not a lawyer, I was also head of legal as well. As you said, I was chair of the Pension and Lifetime Savers Association, and I co-chaired the governments 2017 review of automatic enrollment and led a few other initiatives as well. So it's been great fun, Rachel.

Rachel Pether: (03:08)
Excellent. No, you've obviously got a number of years experience, and I'm not saying that because you look old or anything like that at all. But we've had people on SALT Talks before and talking about some of the funding gaps in the US pension market. So, given your perspective and your expertise in the UK and European pension market, can you talk us through the status of funds there? Does it show a similar level of underfunding that the US does?

Ruston Smith: (03:37)
Yeah. So what I'd say Rachel, is that certainly in the last few years, the funding gaps across Europe have narrowed. We've had some good investment returns in fact over the last five years. As you know the FTSE world has returned around about 12% a year. Interest rates have reduced so that means that gilt yields have gone down, which naturally increases the cost of pensions. But generally, funding positions have improved.

Ruston Smith: (04:06)
However, at the beginning of 2020 of course, with COVID, it was quite a challenging time. So what we did find is that assets fold back a little bit and those funding gaps opened a little bit wider. But to be honest, having spoken to a number of consultants across the UK just over the last week, I think the view is that actually they will come back. So, we're probably now back in the position that we were last year, so that's a great position to be in.

Ruston Smith: (04:35)
Of course, you'll hear accounting deficit information from CFO's when they announce their results. A kind of similar story Rachel, they sort of had a difficult first couple of months this year because simply yields fell down. Implied inflation went up and assets fell at the same time, so those international accounting standards gaps increased. But again, they've come up. Credit spreads have widened a little bit now and they're really pretty much back to where they were before. However, as always, there's a caveat: it depends on the investment strategy, the extent of hedging and all that kind of stuff. So those funds that are a better hedged, very good diversification across their assets, will be in a better position than perhaps those that are less well funded and not so well hedged as well.

Ruston Smith: (05:29)
But probably one point to call out, just particularly in the UK market, is that we have been on a program of de-risking. So, that basically means that we've been moving from return-seeking assets like equities into what we call matching assets. They're assets typically like government bonds, so where the yields are sort of matching the discount rates of the underlying pension liabilities.

Ruston Smith: (05:55)
And just going back to 2006, there's been a surprising change since then in the allocation to equities when, at that time, we were around about on average 61%, and the allocation has now reduced down to 24%. And a similar reverse story for bonds. So at that time in 2006, it was around about a 28% average holding, that's now increased up to 63%.

Ruston Smith: (06:22)
So you can see that there's been quite a significant amount of de-risking across the UK. And the Pensions Regulator is really keen that UK pension funds have a very clear journey plan, which basically is a plan to de-risk so you get to a point of funding where essentially you can have just a low dependency on the employer that supports that pension fund.

Rachel Pether: (06:48)
Yeah, I'd love to go into a bit more detail about that de-risking side of things shortly. But you mentioned the 63% allocation to bonds, and I also want to go more into the areas of lower growth and lower interest rates. But just taking a step back and looking at some of the macro recovery plans that we're seeing post-COVID, what are some of the implications here?

Ruston Smith: (07:16)
So I think, first of all, just to call out the obvious, where we haven't really got the pandemic under control, we're still waiting for a vaccine. And I'm sure that when that happens we'll see sustainable rises in the market. It's really a very different challenge, I think, to the one in 2008, the financial crisis. And when I look at governments and the amount of spend right now, I see them sort of investing to survive as opposed to the investment that they put in in 2008 and beyond for growth.

Ruston Smith: (07:50)
The IMF estimated, more recently, that countries across the globe are probably invested for COVID something like $11.7 trillion. Put into context, that's around about 12% of global GDP. If we go back to the financial crisis, the G20 countries, their stimulus package was equivalent to more like 2%. So you can see already the level of spending that we've had.

Ruston Smith: (08:20)
I mean, in terms of the recovery plan and where we might go when we start to see some light at the end of the tunnel, again, comparing it back to the last financial crisis, I think from my perspective and listening to people like John Allan in the UK who's leading the sort of COVID recovery plan, getting business leaders together across the UK, I think we're looking for a much more sustainable recovery and also looking at opportunities to almost leapfrog where we are to where we need to be. So investment, for example, in the likes of infrastructure, training in particular ... because I think people will need new skills in the new world ... digital and also technology.

Ruston Smith: (09:01)
But of course there's still huge uncertainty. And if we look at the sort of macroeconomic data at the moment, China's just come out and said that they've had growth of 4.9%. Now, that's compared to the same time last year and that's been driven by industrial growth. On the other hand, you look at the UK and we are struggling. We've got growth month on month and quarter on quarter, but it's still behind where we expected it to be.

Ruston Smith: (09:31)
And I think that when we look at 2020, we look back, the IMF is expecting that the globe in total will probably have net negative growth and something similar to the great depression, the 1930s. So this is really quite a significant event. And probably we'll find that China's the only major economy that will have any year on year growth when we get to the end of this year. So, a few challenges ahead.

Rachel Pether: (09:59)
No, thanks Ruston. And also want to pick up a bit more broadly on some of the income generation points that you mentioned. We have had an audience question come in from Ken [Lustock 00:10:10], which relates directly to what you were just talking about. And he said, "So in this environment of potentially lower interest rates of the longer-term and the significant de-risking that you speak about, it'd be great to hear your perspective on how pension funds anticipate generating sufficient returns and being able to keep funding the pension obligations."

Ruston Smith: (10:30)
So, that's a really valid point. Looking across Europe at the moment, there are some nominal rates, some nominal yields which are actually negative. But then when you throw into the mix inflation, you can actually see that yields, real yields, are negative pretty much everywhere. So, for example, in the UK, if you look at 15 year index-linked yields, their yield at the moment is -2.8%.

Ruston Smith: (10:59)
So, when you stand back as a rational investor, the question is: why would you invest there? The reason that pensions funds do, of course, is because the value of their liabilities, the cost of the pensions that they pay, are pegged to a discount rate that's linked to gilts, gilt yields. And therefore, it does make a lot of sense for pension funds to be investing in gilts, because what happens is as the cost of your pensions go up so does the value of your assets if you're purely matched.

Ruston Smith: (11:30)
However, coming back to the value argument. Obviously there's a cost, because if your returns aren't high somebody has to pick up the cost of funding the scheme, which is typically the employer. So some of the larger pension funds in particular, have been looking at what we call income generating assets. So it's kind of in the private market, the alt bucket, and typically they have long-term contractual cash flows, total returns up to around about 6%. And what they are is a kind of proxy faux yields, clearly they are not gilts, they carry more risk in a number of different ways. But they allow pension funds to invest in a different kind of asset class to try and have a proxy towards matching those liabilities and in doing that.

Ruston Smith: (12:18)
So I think I see more of those private markets investment from pension funds, but particularly at the larger end. If you're at the smaller end, you're probably going to buyout at some point. And typically they like a bunch of gilts, so it's quite likely that lots of pension schemes will continue to buy the gilts that they need.

Rachel Pether: (12:38)
So when you're talking about an income in the private market, would some examples of that be infrastructure assets? Or what would be some tangible examples there?

Ruston Smith: (12:48)
Yeah, I think that's right Rachel, sort of. Infrastructure, long-leased property, although obviously would have to look at the property market to make sure it's a sustainable kind of investment. But something that is long-ish term, so that's 10 to 20 years, if you can get that. Something that's got a good income yield, so that you can also cash flow match as well as matching your liabilities. And then have something that generates a reasonable return.

Rachel Pether: (13:17)
So with so many different variables to think about [inaudible 00:13:21] Tesco Pension as a global investor, how do you think about some of the key trends in the global markets?

Ruston Smith: (13:31)
So I think just going back to the point earlier Rachel, when we get to more stability, when we've got positive news about a vaccine, I think we'll see greater stability of markets and also hopefully a pick up in those. PE ratios, I think, for the rest of this year, will be lower, inevitably. We've had earnings which have been stressed through lockdown in different countries. But also, I think that where we've had sectors that have been particularly affected, unfortunately, I think that M&A activity will pick up. So I think there's an opportunity there for that M&A activity, which might also have an impact on the number of stocks that we see on the stock markets.

Rachel Pether: (14:17)
Yeah, that's actually a great point and I would love to pick up on that, because I guess it ties into your de-risking piece. With fewer and fewer public equities available, are investors walking into some sort of concentration risk there? Or how are you looking at the public equity markets?

Ruston Smith: (14:37)
So, I think it would be a bit unfortunate if they walked into a concentration risk, I think it's got good diversification. However, I think that inevitably, if we go back to the 1980s and you look today, the number of stocks that are actually quoted on stock markets, particularly in more developed markets, has reduced quite significantly. So I think in the US, for example, US stocks that are quoted have dropped from something like 7,000 down to around about 3,000 to 3,500 at the moment. So, that's quite significant.

Ruston Smith: (15:13)
I guess the other consequence of that actually though, is the concentration risk of larger companies. So, for example, you've got the FAANGs in the States. And sort of six of the largest companies in the States, I believe, represents something like 50% or just less than 50% of the US stock market. And equally, across Europe we've got large stocks called the GRANOLAS, I think they were named by Goldman's at some point. Always reminds me of breakfast, it's quite nice. But they represent something like 25% of the market cap of the European indices as well.

Ruston Smith: (15:50)
So that's a watch out, because interestingly if you've got a relative performance target against a benchmark, whether you hold or you don't hold those stocks has a really big impact on your performance. So it's another kind of concentration risk and an implication, I think, of the changing dynamics in markets.

Rachel Pether: (16:13)
Yeah, I think that that question around how to benchmark when you have such a varied portfolio always comes up as a sort of point of discussion and debate.

Rachel Pether: (16:24)
What does GRANOLA stand for actually? What are the key stocks there? Is it mainly tech-driven as well, similar to the US?

Ruston Smith: (16:31)
Yeah, I thought you might ask me that question. So I think it's ... you've got Glaxo for the G, Roche for the R ... and then I'm going to have to check ... AMSL for the A, and then you've got Nestle, and I can't remember the rest. But that's not a bad shot at GRANOLA. So it's basically the first letter of the names of each of the largest companies on the indices in Europe at a point in time inevitably. As I say, named by Goldman's I think.

Rachel Pether: (17:03)
Sorry, I wasn't ready to give you such an on the spot test there.

Rachel Pether: (17:07)
But I just wanted to ask one more question on the sort of private assets right before we move into ESG. If you're looking at a greater exposure to the private markets, how might this align with domestic government investment policy?

Ruston Smith: (17:26)
So that's a really interesting question, as we start looking forward at how domestic investment by governments is made. I mean, essentially, they need to invest in the underlying economy, they need to create jobs. And as I said before, it's going to be in the likes of infrastructure, training, digital and technology. Now, clearly, there'll be a lot of investment in quoted businesses to leapfrog where we are today. But I guess and a lot will be invested in infrastructure, whether that's digital infrastructure or whether that's the physical infrastructure of different countries. And I think that through that, there will be many opportunities through private markets, to invest in opportunities for the future.

Ruston Smith: (18:12)
And in fact, even in the UK, the UK government have been encouraging defined contribution schemes where people pay in contributions alongside the employer. Because they're relatively immature and we've got people been paying in for decades, there's the perfect opportunity where you don't need the daily price in liquidity that you might do in other areas. So it's a good opportunity to invest in the underlying economy and to support start-ups in other areas and build the country. But of course, like anything, a good diversification's really important. So not just between private markets, but also across public markets as well. So I think there'll always be a need for both.

Rachel Pether: (18:59)
Yeah, that's interesting. On the sovereign wealth fund side as well, we're certainly seeing that in the Middle East, that your point about investing in physical infrastructure in the region but also digital infrastructure through the venture capitals. So certainly seeing that on a global perspective.

Rachel Pether: (19:16)
When you're looking at the infrastructure efforts, what sort of returns are you looking for there?

Ruston Smith: (19:22)
Well, and I think when we think of infrastructure, we think of two different things. One is income-generating assets, another is ... people might call them secure income assets, that's another name for them. So, for there, you might be looking at a total return of 6%. Because, again, you're looking at something that is a proxy to gilts, which at the moment are sort of sub-1%, and in some cases negative even in nominal terms.

Ruston Smith: (19:48)
When you're looking at an alternative's allocation, then you'd be looking at double digit ideally. But also you're carrying a lot more risk, and duration is probably just not as important as income-generating assets because they're there to do a very different job.

Rachel Pether: (20:05)
And when you look at the concentrational or market consolidation, do you think that this will open room for more record growth of innovative start-ups? And thank you for your question, Phillip.

Ruston Smith: (20:20)
I think we'd need to encourage that. I think that we've seen a lot of start-ups in the last few years as the economy really got going. And there are so many amazing, creative people. I think the key thing for me, is making sure that we provide the right capital at the right time to the business that can make that difference. But I think that the appeal today, perhaps, would be for entrepreneurs to go down the private markets route and then perhaps IPO at the end of it. Rather than going into a quoted listed company, which of course has huge governance requirements and reporting requirements on quite a regular basis.

Ruston Smith: (21:01)
And in fact, you've seen some entrepreneurs like Richard Branson for example, who was quoted at one point and has sort of de-listed. And again, it's to take a longer-term view and to manage businesses in a slightly different way, but without all those very short-term reporting requirements.

Rachel Pether: (21:20)
Yeah, their companies are certainly staying private longer. I mean look at SpaceX, raised its Series N funding round recently. And historically it sort of went up to like Series B or C, and now we're getting into the latter half of the alphabet already.

Rachel Pether: (21:35)
I do want to shift slightly into ESG. And obviously pension funds with a long-term view can make some long-term investments. How was the Tesco Pension Fund looking at ESG? And maybe you could talk about balancing that out with the fiduciary duty as well?

Ruston Smith: (21:59)
So, I'll first of all differentiate between the Defined Benefits Pension Scheme at Tesco, which is closed, and where ESG is embedded into the investment process. And that includes right across private markets not just quoted equities, for example. What we've got is a retirement savings plan, which others might call defined contribution or DC. But in Tesco, if I say DC, colleagues there think I'm talking about a distribution center so I have to make sure that I'm very, very clear. So we apply responsible investment to both, but they're applied differently. So they say on defined benefit, it's physically integrated into the investment process right across all asset classes.

Ruston Smith: (22:46)
Interestingly, on the Tesco Retirement Savings Plan, the defined contribution scheme, that's quite young actually Rachel. It's been set up in the back end of 2015, worth around about £2 billion today. And what we're trying to do is look at how we can apply responsible investment right across the asset base, 75% at the moment of which is passive, passively managed as opposed to active management. We have spoken to our members, to ask them what matters most to them around responsible investment. We've also captured the language that they use, because the other point that we're very conscious of is there's a huge amount or jargon in the industry, and actually in communications when we try and talk to members across the UK. And what we want to do is to make sure that we capture the language that they use, and then we can talk to them in the words that they use rather than the jargon that the industry uses.

Ruston Smith: (23:50)
As part of that, understanding what mattered most, we're looking at how we apply responsible investment right across the investment strategy, but at the same time emphasizing the areas that mattered most to them. So we're going through a process at the moment where we're looking at how we can leverage that through all the different asset classes. How we can also align that through our stewardship, so that as we are investing and as we are influencing companies and entities at which we invest, we can make sure that we've got a very focused approach to what we're trying to deliver in the long-term. And as part of that of course, we're also making sure that we've good, clear communication with our people.

Rachel Pether: (24:40)
That's great. There's so many points within that I want to pick up on, particularly when you talk about the heavy allocation that you have to passive strategies, but also some of the private market points I think would be quite interesting to go into.

Rachel Pether: (24:55)
So, how do you think about ESG when you're looking at the passive funds that you govern?

Ruston Smith: (25:02)
So, I think the way we look at it is first of all to apply it right across the portfolio, all the savings we've got. What I'm seeing in the UK at the moment is a huge effort to focus on ESG and do the right thing, but it tends to be led by an allocation into an ESG product. So you might have a 20% allocation to a product but then the other 80% is just essentially the rest.

Ruston Smith: (25:32)
What we're going to try and do is make sure it's applied uniformly right across the whole asset strategy, and that will mean probably a greater mix of active management compared to where we are today. But also just making sure the remainder of the passive is responsibly invested. And then, as I say, because we understand what matters most to our people, we're going to look at, for example, three themes are protecting people's rights, so that was part of it, including things like fair treatment of people, fair pay, human rights. Working towards a better society, so caring for the elderly, health, education, future opportunities for all. And then protecting the planet, reducing plastic waste, renewable energy and renewable waste.

Ruston Smith: (26:14)
So we would look at opportunities to invest, where they emphasize the areas that matter most. And, as I say, then align that with the stewardship strategy that we have so that we're influencing in a very consistent way.

Rachel Pether: (26:27)
And so, just taking that and applying that to the private markets there. If you were investing in, say, health care asset like a senior person's home, or something that fitted within one of those desires from your fiduciaries, would you take an active role in the management of that as well? Would you try and influence the company in certain ways or would it be more of a passive private market investment approach?

Ruston Smith: (26:59)
Well, I suppose it depends on how we've got exposure to that company. Whether it's parts of an overall product through an investment manager, a provider, or whether we've done it directly. If it was direct investment, and assuming that it was a sizeable investment, you would hope to have that direct contact with them and influence them in the way that you could best. If it's through the fiduciary, like a manager, then essentially you would have to monitor the manager and how they're doing that.

Ruston Smith: (27:31)
It's an area that I think is quite challenging. And so, it's an area that we're thinking about and sort of asking lots of questions globally, to look at the leading edge way of managing those relationships.

Rachel Pether: (27:46)
And we've actually had a question coming in from the audience, thanks very much Mark, who said, "What's the most efficient way for a manager to create an ESG commingled fund, given that ..." and I guess we haven't really touched on this point yet in depth but ... "Given that ESG means different things to different allocators? Should the manager plant a flag in the ground and say in effect, 'This is what we believe,' and then let the allocators decide whether or not they want to invest based on that?"

Ruston Smith: (28:16)
So I think inevitably, Rachel, that ESG will be generalized. I think one of the challenges we've got at the moment is that we all understand and know what we've got to do through ESG. I think what we're all still grappling on is a consistency around what does good practice actually look like? And then also, how do you measure that? So for example, one of the things that I'm considering at the moment ... and again, talking to global partners ... is what are the most appropriate metrics to use to measure companies and entities in which you are invested?

Ruston Smith: (28:56)
Now, one of the challenges here is you could go to a company ... in fact, you could have 500 or 600 pension schemes going to the same company, all with different metrics and saying, "We think you should use those. And we think you should measure yourselves against those and disclose them." The challenge obviously, is they're not going to do that. So what I'm quite keen on is looking for some global consistency, and I know there are entities out there trying to drive this through, to look at what are the metrics that matter most? Which then, coming back to your question, provides the greatest future influence of change, delivers the future expected returns as well ... because obviously that's important ... but then builds a product which actually delivers on both. So it's a product then, which essentially drives the returns for the customer but also, at the same time, truly hand on heart is going to deliver the most positive influence in the future.

Rachel Pether: (29:57)
So when you're looking at, say, commingled funds, I guess that ties nicely into: what are asset owners doing collectively about ESG? I know there've been a lot of groups formed and discussions have been started. So you've got the One Planet working group, for example, where six of the worlds largest health and wealth funds came together to invest in assets that could tackle climate change.

Rachel Pether: (30:25)
What are you seeing in terms of collaboration between some of the larger asset owners? And do you think more needs to be done in this regard?

Ruston Smith: (30:34)
First of all, I think more needs to be done, it would be better if we could have a much more collaborative approach. But some of the largest pension funds in the UK have been getting together, for example, to look at climate risk, climate change, and look at what is the best approach that we could all take. And then obviously, we benefit from the scale that we create.

Ruston Smith: (30:56)
And just going back to really a question on being the commingled funds. It's about looking at what is the change we want to see? What are the things that matter most to members, which are then the ultimate customers of pension funds? And creating that proposition that really delivers for the customer.

Ruston Smith: (31:16)
So I think that there are opportunities here, but I think it's about listening, it's about identifying the right forward-looking metrics that will make the most difference in the future. And then building product around collaborating together, so that the sum of our parts optimize the opportunities set in the most efficient way for corporates. So, what are the smallest number of metrics that will make the biggest impact? And we can measure them and we can work and get behind them.

Rachel Pether: (31:49)
And are you seeing any negative unintended consequences of the ESG investing? There's been a lot of corporations being accused of greenwashing. What do you see as some of the downsides associated with this?

Ruston Smith: (32:06)
So I think sadly, inevitably, there will be some greenwashing, there is some greenwashing. I think the point that I'm more reflective of is whether or not, with all good intentions, collectively pension funds rush to be net zero on emissions in carbon. And if they do that really quickly ... As I look at the whole global corporate environment, all the companies around the world, you're inevitably going to have sectors that are able to lead, you'll have companies which perhaps are not in the right place to be able to be part of that leading pack. And I guess the concern I've got is, could we be in a position whereby we put all our money behind the companies that will naturally be the leaders? And then, what's the consequence for those who have all good intentions but are starved of capital and are unable to catch up?

Ruston Smith: (33:03)
In the ESG, my mind is around the S, what happens to people in jobs and communities and environments if we just focus on the leaders globally in this space? I'm hoping that won't happen, but I can just see potentially where pension funds want to be doing the right thing and get down to net zero and do it as fast as possible. I do question: what about the rest? And where will they get their capital from and will they be sustainable entities in the long run?

Rachel Pether: (33:35)
Yeah, I guess that's a really interesting point about the intent of the companies, right? If they have an intent to focus on the E and the S and the G and it doesn't quite come to fruition, then whose responsibility is that debt? But I guess as long as the intent and the [inaudible 00:33:54] [inaudible 00:33:55] [inaudible 00:33:55], where there's a will there a way.

Rachel Pether: (33:58)
We have another few questions that have come in from the audience, some are specific and some are broader. So I'm just going to ask a couple of the specific questions first. When you're looking at some of the concentration risk within the GRANOLA stocks that you talked about before, how are you seeing the pension funds balancing outside of these risks? Are they doing that with more hedging? Or it's more just through diversification of other parts of their portfolios, for example?

Ruston Smith: (34:30)
So I think that in the defined contribution world there's a lot of passive investments, so they just hold everything. So that, in a way, that doesn't really matter. I think when you go to active management, one of the challenges is: how do you avoid it? I think when you look at regional equity allocation, in other words you are trying to perform against the benchmark for a particular country, that then becomes quite challenging. Because if you've got some dominating stocks of six, there's a real consequence as to whether you hold or don't hold those stocks. Equally, to be honest, even on a global basis. But what I see more of now, moving away from a more traditional model, is that equity mandates are more global and therefore you've got wider choice and it dilutes the impact of those larger businesses.

Ruston Smith: (35:21)
Having said that, we know that ... I think it's the top five stocks in the US are worth something like $4 trillion. So even globally, when look at the FTSE world, they're still a very big part of it. But I suppose it's like anything, it's just managing the risk of diversification and just thinking about the very long-term philosophy that hopefully you're trying to adopt.

Rachel Pether: (35:46)
Thanks Ruston. So we have time for a couple more questions.

Rachel Pether: (35:49)
So, when you're looking at the long-term philosophy, what do you think might surprise us in the next, say, two to five years?

Ruston Smith: (35:58)
So I think, first of all, I'm quite optimistic. I'm hoping that what we're seeing in the early part of this year, so I think of the canals in Venice and how clean they were when they weren't used, we can see the air and the pollution that's been eradicated in different parts of the world because we took cars off the road. I'm hoping that as we invest in this new world, as we come out the other side of COVID, we will do so in a very sustainable way. In a way that we will invest in technology, we will invest in the planet, cleaner technology, and will accelerate that.

Ruston Smith: (36:39)
So I'm actually hopeful that all those things will be positive. I guess that the bit that concerns me in the short-term are the social aspects around the world. Inevitably, even in the UK, you can see unemployment increasing and the social implications of that, with people not having enough money. And then it's, how do we create an accelerated approach to injecting capital to places to help people retrain very quickly and then importantly get them into jobs?

Ruston Smith: (37:12)
The other thing is that I'm quite hopeful that people have continued to save through the crisis, and particularly people that put money into their pensions at the early parts of this year. When we get back to where we think we're going to be, hopefully they'll have a nice sort of pick up in their retirement savings, so a nice little incentive for their future.

Rachel Pether: (37:33)
Well that's actually a really optimistic note, and it would be a good place to end but we have actually had a question that I think is highly relevant. So, Mark [Birbeck 00:37:43], thank you so much for your question: Just as a counterbalance to the de-risking trend that we're seeing, do you think there's a role for pension funds to be entrepreneurial and support young businesses with capital? Which I guess sort of ties back to your previous comments about investing in innovation. And then: What is the future DNA of pension funds as an investor?

Ruston Smith: (38:07)
So a good question. I'm going to split this between two types of pension fund. So I've got defined benefit, who really are trying now to get to a place where they've got little or no dependency on their employer, which means that they will be de-risking. And so they will invest in private markets for sure, I've already called how they'll do that through income-generating assets.

Ruston Smith: (38:31)
But I think the future for the investment, particularly in start-ups, as the [inaudible 00:38:37] is described, is in the defined contribution market. We've got lots of people investing money with very, very long-term time horizons. And this is a perfect opportunity, with a good manager that gives good diversification across lots of ideas, acknowledging that sadly, yeah, there will be defaults, that we can invest in entrepreneurs in the underlying economy and then drive that through to get to a much better place.

Ruston Smith: (39:04)
And we do have the funds going in, there are lots of savings going in. We're building assets in the UK really quite quickly in defined contribution. We shouldn't get hung up on [inaudible 00:39:14] pricing, particularly for the younger end. There is a huge opportunity. But I think, to some extent, there'll be a change in mindset from where we are today, but it's one I know that the government's behind which is a very good thing.

Rachel Pether: (39:27)
And could you also see the sort of investment in start-up ... I mean, that could fall under an ESG agreement couldn't it? Because it's that social side, it's supporting young entrepreneur's kind of capital for growth as it were.

Ruston Smith: (39:42)
Yeah. And I think actually, Rachel, that the new world should be about sustainability. So any start-up should be thinking about the learnings from the experience we've just had, thinking of the future. And to be a really successful, sustainable business will be all the good elements of ESG.

Ruston Smith: (40:00)
So to bring that together, will be an attractive proposition for a pension fund. Obviously, providing that the idea is good in the first place because we do need to make money.

Rachel Pether: (40:10)
Absolutely. That's true, you need to pay those pensioners because that would probably cause even greater social unrest.

Ruston Smith: (40:19)
Yeah.

Rachel Pether: (40:19)
So we have time for one more question, and my question is: Why do you not have your recent Pension Personality of the Year award up on the bookshelf behind you?

Ruston Smith: (40:28)
So, really simple answer: it hasn't arrived. It's in the post apparently, so I'm very excited. Thank you.

Rachel Pether: (40:39)
Excellent. Well, maybe we'll need to do a follow-up and you can have it in the background.

Rachel Pether: (40:42)
But Ruston, thank you so much, I knew it would be a lot of fun talking to you today. And thank you for your insights and your eternal optimism.

Ruston Smith: (40:51)
Thanks very much indeed Rachel. I hope your finger gets better.

Mishal Kanoo: See Change as an Opportunity | SALT Talks #98

“If you want a company to fail, surround yourself with yes-men.”

Mishal Kanoo currently serves as the Chairman of The Kanoo Group, one of the largest, longest running and independent family-owned groups of companies in the Gulf region. He holds chief positions as Chairman/Director of various reputable companies, including AXA Insurance Gulf, Gulf Capital, KHK & Partners Limited, Dalma Capital, Johnson Arabia LLC and KAAF Investments.

Started in 1890 in Bahrain, The Kanoo Group has been effective at avoiding the generational drop off as control passes down. Often times, there is a disconnect between a family group’s founding and the third generation of control. The Kanoo Group has maintained longevity by treating each generation as an opportunity to change. “We were lucky in that every generation within my family looked upon the new one as a rebirth of a new business.”

Among the recent shifts in approach is the inclusion of more women in the family business. Women are not only equal in ability, but more importantly, they offer a different perspective that contributes to more well-rounded decisions. The combining of men and women on boards creates a long-term benefit where both groups learn to adopt and incorporate a more holistic view when making decisions.

LISTEN AND SUBSCRIBE

SPEAKER

Mishal Kanoo.jpeg

Mishal Kanoo

Chairman

The Kanoo Group

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hi everyone and welcome back to Salt Talks. My name is Rachel Pether and I'm a senior advisor for SkyBridge Capital based here in Abu Dhabi as well as being the MC for Salt, a thought leadership forum and networking platform that encompasses business, technology and politics. Now as many of you know, Salt Talks is a series of digital interviews, with some of the worlds foremost investors, creators and thinkers. And what we're really trying to do here is, provide our audience with a window in to the mind of subject matter experts.

Rachel Pether: (00:40)
Today's focus is going to be on family businesses, entrepreneurship and gender diversity. And who better to discuss these topics with, than Mishal Kanoo, one of the most iconic business figures in the Middle East. Mishal is chairman of The Kanoo Group, one of the longest running, largest and independent family owned businesses in the Gulf region. He is also a motivational speaker, is published in business journals on a regular basis and holds key positions as chairman or director of various companies, including AXA Insurance Gulf, Gulf Capital, KHK and Partners Limited, Dalma Capital, Johnson Arabia and CALF Investments.

Rachel Pether: (01:22)
Finally, Mishal is also something of a role model to me for the absolute tireless work that he does in terms of female empowerment and gender diversity in the region. So Mishal, welcome to Salt Talks. It's a real pleasure.

Mishal Kanoo: (01:38)
Thank you very much for inviting me.

Rachel Pether: (01:41)
So, we have quite a geographically diverse audience on today's calls, and I know what they say about assumptions, but assuming that people don't have much knowledge about you or your background, could you just tell me a bit about your personal story?

Mishal Kanoo: (01:58)
Yeah. It's kind of an embarrassing situation to be put it, because t's not easy for me to sit and talk about myself. However, I will say the things that I am very proud of are the fact that I'm married and have four beautiful children, and they mean the world to me. And that is my main concern in life, other than of course, ensuring that whatever businesses I'm in, does the best that they can do and make sure that the people who work within the organization also get as best an opportunity for them to grow and to benefit from the organizations we're in.

Mishal Kanoo: (02:40)
I think it's very important, because we tend to forget as humans, and we put organizations at the top of the list, but reality is also going to be the humans are to be at the top of the list, and recognizing them and recognizing the people who help build any business or any institution. They are the key personnel, they are the people who you should be saying thank you to all the time, and we seem to forget that. And I would never be in the place I am in, without the fact that I am member of my family, I am member of my company, I am a member of my community, I am member of my society, and each of them play an important role in where I have arrived.

Mishal Kanoo: (03:28)
And I think it's also very important to recognize that education is what got to me sit here with yourself and be able to sit and talk to you. Education is formal education and education is informal education, and it is both of them, being able to utilize both of those, again, is the reason why I'm sitting here and able to be able to talk to you about this situation or any thought that you'd like to express and talk to me about.

Rachel Pether: (04:00)
Fabulous. And I'd love to come back a bit later to the points you made about education, but you do work for one of the oldest, largest and most well respected family businesses in the region. Did you always want to work in the family business?

Mishal Kanoo: (04:16)
The reality is, yes and no. Yes, I always wanted to give back to my family because they've been very generous with me. They ... when somebody takes care of you, somebody ensures that you have an opportunity, I think the very least you can do is give back something to them. And no, because after a while it becomes a bit hard to continue pursuing all the goals you want to do from personal point of view.

Mishal Kanoo: (04:48)
It's not that I have anything against my family. In fact, I love my family, and I think what you call ... as I said, I wouldn't be sitting here if it wasn't for my family and all the support I get from my family. It's what makes family businesses special, not just my family, by families in general. And it's having the heritage. The company started in 1890 in Bahrain. So, having that heritage in this region is not easy to come by. Having a huge network made up of family members ... at one time, which was made up of uncles, for me, they were made up of uncles, and now made up of cousins. And each one brings his or her own specialty, knowledge base, and we all play a whole role together to make this company significant. And being part of that, for me, is really special.

Mishal Kanoo: (05:40)
So, while I'm not able to do everything I want to do from a personal point of view, but having this as something to fall back on and something to be full of pride about, not arrogance, but pride in my family and all we've accomplished, keeps me and drives me forward.

Rachel Pether: (06:03)
And so if you go back to 1890, the family business was established 130 years ago, you've been through a number of generational wealth transfers during that time. How well prepared do you think family businesses are in general in the Gulf Region for intergenerational wealth transfer? And maybe in terms of being institutionalized enough to make that transfer without too much [inaudible 00:06:30] political tension?

Mishal Kanoo: (06:31)
You ask a very, very important questions, because a lot of family businesses, not just in the Gulf, but in the world as a whole ... there is an axiom that usually says, and sorry it's going to be male-dominated in terms of the wording, but it's, "The grandfather starts the business. The son takes care of the business. And the grandson fritters it away." Again, doesn't matter which country you're from, there's always an axiom that's similar to that one. And it's usually by hitting the third generation, and the reason why hitting the third generation, the business starts to die, is because there is a loss of connection between the last generation, the third one, and the first generation in terms of the struggle and the pain that went into making it, and there is a disconnect. Because of that disconnect, they can't see why they have to continue the struggle.

Mishal Kanoo: (07:29)
I think we were lucky in that every generation within my family, every generation looked upon the new one as a rebirth of a new business. We take new generation, and we look at this, say, "Okay, this is what we have currently, but now the next generation has to add onto it and build up on it. It's a new generation, and a new idea, new thought." It's not a disconnect, because we are consistently and constantly talking to one another, interacting with one another.

Mishal Kanoo: (07:59)
I got to see the pains of my uncles who helped institutionalize for us this business in the 1960s. At that time, it was a very strange beast. Usually, it was the father running the business and bringing his son or sons on board, and then they would run everything. Whatever the father said, the sons would apply. My uncles, two of them at the time, my uncle [inaudible 00:08:31] and my uncle [inaudible 00:08:32], God rest their souls, decided we are going to institutionalize this. They saw the British equivalent that they were competing against, and they brought in professional managers. And the professional managers had a very strong say in terms of how the business was run, in conjunction with, by setting up a board, by setting up how a business should be functioning, governance structures. We did that in the 60s, and I think that was one of the reasons why we managed to institutionalize at such an early time.

Rachel Pether: (09:06)
I love what you said about you're also constantly, not reinventing yourself, that's maybe the wrong word, but trying to be innovative within the family business. Where are you looking at in this generation, and how have you changed your investment strategy and focus to make sure you stay current?

Mishal Kanoo: (09:26)
What's happening currently in the world is a complete different ball game compared to what happened before. In the past, you had geographical/political barriers, and would block companies to come into your playground and start competing with you. Right now, it doesn't really matter what business you're in, if it is expandable, if it's available, it'll be coming to your neighborhood whether you like it or not. And you have to start to say, "Okay, I have what I have, and it'll take a while for this current business to be threatened. But there are opportunities on the other side, on the businesses are coming up. Which one of them is going to be a unicorn?" I'm using the moniker that's used currently for large companies.

Mishal Kanoo: (10:18)
And, it's a shot in the dark, because really you don't know which one it's going to be. The key is trying to understand, do you want to stay in your current businesses and hope to God it goes away, which I can't see happening. So you want to stay in your businesses, and look completely outside of your area of comfort? Or, are you going to look at your businesses, and say, "Okay, what businesses can I add to that are going to scale up, and I can be part of that huge scale up that's going to happen?"

Mishal Kanoo: (10:48)
Right now, every company is basically ... family businesses anyway ... are trying to figure out which one is the best approach. I think those who are going to say "I'm going to seal myself up in a cocoon, and everything is going to go back to what was before," they will very soon cease to exist. Of the other two, one is a more hotshot hoping it actually happens, and the other one is a bit more focused.

Mishal Kanoo: (11:13)
Now, it might be that it will take a while for the ones that they are concentrating, the investments they're concentrating on, will bear fruit. The question is, to what degree are you willing to be patient? If you were an early investor, for example, in Amazon, and first five years, horrible. Next five years might not have been that great. But 20 years on, wow, it's there, this is the company you want to be part of. How many people had the breadth to wait for that to happen? Because it might be that it's not the business that's wrong, it's not the management that's wrong, it's just an issue of time because you need things to catch up with you.

Mishal Kanoo: (11:58)
Or, in some cases, for example, things that happen over night. I mean, you have so many companies that started in say 2018, and today are bigger than companies that existed 100 years ago. It's a matter of sometimes luck, and I know we try to think in business or investment there's no such thing as luck. Yes there is. And sometimes it's an educated guess, and perseverance, because again, whenever someone invests in private equity invests in a VC fund, the rule is one or two are spectacular, three are okay, and the rest are garbage. The question is, is in any business, if you're going to take that approach, you must be able to hope, of your bouquet of investments that you've invested in, one or two of them are actually going to be successful, and you stay with it.

Mishal Kanoo: (13:02)
Now, how lucky are you? Well, that depends on how lucky are you?

Rachel Pether: (13:11)
Yeah, no, I think you're almost de-risking yourself as well, aren't you? If you're investing in companies that can have a direct impact on existing companies in your portfolio, you obviously have a very diverse portfolio.

Rachel Pether: (13:25)
I do want to go down further on some investment questions, but-

Mishal Kanoo: (13:29)
Before you get to this, I also want to focus on one thing. The current businesses, any business currently in [inaudible 00:13:39] is not going to go away for these new technologies. People forget that technologies, any technology is a tool that will be utilized by a business. This is key. I'm not going to invest in technology for the sake of technology. I'm going to invest in technology that's going to actually help what I currently have. So, the key is to be able to understand where I am and what technologies are out there that I can add on to my business, because that business is not going away.

Mishal Kanoo: (14:06)
For example, food is not going to go away. Logistics is not going to go away. Shipping is not going to go away. Air travel is not going to go away. But the tools that will get me from point A to point B, or the project from point A to point B, or the service from point A to point B, if I can get those tools that make me better positioned than my competitor, is what will drive business towards me. So, I just wanted to mention this point. The old world businesses should not be thrown aside in the thinking they're dead. They're not dead. It's just how many new tools can I add on to my current business that will allow me to grow that? That will be key to my success if I pick the right tool for it. I'm sorry, I just wanted to clarify that point.

Rachel Pether: (14:58)
No, I think that's a great clarification point, using technology more as an enabler rather than a set class, as it were, in an of itself.

Rachel Pether: (15:09)
We've already had, actually, a couple of audience questions come in that are related to specifically the family business side of things. So, I'll address them now. We've had a question from Kim, thank you as always, Kim who said: "Mishal is so impressive, and his family's accomplishments. Please ask what he and his family are doing to prepare the next generation to take forth the business." And maybe this comes back to the education point that you raised before as well.

Mishal Kanoo: (15:39)
Formal education is very important. There is no doubt ... and by the way, this is something that we've always done, at least as far as I can remember ... you have to get a formal education, because that's the basis for where you start the other education. But once you've had the formal education, then the other education, which is the on the ground, hands on education ... I'll give you an example of something I experienced.

Mishal Kanoo: (16:01)
When I got my bachelor's degree, I was really happy. You know, I have my degree. Right. Now, I want to have a position in the company. I want to run things and do things, and fix things. My father looked at me like "What are you talking about? Yes, you have formal education, but you don't know anything about the businesses were in. So, do a round of the businesses." So, I did a round of the businesses. Then I thought, "Oh, you know what? Now, I have a better grasp of the businesses, I know everything, and I can take on the world." My father said, "You know what? No. You're going to experience what everyone else experiences from the bottom up." And while it's annoying, and it was painful, it did give me insights that otherwise I wouldn't have.

Mishal Kanoo: (16:47)
So, yes, it's important to get the formal education. Yes, it's important to get the training, what it's calling, investment banking training, which a lot of investment banking will go to family business ... banks will go to family businesses and say, "Give us your children to help train them in the investment aspect of it." But, it's only when you're on the ground, when you feel that you don't have a say in things, and you can start seeing things without having to worry about things so much, because you are so low in the food chain, that you can get to have better picture.

Mishal Kanoo: (17:24)
One of the things we do do in our family, is we send our ... as soon as someone graduates and has gone through a small series of understanding our current businesses, we try to send the outside to other businesses to go and work outside. The idea is you go work outside, you don't have your family nearby to carry you and to push you forward. You get to see what other people, how they interact. You get a better understanding of human nature. And then, when you come back in, you are a bit more of a rounded person. And then you add your experience. There is nothing better for a person to have than his or her own experience in a business because that adds a dimension that books cannot explain to you, other people who've experienced it cannot explain it to you, because it's something you've touched, you've felt, you've experienced. And then, you can have a better picture.

Mishal Kanoo: (18:27)
Now, hopefully, the member of the family who comes in, doesn't come in with an idea that once they've gone through all those steps, that "Okay, now I know everything." Because we're constantly in flux and change, and we have to understand how things work.

Mishal Kanoo: (18:50)
Another anecdote: At my office, I had a huge painting, and it says the word in Arabic, [foreign language 00:18:58]. [foreign language 00:18:58] is not [foreign languane 00:19:01]. In Arabic, [foreign language 00:19:02] means "no." [foreign language 00:19:04] is a definitive "no." It means, "Forget it, it's never going to happen."

Mishal Kanoo: (19:07)
And everyone used to ask me, "Why do you have the painting behind you? Why do you have that painting in your office?"

Mishal Kanoo: (19:13)
And I said, "Because this is the first thing my family tells me every time I have an idea: 'No.'"

Mishal Kanoo: (19:19)
And one day, I am frustrated ... I've been in the company for a while, and I got frustrated ... and I went to my uncle, my Uncle [Abdullah 00:19:24], who was the chairman at the time, and I asked him, "Why do you say, 'No.'? Why is it every time I have an idea, you say, 'No.'?"

Mishal Kanoo: (19:32)
He said, "Because I want you to go and find every plausible answer for every plausible refusal I'm going to give you, so when I say, "no" you can give me the answer, and finally I'll be convinced and we can move forward."

Mishal Kanoo: (19:45)
And I said, "You know what, I didn't think of that."

Mishal Kanoo: (19:48)
It's all, again, coming through these experiences. Now, hopefully, I think myself and my cousins don't do that to our younger cousins, our younger siblings. The idea is to try to help them, embold them to take risk, to don't worry. If you make a mistake, you learn from your mistake. The key is to learn from your mistake. And, get a formal education. This is key. Get a working education and experience. Learn. Read. Come back. Go outside, learn from others. Come back. And then try, and take risks. And if you fail, we are there as your ... we are like a coach, we're there to hold your hand ... you have a problem, go and try to find the solution yourself. You can't find it, come back to us, and we'll try to help you. Our job is always to find ways to help people move forward.

Mishal Kanoo: (20:51)
The next one, and this is key, a lot of families need to understand this, is I need to prepare the next generation for succession. I cannot take their time. I have a certain amount of time where I will work, and then I need to find myself slowly taking a back step, and allowing other members to come in, and for me to sit back and end up being like a consultant. They take up the decision making, they take up the reigns of the company, and I'm there to consult if you have a problem, if you've never experienced this, if you have a political tangling that needs untangled. That's what my job should be.

Rachel Pether: (21:39)
You mentioned the power of the word "no" in sort of forcing you to look at other possibilities and options, but one thing that I do find ... and this is perhaps a cultural thing or a society at large's ... there are a lot of yes-men out there. Right? So, there's a lot of people that will just say "yes" even if they don't think that it's a good approach. I know you sit on a lot of boards. What do you think about the notion that you just surround yourself with yes-men, and it makes your path a bit easier, and how do you go about changing that culturally and creating an environment where people do actually speak up and say "no"?

Speaker 3: (22:22)
If you want a company to fail with you, surround yourself with yes-men, because the moment you die, the company collapses. It's simple as that. I don't need, no company needs chaos from within, as in people fighting all the time. But, you need people to push back. If you have an idea ... okay, I hire professional people, so if I don't listen to the professional advice, why do I hire? I can do this all by myself. You don't need them. I need people to come back and say, "You know what, don't give me an opinion." I have as many people, who ... and every person has an opinion. I don't need opinions. I need you to defend what you say with something that is on the ground. You have better knowledge in finance? Explain to me why this investment is not good. You better experience in operation? Explain to me why we shouldn't be doing this logistic. You better knowledge in human resources? Explain to me why I shouldn't hire this person.

Speaker 3: (23:20)
This is what is the responsibility of any leader. There is this misunderstanding that leaders are the person on top of the hill, leading the charge, and everyone is a minion following behind them. I assure you, the moment that that person is killed, the minions will run away. Now, that's one alternative.

Speaker 3: (23:47)
The more sustainable business leadership style, should be, I bring in people who can help grow the company, so whether I am there or somebody else comes in, it shouldn't have an effect necessarily on the business itself. And the best example I can give you ... this is a story I learned when I was in university, and it stuck in my head. And forgive me for just a couple of minutes, just to understand the type of leadership you should have.

Speaker 3: (24:19)
The story goes, there was this young boy in China walking with his father, and they saw a gathering of men, one man who was sitting down, and a lot of men surrounding him. And the young boy asks the father, "Who's that?"

Speaker 3: (24:36)
And the father says, "That's the Emperor of China."

Speaker 3: (24:39)
So the boy goes, "Oh, he must be the bravest man in China."

Speaker 3: (24:43)
So the father goes, "No, no, it's that man over there."

Speaker 3: (24:45)
"Oh, in that case he must be the smartest man in China."

Speaker 3: (24:47)
Says, "No, that's that man over there."

Speaker 3: (24:49)
"Ah, he must be the wisest." And imagine all the adjectives where you call it the bravest, the smartest, the most philosophical, the best swordsman, the best...

Speaker 3: (24:58)
"No, no, no, no. It's that man. It's that man. It's that man."

Speaker 3: (25:01)
So the son was looking at the father, and he does, "Well, if he's not any of these attributes, why is he the Emperor of China?"

Speaker 3: (25:08)
And the father says, "Because he's the hub that allows all these spokes to function."

Speaker 3: (25:12)
And this is the key of leadership. You don't need to be the best, but you need to surround yourself with the best, and you need to allow them enough space to be able to push this company forward, because remember it's in their interest as much as yours, if you're the leader, it's in their interest as much as yours to move this thing forward, whatever the company is. They need to be part and parcel of it. If they feel at any point it's not theirs, they're not important to it, well very soon they will either go away or utilize you as a base for their own benefit.

Rachel Pether: (25:49)
Yeah, I really like that hub and spoke analogy. I think that was very applicable. And we spoke, I think it was last month, about gender balanced boards, and I want to talk about this specifically in relation to speaking one's mind as well, and creating an environment where people can say "yes." Where are the weaknesses in regional family businesses, and maybe even society at large in creating a sort of environment where females feel in a safe place where they can be assertive, rather than being called something else?

Mishal Kanoo: (26:26)
I will say fortunately in family business as a whole, better than say non-family businesses, unless we're talking multi-national companies, but in family businesses as a whole I think there's ... depending also on the age, of the makeup of the family business to start ... there's a lot more females coming in and playing an active role in the businesses. And, hopefully smart families are not using them as a rubber stamp to say, "Look, we have females in our company."

Mishal Kanoo: (27:03)
Women are a smart as men. There's no reason to think we can [inaudible 00:27:09] otherwise. They have a different perspective in terms of how things are done. There are certain traits that females bring that males don't bring. Now, by the way, I'm talking about traits, I'm not talking about the gender. But, some of the female traits that are brought in ... and the more there are the better for a company ... consensus building, care for people around you, making sure that there I a buy in. These are very female-oriented traits. Male-oriented traits are decision-making, quick decision-making ... how should I put it? Attacking the hill kind of mentality, you know? I'm going to gather people and attack the hill. That's a very male trait.

Mishal Kanoo: (27:54)
I don't necessarily want to see a female on a board that just thinks like a ... have all these female traits. And I don't want to see just male having male traits. I want to see that after a while both males and females on the board, there's a cross filter between the female traits and the male traits so that both of them can start understand each other. Because the more you have a better understanding ... because there are times when you need to make quick decisions, and there are time when you need to be consensus building. And having those traits, whether it's male or female, between both genders on a board is always going to be something beneficial for any board. Lip-service is never going to achieve anything.

Mishal Kanoo: (28:41)
Having also ... By the way, in terms of family businesses, just to bring this to the issue of family businesses, you will find the most successful family businesses are not the ones that are run on board level. It's the one with a very strong matriarchical person who ensures in the background that there is consensus building, that there is some sort of comradery between everyone. And she is looked upon as the person that they all fall back to, because, yes, I need to make quick decisions in a business perhaps, but I also need to have harmony within a family. And she can help in that aspect in a way much better than a male can. Males, unfortunately, will focus on the fear factor, the dictatorship mentality, but the females ... that's the patriarch ... but the matriarch is much more of a consensus building in making sure that no one's left out, everyone gets a piece of the pie. Not everyone necessarily gets equal pieces of the pie, but at least they get a piece of the pie, and there's buy in.

Mishal Kanoo: (29:55)
And this is important, and it's not seen, certain superficially, it's not seen. And it doesn't have to be seen. But, if there is no matriarchical counterbalance to the patriarch, you have issues going to happen.

Rachel Pether: (30:13)
Yeah, I couldn't agree more on that. It's a great point you made about the box-ticking. I mean, I don't think putting someone in the position just to tick a diversity box is going to be beneficial to anyone. Is there anything that you can do, and maybe a politically correct answer, that we could do, to address the sort of fake advocates of diversity? So, those people that are just doing it to pay lip service. Is there a way around that?

Mishal Kanoo: (30:42)
Well, I'm hoping the Darwin awards mentality kicks in, i.e. those who don't utilize soething to the betterment and sustainability of their organization, eventually kill themselves off. You can't change their mindset. If someone has a mindset that he or she thinks ... I'm sorry, in this case, he ... thinks that he's right and he knows everything, and he's going to do everything the way he wants, eventually he's going to kill his company. And, so much the better. Sad for the people employed by him, but so much the better, because when that company dies another company comes up in its place, and hopefully is smart and intelligent to say, "Oh, let's see it from the mistake that that company did, and let's change that."

Mishal Kanoo: (31:28)
And, again, bringing people on board ... to my knowledge men did not inherit the genius gene. It's available to both genders. Men did not inherit the knowledge gene. It's available to both genders. Perspective, a man's perspective and a female perspective, are different. An intelligent person, would say, "You know what? I need to have, since women make up at least if not more than half the population, if I'm selling something to them, I need to make sure I understand what they like. And so, I need to bring them on board, and make sure that they also tell me what I like."

Mishal Kanoo: (32:15)
If you're going to invest in FMCG, sorry, in retail, in clothes, the best thing you could do ... and I heard this from the founder of, I believe it was Vanguard Fund. He's a famous gentleman. I can't remember his name, but I remember what he said. He took his advice from his teenage girls telling him these are the companies they like, these are the companies her and her friends buy from, and they knew something [inaudible 00:32:49]. "You know what, if I asked my boys, they would never know this. If I never asked my girls, I'd never know this." So, he was intelligent enough to say, "You know what, I'm going to try to find from every resource, including my wife, my children, my girls, my boys, my friends. I'm going to try every resource I can to help me in their own way direct me to my benefit."

Mishal Kanoo: (33:16)
Now, as I said, if I don't have the female perspective, whether it's on the board, whether it's in the employment in the company, whether it's within my family, if I don't have that perspective, I've lost half the market. Why would I do that? Whey would an intelligent person do that? The first thing I would be doing is trying to find from everyone what everyone wants, and then seen whether I can afford to bring them the product and/or service, or not. That's what intelligent people do. Not intelligent people, as I said, hopefully will go down the Darwin awards way where they kill themselves off, as they die.

Rachel Pether: (33:55)
That was more politically correct than I thought you would give, so thank you for that. We've had a few people come in and say, "Yes, that was John Bogle from Vanguard [crosstalk 00:34:04] that made that comment."

Rachel Pether: (34:07)
We've had more, so many audience questions coming in. Someone has asked, "What do you suggest for children who are rebels and not willing to flow with the family?" And I guess that means from a cultural perspective. .

Mishal Kanoo: (34:22)
I know the feeling, because I'm one of them. There are different types of rebels, those who rebel against authority and those who are rebelling against a person, not necessarily the authority but the person wielding an authority against them. So, if that person that's wielding the authority against them goes away, rebellious nature goes away. It's just natural. And there are those who rebel again an idea. You can't do anything about that.

Mishal Kanoo: (34:55)
One way to harness this, if you do have a quote-unquote black sheep ... I know it's not political correct, I can't use these words these days ... or a rebellious person, maybe it's time for that person to discover for him or herself what he or she can do. So, I would say, "Here's a chunk of money," whatever amount of money it is ... "Here's a chunk of money. Go away." Now, "Go away and discover for yourself, and then you'll understand what you're missing." Or, "Here's a chunk of money, but you need to also put a chunk of money in there so that you have skin in the game, so it hurts you, and let's see how well you do. And if you do really, really well, put in a clause that says the parent company can come and buy the company that you've built if you both agree to it."

Mishal Kanoo: (35:47)
This way, there's an incentive. If I don't like the way you're running things, and I think I can do better, here's a bunch of money, you add a bunch of money to it. "Go run the business. Go run the business that you think you can run. You will either fly, because your idea is fantastic and great, or you'll be mediocre, and then you might want to think about going back or not. Or, you will fail, and then you can come groveling back to the family." The three options are there, but I think sometimes ...

Mishal Kanoo: (36:20)
Again, depending on the age, because if you have someone who's rebelling at 40, there's a systematic issue that you need to address. If you have someone rebelling at 20, it's usually a personality issue. You can control that one. You can try to help them along the way. When you have someone rebelling at 40 or even 50 ... you can have that ... again, it might be a systematic thing that you need to address. Why is this person rebelling? Sometimes it's not they are rebel just for the sake of rebelling. There is something that they're telling you, but you're not listening.

Mishal Kanoo: (36:58)
Now, it always takes two to tango. Forgive me on the cliché, but it's two parties. One is trying to tell you there's an issue, and the other party is saying there is no issue. Now, if you don't want to listen to the other one, ideally, pay them off and let them go away. If you keep them inside, it's like having an angry tiger in your house. Do you really want to have an angry tiger? But, that's what you're asking for.

Rachel Pether: (37:32)
Yeah, and this may be a Mike Tyson or someone, but, no I really like that point about [crosstalk 00:37:44].

Mishal Kanoo: (37:44)
[crosstalk 00:37:44] tiger, how about that?

Rachel Pether: (37:47)
In any situation, I guess no one party is every solely guilty.

Rachel Pether: (37:52)
We've had a number of audience questions coming in as well interested about your approach, and you mentioned sort of supporting the family at a micro level. Do you also look at, with your businesses, really supporting the regional ecosystem? So, is it important for you to invest in regional start-ups and companies, and how do you see your role within the Middle East?

Mishal Kanoo: (38:18)
I will talk from my personal point of view rather than my family, because it's easier for me to do that. From my personal perspective, there are two roles. When I invest, there are two things that are in my head.

Mishal Kanoo: (38:31)
Obviously, the first one, which is what everyone is in, but no one wants to say, is I'm in there for the money. I say that to get that out of the way. Because, if I don't make money, then I can't continue doing the things I want to do. It's not ... will my lifestyle change? Not really. But, I want to take that money, so that I can do the things that I really actually want to do.

Mishal Kanoo: (38:53)
This is where it comes to the second point. I'm 51 years old. I'm not going to create rocket science, what you call, but there are people in the region in their 20s and 30s, perhaps even in their 40s, who have the breadth to want to do that. And sometimes, there's no one who believes in them. That's when you have to sit there and ... okay, I don't necessarily have to invest financially, but I can invest with my ear. I can invest with my experience. I can invest with talking to them, and giving them an opportunity. "You know what? If you do something along those lines, I'm interested at the next stage. So, I'm giving you hope. Get to that next stage. I will come in. But get to that next stage. If you need help in terms of 'How do I address this problem', maybe you need somebody who can help you because they've experienced that. And that's what I'm here for."

Mishal Kanoo: (39:46)
My job is to try to help the young generation. And, in respect for me, nationality becomes secondary. The key for me is to help young men and young women who want to do something, who don't want to be lazy, who don't want to rely on others, who want to create soething, who want to add something to this world, and sometimes might not have the opportunity. My job is to help them get there. And, as I said, different stages takes ... sometimes it's just a pat on the back. Sometimes it's just recognition. Sometimes it's experience and knowledge. It's sometimes opening the door. Sometimes it's finance. But my job, and this is for me key, I want to make sure as much as I can, and I am limited to what I can do, but as much as I can to help those people to get to a point where they can pick up themselves.

Mishal Kanoo: (40:39)
The more we have those success stories, at least ... and I'm talking in this region, irrespective of nationality ... but the more we have in this region, the more all the rest of the world will start saying, "You know what? Something's happening here." And it is. We have young, intelligent, bright, smart, articulate, go-getters, risk-takers. They're in Egypt. They're in North Africa. They are in the Levant. They're in Iraq. They're in the Gulf. Sometimes they feel, "I don't have the ability." Sorry, "I don't have the support" not the 'ability.' "I don't have the support around me." And my job, and I hope others will also do the same thing, in saying, "You know what? No, no, I am here to help you. I'm here to help you promote and do whatever you want to do." Because we want this region to be a bastion of opportunities for others.

Mishal Kanoo: (41:37)
And I'm taking my lesson, and I'm not saying this because somebody is putting a gun to my head. I'm saying this because I actually believe this. I'm taking a page from the lesson that Dubai created, and it's very specifically Dubai, because Dubai said, "I'm going to open up the door. I'm going to open up the landscape, and I'm going to give you the opportunity, as long as you don't cause mischief in a place, to grow your businesses." How many businesses in the Arab world have grown starting from here because the door has been opened? And I would love to see this happen in Saudi Arabia. I would love to see this happen in Bahrain, in [inaudible 00:42:23], in Kuwait, in [inaudible 00:42:25], in Yemen, in Iraq, in Syria, in Lebanon, in Jordan, in Palestine, in Morocco, Algeria, Tunis, Sudan, Egypt, [inaudible 00:42:40] Somalia ... I'm trying to think of the ones in the Arab world. Did I miss anyone? Djibouti. I think Djibouti was the last one.

Rachel Pether: (42:50)
We're going to get who are writing in from a country that you've left of the list, and they're going to be very irate. But, now, I think that's great, and you're obviously doing so much to support the ecosystem, and the family, and businesses in the region.

Rachel Pether: (43:05)
We do just have time for one more question. So, I'd be very interested ... you put so much effort into helping others achieve their goals, and acting as a source of inspiration. Who or what inspire you?

Mishal Kanoo: (43:22)
The answer for me is very simple, but I'm a bit cautious in what I'm about to say, because I don't want it to sound I'm propagating religion. But, for me the reality is, for me the book that matters to me the most is the Qur'an, and the personality that matters to me the most is the prophet [foreign language 00:43:45] Muhammad.

Mishal Kanoo: (43:46)
And the reason I say that is because the gist of the Qur'an ... put the religious aspect aside ... the gist of it is to be fair and to be caring. And this is what any business has to be to its employees, to its customers, to itself, to be fair, just, and to be caring. Because there are sometimes when you need to bend the rules to help someone who is in need of it. So, this is the principles that are in there, are the principles that drive me. And justice and fairness are huge principles that drive me.

Mishal Kanoo: (44:26)
And the life of the prophet [foreign language 00:44:28] in terms of how he interacted with the different peoples at different times ... whether they were unfair with him, whether they were nasty with him, whether they were good with him ... in terms of how he interacted with them to the idea of whether it was in trade, whether it was in politics, whether it was in social structures, social change that he was bringing, all of thee things matter. And, this is a driver for me. This is what makes me say, "You know what? I want to do as much as I can to live up to the principles in the Qur'an. I want to be fair with people. I want people to be fair with me. I want to give people an opportunity. I want to give them a message. I want to be caring for them."

Mishal Kanoo: (45:11)
I can't do everything. I'm but a human. But, key is to try to do as much as I can to help others, again irrespective of religion, irrespective of nationality, irrespective of political affiliation. At the end of the day, everyone is free to choose what he or she wants. The only thing you can't choose, is I can't choose who my parents were and what the color of my skin is. I can't do that. But, everything else, I can choose. And, as long as they're not harming others, as long as they benefit others, and as long as they're caring of others, there's no reason why I would not want to take those principles that I've learned from the Qur'an and help apply it into my life and help others benefit from it.

Mishal Kanoo: (45:58)
It's key, and it's the most significant driver for me, is to help others. There are people, and God bless them, but there are people who want to obtain money for the sake of money. If they want make their bankers happy, good for them. For me, the key is to take this money and utilize it for the benefit of humanity. And if I can't do that, then making money is useless.

Rachel Pether: (46:31)
Mishal, yes, life is about choices, and I really appreciate you choosing the spend the time to talk to us today and share your views. It has been a pleasure, as always, so thank you.

Mishal Kanoo: (46:43)
[crosstalk 00:46:43] [inaudible 00:46:43]

Saeed Al Mazrouei: Investment Banking & Debt Management | SALT Talks #86

“We want Mubadala to be a pioneer as the entrepreneur organization for the government of Abu Dhabi.”

Saeed Al Mazrouei is the Deputy Chief Financial Officer of Mubadala Investment Company, a sovereign wealth fund for the government of Abu Dhabi. In this role, he oversees the group-wide finance function, supporting the delivery of the company’s growth strategy and ensuring the successful execution of strategic transactions and financing projects, as well as supporting the company’s business units in various acquisitive transactions and assets monetization.

Mubadala was created to focus on investing in and growing a more diverse business ecosystem within in Abu Dhabi. This includes working with American organizations like the Cleveland Clinic to build a world class healthcare system in Abu Dhabi.

One of the keys to creating the scale diversification is based on developing an entrepreneurial environment within Abu Dhabi and the UAE. This movement is important to creating sustainable jobs. “We are trying to build an ecosystem in the Emirates of Abu Dhabi; how can we help entrepreneurs, how can we help venture capital come and establish businesses to grow out of Abu Dhabi?”

LISTEN AND SUBSCRIBE

SPEAKER

Saeed Al Mazrouei.jpeg

Saeed Al Mazrouei

Deputy Chief Financial Officer

Mubadala Investment Company

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hi everyone, and welcome back to SALT Talks. My name is Rachel Pether and I'm a Senior Advisor to SkyBridge, a global alternative investments firm, as well as being the MC for SALT. A thought leadership forum and networking platform that encompasses finance, technology and politics. Now SALT Talks has a series of digital interviews with some of the world's foremost investors, creators and thinkers. And just as we do at our global SALT Conference series, we aim to empower really big, important ideas and provide our audience a window into the mind of subject matter experts. Today I am very excited to be speaking to Saeed Al Mazrouei. Saeed is the Deputy Group CFO of Mubadala Investment Company. One of the world's largest sovereign wealth funds. Before his current role, Saeed was seconded from Mubadala, to spearhead the launch of the Debt Management Office within the Abu Dhabi Department of Finance.

Rachel Pether: (01:05)
During this time he led more than $30 billion worth transactions, including a $10 billion joint venture between the Russian Direct Investment Fund and the Department of Finance. He sits on the board of several companies, including, but not limited to Abu Dhabi Commercial Bank, Cepsa, Abu Dhabi Future Energy Company, Cleveland Clinic Abu Dhabi, and the Abu Dhabi Pension Fund. Saeed, welcome to SALT Talks.

Saeed Al Mazrouei: (01:32)
Thank you for having me Rachel, pleasure to be with you.

Rachel Pether: (01:36)
Now. I severely truncated your biography and I apologize for that. So maybe let's just start by tell me a bit about your personal background and how you ended up in your current role in Mubadala.

Saeed Al Mazrouei: (01:49)
Maybe in short as they guess you have given a good brief on my bio. My name is Al Mazrouei. Have been with Mubadala actually since 2007, a few years after Mubadala was started in 2002. I started my career in the investment banking side here in the UAE for a couple of years before joining Mubadala. And then I joined the acquisition team. It used to be called the acquisition team back in 2007, was under the leadership of Harney who is also today, the executive director of Mubadala capital here in Mubadala. Then I decided after a few years to change my career for a new opportunity, as you mentioned to move to Department of Finance on secondment basis to establish the Debt Management Office. In 2009, with the global financial crisis, it was really critical and important for the government to establish an office that will be the window for all debt issuances for the government, as well as managing the rating of the government or the sovereign rating with the rating agencies.

Saeed Al Mazrouei: (02:59)
We have done a couple of issuances for the government, but we were also lucky at that time in 2010 and 2011, we saw increase in oil prices at 110, 120. We pivoted the focus more into looking into special projects here in Abu Dhabi. And if you would recall on the back of 2009, we had a couple of credit situation and insolvency situation either on the banking industry or on the real estate side where the government needed to actually intervene with these entities. I had the pleasure at that time to work with the chairman of Department of Finance on these couple of projects. And we were very successful in providing funding and liquidity either on the banking side or also on the real estate sector, which were large sectors for us at that time for the Emirate of Abu Dhabi.

Rachel Pether: (03:53)
Excellent. And I want to come back to the points about the debt capital markets a little bit later on, but you obviously work for Mubadala now, which is one of the world's largest sovereign wealth funds is not your typical sovereign wealth fund. And we can go into a bit more detail on that later, but we have quite a geographically diverse audience on the call today. So the benefit of those that might not know so much about Mubadala. Could you give an overview of its investment strategy and focusing.

Saeed Al Mazrouei: (04:22)
Of course I always try. I mean, Mubadala is very complicated organization. But let me simplify it, maybe for our audience into Mubadala Development Company and then Mubadala 1.0, and then Mubadala 2.0. So Mubadala Development Company was established back in 2007, and that goes all the way to 2017. And the purpose of Mubadala when it was created at that time we had Abu Dhabi Investment Authority, which was at that time, the largest sovereign wealth funds for the government of Abu Dhabi. And it's a fund that focus on financial investments and drives all their investments based on asset classes diversification or asset classes strategy. The government in 2000 and 2002 were looking for someone who can build businesses, build sectors for the Emirates or the Emirates for Abu Dhabi and for the UAE economy. And the main purpose was at that time is to create an economic diversification with sustainable jobs.

Saeed Al Mazrouei: (05:25)
In 2002, we had the first great projects for us, which was Dolphin. In 2002 energy sources was critical for us when it comes to power. As an energy security for us, Dolphin gas pipeline have helped and support the government of Abu Dhabi to actually provide enough gas supply for the power sector. And that was an iconic, remarkable project for us. Also, I can give other few projects there were, I believe have been key milestones that the government of Abu Dhabi as a shareholder of Mubadala was able to achieve. The leadership here in Abu Dhabi were looking for a world-class health system or world class health organization that can actually help and support the UAE national to be treated in Abu Dhabi or in the UAE vis-a-vis giving ... taking them abroad either to Europe or North America.

Saeed Al Mazrouei: (06:28)
And the vision is how can we have that world-class healthcare facilities in Abu Dhabi. And the launching of that was basically how can we partner with CCAD, with Cleveland Clinic in the U.S. by having CCAD or Cleveland Clinic, Abu Dhabi here in Abu Dhabi. What's really interesting now, after a few years after opening Cleveland Clinic, we have seen high quality feedback from individuals and patients either from Abu Dhabi or the region, that basically the vision that was said that instead of people traveling abroad and getting that high quality health care services to be delivered to them in Abu Dhabi, and we were able to achieve that vision, and we continue to improve on that.

Saeed Al Mazrouei: (07:18)
On recent transactions or recent initiative that we came up with, especially on the technology side. I think it's becoming a hot topic, especially with what Mubadala have been doing either with Vision Funds or direct investments that we are doing on the technology sector. And I guess we will touch base on that. In the coming few minutes is up 71. We were trying also to build an ecosystem in the Emirates of Abu Dhabi, how can we help entrepreneurs, how can we help venture capital to come and to establish businesses and to grow businesses out of Abu Dhabi? Last but not least, the catalyst fund, the asset management business sector we can grow it here and in the UAE. And I guess we have been trying now to deploy capital as an LP investments to give a Seed Capital either for private equity or alternative investment funds, or even on the equity capital market to establish their offices here in Abu Dhabi through a global financial market.

Saeed Al Mazrouei: (08:20)
And to sure, basically that ecosystem develop over the year, that was from 2002 to 2017. And that culture Rachel, we care about as an organization or as more Mubadala because we want to continue to be pioneer as Mubadala, as being the entrepreneur organization for the government of Abu Dhabi. And we want to continue to create sustainable jobs and economic diversification. Post the financial crisis in 2015, when we show low oil prices, the government started to give direction by consolidating sectors, either on the banking industry or even on the real estate side. And you would recall in 2017, there was an announcement, a merger between IPIC, The International Petroleum Investment Company and Mubadala Development Company. And here where I call it Mubadala 1.0, the Mubadala Investment Company, were established. Were basically the government said "We have an overlap in the oil and gas sector, why don't we create one unified window to ensure basically we don't have competition from both organizations. And at the same time you needed that scale to have a presence on the investment community." One year later it seems post the merger with IPIC.

Saeed Al Mazrouei: (09:42)
The shareholder basically realized that scale diversification is really critical and important by having a really large sovereign wealth funds similar to two ADIA. The decision came in 2000, I guess, to 2018, basically Abu Dhabi Investment Council to join Mubadala Investment Company, which is, I call it Mubadala 2.1. And that created really the large scale for us. Now we're around $230 billion company. We have created enough diversification in our portfolio, and we were able to manage to create a sustainable return for the shareholder. Abu Dhabi Investment Council, it's basically a full subsidiary owned by Mubadala. That subsidiary is being, have taken the endowment business model on the last 10 years, because they were established in 2000 and 2007. And their portfolio is a fund the fund were basically their business or their investment strategy focus on investing in asset classes through funds, through external fund managers who manages their capital on their behalf. This is in summary what Mubadala Investment Company is.

Rachel Pether: (10:58)
That's great. And I want to pick up on one of the points you made about that entrepreneurial spirit. A couple of weeks ago, we had had Alama hit up in the battle air space on SALT Talks, and he was telling this great story about how Strata had adapted their manufacturing line that was producing aerospace plant to create a 95 mosques and actually become an ex-altar. How, can you give me some other examples of how some investments have adapted during the pandemic in recent times?

Saeed Al Mazrouei: (11:34)
It Rachel, I think my view on this, I mean, post COVID-19, that's my personal opinion on it and what I have heard from others through our network. I think a couple of themes that I see them going to grow over the next few years before I touched base on Strata and other examples. Clearly digitalization is going to be disrupted across different industries, not just on the UAE, but across the globe. Working from home is something that we see it as a trend. And I don't think post COVID 19 era people will fully come back to work because I think working from home has created a lot of efficiencies for many individuals who are being able to cope with the work from staying at home. And I see that a big risk on the real estate side, especially on the commercial side.

Saeed Al Mazrouei: (12:30)
Less business travels I think that will have also its impact on the aviation industry. And I don't know how much disruption and production and profitability of these sectors. Consumer behavior has changed. And this is, will take me to one example before we touched base on Strata. As you mentioned, I sit on the board of ADCB and we have seen a lot of statistics post COVID 19, that the behavior of consumers have changed from the traditional way of doing banking by going to the branch and getting their services done physically. Today, the cash transaction have prompted to levels that we have never seen them pre-COVID 19. Usage of credit cards have increased. Also we have data and access to how much people are active on the application and the time that they spend on banking application, that have skyrocketed. All this gives you an indication that basically consumer have built the experience of how to use applications.

Saeed Al Mazrouei: (13:36)
They are satisfied with that customers because also we are on service for our customers and the service have shown very positive signals that customers, they want to continue to use that hence that will create an opportunity on the banking industry, because remember, if there is no credit growth, you will be focusing on cost optimization and reducing your cost income. And that at the same time, as it's being profitable for the bank, improving the return on equity, that also would reduce the number of jobs as you are starting to close branches, or to have branch closures, because you really don't need all this number of brunches. If retail customers more specifically are happy and ready to use all these online applications. On the retail side, I think the retail is going to shift completely from shopping malls to online. And maybe we have seen it within our families, with my wife and with friends that people, I mean, personally, I use not to shop online, usually go and buy consumer goods by spending some time on the shopping malls.

Saeed Al Mazrouei: (14:46)
Now you are forced to use Amazon and other online applications because of the COVID, because of the quarantine and the less movement that we see. So Strata is another good model to me that how the banking industry, how the retail industry, how these companies will change their business model, because you really need adapt yourself to the new era, because to me banking, if we're not going to be spending on digitalization, I think we are going to be lagging behind as a bank because customers are going to be demanding more technology, more applications to be in place. That's what Strata I think went for because yes, you are an aircraft composite structure manufacturing company, but on the long term especially if there will be a slow down on aircraft purchases then also you, the supply chain will reduce with that minimal growth on the aircraft manufacturing sector.

Saeed Al Mazrouei: (15:49)
So you really need to adapt yourself how you can pivot by creating new business products or creating a new project for you, be it at 95, or even to take a step back and to say, should I focus on personal protection equipments that basically can be a new business lines for me to cover for any losses that I potentially could have from the airline industry?

Rachel Pether: (16:18)
No, that sounds really interesting. And I want to actually just follow up on something that you said previously about this will Mubadala Development Company was more focused on economic diversification and job creation within the Emirates, obviously the UAE economy, I guess, like most economies have taken a hit during the pandemic. Will Mubadala 2.0, look to invest more locally, again, to support the regional economy, or how do you see that playing out in terms of investment strategy?

Saeed Al Mazrouei: (16:53)
We, as an institutions, we have been always in the centric of our strategy, always Abu Dhabi and the UAE, economic diversification has been always in our mind, whenever we see opportunities, whenever we see that Mubadala can play a role on that, we will continue to play that. Because it has been always mentioned by our senior managing director that, the culture of being a sector builder or a business builder, something that we need to continue to maintain as a culture, because that's our roots. And that's how we evolve as an organization. As maybe you have mentioned post COVID 19, I think data and statistics, they don't really look good in terms of what numbers are we going to see in 2019, I guess we going to see the GDP dropping by six to 8% this year, and maybe hopefully a potential of a growth of around 3% next year as you know, the UAE GDP has too large external factors that is impacting our growth.

Saeed Al Mazrouei: (18:02)
One is oil prices, as revenue represents oil revenue represents one third of our GDP and that volatility would have a significant impact on our growth going forward. Also, there are sectors be it retail, hospitality, real estate sector. Those sectors in combined, I think also they represent one third of our GDP. What's really important here for us is basically the international traffic that comes to the boy and to the UAE. Without this, I think the over supply of the retail or the real estate sector or the hospitality, it won't be covered by the local demand, hence the programs that are being set by the government related entities, be it Mubadala or other government related entities. And Dubai will have to continue to support the UAE economic growth by having new programs and new industry that will basically revive these industries to come back post COVID 19.

Saeed Al Mazrouei: (19:13)
One good example of that is Export 2020, which is going out to be Export 2021. It's hopefully it's going to take place next year, but that's a risk factor also that if it gets delayed again by another one year that is a risk on the UAE economy because it's going to take out many of visitors that they were supposed to plan to come to the UAE, but let's see how the virus will play. And we're going to see a vaccine by the end of the year.

Rachel Pether: (19:47)
Yes. Inshallah fingers crossed. I'm just interested when you talk about Mubadala 2.0, obviously across a lot of different asset classes, a lot of different geographies. How do you view the world when you break it down and to say for the economies will separate geographies?

Saeed Al Mazrouei: (20:05)
Maybe, I don't know, let me, maybe I think, why don't I give you some overview of our strategy and then where you feel you want me to speak more. I'm very happy to also to double click on specific areas, but Mubadala, even pre-COVID 19. I think our strategy has two folds. We spoke about the first fold, which is basically the local investments. And as I mentioned, this is on the core of our strategy and we'll continue to invest on the local economy where we see it's relevant for Mubadala and commercial basis. And we will continue support to help economic diversification and creating sustainable jobs here in the Emirates Abu Dhabi or in general in the UAE. But for us internationally, we will continue as an institution to grow and to manage our portfolio.

Saeed Al Mazrouei: (21:02)
We'll continue to enhance the resilience of our portfolio and manage the volatility of that portfolio to ensure basically we achieve an acceptable risk adjusted the retail for our shareholder. Tactically, maybe on the last 18 months or 24 months. We have embarked on a strategy on specific sectors. I'm going to come to those sectors, is to look for specific funds within the alternative investments, either be it an infrastructure on the private equity, where we invest with them through LP investments. We have a strong partnership with them, and we do a lot of co-investments that have turned to be good investments for us so far on the last 18 months of deploying this capital.

Saeed Al Mazrouei: (21:53)
But maybe let's double click now into sectors and asset classes. On the sector side, Mubadala is trying to focus on couple of sectors, technology, life sciences, consumer and financial services. On the technology side, maybe we have seen our investments a few years back with Vision Fund. We have direct investments either in North America and our San Francisco office to look into investing in venture capital, small ticket size, taking a portfolio strategy by seeing what could be successful. Also, we have a fund that is dedicated to Europe and clearly for us the themes there are mobility autonomous is something that we see it going to grow. And we will see a lot of capital going to that sub sector.

Saeed Al Mazrouei: (22:52)
Robotics is another area of an interest for Mubadala and energy storage. Those are the three or four themes that we continue to look to see if there are opportunities. And the reason for that is the technology sector will continue to grow over the next 10 years. We see a lot of capital and knowledge going toward that sector. Clearly after post-COVID-19, after we saw the market crashed a few months back ... we saw basically how the big five technology companies actually hold the market to achieve levels above 3,200 or 3,400 levels. So that's an area that we will continue to invest in. Life sciences and consumers. There are great themes there. Those two sectors have been growing around four to five sectors, more specifically in North America. So we see really till Wednesday, the themes, a lot of consolidation, because some of these sub-sectors of life sciences and consumer are very fragmented.

Saeed Al Mazrouei: (24:04)
So consolidation is a play. On the consumer side, disposable income has been growing in North America. And clearly we have, I mean, latest data have been showing household savings past 1 trillion, which is a good indicator that households have been de-leveraging and having saving, deploying that on financial assets, which basically it will give them the power over the next six to 12 month post COVID-19 to consume that. So consumer spending either on services or in goods, we're going to see something that will grow. 70% of the U.S. GDP also represented by consumer spending. So that will continue to be the play going forward. On the life sciences, I think there is people have the capacity to have health insurance, especially in North America. So spending on healthcare will continue, especially with the effect of COVID-19.

Saeed Al Mazrouei: (25:06)
Also the feasibility on the cash flow, especially with the investments that we have seen a lot of feasibility and very health, but the margins. Those themes have really attracted us to say, we want to focus on those sectors that makes a lot of sense for us to look at them and to invest with our partners, the private equity funds. Last but not least, financial services. We have been developing a strategy on financial services here in Mubadala and hopefully in the next couple of months, maybe it will be launched at the beginning of next year. It's a lot of sector, it represents almost 6% of the global GDP. It has been growing at four to 5%.

Saeed Al Mazrouei: (25:51)
The banking industry has been highly regulated post the GFC. So what's the interest here is actually many of the bank starts to spin off a lot of their non-core assets that have an impact on their capital adequacy ratios. And that's creating an opportunity for us. So for us, we're looking into investing in life insurance, we're looking for corporate brokers and general insurance. Also consumer finance, as I mentioned on how household starts to de-leverage and having savings, consumer finance near prime is an area that we like. FinTech is a big play with with payments. So those are the couple of sub-sectors that we're looking to invest in and the team are working on that strategy. And hopefully by the beginning of next year, we see the launch of that strategy.

Saeed Al Mazrouei: (26:43)
That's from a sector point of view, on the asset classes, real estate and infrastructure will continue to be an attractive sector for us because of the feasibility on the cash flow and the low beta that reduces the volatility in our portfolio. Renewable is a big thing for us, especially in Masdar. I think with energy transition ESG, those two big topics that have been pushing international oil companies to shift from IOCs to become an energy company. I think there will be more renewable projects and renewables, frankly speaking starts to become very competitive from a pricing point of view and that is creating an opportunity for renewable projects to get a bigger market share vis-A-Vis the other energy sources.

Saeed Al Mazrouei: (27:35)
Last but not least, from a geography point of view, maybe you have seen our investments in Asia, more specifically in China and India be it reliance geo or reliance retail and our SIP team, the Sovereign Investment Partnerships already investing in China. And we like both geographies or both countries because of the GDP growth that we see increase in wealth and wealth distribution. The urbanization rate, a pace that both countries are going through is actually creating an opportunity for us. Also, we have been very lucky in India also to partner with Reliance, Reliance as a very credible partner, a large corporation, have a very successful track record and execution capabilities. And we were lucky with other financial institutions and sovereign wealth funds to invest either on Reliance Geo or Reliance Retail. And definitely North America will always be an area that we will invest in, because of the size of the economy and the opportunities being created across different sectors in the United States.

Rachel Pether: (28:45)
There were so many things that I would like to pick up on there, and we've already had a lot of questions coming in from the audience and broadly they tend to some of the sectors or countries that you've just discussed. So I'll try and break them down accordingly. With regards to healthcare, are you mainly looking at that from a financial investment focus or are you also looking to bring the technology or the investments to the UAE? And the recent example I'm thinking of here is science 87, the clinical trials platform. So now those types of investments, are they things that you actually want to back to Abu Dhabi? Is it more just a financial investment?

Saeed Al Mazrouei: (29:30)
See, I think we need to segregate between the international investments and the national investments we do, but there is a coordination there. So for us, everything on the international side, it's purely driven by the expected financial returns that we are going to achieve either on direct investments, LP investments or our core investments. But at the same time between our local team, if they realize basically there is something that is really interesting, and that makes sense for us to establish it here in Abu Dhabi or in the UAE, you would see that coordination between the international team who have done the transaction with the local team to see if we will be able basically to copy or to paste this to reflect or to place something like Science 72 to be here in the UAE.

Saeed Al Mazrouei: (30:25)
But that's not the only example. I think there are many transactions that we have done globally that basically when we feel it makes sense and financially it makes sense for us to bring it here to Abu Dhabi or to the UAE. Definitely, that creates an opportunity for us to partner either with the government or to partner with the private sector to launch those projects here in Abu Dhabi.

Rachel Pether: (30:54)
Right. And there's actually a question that's come in from Kim Lustig which kind of ties in some of these things then points you've just made. Given your ownership or involvement with global foundries and ACA, do you see Mubadala bringing any large scale technology infrastructure investments into Abu Dhabi? You did touch on sort of data centers. Do you see those data centers or hardware manufacturing being brought into Abu Dhabi?

Saeed Al Mazrouei: (31:24)
Rachel, I think that the short answer, if it is relevant and commercially make sense for us to bring it to Abu Dhabi to the UAE absolutely we are going to bring it. I think we brought a lot of services industries, I think technology and the industry is more complex nature because of its complexity, but generally speaking as a vision or as a direction for us as an institution, we always try to see if there is a possibility that we can replicate something here in Abu Dhabi or in the UAE. And that makes sense, commercially we will definitely bring it.

Rachel Pether: (32:08)
Excellent. And I do want to take a step back actually and ask some Mubadala questions, but just another quick question, that's coming from the audience. And you mentioned financial services as a sector, as well. Is digital assets, an area that looking at, and what is your exposure to this portion of financial services?

Saeed Al Mazrouei: (32:31)
I mean, I want to explore in general our exposure, if I would exclude the national banks here, we own a large stake in First Abu Dhabi Bank, and Abu Dhabi Commercial Bank. Our waiting on the financial services relative to the overall of Mubadala's portfolio is very minimal. And that was the rationale behind this, why we have not entered the financial services sector. And especially it has that growth of four to 6%. It has been growing at 4% and there are a long list of potential transaction that we see that we can execute as an institution. On that basis, the team in the next couple of months, maybe at the beginning of next year.

Saeed Al Mazrouei: (33:26)
And that we'll touch base on the sectors that I have mentioned either be on the Fintechs or payment, but large part of that as we spoke that the sector itself, we like it a couple of sub-sectors of that. It's a priority for us. But really depending on how that strategy will evolve in the next couple of months. And what's the right start for us. Are we looking to do LP investments with funds and then do the core investment? Or are we going to partner with private equity right away to do co-investment opportunities? The picture today is not clear because we're still working on that strategy.

Rachel Pether: (34:12)
So you mentioned going into things as an LP, and co-investment. One of the other reasons that Mubadala isn't your typical sovereign wealth fund. And this ties back to the entrepreneurial point is that you do manage good passion capital. You're one of the first, I think the only sovereign wealth fund in the world to do so. Can you talk a bit more about that program and how you see that evolving over the short to medium term as well?

Saeed Al Mazrouei: (34:39)
Maybe we talked about how Mubadala has the spirit of trying to come up with new ideas, right? And we have this space of thinking outside the box and we don't really shy away from those ideas. So the team who have worked on managing third party capital came with that idea. And at that time it makes a lot of sense because one, we will be the first one as a sovereign wealth funds to manage their party, but not just that, the reason, but also it validates many things. It validates your institutions, and also it validate your knowledge, it validates your reliability as an institution to manage third party capital. And also it gives the opportunity for some part of Mubadala team to get to be on the other side of the fence where they're not managing one shareholder money or the government money, but they manage other financial institution money and they get scrutinized for managing those funds.

Saeed Al Mazrouei: (35:55)
I personally believe it's a great idea. And I think it makes a lot of sense because that asset management business, it can be grown to other asset classes and it could, it's not going to become the size of Mubadala or sovereign wealth funds, but also you could sell a GP as Mubadala to other financial institutions, either from the region or international and you will continue to grow that. And it could be a home grow and asset management business that Mubadala or a sovereign wealth funds have created. And at the same time they have investments and footprint across the globe.

Rachel Pether: (36:32)
No, I think it's always great to see how Mubadala's evolving like that. And certainly when you have that third party assessment or analysis, it's really a verification of what you're doing. I guess there's another, well sort of the initial part of Mubadala's journey into this transparency and taking on more external stakeholders was when you went to the debt capital markets. And I know you're quite active in the debt capital markets last year, obviously historically low interest rates. What sort of a cost of funding are you trying to achieve? And how do you look at the debt to equity ratio from Mubadala?

Saeed Al Mazrouei: (37:08)
So for us, I think the debt capital, I mean Mubadala have started that program back in 2009. And we look at that as a source of funding for Mubadala and managing our liquidity. Mubadala managing their portfolio either through asset divestments and monetization. And redeploy that new capital into a new investments. Also, there are government injection from time to time, historically Mubadala have, basically government have stopped that injection a couple of years ago. And now Mubadala is self-funded, or it comes from dividends that come from the large assets that we have today, be it the world of SEBSA, Borealis, Nova and OMV. So that for us is critical in terms of source of funding. If you would recall, 10 years ago, back in 2009, interest rate environment was different. Cost of funding was really high, and we started to build the portfolio of Mubadala when it comes to fundraising.

Saeed Al Mazrouei: (38:10)
And at the same time, if you would recall, also IPIC at that time it's independent from Mubadala and they have been doing their own debt funding. We embarked on a strategy on the last 18 months to really benefit from the advantage of low interest rate environment. So we have raised around $7.5 billion. Back in November, 2019, we raised $3.5 billion. And last May during the COVID crisis, we raised $4 billion. And the main reason for us is to create liquidity, a dry powder for the organization. But also we were able to bring the cost of funding substantially down. We were North of 4% today, I think we are close around 3.5%, and we are targeting to bring that below 3%. Relative to potential retains that Mubadala can achieve on the future, especially on the alternative investment asset classes on a double-digit higher. At the same time, the duration of portfolio today is around eight years.

Saeed Al Mazrouei: (39:16)
It used to be around six years before we raised 7.5 billion, but we continue to refinance any expensive debt to ensure basically our duration is North of 10 years, that will give the opportunity for the different investment teams within Mubadala to have the runway and to have the time to deploy capital, to manage those assets with enough time to create value for the next maturity that we will have on average over the next eight years or 10 years. So hopefully we have been successful on executing on that strategy. We'll continue to optimize Mubadala's balanced sheet but what's really important for me is the attractiveness of our debt as an organization. As you know, we have a very close relationship with the government as the chairman of Mubadala is the Crown Prince of Abu Dhabi Sheik Mohammed bin Zayed. Also, we have a rating equal to the sovereign rating, which is a AA rating.

Saeed Al Mazrouei: (40:17)
We have demonstrated as an institution, a lot of transparency, governance transparency. We are prudent in nature. So from a risk management point of view, the balance sheet that we have in terms of a debt equity ratio is low teens ratio. So what that means basically relative to other sovereign wealth funds or financial institutions, or even the ratios that are thresholds ratios, that's being set by the rating agencies. We are way below those ratios, which is really positive, and that have really helped us as an institution to be very attractive when it comes to any debt issuances. A good example in May, in around May, 2020 we raised $4 billion. It was almost 10 times over subscription. Also in 2019, we were able to raise 3.5 billion. We got three times over subscription, and that is for us basically a demonstrate how attractive the debt issuances or the debt paper of Mubadala.

Rachel Pether: (41:29)
I just wanted to pick up on some of the points that might, I guess, that long-term focus and which is obviously helpful, given the majority of your assets in the private markets. I'm interested to know how you actually benchmark that fund when you're looking at returns, how do you actually benchmark Mubadala if you do it all?

Saeed Al Mazrouei: (41:52)
I think there are a lot of benchmarks really depends on which sector you are. And so today Mubadala started to apply a relative performance and certain KPIs that we have. And technically speaking, if we take an example the oil and gas sector or natural resources then there are specific benchmarks that are being set and agreed between the portfolio management team and the asset management team. And this gets applied as if you wish on relative basis and based on the score card, that's being set for example, natural sources or petroleum and petrochemical. And then you apply this across the different 13 or 14 sectors that we have today.

Rachel Pether: (42:50)
Excellent. And we actually, we are officially over time, but we do have about a dozen questions left so, I'm going to ask two more questions and I wanted to ask one that's right in your wheelhouse, given the work that you've done at the Debt Management Office as well. We've had an audience question coming in saying, "Firstly, fascinating interview Saeed, very insightful. Do you foresee Mubadala in the driving seat to issue in the domestic market and local currency supporting the local debt capital markets?" Thank you for your question as well.

Saeed Al Mazrouei: (43:22)
I am personally very keen to see the government of Abu Dhabi and the federal government to start establishing the local debt capital market. This is a dream for me to see it in reality because I think the private sector, our economy needed this. I believe our colleagues at the federal level and the local government, they have been working on this. And hopefully we see both governments start issuing that because you need that benchmark before you see government related entities, be it Mubadala or other institutions to come to the local market. But also at the same time, we are very cautious and mindful when it comes to impacting liquidity. If the liquidity is going to be there. And it makes sense for Mubadala to issue on the local market and support the local debt capital market. Absolutely. We will be supportive.

Rachel Pether: (44:15)
Great. Thank you, Saeed. And you've answered so many difficult questions today that I'm going to end on a nice, easy one. We have had actually a couple of people ask who or what inspires you, and please give the Saeed answer, not the Mubadala answer.

Saeed Al Mazrouei: (44:32)
To me the challenge that you live in everyday. I think it's something that makes me work more. I don't think it's the title and I don't think it's only the actual investments. I think I am lucky to grow up here in Mubadala and to see the competition within the organization. It's not on the bad way. I think as a team working together in a transaction to achieve a specific thing and that journey that you spend either on the buy side or on the sale side, a good example for us to me is the journey of Cepsa. We spent almost 14, 15 months from the start to them to the finish. And you go through ups and downs on that journey. Sometimes it works with you, sometimes it doesn't. And those challenges actually it makes me work hard, push myself more beyond the boundaries and to challenge my team and the different teams that we're working with in Mubadala.

Saeed Al Mazrouei: (45:42)
This is what really makes me happy everyday to come to the office and to work with the different functions in Mubadala, but absolutely the inspiration that by supporting your family and making your family happy, especially we're going through very difficult time these days, managing kids from home or even to give the credit to the women and especially wives, taking the lead on, taking classes from home and making sure kids are taking class from home, it's very challenging. So this is an area where it pushes me as a father or as a husband to work more and to make sure that the family is safe and to protect them.

Rachel Pether: (46:35)
Well, thank you so much, Saeed, yes I think you do have a lot of roles to fulfill, but I think that's a very optimistic note to finish on. And from my side, I just wanted to thank you so much. It's been such a pleasure. Talking to you today.

Saeed Al Mazrouei: (46:48)
Thank you. I really enjoyed the interview with you.

Christopher Toomey: Money Management Principals | SALT Talks #72

“We saw one of the quickest recessions we’ve ever seen and one of the quickest recoveries we’ve ever seen.“

Chris is a partner of a top NYC-based Private Wealth Management team managing ~$5 billion in client assets. Their clients include high net worth individuals, family offices, foundations and organizations, money management principals, institutional money managers, small cap banks and offshore investors.

We saw almost $3 trillion deployed through the four stimulus bills delivered by congress, almost equaling the normal tax receipts of the United States in any given year. Despite the inorganic nature of capital flow, markets should go higher.

With regard to tech stocks, “there’s a reason why tech companies have outperformed so dramatically.” They are changing how we do business and live our lives, all while maintaining pristine balance sheets. These businesses are here to stay, but they are comparatively expensive. Depending on the election, there may be sell-offs later on in the year to take advantage of potentially lower tax rates.

“I don’t think [interest] rates go back to normal, but I think they go higher.” Value trading will be driven by a cyclical rebound, improving financials and net interest margins, and projected economic growth coming to fruition.

LISTEN AND SUBSCRIBE

SPEAKER

Chris Toomey.jpeg

Christopher Toomey

Managing Director & Founding Partner

Morgan Stanley Team Global

MODERATOR

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Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello, everyone. Welcome back to SALT Talks. My name is John Darsi. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology and public policy. The SALT Talks are a digital interview series that we started during the work from home period, to replicate the type of experience that we provided our global SALT conference series. And what these are, are really conversations with leading investors, creators, and thinkers.

John Darsie: (00:33)
What we're really trying to do is provide our audience a window into the minds of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. And we're very excited today to welcome Chris Toomey to SALT Talks. Chris is a partner of a top New York city-based private wealth management team. That's affiliated with Morgan Stanley and they manage around five billion in client assets.

John Darsie: (00:55)
Their clients include high-net-worth individuals, family offices, foundations and organizations, money management principles, institutional money managers, small cap banks and offshore investors. Chris began his career at JP Morgan's private bank and he was there until 1998 when he joined Lehman Brothers. He's held various positions throughout Morgan Stanley, transitioning from portfolio manager of the government credit portfolio to building out Lehman's third-party long only manager platform. As senior vice president, he was responsible for manager due diligence and often assisted in providing asset allocation and investment advice for private wealth clients. He joined Morgan Stanley Private Wealth in May of 2008.

John Darsie: (01:38)
Chris has earned various distinctions including membership in Morgan Stanley's president's club. He was recognized by the Financial Times as one of the top 400 advisors and by Forbes shook top wealth advisors. He's spoken at several conferences about alternative investments, including the SALT conference, Hedge World and the Investment Institute. He's also appeared on CNBC Squawk on the Street, Fox Businesses, Fox Business News FBN:am Show, as well as Wall Street Week, he's also appeared within Reuters as well.

John Darsie: (02:09)
A reminder, if you have any questions for Chris during today's talk, you can enter them in the Q&A box at the bottom of your video screen. And hosting today's talk is Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, a global alternative investment firm. Anthony is also the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:28)
[inaudible 00:02:28] Unmute myself here. I'm sorry. I had myself muted because I've got my kids in the background here, Chris. Okay. I've got a great room Raider today, but I've also got kids outside shooting Nerf bullets at me while we're speaking. So I apologize for that. But let's go to your personal background for a second. You and I met probably 2005 or six, I think you were at Lehman at the time, if that's correct. Tell us your early start. What were you thinking about being when you grew up? As an example, John wanted to be a physicist and, of course, I wanted to be an astronaut. What did you want to be when you grow up and how the hell did you end up in this business?

Chris Toomey: (03:07)
Well thank you for having me. I appreciate it. It's a big difference from being at SALT in Las Vegas. And you're right, Anthony, we got to know each other very well during the integration between Neuberger and Lehman Brothers. At the time Lehman Brothers was growing out of their asset management from the spinoff from Shearson about four years before that. And we acquired a bunch of different asset management companies, the last being Neuberger Berman, which also proved to be the biggest and probably one of the best. And so it was great getting to know you and working on that integration.

Chris Toomey: (03:43)
But to answer your original question, I went to a small liberal arts school in upstate New York. I was an English major. I took my LSATs and I think like you, I was thinking about going into the law. But before I went to law school, I figured I would intern in New York at one of these white-shoe law firms. And so I was doing interviews and a bunch of my friends who I had econ classes with told me, "If you're going to go down to New York, you might as well start interviewing with some of these banks." And at the time it was the 90s where everybody was working hard and there's lots of money to be made. And I said, you know what, maybe I'll go work for an investment bank and see where that takes me. And if I want to go to law school, I'll go to law school.

Chris Toomey: (04:33)
I got an opportunity to work at JP Morgan, learning about managing wealth for ultra high-net-worth families. It was a very exciting time in the 90s, as you remember. And from there, I got an opportunity in 98 to go over to Lehman Brothers who, as I mentioned before, were starting to build out an asset management business. And so at the time it was 150 year old firm, but it was really feeling like a startup. I was employee number 11 of what became Lehman Brothers Asset Management. And I guess the rest is history.

Anthony Scaramucci: (05:08)
Well, what I love about the story is that it was a weird arc to your career path, but you love what you do, obviously, because you're so good at it. So let's get into it. Stock market is at an all time high, having a good day today, it was down more than 30% in March, which we both know. Is the snapback justified given the state of the economy? And if so, why and where do we go from here, Chris?

Chris Toomey: (05:38)
Yeah, I think that's a good point. We saw probably one of the quickest recessions we've ever seen with one of the quickest recoveries we've ever seen. If you look at the numbers, the market did bottom in March 23rd. Initial claims peaked at the end of March at about seven million. We also saw the unemployment peak around April. Retail sales bottomed in April. ISM bottom in April. So we had that natural bottoming process that you would normally see with the recession. It just happened very quickly. And the flip side to that is while we had a very, very difficult to store GDP number in the second quarter, our expectations is that we'll get a very good one in the third quarter. And so what is it? It's all basically about stimulus, right?

Chris Toomey: (06:32)
If you look at 2019 federal tax receipts were about $3.4 trillion, if you take the four different stimulus bills combined they equal about $3 trillion. So in that stimulus, we basically almost equal all of the federal tax receipts that we normally take in, in one year. And all that money was used to prop up the economy, keep people from going into work and spreading the virus, and it stimulated the economy and it stimulated the markets. And so I think, putting money to work when the market was at 2200 was a little bit easier than putting to work at 3,500, but we think it's definitely justified and we think the market's going to continue to go higher.

Anthony Scaramucci: (07:16)
Let's talk about equities for a second because you and I watched this stuff very carefully. The tech side of things, like 10 to 15 names, Chris have dramatically outperformed in the recent rally, will that continue? Is value investing dead? Is passive investing ruling for the next decade? What do you make of what's going on? And where do you see things in terms of the trends?

Chris Toomey: (07:44)
I think there's a reason why these tech companies about perform so dramatically. One, they're breaking paradigms, they're growing at astronomical rates and they're changing the way that we do business. And as opposed to the period that I entered the market, when everybody was chasing technology companies that weren't profitable, these companies are making tons of money, they've got pristine balance sheets, and there's a reason why people are looking at them and saying, "Are these monopolies really good for the economy?" They've got impenetrable balance sheets. They're growing at astronomical rates and a period where there's some real concern about what's going to happen because of COVID, it's become a safe harbor trade. So if you look at it, I think 25% of the return in the S&P 500 is driven by these names.

Chris Toomey: (08:34)
I think it's about 50% with regards to the NASDAQ. Yeah. I think if you look at what Mike Wilson saying in our global investment committee is saying, "These businesses are here to stay, but they're probably a little expensive here." And so I think it wouldn't be a shock to me if I saw a bunch of these names starting to sell off for a variety of reasons. One, depending on what your view is of the election, there is a high likelihood that we could see tax rates go higher. And so for that reason, you could see some investors taking some tax loss selling between now and the end of the year. And a lot of these investors have huge gains in these names. So you could see that providing some downward pressure.

Chris Toomey: (09:15)
I also think you could probably see with the proliferation of some of these new technology companies coming into market, where you've got a lower market cap, you've got higher growth rates, investors taking some money away from their winners and looking to get into next year's or next decades where it's. I think the question with regards to value stocks, I think you've got to look at what's driving those returns. When you think of value, you think of defensive names, but large majority of these indexes are basically financials driven. And as you know, coming out of the credit crisis, there was a tremendous amount of regulatory pressure put on banks. And so what you saw was while banks they got much better and more efficient with regards to using capital, they took their leverage down dramatically.

Chris Toomey: (10:06)
So the return on equity has come down dramatically from prior to the credit crisis. And so that's been a drain with regards to financials ability to outperform and keep up with technology companies. Now, if we do get a normal V-shaped recovery, and from a cycle standpoint, we see a regular cyclical type rally, which we're anticipating, part of that might include a situation where interest rates start going higher, and I think we're in a situation where interest rates we're at about 50 basis points, they were going towards 80 basis points and everybody was having a heart attack that rates were going higher.

Chris Toomey: (10:46)
I don't necessarily think rates go back to normal, but I think they do go higher. So I think there's a couple of things that would drive the value trade. One is, do we get a cyclical rebound? Two, do financials start to see improvement with regards to net interest margins? And three, do we continue to see the economic growth that we've been expecting to see?

Anthony Scaramucci: (11:14)
Is there a scenario where the bottom part of the S&P... So right now it feels like it's the S&P 10 or the S&P 15, and then the S&P 45, but really the bottom part of the S&P that sort of S&P 250 to 500 has really underperformed Chris, is there a scenario where it rotates and that starts to outperform? And if there is what would be the catalyst?

Chris Toomey: (11:43)
I think a catalyst would be that traditional V-shaped recovery, so that you typically see the names that have underperformed, like financials, energy materials, consumer discretionary outside of a couple of tech focus, consumer discretionary names, really starting to do well. And I think that is going to be basically driven by two things. One, we're getting a lot of results with regards to a vaccine and treatments over the next four to eight weeks with regards to treating COVID. Secondly, is continued stimulus with regards to fiscal stimulus. Now we're in a situation right now, between the Democrats and Republicans, where originally we were thinking there would be some sort of compromise going into the election, anticipating maybe another stimulus bill of about a trillion dollars.

Chris Toomey: (12:33)
The Democrats are pushing for over $2 trillion. And you're seeing everyone starting to ratchet down their estimates with regards to getting some sort of fiscal stimulus between now and the election. Our view is, we're probably more leaning towards no stimulus before the election than stimulus was before the election. But our view is that, shortly after the election, we'll see some sort of stimulus between one and $2 trillion. I think that type of stimulus will continue to power us through, and continue to increase GDP. And we'll start to see some of those other sectors start to participate.

Anthony Scaramucci: (13:14)
We're talking about a V-shaped recovery, but we've already had a lot of time be expended. We've got six months of time that's been expended, somebody who likes talking about it's a K-shape meaning, some of us are doing well and some of us are doing less well. Why are you still confident in a 'V-shape recovery'?

Chris Toomey: (13:37)
I think it's because if you look at the data, the data is telling you that it's V-shaped, if you look at retail sales, we're seeing consistent growth in retail sales. If you look at personal savings, the consumer's actually in great shape going into COVID and their balance sheets have actually improved during COVID just with regards to the stimulus checks that they're getting. If you look at the manufacturing, you're seeing manufacturing continue to pick up. And if you look at places like Asia and particularly in China, you've seen that they've actually recovered to pre-COVID levels.

Chris Toomey: (14:11)
So our anticipation is we get to pre-COVID levels of GDP, probably sometime in the second half of 2021. And as such, that should be anticipated by the market and continue with the follow-through. So while our base case right now on the S&P 500, doesn't provide a tremendous amount of upside on the S&P in general, our view is, is that there's going to be opportunities to go well above our bull case. If you look at different areas to take advantage of.

Anthony Scaramucci: (14:43)
When you were growing up in the business, as was I, we talked about asset allocation being 55/45, 60/40 depending on the person's age, 50/50, et cetera. But do you think the 60/40 model, the portfolio model of 60/40 is viable today, given where interest rates are?

Chris Toomey: (15:05)
No, I think that's the crux of, I think, asset allocation right now. Historically, it was always about that base of fixed income, where you were collecting a certain amount of cash flow and maturity was always going to provide you your principal back in return. And then you took risk on the equity side of your allocation. Right now, if you look at the global debt market about 85% of it yields less than 2%. So if you're a foundation, you're an endowment, you're an individual family that's looking to live off of your retirement assets, and you're only making two and less percent on your fixed income. There's no way that you're going to be able to meet those goals.

Chris Toomey: (15:45)
And so I think what you're seeing is whether it's from a regulatory standpoint, where regulators are saying, you know what, we need to provide high-net-worth investors and retail investors with options besides fixed income to provide that stability, to provide that cash flow, to offset the volatility of the equity market, or it's just the natural progression with regards to where people are putting assets. In our view, the traditional asset allocation has become very outdated and you need to start thinking differently.

Anthony Scaramucci: (16:19)
Let's stay on this for a second, [inaudible 00:16:21] huge low rate environment, obviously stocks have gone up in that environment, hedge funds have typically underperformed, just pockets of them done okay. But really since 2012, hedge funds have really not performed well. What role do you think hedge funds play in portfolios going forward?

Chris Toomey: (16:44)
Yeah, look, I think there's a reason why hedge funds have underperformed since 2012. You saw a situation where a lot of money was flowing into the space, and the pendulum swung too hard. And you had a lot of people managing money that probably shouldn't have been managing money and the amounts of money that they were managing. And so it was only natural that you'd start to see those opportunities dry up and hedge funds underperform. What I would say is, is what we saw in 2008, 2009, during the global financial crisis, and what we saw coming through the COVID crisis was that our hedge funds for by and large did exceptionally well this periods.

Chris Toomey: (17:25)
When you looked at macro, whether you looked at equity long short, whether you looked at multi-strat, with these periods of uncertainty and this periods of volatility, and really a dispersion between great companies and not so great companies, there was a real good opportunity to generate alpha. And in our view, we think that that's going to continue and that you'll to see continued amounts of capital flowing into the hedge fund space.

Anthony Scaramucci: (17:56)
One part of that market though, and the hedge fund side structured credit did not do well during the crisis. So, what happened there? What do you think happens there? And what do you say to your clients about that?

Chris Toomey: (18:09)
Yeah, look, I think it was a very scary time, very similar to the global financial crisis. When you're at dinner and you're receiving calls from friends on desks, friends at hedge funds, hearing rumors about this hedge funds going under, that hedge funds going under, these hedge funds over levered. And then when the banks came in and changed the margin requirements on a lot of this paper, we knew that there was going to be a bloodbath. And I think you notice this as well as I did when the treasury secretary is doing a press conference and talking about, on the run treasuries versus off the run treasuries, you knew they were looking exactly at where the heart of this problem was, which was overlevered players and structured credit. And what I'll tell you is, is it's the old adage, you could be right, but with the leverage, you might not be around long enough to see being right.

Chris Toomey: (19:06)
And so a big part of this I think is, was leveraging the space. I think a big part of this was players that shouldn't have been in the space, and the space had to have a shakeout. And so we saw that shake out, and it was painful for a lot of those players, but that pain provides opportunity for us going forward. And so in our minds, if you've got exposure to a structured credit, if you're looking to get exposure to structured credit, it's probably one of the few places in the bond market that is still attractive. And what I would say though, is I would be very selective with regards to how you play it, really looking at diversifying into managers and funds that have a long extensive history of being able to manage in that space, understand what the risks are.

Chris Toomey: (19:56)
Many of these pieces of paper are very esoteric and you really need to know what you own. And then they also have to have the wherewithal and the ability to withstand a potential pullback. We still haven't seen the stimulus come through that, we're expecting at some point, there's going to be a talk with regards to a double dip recession. If the economy continues to kind of mull along, we don't have a vaccine and we don't have stimulus. And so in that type of situation, you really want to make sure you've got a manager that's not necessarily selling into those markets, but taking advantage of that weakness.

Anthony Scaramucci: (20:38)
We both do it as a long time. This is my 32nd year doing this. I find that high net worth individuals, which I have been managing money for high net worth individuals for 32 years. And we have, Morgan has Alon who talked about the psychology of money. I find that people get very emotional with their money and justifiably. So I'm not saying otherwise, but it seems the best strategy is to be unemotional. And so when sharp selloffs take place, if the fundamentals are okay, it makes sense either to add money there or to stay patient. So have you found that to be the case with your clients? And if you have, what psychological things do you do to help your clients through those things? Or do you think about these things in a contrarian way?

Chris Toomey: (21:31)
Yeah, look, I think it's the crux of what we do, which is providing our clients with the right advice at the right time. And while you've been in the business a little bit longer than I have, we've been seeing one crisis after another-

Anthony Scaramucci: (21:45)
Don't rub it into me. The conversation was going great up until that moment, all of a sudden the conversation got a little disturbing, don't rub it in.

Chris Toomey: (21:55)
In fairness, we've seen quite a few crisis over our time in the market. And in each of those we've come out of them. And we've seen the guys that have been able to take advantage of those pullbacks. And in many cases, it's all about having a plan and being disciplined. So when you're talking to your clients and you're talking about what you're trying to achieve, in certain situations, when markets are elevated, when things are going along as they should, there isn't a whole lot to do. But when you do see those periods where the market sells off 30%, that's why we're here. That's why we've got cash. This is why we want to rebalance our portfolio.

Chris Toomey: (22:34)
You want to have something that's doing well when the market's selling off. So you have some dry powder to put into these markets that have become cheap and that you want to get exposure to. And so the good news is we left Lehman Brothers about 120 days before the bankruptcy. We brought in a lot of new business during the global financial crisis, and we did exceptionally well for a lot of these clients. And when COVID hit and the markets sold off about 30%, we were ready. We went back to the same playbook in 08, 09, and our clients were prepared for it. And so they were holding their noses like we were in some situations because, you don't know when you're going to pick the bottom, but you know, that the probability is that those times that you're going to get a really good return by doing the right thing.

Anthony Scaramucci: (23:26)
Well, let's talk about that because you had a pandemic, 1918 pandemic, 100 plus years go by, we have another pandemic. You did have the financial crisis seems like a dress rehearsal, frankly, for the pandemic, but your portfolio construction ideas and your view of risk management have been changed by the pandemic, or are you unchanged? Like what does the pandemic say to you about where you need to be from a risk management perspective? Or does it not say anything and just say it chalk it up to it being a meteor strike?

Chris Toomey: (24:05)
No, look, I think it's one of those things, what we have to be prepared for. We have to be prepared for the known unknown. And this is a situation where, who knew we were going to have this crisis coming? And so you need to make sure that you build portfolios that can withstand some of these pullbacks and that you're going to have the capital and the wherewithal with regards to take advantage of those cheaper prices and take advantage of that opportunity. So I think what it did was it just reinforced the fact that you need to stick to your knitting. You still need to have a plan in place, because these things are going to occur. They've been incurring probably every seven to eight years. And if you're not prepared, and know what you should be doing, you're going to miss them, or you're going to make a mistake.

Chris Toomey: (24:54)
I'd say the difference with regards to COVID versus GFC is the fact that interest rates now are so low and just having kind of a 60/40 portfolio, or having some long duration fixed income in your portfolio, was really going to be helpful in each of these situations. But now that rates are so low, you're not necessarily getting that reward that you used to get when the market sold off. And so you really have to start thinking differently. And so what it did is, it really is accelerating our asset allocation decisions in investing in other things like hedge funds and private credit and private equity, and in places like real estate. And so, getting some real stability on the other side of your portfolio with those types of asset classes, I think is really necessary just given the lack of opportunity on the fixed income front.

Anthony Scaramucci: (25:50)
All right, I'm going to turn it over to Darsi. He's been dying to ask you a few questions. You got a lot of questions in the queue and you got tremendous amount of participation today, Christopher. So I'm impressed with that. And let's start it over to John Darsi, who's going to try to out shine you and me now. So we get ready to me, get ready.

John Darsie: (26:09)
Of course. I want to build on, you've alluded to this a couple of times, and you just mentioned that again, the idea of trying to drive returns outside of the traditional core fixed income part of your portfolio. And even now with equities, having rallied back to highs, trying to drive returns elsewhere, we have a question about private equity, whether it's direct co-investment or indirect, and the need to have private equity in your portfolio to try to juice returns a little bit in this low interest rate environment, how much private equity is typical today, or should be typical in a balanced portfolio? And what sort of a max percentage of a portfolio that you would recommend the average client? Obviously, every client is different and I want to paint it with two broad strokes, but within a high net worth individuals portfolio, let's say what's the max percentage of private equity? And what's the role in the portfolio of that private equity allocation?

Chris Toomey: (27:00)
No, I think that's a very good question. And as I think you hit on every client's different and every client situation is different. And so when we're talking to our clients, we've got a general consensus within our investment committee with regards to, if we had a clean slate and we had no variables to worry about what would that model portfolio look like? And variably though, our clients don't have a clean slate. They own businesses, they have their own direct investments, they have their own return and risk parameters. And for that reason, we have to take those things into consideration when we're looking at how we build a portfolio for them, and making sure that we don't have outsized risks within one area of the portfolio, and not providing the type of balance that you need.

Chris Toomey: (27:51)
I think when you think about private equity, I think you need to think about it as a commitment. Because it takes a long time to put that money to work. It takes a long time for that money to get harvested. And you want to diversify against what we call vintage year risk. And so there's certain vintages, where there were great opportunities and you got great returns and there are certain years or certain vintages where the opportunities were not as great. And so what I would say is, is that broad-based private equity right now, is not an area that we think is very attractive. There's about a $2.2 trillion of cash sitting on private equity balance sheets, waiting to get put to work. And the market is still, if you look at it from a valuation standpoint, pretty highly valued.

Chris Toomey: (28:44)
Now we've got the flip side of that, of interest rates being relatively low. So financing these deals becomes a little bit more attractive. In addition to that, as Anthony mentioned before, a lot of this performance has been concentrated into a couple of areas in the tech space. But if you look at the S&P right now about the average stock, I think is down about eight to 10%, so there are opportunities out there. And so what I would say is, is within this kind of period, we would say the opportunity in private equity is probably below average. And so we wouldn't necessarily be aggressively allocating broadly to private equity funds. But we would maintain that commitment. And so that can be anywhere from 5% of a liquid portfolio to as much as in some cases, 30 or 40%.

Chris Toomey: (29:39)
If you take into some of clients who have direct businesses, where they own a private business, that can be North of 50%. And so what I would say is, is it's all about making the right blend and taking advantage of the opportunities that are there. What I would say is actually a place that we think is actually even more interesting is owning a publicly listed alternative managers. So if you look at that, those alternative managers have the benefit of sitting on $2.2 trillion worth of cash. We're in a period which might be one of the greatest opportunities that we've seen in distressed investing in alcohol time. Many of these companies are growing at over 15% and have a dividend yield more than the S&P 500. So, what we would probably be doing is investing in less private equity funds and probably investing alongside them and owning their own stock.

John Darsie: (30:39)
That's an interesting way to look at it. Pivoting to real estate for a moment. A lot of what we've talked about with COVID is that it's accelerated trends that were already in place in terms of digital work, things of that nature, but there's also been some situations where it's reverse trends that were in place in particular with urban real estate and especially urban commercial real estate. What's your view on the real estate market? What are areas that you think are beaten down that might be a good place for opportunistic asset allocation? In general, how do you teach clients to access the real estate market? And what's your view of this space as a whole, in terms of what segments of the market are attractive and unattractive?

Chris Toomey: (31:21)
Yeah, we think real estate is actually a very attractive place to be invested right now. Outside of what you read about constantly in the press about, the issues that New York is having in San Francisco and some of the other large money center areas, that were probably expensive going into COVID. And then as you mentioned, are now dealing with some of these new trends with versus to work from home and remote working. But I think if we look at it right now, right now we're building less homes on an annualized basis than the 1950s, and the population's increased about 62%.

Chris Toomey: (32:00)
We're in a situation where, three month inventory is increased over six months. It's the highest level since 1963. So there's no inventory, we're not building as many houses and you're in a situation where millennials are leaving the home and looking to move into a new house or new apartment and mortgage rates are at all time lows. So it's a very attractive opportunity for multifamily housing. We also, we're seeing migration of people from the North and to the South, and aren't enough office buildings in those locations. And so what we're typically also seeing is some real opportunity in office in the right locations. Now broadly speaking office is going to have some issues, particularly, in the Northeast and in some areas of California.

Chris Toomey: (32:57)
But we also see some opportunities in office particularly in the South. We also like triple net lease opportunities. And so there are a variety of opportunities outside of your own home, outside of owning a publicly traded REIT, where you can get diversified exposure into some of those markets in a thoughtful way. Where you're in a situation where even with COVID, rental collections and lease collections are at average or above average collections. And so you've got high quality assets, you've got good cash flows. In many cases, you also might have a situation where you also have certain tax benefits built into that. So we're not accountants, we're not tax experts, but there are some benefits for taxable investors owning real estate and depending on what type of vehicle you owe.

John Darsie: (33:55)
So your team services are wide constituency of high net worth clients, individuals, institutions, what are some new trends that you're seeing among potentially next generation, high net worth investors in terms of what they're looking for from their investments? So the question I believe is leading towards it. Do you see more of a tilt towards things like ESG and impact? And how do you quantify those when you're building a portfolio for an investor?

Chris Toomey: (34:23)
Yeah, look, I think ESG has been around for decades. I just think people probably haven't talked about it. And I think, the millennials have really made it a key point with regards to how they invest that it's not just about profits, it's about what these companies are doing to make the world a better place. And what you're seeing is, is I think with COVID and people be more thoughtful with regards to how their money's being managed, it again, is accelerating these trends. And what we're also seeing is more and more opportunities to take advantage of these ESG mandates.

Chris Toomey: (34:59)
And I don't know for a fact that this is true, but if you look at value indexes, they've been underperforming, growth indexes for some time, there is a larger proportion of energy and materials and value indexes, and there is not a lot of value in material investments in ESG mandates. And so, that could be one of the reasons why you're seeing a little bit more of a divergence between growth and value.

John Darsie: (35:30)
Yes, the chicken and the egg. Which one is it? Is it the fact that demand fell off a cliff while supply, obviously with the OPEX situation deteriorated for markets? Or is it what you're talking about?

Chris Toomey: (35:41)
And it very well could be both. It could be a situation where, we came out of the global financial crisis where markets have done well, it's been probably one of the weakest economic recoveries out of a big pullback, like we've seen. So you don't have that tremendous amount of demand for energy that you had going into it. And you're not in a situation where you're having a hard time finding supply. And so that's definitely got to be a weight with regards to energy companies, but I think ESG is also going to have an effect on that, on the energy and materials side, but also on the industrial side. And just in general companies broadly speaking. I think it also is seen with reverts to a real focus in, on some of these newer growth companies.

Chris Toomey: (36:29)
You're seeing what we call the next Fang. We put out a report a couple months ago, about 25 names, about $155 billion worth of market cap growing at over 10% peg ratios, less than two. And since the markets bottom, we're actually the next fangs are actually outperforming the fangs. And I think part of this is the fact that there's more opportunity there. A lot of these technologies, a lot of these opportunities are getting pulled forward, and people are looking to take advantage of that.

John Darsie: (37:07)
Last question, before we let you go, you're affiliated with Morgan Stanley, a great firm, and I know we have a lot of high net worth individuals within the SALT community who tuned into these talks. If somebody was a free agent out there right now, a high net worth individual or an institution, and they're shopping around for a financial advisor, why would they want to work with a group affiliated with a firm like Morgan Stanley with its resources and its depth of knowledge, make your pitch to a perspective client?

Chris Toomey: (37:35)
Well, thank you. This is what I do every day. [crosstalk 00:37:39]

John Darsie: (37:39)
You're pretty good at.

Chris Toomey: (37:41)
We're a $7 billion, wealth management team. We basically could do whatever we want. We could go independent, we could go work for another bank. We've made a conscious decision to do what's the best thing for our clients, which is work at Morgan Stanley. From a technology spend around cybersecurity and just making things easier for our clients, to the amount of a scale that we have built into our business, to our partnerships, with reverts, to third-party asset management companies, the product that's available to us. And most importantly, just being able to do the business that we do and provide the advice that we provide. During the COVID crisis, operating from 30,000 feet was not going to work.

Chris Toomey: (38:31)
You really needed to look at what was going on at ground level from things as nuanced is, on the run treasuries versus off the run treasuries to what's going on in the securitized credit market, to what's going on with reverse to margin loans and margin reserve requirements. And so being a part of an investment bank that has a strong capital markets influence, is providing us information with reverse to what's going on, on the ground level, and then having the deep relationships with some of the greatest investors, the world is known, provides us kind of that top down and bottom up information flow that really provides customized solutions for our clients.

John Darsie: (39:16)
Well, I'm sold, but I want to leave you a final word before-

Anthony Scaramucci: (39:20)
That was a ridiculously easy question. What you should ask them is who's going to win the next election? That's what you should ask. Okay. That was a ridiculously easy question, but you don't have to answer that to me. I'm sure there's Morgan Stanley compliance that would be putting you in a bad spot. We appreciate you coming on-

Chris Toomey: (39:38)
I [crosstalk 00:39:39] question for you Antony.

Anthony Scaramucci: (39:40)
You go ahead.

Chris Toomey: (39:42)
All right. So this all conference takes place in Las Vegas, Nevada in May, will there be a SALT conference in May of this coming year?

Anthony Scaramucci: (39:59)
No, probably not unfortunately. I don't see how we could do that given the guidelines and what we know from the World Economic Forum and the Milken Institute and so forth. Could we have an event in September? I think so. I think that's possible. I'll turn it back to John Darsi and he could be more declarative about it. The number one thing for us Chris, is we want to make sure everybody's safe and healthy. And so that's a priori. I don't think we can get that done by May. If I thought we could, we certainly would have it in May. John, do you want to add anything to that?

John Darsie: (40:35)
Yeah, just reiterating what Anthony said, the public health guidance that we've gotten is that the first half of 2021 is going to be challenging for large in-person gatherings. And we love doing the SALT Talks series, has been great to stretch the content out over the course of several months, as opposed to jamming it into three days in Las Vegas, even though Las Vegas might be a little bit more fun than Anthony is sitting at home in his cargo shorts and his blazer.

John Darsie: (40:57)
But we're anticipating doing another in-person gathering, likely in the second half of 2021, we have a few tricks up our sleeve and we'll make that announcement probably in the next couple of months about what that event is going to look like. But for the time being, we're engaged in the virtual events and content the way everybody else is. And it's been a learning experience for everybody and we've really enjoyed all the conversations we've been able to have, including with you.

Chris Toomey: (41:23)
I appreciate the opportunity. I look forward to seeing you guys in Vegas sooner rather than later.

John Darsie: (41:29)
Absolutely.

Anthony Scaramucci: (41:30)
You well Chris. See you soon.

Chris Toomey: (41:32)
Thank you [crosstalk 00:41:32].

Anthony Scaramucci: (41:32)
Great job. All right, all the best.

Stuart Leckie: Investments & Pensions in the Far East | SALT Talks #65

“Chinese population is just coming up to 1.4 billion and it will peak actually very soon within the next decade and then have a long slow decline.”

Stuart Leckie advises on investments and pensions in the Far East. He is the author of books titled "Investment Funds in China" and "Pension Funds in China". He is the Founding Chairman of the Hong Kong Retirement Schemes Association and was Chairman of the CFA Institute Advisory Council on Standards and Financial Market Integrity.

Hong Kong adopted the Mandatory Provident Fund in the 1990s that required residents to put money away monthly towards a retirement savings account. The Hong Kong Retirement Schemes Association was created to address many of the questions surrounding the new program and offer guidance and expertise.

Hong Kong’s retirement plan stands in contrast to a much more complicated Chinese pension fund. China has two separate plans: one for urban residents and one for rural. Glaring problems exist in its current construction and face problems with its growing population in urban areas. “what's going to happen is that the cash requirements to pay out the pension benefits in future, is going to increase and become a very serious burden once the numbers of employed people in China greatly expand.

LISTEN AND SUBSCRIBE

SPEAKER

Stuart Leckie, O.B.E..jpeg

Stuart Leckie

Founding Chairman

Hong Kong Retirement Schemes Association

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

Rachel Pether: (00:07)
Hi, everyone. Welcome back to SALT Talks. I'm Rachel Pether. I'm a senior advisor to SkyBridge capital, which is a global alternative investments firm, as well as being the emcee for SAlT, which is a thought leadership platform and networking forum that encompasses, finance, technology and politics. SALT Talks is a series of digital interviews with the world's foremost investors, creators and thinkers. And what we're really trying to do with the SALT talks is aim to empower big, important ideas and provide our audience a window into the minds of subject matter experts just as we do at our SALT event series. Today we're very excited to welcome Stuart Leckie to SALT talks. Stewart is the founding chairman of the Hong Kong retirement schemes association and was chairman of the CFA Institute advisory council on standards and financial markets integrity.

Rachel Pether: (01:00)
He now advises on investments and pensions in the far East and has advised the Chinese government on pension reforms. He was the director of the exchange fund investment limited, which created the Hong Kong governments tracker fund, which was the first ETF in Asia. Stuart is the author of two books, Investment Funds and China and Pension Funds and China. If that's not enough, he was appointed justice of the peace by the Hong Kong government and has been awarded an order of the British empire by the British government. Stuart, you're the first OBE that I've ever interviewed so welcome to today's show.

Stuart Leckie: (01:36)
Thank you very much for, Rachel.

Rachel Pether: (01:38)
I had the pleasure of meeting you in Singapore a few years ago now, and your knowledge of Hong Kong and the wider Asia region was certainly impressive, but maybe before we dive deeper into Hong Kong, tell me a bit about the journey that took you there in the first place.

Stuart Leckie: (01:54)
Yes. I was born and brought up in Scotland and my degree was mathematics, pure mathematics. I decided to train as an actuary. So I did that. Qualified as a fellow of the Institute of actuaries and then worked in insurance in the UK for a number of years, I got something called a Churchill fellowship, and that enabled me to go to US and Canada and I saw a little bit of the international dimension. After that, I was asked to go to Hong Kong to establish an office, a pension consulting office. And the expectation was that I'd be in Hong Kong for two years. Well, the first two years, it was very tough because I was a new boy in town. But gradually it got a little bit better. So after two years, I said, I'll do one more year. And after three years, I said, I'll do maximum one more year. In fact, I'm 40 years past since I first arrived in Hong Kong, but I don't regret it. I think I've been very lucky to see things, transformation of Hong Kong and even more transformation of China.

Rachel Pether: (03:00)
I Think that's the typical expert story, isn't it? You go somewhere for two years and you end up staying for a lifetime in many cases. As the founding chairman of the Hong Kong retirement schemes association, what led you to establish that in the first place?

Stuart Leckie: (03:15)
Well, what was happening was that Hong Kong had a very poor record for social security or things like unemployment, healthcare and so on. The government actually decided to establish this Mandatory Provident Fund. Which is not really a pension scheme. It doesn't give a monthly income after retirement. It's really a sort of compulsory savings scheme. But when this was being discussed in the 1990s, there was a great deal of mystery and lack of understanding. It seemed to me that we should have some organization where we could approach the government and say, this is okay, but something else is not good enough and you must explain and so on and so forth. We were meeting a need at the time to form a proper professional organization that people would be able to turn to. We were lucky to get a good speakers and to get some good rapport with the other countries, particularly UK and Australia. Things just developed from there.

Rachel Pether: (04:18)
And how's it working then with the handover of Hong Kong to China and the integration with the pension schemes?

Stuart Leckie: (04:26)
Well, when Hong Kong set up the Mandatory Provident Fund, that was purely for Hong Kong and China in fact has its own quite complex pension system. In fact, more than one system. In the long run after the 50 year period has passed, one presumes that the Hong Kong retirement system will be folded into the Chinese pension system, but that's not really been confirmed yet until we got quite a bit closer to the year 2047, which is when the ultimate handover will take place.

Rachel Pether: (05:08)
I guess the Chinese economy is so much more complex than the Hong Kong one. What are some of the considerations within the Chinese pension system given that there's such a bifurcation, I guess, between the rural population and the urban population?

Stuart Leckie: (05:26)
Yes. Well, that's right. China has two totally different pension systems for the urban population in towns and cities and the rural population in the countryside. Every pension system has two sides to it. First of all, there's the design of the system. And secondly, it is the funding or the financing of the system. So the Chinese pension system for the urban population is actually quite a sensible design, but there's a huge shortage of cash to finance it. So what's going to happen is that the cash requirements to pay out the pension benefits in future, is going to increase and increase and become a very serious burden once the numbers of employed people in China are greatly expand.

Stuart Leckie: (06:15)
In the meantime, the rural population is just a very small amount because the farmers, even though they're encouraged to save for retirement, if they need a new tractor or if they fail a harvest, they can't even think about retirement. They've got to solve the urgent problem now. So many considerations. Salary's of course vary tremendously between the rich cities of Shanghai, Beijing, and the poor towns and cities in the countryside. You have this big disparity in wages and that inevitably means a big disparity in pensions. Which in one way, doesn't seem fair, but there's probably reality for many years, if not decades to come.

Rachel Pether: (07:06)
I remember that reminds me of a comment that you actually made in Singapore which really stuck with me. You said that China will grow old before it becomes rich. So how does the demographics play into that split as well?

Stuart Leckie: (07:20)
Yes. Well, Chinese population is just coming up to 1.4 billion and it will peak actually very soon within the next decade and then have a long slow decline. The United Nations produces very good population projections. By the end of this century, we would expect China's population to be down just probably a little over 1 billion. In the meantime, India, the Indian population is growing pretty rapidly. First of all, India is going to overtake China, and at the end of the century, we expect India's population to be somewhere between 1.4 and 1.5 billion. These are huge numbers with huge implications as far as finances and for getting the demographic projections correct.

Rachel Pether: (08:12)
Do you think in terms of the pension system, there's any resistance or the pushback to the one child policy in terms of how it's affected demographics and how that might affect people in terms of getting their pensions when they do eventually retire? How does that factor into the equation?

Stuart Leckie: (08:33)
Well, absolutely. Basically until quite recently, all the projections were done in the basis of one child. Now in fact, China's realized that there is a cost and there is a downside to the one child policy. About five years ago, they amended the one child policy to a two child policy. Now, in fact, the government have been quite surprised, quite disappointed that not more people are having more than one child. What's actually happening in major cities in China is that, and this, of course it's happening in many other cities worldwide, if a couple of one child then that's fine.

Stuart Leckie: (09:16)
But if they have two children, then they need a three bedroom flat. And so that's not so easy. And the environment where both husband and wife basically have to work in order to compete for income and pensions and education and housing and so on. It's really been a very interesting phenomenon to watch conditions in the major cities in China become closer and closer to Hong Kong. Interestingly enough, the fertility rate in Hong Kong is just about the lowest in the world. A rich society, lots of freedom, but people are very leery about having more than one child.

Rachel Pether: (10:01)
And has that always been the case or you think that's associated with the increase in costs of living and expenses?

Stuart Leckie: (10:10)
Yeah. Well, if we go all the way back to the foundation of people's Republic of China in 1949, at that stage, and of course virtually the whole population was rural, but at that stage, the average family had between five and six children. This in fact has benefited China in the last few decades with them. Lots of those people, five and six children now in the workforce, or having been in the workforce. But it is not going to help them going forward. Whereas, the proportion of people over retirement age is increasing pretty rapidly now.

Rachel Pether: (10:50)
Do you think it's also leading people to work longer or start earlier? We heard those stories of child labor and China and people starting work or being forced to work from quite young. Do you think that this pressure or this tension is impacting that as well?

Stuart Leckie: (11:12)
Absolutely. We have this phenomenon of migrant workers in China where something like maybe 80 million people from the countryside actually work in towns and cities. Usually the male will work on a building site, the women will work in a restaurant or a factory. And so they've got two incomes to send money back home where maybe they've got one child, maybe a got two children. Hopefully from the age of maybe seven, the youngsters can feed the chicken and feed the ducks, but they can't really do farm work. And so the parents try to get back to whatever village they come from at Chinese new year. And which of course is just awfully important to Chinese people. This migrant workers phenomenon, it's really one way of factories having access to cheap labor, but it's probably not very good for the young kids to be left alone or maybe left with a grandparent for 11 and a half months of a year.

Rachel Pether: (12:22)
No, certainly. That does seem like quite a lot of responsibility to place on young shoulders. I do want to dive into some of the other risks that you see facing China, but we've actually already had quite a few questions coming in from the audience that relate to Hong Kong so I'll address those as well. Someone has also just asked for clarification on what the Hong Kong retirement system looks like and does it have multiple pillars?

Stuart Leckie: (12:52)
Well, the Hong Kong retirement system, called the Mandatory Provident Fund, it's mandatory, compulsory. It's provident fund in that it's a lump sum scheme. Individuals pay 5% of salary up to a ceiling and the companies pay 5% of salary also. This is accumulated. There is a choice of fund, there's a very wide choice of funds now. You can be equities, you can be bonds, you can be a cash bond, different currency's and so on. There's no shortage of fund.

Stuart Leckie: (13:26)
People are not encouraged her switch funds too often, but it is very possible if you want to try to do that. The weakness of the system is that when you get to retirement age 60, or maybe 65, then you're going to get a lump sum. But the question is, what do you do then? What people need is an income. They got to have an income to live on, not a lump sum that they may be able to invest wisely that very often they may not be able to invest very wisely. This is the biggest single flaw in the system of how are individuals going to convert a lump sum to a pension because the government isn't going to do it for them.

Rachel Pether: (14:12)
That seems quite a lot of responsibility to place on the individual as well that might have no investing knowledge, as you say. Someone has also asked about your personal views. I guess this ties in to people looking at various funds, so fixed income and equities, what's your outlook on emerging markets, fixed income and equities. Specifically, if you could talk about Asia.

Stuart Leckie: (14:40)
Wow. How much time do I have? These are big questions. Personally, I'm a bit of an equity man. I tend to have more in equities than anything else on the basis that, I know it'll be volatile but I'm not planning to sell up anytime soon. So quite happy to have predominantly equities. I think part of the question related to fixed income or emerging market fixed income, sure, why not a five or 10% in that, but I certainly wouldn't put everything into emerging markets, fixed income. We've got problems in places like Argentina. Once again are on the verge of defaulting. I would just say to people, by all means have a quite a bit in equities, by all means have a balanced fund, very good thing. There are a number of sort of ETF type of funds like index funds. And then you should just mimic the index no better and no worse. Probably don't switch too often. That's just a sign of impatience.

Rachel Pether: (15:59)
And so with the Hong Kong, we've had another question from the audience come in about the way the Hong Kong pension retirement schemes association actually invest, given that it has this lump sum payment at the end. Does that encourage it to take on more risks than say another pension fund might because it doesn't have defined annual ongoing liability streams or how does it actually invest?

Stuart Leckie: (16:28)
Well, the way it works, retirement scheme association is really a trade body. It's not actually doing the investments themselves. But it will from time to time have speakers from different fund managers or different parts of the world coming to talk about how they see things. That's the nature of the organization. Also, if there's something that the government are doing and maybe somebody that government are not doing, and retirement scheme association together with others, of course, can approach the government and say, look, this is not good. We need to change this. We need to amend. The situation is you cannot get your money out to the system until you retire or get to at least age 60. And then you have to think Very, Very carefully about how long you may have a happy and productive retirement life so that you don't run out of cash.

Rachel Pether: (17:26)
Yeah. I guess that's something that we're all concerned about. We've also had a number of questions come in relating to the mainland China pension scheme as well. More about, I guess, the specifics of it. In terms of the Chinese pension systems then, that typically works as a typical pension does it? In terms of, monthly payouts upon retirement and standardized retirement age at 60 or 65?

Stuart Leckie: (17:58)
That's correct. First of all, it is a pension system. The retirement age is used to be 60 and used to be 55 or even 50 for women. That's being pushed up now. And of course, what they should be doing is having a retirement age probably more like 65 to tie in with the life expectancy now and not just stop at 60. The second part of the question was?

Rachel Pether: (18:30)
That was more about if it was just a typical pension scheme in terms of receiving monthly payouts once you retire.

Stuart Leckie: (18:37)
Well, it is except when the current system started off based on something called document 26 of 1997, as it happens. This was ideally to give the average person, average urban worker to give him somewhere maybe round about between 50 and 60% of final salary. So if you've got 50 to 60% are final salary, and as long as your salary is not totally inadequate, you should be able to live quite well. One of the concerns is that knowledge in China of how the pension system works is very, very scarce.

Stuart Leckie: (19:19)
It's now almost given up and having a funded system, so they're basically having to rely and pay as you go. In other words, contributions collected this month are just paid out next month by way of benefits. That's okay so long as the population is stable. But we know that the aging increase is going to be very severe. I think if my numbers are correct in about 20 years time, the number of people aged over 60 in China will be about 28% of the total population. This is going to be a huge burden on the workers let's say 20 years from now, having to pay these relatively generous pensions to many, many retired people.

Rachel Pether: (20:09)
Now we've discussed in depth on the demographics side of the equation. What are some of the other key risks that you see facing China? I appreciate that, that's another question that could be spoken about for a whole day. But maybe you could highlight where you see some of the other key risks at the moment.

Stuart Leckie: (20:29)
Well, you could get out of your Atlas and look around in China and many places could be potential risks., Starting off with the South China seas and maybe with North Korea, then how about Mongolia and then special problem with Xinjiang and what's happening with the Muslim population of China being, what is the phrase reeducated, is the phrase. And you've got tension in Tibet and you've got barges between China and India. As we saw quite recently. So there's many geographical issues. Then there's demographic issues that we've talked about already. And then there's also other things like corruption, like pandemics.

Stuart Leckie: (21:18)
This is not the first and it's not going to be the last pandemic we have at the moment. Things like bonds and debt. Sometimes in China, it seems a bit of a miracle that they don't have more problems with banks or other institutions that are getting into default. If you add up all these potential problems, you probably come to at least 15, maybe closer to 20 problems. in a way, it's not that China can avoid these problems, it's just that you should know that you're going to have very big problems from time to time and get ready, or if possible to prepare for it so that you get out of the huge difficulty, whatever it relates to.

Rachel Pether: (22:06)
A couple of questions on the debt piece. Why is it that you think we haven't seen as many defaults from Chinese banks given the high debt possessions?

Stuart Leckie: (22:15)
Well, see, I think the banking commission and the insurance commission have now been integrated into one very big Chinese banking and insurance regulatory commission. I think they do have a kind of early warning system that tries to prevent any big problems happening. But problems do happen. For example, buying insurance company, it was basically mostly a fraudulent company and that was a very seriously large institution. Didn't get too much publicity out here because it wasn't affecting Hong Kong and other countries really internal. But undoubtedly there are probably more problems than we might care to see from the outside.

Rachel Pether: (23:04)
You also mentioned debt as it relates to this sovereign wealth fund world as well. I believe that CIC actually borrowed from it. So they essentially issued bonds to create the farm. They borrowed from the future. Is this a typical structure that Chinese do? It's very unusual for a sovereign wealth fund to actually establishes itself in this way, rather than taking commodity revenues as they have them in middle East with oil.

Stuart Leckie: (23:39)
Yes, I would agree. It's pretty unusual. If we just think about sovereign wealth fund for a moment, there's two types. There's the genuine sovereign wealth fund, which is pretty well independent from government and they do the right thing, investment wise. Independent audit and independent management and so on. And the second type of sovereign wealth fund is what are called a quasi sovereign wealth fund. Whereas a lot of influence or control by government or by the ministry of finance. Basically they have to do what they're told. The example of a genuine one would be, for example, they Norwegian sovereign wealth fund. An example of a sovereign wealth fund that is only a quasi fund would be CIC in China. There's no way that the government will permit CIC to do too many independent things.

Rachel Pether: (24:36)
You've been in Hong Kong now for what, over 20 years, what's it been like on the ground with the tension that you've seen playing out with China? I appreciate you're not there at the moment, which we'll also dive into shortly, but maybe you could give your firsthand account of how it's been actually living in Hong Kong.

Stuart Leckie: (25:02)
I've been there two times, 20 years, nearly 40 years, in fact. I think the first 20, probably first 30 years, everything was good. Everything was positive. The economy was expanding. Hong Kong was doing exceedingly well. But in the last year or so, we've had [inaudible 00:25:27] problems being the riots in favor of democracy and then with the pandemic, and then with this introduction of the new national security law, which is very unpopular in China, as a Chinese law that has been forced upon Hong Kong. It seems to me that what the Chinese government is trying to do, they're trying to convert Hong Kong into being a Chinese city just as rapidly as they can. I guess many people thought this would happen maybe just at, or just before the year 2047. But it's happening now when we're only sort of halfway between 1997 and 2047.

Stuart Leckie: (26:22)
Hong Kong will, it doesn't become a very major city because population at the moment, seven and a half million, it might go to 9 million. But when you compare it with Shanghai's 22 million, Beijing's 23 million and so on. Hong Kong is not going to be anything like the biggest city or the most important city in China. So as long as we realize that, and I mean, Hong Kong is a wonderful place in many ways. The weather can be very attractive and a lot of other good things in Hong Kong, but it is going to change in a way that maybe some of the expatriates don't care for.

Rachel Pether: (27:06)
I guess this is probably only been highlighted by the current pandemic. I think we'd be remiss not to talk about that, given that your now sitting in Scotland unable to travel freely back to Hong Kong. How do you think that the current pandemic has maybe accelerated some of the issues that you've discussed? I guess you were out there during SARS as well. So maybe you could talk about maybe how that's prepared Hong Kong or how the impact of previous things have played out.

Stuart Leckie: (27:41)
Yes. Well, since you mentioned SARS, I mean SARS in many ways is much more serious than the pandemic so far because about 300 people in Hong Kong died as a result of SARS, nothing we're like that in Hong Kong with COVID. I think in some ways the challenge of COVID is that people don't quite understand it. It's very hard to predict what's going to happen with its application to individuals or the second wave or even third waves. There's so much more that we need to learn about the pandemic. If we look over the history, then of course there's been pandemics in Europe, there's been pandemics in Asia from time to time, but this one is perhaps a little bit more frightening to people because I guess many people thought that this sort of thing just couldn't happen in modern day society, but it absolutely can happen.

Stuart Leckie: (28:49)
My situation is that I came back to UK just before Christmas, last December, but at the time I was coming back to visit Hong Kong. In fact, things deteriorated quite a bit and I could have actually got into Hong Kong after two weeks quarantined by Hong Kong and then two weeks quarantined by the UK. That was really just to high a price. But I actually do my Hong Kong work in the mornings. I've got a home office set up and that's quite efficient in email and phone and so on, in speaking to all the people in Hong Kong, I have to work with.

Rachel Pether: (29:32)
Remote working has, I mean, I think everyone's just appreciating how easy it is to do and how you can do it from anywhere. We have a lot of audience questions still coming through. We only do have five minutes left, so I'll end on a couple of serious questions and then a more lighthearted one to finish. Just a more specific question about China and the pension scheme. Is it committing towards overseas infrastructure projects, such as China's state development investment corporation? I appreciate, we actually, haven't spoken about one belt, one road admits actually on purpose. I know that could be another entire discussion, but are you seeing China commit much to infrastructure projects?

Stuart Leckie: (30:24)
Yes. We've got the whole road belt and system, system. That's of course trying to do good and to help a lot of smaller countries. But of course, it's also serving China's aims of getting more influence and more involvement in many, many countries. I think China and the amount that it's happy to invest outside of China. That is a key question. We've got things like the new Asian infrastructure bank, which is perhaps competing with Asian development bank. I think it'd be very interesting just to see how this develops. There have been quite a lot of criticisms in some countries as to the attitude or the way that the Chinese have been acting almost like a colonial power. There's certainly issues there to be solved. But I think China's smart enough to implement the one belt system and so on without causing too much angst on the other side.

Rachel Pether: (31:42)
That's interesting. Now we actually have time for one final question. There have been quite a lot of discussions about China issuing a digital currency as well. What are your thoughts on a future role for cryptocurrencies in China, particularly if it's a Chinese government issued currency, do you have any view on that?

Stuart Leckie: (32:08)
I don't own any digital currencies and I don't plan to and I wouldn't advise anyone else to. [inaudible 00:32:18] This extent.

Rachel Pether: (32:20)
Do you think that the Chinese government is likely to go ahead and issue their own digital currency? I know there's been some talk of that for quite some time.

Stuart Leckie: (32:32)
I think if China was to do that, it would be with the sole purpose of them disturbing and disrupting and other countries' currencies.

Rachel Pether: (32:45)
Wonderful. Well, we only have a couple of minutes left, Stuart, so I just wanted to thank you so much for your time today. You've answered a lot of difficult questions and given a really great overview onto both the Hong Kong and Chinese market. Thanks so much for joining us today and hopefully you'll come back on and we can do a deep dive into one of the topics further.

Stuart Leckie: (33:06)
Thank you very much indeed, Rachel.

Mark Stoleson: Principles Before Profit | SALT Talks #51

“Life is not about what you get, life is about who you become.“

Mark Stoleson is the Chief Executive Officer & Partner of Legatum, a global investment firm based in Dubai with the mission to generate and allocate the capital and ideas that help people prosper. Prior to Legatum, Mark was a corporate finance and M&A attorney with Akin Gump Strauss Hauer & Feld.

“Hard work, a focus on service and looking after your neighbors” are guiding principles of both Mark’s personal life and Legatum. The firm manages only their own capital, which means they can have a longer-term perspective in their investments. Mark focuses on simple, big ideas: Where is the growth? What simple idea can they express with a really big company? Points of focus for Legatum include the expansion of China’s middle class by 300 million people over the next 10 years, as well as the 450 million unbanked people in India.

Philanthropy is a pillar of Legatum’s investment prospectus. “If we generate excess capital, how can we use it to help others prosper?” The firm has worked to eradicate neglected tropical diseases, like worms, that are prevalent due to a supply chain issue, not a shortage of capital or resources.

LISTEN AND SUBSCRIBE

SPEAKER

Mark Stoleson.jpeg

Mark Stoleson

CEO & Partner

Legatum

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hello, everyone. Welcome back to SALT Talks. My name is Rachel Pether, and I'm a senior advisor to SkyBridge, typically based in Abu Dhabi. I'm also the emcee for SALT, which is a global thought leadership forum at the intersection of finance, technology, and public policy. SALT Talks are a series of digital interviews that we launched during the work-from-home period. And what we're really endeavoring to do with the SALT Talks series is replicate the type of experience from our SALT conferences, where we provide a window into the mind of leading investors, creators, and thinkers, as well as providing a platform for what we think are big ideas that are shaping the future. We obviously want to hear from you, our audience, so if you have any questions, please do just enter in the Q &A section of the Zoom screen.

Rachel Pether: (00:59)
And today's guest. We are very excited to welcome Mark Stoleson to SALT Talks. Mark is the chief executive officer and a partner of Legatum, a global investment firm based in Dubai with a mission to generate and allocate capital to help people prosper. Over the last 16 years, Mark and his partners have worked together to build a world-class investment fund while pioneering a number of high impact philanthropic endeavors, which I'm sure we'll hear more about later today. These include the END Fund, the Freedom Fund, Luminos, the Legatum Center for Development and Entrepreneurship at MIT, and the Legatum Institute Foundation in London.

Rachel Pether: (01:43)
Prior to Legatum, Mark was a corporate finance and M & A attorney with Akin Gump in Dallas, Texas, and also Moscow, Russia. He earned a BA in international relations from Occidental College and a master's in law from Duke University. Mark, it is a real pleasure having you with us today.

Mark Stoleson: (02:02)
Rachel, great to be with you. Thanks for having me on.

Rachel Pether: (02:06)
So I completely paraphrased your bio there, and I apologize for that. So maybe before we talk about Legatum, tell me a bit about you and your personal background.

Mark Stoleson: (02:16)
Well, I actually thought you did a great job. That's just about it. But just my personal background, so I grew up in just a great, but fairly normal American middle-class family in Phoenix, Arizona. And my both my parents were first-generation college graduates. My dad served in the military, and my mom was a pioneering young CPA in the 1960s. And I think from the two of them, I got a lot of who I am today. So hard work, a focus on service, taking care of looking after your neighbors, and just the values that I have. And I think some of the values that Legatum has just came from where most of us get our values, from our family. One of my partners has a great phrase that we've really adopted as kind of the firm motto, which is that life is not about what you get, life is about who you become. I really think my parents infused that spirit and those values in me, and you can really see them expressed in what Legatum is all about today.

Rachel Pether: (03:22)
I love that. And I guess that's a nice segue to Legatum itself. It's obviously quite a lofty name. What does the name actually stand for? Tell me a bit about that.

Mark Stoleson: (03:32)
Yeah. Legatum is Latin and it means legacy. But the Latin word for legacy is actually a legal term, and it means a gift or a bequest to the next generation. So if you were writing up a will, a legatum would be the gift. It would be, "I legatum Rachel my car." The car would be the legatum, you would be the legatee, that would be the legator. So it means gift. And the idea that we seized on was we've got a limited amount of time on this planet, we want to do our best to make it better for the next generation. We feel like we stand on the shoulders of giants that came before us. We inherited a bunch of wonderful things. What can we do to make it better for others? So that's what legatum means, and it really drives a lot of who we are and what we try to do.

Rachel Pether: (04:17)
And I know that you were previously in Moscow before, when was it that you made the move to Dubai? How did you come about moving to the UAE?

Mark Stoleson: (04:33)
Well, it's a bit of a funny story, but I was sitting in my office. I was a young lawyer working in an American firm in Moscow doing corporate finance work, and a recruiter just called me out of the blue. I was sitting in my office. I don't know, it was probably a Saturday. And she said, "Look, I have this very off-the-wall opportunity, but it's in Dubai. So just stop me right now if that's completely off the table and if you have no interest moving to Dubai." This was 2004, maybe 2003, 2004. And I was interested. I was just immediately keen to know more, but I had no idea where Dubai was.

Mark Stoleson: (05:10)
So I remember holding the phone to my ear saying "Absolutely, no problem with Dubai. Tell me more." And I was Googling Dubai. Where exactly is Dubai? So that's how it all started. And that was 16 years ago. And it has been an incredible adventure. One that I didn't expect. I came for a job, but I really wound up teaming up with some incredible partners and an amazing team that has a purpose and a sense of mission to not only build a world-class investment organization but to use the capital that we generate, like you said, to express our mission, which is to help others prosper.

Rachel Pether: (05:47)
I love that. And I remember doing the same when I first had the opportunity to move to Abu Dhabi. I mean, I couldn't even spell it at first. So when you were ... you were active in emerging markets as Legatum before many people were even venturing there. What drew you to the emerging markets initially?

Mark Stoleson: (06:07)
Yeah, I think some people, when they look at our history, they instinctively think that we're an emerging markets fund or that's a focus of our business. And it is, but it really isn't. Something that makes Legatum quite distinctive is that we only manage our own capital. So it's all proprietary capital. And that gives us a huge competitive advantage in that we can take a very long-term perspective, and we can invest in any sector in any country and really are the masters of our own destiny. So that's the core of what makes Legatum different. And because of that, we do ... because we have long-term capital, we have a longterm perspective, and we're looking for companies that can create long-term value. That's just a good fit for our capital.

Mark Stoleson: (06:50)
So historically, we've been looking for, great secular growth stories in companies or companies that are innovating and disrupting, creating long-term value. It just so happened that for several decades, you could find those types of opportunities in the emerging markets, but we're not wedded to that. And today, we would be looking for a more nuanced view of emerging markets within global markets today. So you might find an emerging technology or maybe in a subset of some country that's really emerging and really beginning to innovate and create value. So we don't think of ourselves as emerging markets investors, but we are looking for emerging trends and emerging opportunities.

Rachel Pether: (07:31)
So what would be some examples of those that you mentioned within emerging opportunities? What are some areas that you're currently looking at now?

Mark Stoleson: (07:43)
Currently, for us, the way that we look at opportunities is through a very big lens, a very simple lens, actually that we call a simple, big idea. We say that we stand on the moon and look back at planet earth and say, "Where are the opportunities today?" And so just try to make it really simple. Where is there growth, and what kind of simple, big idea can we express with a really great company, and just looking at a country like China, for example. Lots of people have different opinions and perspectives on China, but the reality is that it's expected that China's middle class will grow by another 300 million people over the next 10 years. It's expected that they'll add about $5 trillion worth of consumption over the next 10 years.

Mark Stoleson: (08:29)
So if you think about that for a second, that's like almost the entire population of the United States moving into the middle class in China. So we sit around thinking, "Well, what's that going to do? What are those middle-class people going to want to do?" Well, they're going to want to do what all middle class people want to do around the world. They're going to want to buy things, and they're going to want to improve their lives. And so when we ponder that and think, "Well, how can we express that in a company that's well-run and that really has amazing opportunity to grow and create value over the long-term?" It would look like a company like Alibaba. So that's a very well-known story, but in our opinion, it may not be known as well as it could be or should be. We just feel like it's got a very long runway and has a lot more value that it can create.

Mark Stoleson: (09:14)
For example, when you look at Alibaba, people think of it, I think, in shorthand as sort of an amazon.com of China. And that's not totally unfair. Like Amazon, it has an AWS cloud-based service. Amazon's is worth, recently when I checked, $750 billion, and that's the whole market cap of Alibaba. So that gives you just a sense of the growth potential of Alibaba as both an online consumer platform and AWS and FinTech. It's just a great way to express this simple, big idea that the Chinese consumer is rising and will do so for a long time.

Rachel Pether: (09:54)
I mean, 300 million people coming into the middle-class. As someone from New Zealand, that number just blows my mind. I mean, that's a hundred times our entire population.

Mark Stoleson: (10:04)
It's hard to wrap your head around it. I'll give you one other example real quick. And that is when we look at a country like India, it's expected that by 2030, India maybe, or should be, the third largest economy in the world. So what happens as an economy of that size grows and expands? Well, you're going to see changes in the capital markets and how businesses are financed. So one of our other investments today is in a company called the National Stock Exchange of India. It's the number one stock exchange in India. And as you see bank financing beginning to morph into capital markets financing for growing businesses, this company should be well positioned to be a leader. And it's got EBITDA margins of 78%. It's highly profitable, well-run, number one in its space, and in a growing country. When we have long-term capital, we're looking for long-term value creation, it's those types of companies.

Rachel Pether: (10:59)
And is that related to micro-financing or is that more like SME corporate lending?

Mark Stoleson: (11:09)
National Stock Exchange of India would be like the New York Stock Exchange of India. It's everything. It's equity, it's credit, it's derivatives, and they are either number one or number two in all of those spaces. So it's just well positioned to capture that entire market in India. But you mentioned microfinance, that's another great story. So that's a great example of the type of thing that Legatum invests in. And many years ago, we were captured by this simple, big idea that there are 450 million unbanked people in India, so people that have no access at all to any banking services. Well, that's a problem, but that's also a huge opportunity. And you saw the emergence of private sector, microfinance companies getting out there into rural areas of India and offering basic financial services.

Mark Stoleson: (12:00)
So we wanted to support that development both from a philanthropic perspective but also just because this has all the hallmarks of potentially a great business. And our first major foray into microfinance was a disaster. It wound up being a complete zero. It was us trying our hand at a private company. We were new to India as well. We got several things wrong, and it was a total write-off. But I think part of the way that Legatum is put together is we invest on the basis of our beliefs. We invest with the posture of hope, and we learn. And we try to apply what we learn, whether it's good or bad.

Mark Stoleson: (12:43)
And so in that case, we took that institutional knowledge that we had built up from what looked like a failure and applied it later. And several years later, we wound up helping recapitalize the company called SKS, which was the number one, and a publicly listed, microfinance company. And that stock went up 4X from our investment, and we wound up making back all of our money and more. And it was a great end of the story, but the key pivot point was a commitment to the space, but also a commitment just to applying what we've learned.

Rachel Pether: (13:16)
That's fabulous. And I think I've heard you ... we've discussed before about how you invest on the basis of your beliefs, not your fears, which is obviously an excellent investment thesis, but I want to go a bit further into what you were talking about, these big ideas made simple. And I know that philanthropy is an area of importance for you personally and for the firm. Can you tell me more about some of the work that you've done here?

Mark Stoleson: (13:44)
Yeah. Sure. So just going back to our mission statement, and you said it very well, it is to generate and allocate the capital and ideas that can help others prosper. So to express that mission, we've got to do two things really well. First, we've got to generate capital. We've got to run a world-class investment organization, and we're super blessed to have a world-class team and a group of people that's been together for a long time. And when we stick to our knitting and operate within our core competencies, we can do that well. If we generate excess capital, how can we use it to help others prosper? And over the last 15 years, we've done that in a lot of different ways. And just like in our investment activities, we've learned a lot of things the hard way, but some things have really fired and have done really well.

Mark Stoleson: (14:29)
And an example of a simple, big idea is our work in global de-worming. So one of my partners, Alan McCormick ... it's a story that's become lore at Legatum. He was reading an article in the FT. It said that 1.5 billion people have intestinal worms and that the medicine is free or almost free, and you just basically have a logistical sort of supply chain management problem, but that this is a solvable problem. It cost 50 cents per person to treat them. So doing some quick math, we thought that's a solvable problem. That's the problem that could be solved in our lifetimes. Let's go for it. And that started us off on a ten-year plus odyssey that started with Burundi and Rwanda. We allocated about $10 million, did a seven-year project and saw the disease prevalence in those two countries come down radically.

Mark Stoleson: (15:23)
So these worms, they're not just small things. These are major neglected tropical diseases. They can kill you. They can make you lame. They can make you blind. And they're only in the poorest communities on the planet. And so we felt like we can make an outsized difference, an outsized return on investment in that space. They're called neglected tropical diseases because they're neglected. People don't think about them because in Western economies, worms are not an issue anymore. You just don't find them in New Zealand or in Switzerland or in the U.S. So we tackled that problem. And what I love about this story is not only did we see amazing success in that first 7 to 10 years in Rwanda and Burundi, but once we had the case study and the data that showed that it worked, we thought, "Well, we need to scale this. So how can we bring in more partners?"

Mark Stoleson: (16:13)
And we took our name off of it and worked with just a small group of other co-founders. And we launched what's called the END Fund, ending neglected diseases, and it started small. But as of today, it's issued more than a billion dollars worth of medicine. It's treated over 900 million people. And this year is amazing. In 2020, with all of the restrictions and lockdowns and challenges, we're on track to treat a hundred million people in 2020.

Rachel Pether: (16:45)
Wow. That's an incredibly impressive statistic. And I know that when we were speaking just earlier, we did notice that you do in fact have a sample of some of them behind you in the bookshelf that have been very, very well-traveled.

Mark Stoleson: (17:04)
And I assured you that that wasn't put there as a prop. It actually does reside here in our library here at work. So we're a hundred percent back in the office here in Dubai and that jar of worms, it's obviously not pretty, but it's very effective at helping people understand these things exist. And this is what it can look like inside of a child's belly. And it can do a lot of damage. And so the CEO of the END Fund, Ellen Agler, was invited to be one of the only outside speakers at a Gates Foundation all staff meeting, and she brought that jar of worms. And so for us, it's very meaningful, it's well-traveled, but it reminds us that we're not just working on statistics or big numbers, but every life is supremely valuable, and we want to tackle these types of problems.

Rachel Pether: (17:54)
And so when you ... a lot of people ... it's almost like CSR and ESG are almost becoming catchphrases nowadays. And many companies have CSR manuals that sit gathering dust. When you look at companies to invest in, is the impact piece or the CSR piece, is that important to you as an investor as well?

Mark Stoleson: (18:20)
So it's not important to us, and I'll tell you why. It may be important to that company. And we don't be grudged what those companies are trying to do or their motives, but from a Legatum perspective, given that our mission is to generate capital, and then for us to use that capital to express our mission to help others prosper, we want as much capital as possible returned to us so that we can control how that money is used to express our mission. We feel like if the company keeps some of the shareholder returns that should be returned to us and they use it, then they're expressing a totally different mission. We would rather have the money and use it for things that we verified, that we trust, and that we have confidence in, and that that's a better use of capital.

Mark Stoleson: (19:06)
And maybe we have a little differentiated view, but when we look at someone like Bill Gates, for example, or Microsoft, I'm grateful to Bill Gates, we use his operating system. In my opinion, he's changed the world for the better. We all use this to communicate and connect, to do business and work from home. And so we should be grateful to Bill Gates for Microsoft and these operating systems, if that's all he did, that would be super noble and just super admirable. But the fact that he then did that, and then started the Bill and Melinda Gates Foundation and takes capital and does more good, to me, is not giving back.

Mark Stoleson: (19:47)
You shouldn't operate out of guilt or out of a sense of duty. That's like giving again. He's already given the world something great, and he's giving the world something great again. And I like that paradigm and Legatum likes that paradigm too where giving should be cheerful, giving should be joyful, not out of a sense of guilt or some heavy sort of duty. And that's kind of the spirit that we have at Legatum that we try to express with all of our partners in the field.

Rachel Pether: (20:12)
That's fabulous. And I guess that sort of leads to another question then. When you're looking at your philanthropic vehicles, and I know you have a number of them, so I would like to talk about some of the others as well, how do you measure success then? You don't use these quantitative metrics because that is separate from the investment side of the business. How do you look at that in terms of success with the philanthropic vehicles?

Mark Stoleson: (20:41)
Yeah. Well, it's difficult. I mean, it's a real challenge, but it's a challenge that we all ... if you're going to give away money well and do no harm is your first obligation, you have to be serious about measuring what it is that you're doing. I mean, Aristotle said that it's harder to give money away than make it. And we think that that's actually true because you're in the business of intervening in people's lives and that should be handled with great care. And so I would answer in that we do are very, very best and we give it a lot of attention. With something like the END Fund, and really across the board in all of our philanthropic activities, we're not asking the question of how much money is required or how much money have we given. That's a metric that the world ... it's a crude metric, and it's a metric that the world uses.

Mark Stoleson: (21:29)
Our question is much more of an investment mindset. What's the return on investment. Running Legatum as an investment organization, if I sat here and told you, "This is how much money we invested," you would say, "Well, that's great, but what were your returns like?" It should be the same question in the philanthropic space. And so that's the mindset with which we approach everything that we do philanthropically. So at the END Fund or the Freedom Fund or the other things that you mentioned, where we infuse into the organizations and work with the leadership and the board just to make sure that we establish baselines right at the very beginning of any project and understand where we're starting from, and then do our best to track the progress so that we've got great numbers that have integrity and that can give us good feedback mechanisms so we can make adjustments to get the highest return on investment.

Rachel Pether: (22:17)
You mentioned the Freedom Fund again. We've actually already had quite a few questions coming in from the audience, which I do want to address, but before I move on to those questions, tell me a bit more about the Freedom Fund and how that's one of the big ideas made simple.

Mark Stoleson: (22:33)
Okay. So the Freedom Fund from a Legatum perspective was doing two things at the outset. One was Legatum had a long history, and really that predated even my arrival here, in fighting modern day slavery, human trafficking, modern day slavery all over the world, including in South America and Eastern Europe, Western Africa. And so we looked at this issue and felt like the latest data coming out of the U.S. and government agencies is that you've got 30 to 40 million slaves in the world. And given the ethos of Legatum and the primacy that we placed just on freedom, just on the sanctity of the individual and freedom, we felt like that's just a scourge and an evil that has got to be addressed.

Mark Stoleson: (23:24)
And the manner in which we're going to address it is to be targeted and focused and take that long-term approach. So what we did with the Freedom Fund was took a page out of our playbook from the END Fund and said, "How can we collaborate with other philanthropists and pool our capital and pool our resources and our experience, and really a serious push here?" So we joined forces with an organization called Walk Free and another one called Humanity United, and together with Legatum, the three of us launched the Freedom Fund. And the goal of the Freedom Fund is to work with front line organizations.

Mark Stoleson: (24:02)
So instead of top down approach of saying, "We know how to deal with issues of slavery," we're coming alongside in partnership and supporting those who are already doing it on the front lines, in their communities, who speak the language, who understand the culture, and who have a passion for this work. And instead of scatter-gunning around the world in lots of small projects, we focused all of our efforts really in sort of the South Asian corridor, where you see a high prevalence of slavery and trafficking. It felt like, "Let's make a big dent there."

Mark Stoleson: (24:35)
And so that's what we've done. And the Freedom Fund has been directly involved in liberating nearly 30,000 people from slavery. And their education programs and rehabilitation and awareness programs have touched over nearly 700,000 people. And we feel like we're just getting going. That's something that we won't stop doing until we're gone or until that ends. And so we have amazing partners in Humanity United and Walk Free that are in it for the long-term as well.

Rachel Pether: (25:07)
And so how do you define slavery, modern day slavery?

Mark Stoleson: (25:13)
Yeah, I mean, I think there are probably different definitions out there, but our definition is people who have lost their freedom and are being exploited for profits. So, again, there are different opinions, but when we look at it on a very fundamental basis, on a simple basis, anyone who's been deprived of their freedom of movement and their ability to express their individual life as they see fit, can fall into that category. But very specifically, when you see people in forced labor or child labor or the issue of brothels in some countries, these are ... you don't need a definition, and you don't need a PhD, you know it's slavery, you know it's bondage, you know it's wrong. And so that's what we're going after.

Rachel Pether: (26:03)
Thank you so much. We have a question. Well, we've had a number of questions coming in from the audience. And I would just like to address some of them. We've had one from David Wagner. And thank you for your question, David. He said, "Mark, Legatum does fantastic work. The Prosperity Index as always a must read each year. What criteria do you use to decide how to allocate capital?"

Mark Stoleson: (26:30)
Okay, great question. Well, if I can, I'd love to, first of all, say thank you, David, for the question. And the Prosperity Index has turned out to be a very, very powerful tool. The story there is if Legatum's mission is to promote prosperity and to help others prosper, we want to understand what that even means. And so many years ago, we worked with some amazing minds at Oxford University to deconstruct the meaning of prosperity. A lot of people think that means money or just material wealth. And the meaning of that word is just much more complex and nuanced. It means your health, and it means the quality of your relationships and your feeling of opportunity. It's just a very multifaceted term.

Mark Stoleson: (27:17)
And so part of what we wanted to do is help people understand prosperity is good because certainly it means wealth, it means growth, but it means a holistic sense of wellbeing as well. It means all the reasons that life is worth living. So that's prosperity. So then we thought, "Well, if we can define it, how can we measure it?" And the Prosperity Index is now run by a team in London at the Legatum Institute who are super brainy. And they use regression analysis and super technical stuff that's way over my head, but they have 82 different variables. They run this slide rule over every country on the planet, and they are beginning to help policy makers understand what drives prosperity and what restrains prosperity. And this to us is a gift. It's a tool, hopefully, to policy makers and decision makers. If they're interested in creating more prosperity in their countries, this would be a tool that serves those interests.

Mark Stoleson: (28:09)
Now, that's the Prosperity Index. The other part of David's question was what's our investment criteria. And our investment criteria just coming back to the beginning of this conversation is just really simple. We look for those simple, big ideas. We look for secular growth stories. When we find things that match up, and we find a great opportunity, we then allocate a significant amount of capital behind our high conviction ideas. So we go narrow and deep. We felt like the way to multiply our capital is not being right 100% of the time, it's being right a few times, but really backing those high conviction ideas with everything we've got. So as a consequence, we tend to run a very concentrated portfolio. Sometimes as few as a handful of names, three names, five names, usually never more than 10.

Mark Stoleson: (28:59)
And to us, that's the way that we manage risk is rather than diversifying with 50 or a hundred names, we just want to have a handful of names that we know extremely well and have high conviction behind. And that's how we invest. And that's all great. We have the ability with long-term proprietary capital to hold through volatility, but our team is amazing. And they've also got the courage and boldness to pull the trigger when opportunities present themselves like we've seen even in March of this year.

Rachel Pether: (29:28)
Definitely. And I think that we've actually had another question come in, which relates almost follows on from what you've just said about these concentrated and contrarian bets. So it's ex alum, and he said the Chandlers, founders of Legatum, are well-known for taking these super concentrated and contrarian bets that sometimes took a long time to play out and had to volatility along the way. The question is would Legatum be able to run a strategy the same way if the firm managed outside capital?

Mark Stoleson: (30:01)
That's a great question. Well, in terms of our history, so Legatum was really launched independently in 2006 with four partners. We have Christopher Chandler, Alan McCormick, Phillip Vassiliou, and myself. And today, it's a partnership of equals. It's a partnership that's tied together. We're not related by blood. We've just worked together for 15, 16 years, but what unites us and actually what unites everyone at Legatum is this sense of mission and the purpose for why we're here. And so we feel extremely lucky to have this job because we get to work in a great investment firm, but we get to use the capital for things that matter.

Mark Stoleson: (30:43)
It's a great question about whether or not we'd be able to execute on Legatum strategy, which is long-term, un-levered, and just looking for really high quality names and letting them compound value over time. It would be really difficult to do this with outside capital. If we had limited partners calling and wanting their money back every time the market has a hiccup that would hugely complicate our investment approach. And so in March of this year, for example, we were carrying a very significant amount of cash coming into this year, had absolutely no idea what was on the horizon like the rest of the world. And with a concentrated portfolio, we saw names in which we have huge conviction, we know very, very well, really take a hit just from sentiments and the market reacting.

Mark Stoleson: (31:35)
And so in those moments of time, we can definitely hold or we can back our beliefs and invest on the basis of our beliefs and not our fears. And that's what we did. And so I'm extremely proud of our team because we basically went fully invested in March and that's worked out well so far. But our time horizon is not just trying to get to the end of this year, we're looking at 3 years and 5 years and 10 years and building a legacy of Legatum for the next generation.

Rachel Pether: (32:03)
What's always impressed me about the story of the founding partners at Legatum as well, you have a very similar ... or you share the same investment thesis. You also share very much the same values. I don't think you'd be able to do all the work that you do on the philanthropic side, if you didn't really, truly believe in the mission statement. So how do you ... and sorry, I shouldn't say statement ... in your mission, how did it work with all of you coming together, and was it always so aligned at the very outset?

Mark Stoleson: (32:37)
It was aligned at the very outset. And how does that happen? I'm not sure, but when it does it, don't miss it would be my advice, grab a hold of it with both hands. And I have two grown sons who are just in university. And part of my advice to them is a lot of ways life is less about what you do, it's more about who you do it with. And that's definitely been my experience. And so I look around today and feel like the things that mean the most to me are my relationships. And within the Legatum context, that really starts with my partners. And we started as colleagues, but we became friends and we became partners and more, and so we're connected within our families as godparents. And we've been to funerals and weddings and graduations and everything else.

Mark Stoleson: (33:32)
We're doing life together, but it's not limited to just these four partners and owners of the firm, it's open and available and we wanted for everyone that works at Legatum, that comes in contact with Legatum because to us, relationships are a core part of a prosperous life. And so I think we recognize that in each other. I talked about my parents at the beginning and that sense that life is about who you become, it's not about what you get. I don't know how they got that programmed into me, but I just knew it. And when I came into contact with other people, with whom that resonated, we were like, "We can do something great." And we did. We sat down with a blank sheet of paper.

Mark Stoleson: (34:12)
We were blessed with ... we had capital, but we said, "What kind of business do we want to create?" And it generated one of those deathbed conversations with yourself where you're like, "Hey, when I'm on my death bed and I look back, what do I want my life to have been about?" It's pretty short. You should stay awake for it. And we all were of the same mind that let's do something special. Let's try to make the best use of our time and this capitol and be excellent at what we do. And so the Legatum story so far is an attempt to fulfill that belief or that mission. And it's had a lots of fits and starts. It's had lots of failures and challenges along the way. We've had a few successes, and we're all still together, which to me is probably the number one success.

Rachel Pether: (35:00)
That's definitely a very good sign. It was interesting when you were talking about the Prosperity Index and the sort of things you look for with regards to prosperity. I feel that in this modern world, we're so hungry to chase down success that actually we become miserable people or people with bad values. And so it's really about how you define prosperity to you rather than just, as you say, financial success or monetary gain.

Mark Stoleson: (35:30)
Yeah. Well, I think that's right. I mean, when I look back over the Legatum experience, I feel like the main takeaway is that no one here came from money, so this is a bootstrap, first-generation environment here. And so it's kind of like "if it's going to be, it's up to me" atmosphere. And yet looking at what we've done together, I feel like therefore, there's nothing special, we're not PhDs in development economics. We're just normal people that came together around an idea, agreed that we were going to try to execute on this together, and then we just never gave up. Maybe we're just very stubborn, but I feel like that formula is available to everyone. Find something that you believe in, find people you want to do it with, don't give up, and you might be surprised what happens in 10, 15, 20 years.

Rachel Pether: (36:26)
I would like to give you the final word, Mark. What is one thing that is exciting about the next 12 months in terms of investing with Legatum?

Mark Stoleson: (36:40)
Well, I mean, one of the things that we try to focus on is, again, like I said, that concentrated portfolio with high conviction ideas. So ideally, we'll be doing very little over the next year in terms of our investing. Now, that's a bit of a joke because we're constantly working. We're constantly scanning the globe looking for new opportunities. We're keen and eager learners. So we're constantly trying to learn about new disruptive technologies. You would find us sort of investing in companies that fit with our profile and our strategy, whether it's in financial services or in tech or in consumer, but you would probably find us trying to learn about crypto and about FinTech and about DeFi, and what are emerging markets within the broader market of global finance.

Mark Stoleson: (37:27)
And so those are some of the themes that we would be excited about and looking at over the next year. But really, Legatum doesn't really even think in terms of the next year. We think in terms of the next 10 years. And what I'm excited about is working with my incredible colleagues here at Legatum to see Legatum multiply our capital, multiply our impact, and multiply our influence, and do it together over the next 10 years.

Rachel Pether: (37:54)
Thank you so much, Mark. It's been a joy to speak with you as it always is. And I think you really do make this amazing case or great example of values based investing and the true impact that you're having. So thank you so much for giving up your precious time today to speak with us. And I hope that we can continue the conversation at some point in the future as well.

Mark Stoleson: (38:16)
Rachel, a real pleasure. Thanks so much.

Michael Vranos: One of the Best Bond Traders on Wall Street? | SALT Talks #45

“I believe investors should take a slightly more charitable view to the hedge fund structure.“

Michael Vranos is the Founder & Chief Executive Officer of Ellington Management Group, a firm founded in December of 1994 to capitalize on distressed conditions in the MBS derivatives market. Michael’s Wall Street career began in 1983 at a time when the Federal Reserve was opaque in its actions and long-term plans.

“Keep more cash on hand to anticipate the panic of others.” Michael has taken this learning from the Crisis of 1998, coupled with best practices from the economic downturn in 2008, to prevent losses during the COVID-19 pandemic. As a result, the firm was able to put $3 billion to work when others experienced sell-offs.

Where are today’s opportunities? Simply put: fundamental value investments and relative value trades. Mortgages were not the source of the 2020 economic crisis, and selling them isn’t going to solve anything. With the Federal Reserve now owning $2 trillion worth of mortgages, they will have tremendous impact on that market going forward.

LISTEN AND SUBSCRIBE

SPEAKER

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Michael Vranos

Founder & Chief Executive Officer

Ellington Management Group

MODERATOR

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Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello, everyone, welcome back to SALT Talks. My name is John Darsie, I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and public policy. SALT Talks are a digital interview series we started during this work from home period. Where we're interviewing leading investors, creators and thinkers. And what we're really trying to do during the SALT Talk series, is to provide our audience a window into the minds of subject matter experts as well as provide a platform for what we think are ideas that are shaping the future, as well as interesting investment opportunities. And today, we're very excited to welcome Michael Vranos to SALT Talks. Mike founded Ellington Management in December of 1994, to capitalize on distressed conditions in the mortgage backed securities derivatives market, and he was involved in that market even before it was considered sort of a hedge fund asset class.

John Darsie: (01:00)
Until December of 1994, Mike was the Senior Managing Director of Kidder Peabody, in charge of the RMBS trading division. When Mike was the head trader and the senior manager at Kidder Peabody, the mortgage backed securities' department became a leader on Wall Street in CML underwriting for each of the three years between 1991 and 1993. Mike began his wall street career in 1983. After graduating magna cum laude, Phi Beta Kappa with a Bachelor of Arts in Mathematics from Harvard University. He currently serves on the board of directors of the Boys and Girls Club, Hedge Fund Cares or now called Help For Children, as well as the Waterside School and he's an emeritus member of the board of the Stanford Shelter For The Homeless. So he's very involved in the charitable side of the hedge fund industry as well.

John Darsie: (01:50)
A reminder to our audience today. If you have any questions for Mike during today's talk, you can enter them in the Q&A box at the bottom of your video screen and conducting today's interview is Troy Gayeski who is the co-Chief Investment Officer and Senior Portfolio Manager at SkyBridge Capital, which is a global alternative investment firm. And Troy is also a contributor to salt. So Troy, thank you for joining us today. And I'll turn it over to you for the interview.

Troy Gayeski: (02:14)
Yes, thanks John. And Mike, it's really great to have you on here. And obviously, before we dive into market opportunities, which I know you're chomping at the bit to discuss. Just wanted to get a little more color on your background. I mean it's a fascinating story, how you came from relatively humble roots. Like many of us that have been on the screen, to running one of the longest, or successfully running a hedge fund that's been in business just about as long as any. And so we can take us through where you're born, how your schooling progressed, and then how you made your way to Wall Street, it'd be fantastic.

Micheal Vranos: (02:49)
Oh, thanks. Okay, thank you Troy. Sure, so I was born in Worcester Mass, and when I was young, our family moved to a town called Ellington, Connecticut. Hence, the eponymously named firm. And Ellington was and still to some extent still is a farm town. They grow shade tobacco there, which is tobacco that wraps cigars, corn, and there was a lot of dairy back then too dairy farming. My father was an engineer, and my mother was a nurse. And when I was young, I just spent a lot of time outside. And I played a lot of sports, I was a decent athlete, and I got involved in bodybuilding in my late teen years.

Micheal Vranos: (03:32)
When I got into Harvard, I was okay in math, and I spent a lot of time even at Harvard, in the gym at school. And this is important because it had some bearing on my decision to go into business because I kind of like being around people. And studying and being isolated was not exactly that. So I had written an undergraduate thesis and was given a grant by the NSF to go to graduate school in math, in Stanford. And at the very last minute, which is last minute meaning, let's say April of my senior year before graduation. I decided that it would be better to quote unquote, go into business. But I didn't know what go into business meant. I used to train with a fellow from the gym, from Harvard Business School. And he told me if I applied to jobs at Kidder Peabody, it would be great because the lunches were free, and they were very good. And if I was in sales and trading, I could be out by five o'clock and I could get to the gym. That sounded-

Troy Gayeski: (04:33)
Mike did they have protein shakes back then? And all the things they have today?

Micheal Vranos: (04:38)
Yeah, it was down at 10 Hanover square. And you could order out at the various places and things like that. It was good 80s food back then. So I decided to do it. And I was offered two jobs at Kidder Peabody, the two openings. And one was in sales and trading, and the other one was in project and lease finance. But the latter was one where I'd have to work more hours, but it was 24,000 instead of 22,000 a year. So I went for the lower salary job because I could get out at five. This was my brilliant logic back then. Anyway, so I started at the Chicago Board of Trade, and I ended up in New York by the fall of 1983.

Micheal Vranos: (05:17)
And I was supposed to be doing research in mortgages, but the traders stopped showing up to work. And they just kind of threw me in the seat. There I am 22 years old, having to figure out everything myself. There was no research group, it was pre-OAS. So the ideas of coupon compression and negative convexity, one had to sort of infer from the markets. Now, it's also important to realize back then, that rates were very, very high extraordinarily high. The current coupon mortgage rates had just dropped from 15% to 13 and a half percent, and rates have been more or less dropping for the last 40 years. And Kidder Peabody wasn't exactly Salomon Brothers, they ran the market back then. But we built our group up slowly over time. And as John mentioned, by the early 90s we became the largest CMO issuer on Wall Street and our group became the firm's profit leaders.

Micheal Vranos: (06:20)
We also produced back that a tremendous amount of mortgage backed derivatives. And in the early 90s, we developed agent based prepayment models that we still use today at Ellington to help us value these securities and these models. They consider each borrower as an individual agent who makes an economic decision to prepay or default based on certain factors, economic factors, and these agents comprise a distribution that we track over time, and that's the basis for the model. Anyway, so leaving Wall Street at the end of 94. And I'll get to the crisis of 94 later.

Micheal Vranos: (07:00)
It was a very good time, because the Fed had been raising rates precipitously, and mortgage backed securities, especially derivatives were highly undervalued. So as John mentioned, we formed Ellington in the last days of 1994. Although, it's important to say that the seeds of the partnership were planted almost 50 years ago. Larry Penn, who's our vice chairman and chief operating officer was a fellow that as a freshman I met at Harvard. And John Geanakoplos our head of research. The well known mathematical economist, and James Tobin, professor of economics at Yale is my cousin. The five of the six regional partners of Ellington... I'm sorry, of the six original partners of Ellington five are still with us today 25 years later.

Micheal Vranos: (07:51)
So we're now a firm of 155 people. We manage about 11 billion dollars across hedge funds, private debt, some long only, and permanent capital vehicles in the forms of REITs that traded in the New York Stock Exchange EFC and earn are the tickers. We write and use our own interest rate prepayment in default models for RMBS, CMBS. And corporates and as I mentioned, develop these models over decades. So that's, a little bit of my background. I can talk a little bit about some of the crises I saw back then, and how it applies to what we're seeing now if you're interested.

Troy Gayeski: (08:38)
Yeah, of course Mike. But before we get into that the question everyone's dying to ask is, how much can you bench press back in the day?

Micheal Vranos: (08:45)
Oh, that's an interesting question. You know-

Troy Gayeski: (08:47)
Don't take too long answer, though [inaudible 00:08:50] my man.

Micheal Vranos: (08:51)
Okay, I'm going to be very honest with you. 395.

Troy Gayeski: (08:55)
Not bad-

Micheal Vranos: (08:56)
It was okay.

Troy Gayeski: (08:56)
It's not bad for a man of your stature. I'll give you credit.

Micheal Vranos: (08:59)
I never got the 400 it was one of my worst lifts by the way the bench press it wasn't-

Troy Gayeski: (09:05)
Yeah, what was your best one the squat and the deadlift.

Micheal Vranos: (09:09)
Probably the squat, yeah.

Troy Gayeski: (09:10)
Squat, yeah. Same here man. That was always my most powerful movement. So, good for you.

Micheal Vranos: (09:16)
I don't know that it's done me a lot of good now at this point. But thanks for asking anyway. So-

Troy Gayeski: (09:24)
But segwaying back to business, because I know you've obviously been a huge lifter your whole life. In terms of the crises you went through, you've touched upon the 94 crisis with asking which is rate driven. You've obviously managed to long term capital, manage to the financial crisis. Just touch upon a few highlights and lessons learned or some of the keys that allowed you to survive. And then once we get through that I want to touch upon the longevity of your firm, because that's something that we feel people don't appreciate enough how difficult it is just to stay in business over time.

Micheal Vranos: (09:59)
Yeah.

Troy Gayeski: (10:00)
So shoot on the crises lessons and some of the experiences there. And then we'll get into some of your keys to longevity.

Micheal Vranos: (10:07)
Okay yeah, sure. So with all these crises, we've tried every possible way to get out of business, and it hasn't happened yet. But there's plenty of mistakes made, and there's a lot to learn. And I think the first real stark sort of learning experience and example, was the crisis of 94. To which you alluded, which is the precipitous rise in rates starting in the early spring of 94, and it's really important to realize back then. The Fed was secretive about their plans. They prided themselves in being sort of opaque with their plans, and they tightened and raised rates seven times, pushing libor from three to 6% over the course of the year in less than a year.

Micheal Vranos: (10:48)
And this was a total disaster for MBS derivatives, which were these highly leveraged securities that carry durations of at least 20 years, sometimes 30 years with negative convexity as well. So a lot of real money accounts lost money back then like mutual funds and things like that. But there was one hedge fund in particular, and there weren't many back then by the name of Asking Capital that had these securities levered as well. And that was my first experience in seeing the deadly effects of the combination of leverage and miscalculation of risk. And the two sort of work together they conspired to create a disaster. And also sort of the rapaciousness of lenders at the time, where there was not a big idea of forbearance back then. And I think, in the COVID crisis now, I can see anecdotally, I thought lenders acted more nobly than they had back then in the 90s. That's been my observation.

Micheal Vranos: (11:50)
Anyway, and then there was as you alluded to the crisis of 1998 the LTCM crisis. And that was also very interesting. And that was a crisis of leverage. And that was rather specific to hedge funds unlike the great financial crisis. And if I recall correctly, and someone in the audience might know better than I, and can check my memory. But they sent out long term capital sent out a letter on July 31 of 1998 stating that they were down 51%, and I think that was the number. So I found that to be incredibly odd, because it being down 50% given that kind of leverage, was akin to saying, "Okay, I've got the edge of his dime, and I'm going to put it on the edge of this razor blade, and it's going to balance."

Micheal Vranos: (12:45)
And that's just not an equilibrium point for a leveraged fund. And so something was going to have to... Either you're going to recover or blow up. And we know what happened, but the aftermath of that was an unnamed prime broker was making very aggressive margin calls to Ellington, and other hedge funds at the time trying to break term financing even before maturity. And we had a lot of term financing out. And I think they just made the calculation they'd rather take legal risk than market risk. And they were just looking for margin just to blow out all their borrowers.

Micheal Vranos: (13:25)
So from that, I learned three important lessons. One is not to trust anybody, two is to keep more cash on hand than you otherwise would think to anticipate the panic of others. And three is don't let your prime broker hold your money. A prime broker can hold up your trades and cause fails to others. So you can use prime brokers and we use prime brokers, but they shouldn't control your money. You should be your own prime broker. And that's not easy. That's why at Ellington we have so much infrastructure, because you need to develop great systems in risk management to hold your cash. But I think it's crucial.

Troy Gayeski: (14:10)
Yeah. And it would also be fair to say having low leverage, right? That was a lesson from both 94, and 98 correct?

Micheal Vranos: (14:15)
Absolutely, but that becomes sort of a follow on from your work backwards from there. You have to figure out how much cash you need in these scenarios, and that governs your leverage. So it's a sort of that's the flow of logic.

Troy Gayeski: (14:33)
And obviously, many of those lessons help you survive the financial crisis, and then also help mitigate losses in March as well, so-

Micheal Vranos: (14:41)
Yeah.

Troy Gayeski: (14:41)
... there's been much discussion on the financial crisis. I thought you touching upon LTCM in 94, which seems like eons ago was very informative. Why don't we segue to March and how you're able to mitigate losses compared to many of your peers.

Micheal Vranos: (15:00)
Okay, so March was interesting. So that, was a time where there was obviously a crisis of leveraging cash as well. And it has to do with managing, again left tail risk. So what we've done internally as we had, and have a lot of what if scenarios? For example, what if high yield goes down 10%? What if high yield goes down 15%? What happens to RMBS, CMBS in corporates. Particularly mezzanine tranches that carry a little extra interest rate, but whose delta will expand tremendously. So negative credit convexity, if you will, in scenarios that I've described to you. And then on top of that, what happens when that happens to haircuts?

Micheal Vranos: (15:55)
And those are the sort of what if's and scenarios that we had run. Starting actually since 2008. And even before that helped us sort of survive and actually put money to work after the March crisis of this year. I also think it's you can't underestimate the importance of having the right kind of investors so that when you call them, they come alongside. Because, the amount of money that you might husband for this sort of situation isn't nearly as impactful, as if you have investors that are willing to come along with you. And so if you could indulge me for a second, I need to get on my soapbox about this one issue with investors because although we had Ellington managed both hedge fund ENP style capital. I believe investors should perhaps take a slightly more charitable view toward the hedge fund structure. We should all keep in mind that hedge fund investors own a put. They can take the cash and put the securities back to the manager at any time oftentimes in inopportune times.

Micheal Vranos: (17:11)
And they can do this because they may have their own liquidity needs, or see better opportunities elsewhere. So as a hedge fund manager, you need to manage that put as well. And that's a drag on returns, quite frankly. Alternatively private equity, they have a call on cash, that's a drag on investor returns, and that accrues positively to them. So we are actually here at Ellington in active discussions with some pension allocators. You know that we sort of like, "Who owns that put, and what's the value of that worth PE versus, versus hedge fund." And I think it's an interesting, separate topic of discussion. But anyway, I'm digressing a bit but the point is that if you have clients that you can call even if you're a hedge fund in a crisis you can ameliorate this problem. And that's one of the ways that we put about three billion to work in April in May once the crisis hit.

Micheal Vranos: (18:13)
But again you're forced to be really fastidious about managing this left tail risk, and the liquidity so that you can buy and not sell in a crisis. And that includes not just putting aside capital, but effectively credit hedging, effectively having robust models that will tell you more or less where you think your assets will be in a big move. I mean keep in mind, the high of the index move 20% in a very short amount of time. So even in our risk scenarios, we needed to extrapolate a bit where we had down 10 and down 15 to some degree. So-

Troy Gayeski: (18:50)
Mike before we get into the key opportunities today. I think you touched upon two key points that have led to your longevity one is obviously a culture of risk management. Two is having a client base that knows when there's a buying opportunity, and isn't selling bottoms repeatedly, which is a recipe for disaster in any strategy. So those are two keys that I think that have led to your success. Are there several others that you'd like to mention that it led to just the longevity?

Micheal Vranos: (19:21)
Well, I do think modeling risk is very important. I can't emphasize that enough, because you really have to fly the plan. You're going to at times, it's like you're a pilot on instrument reading at times, because we've seen times where certain mezzanine CLO tranches for example, that we thought had the risk of let's say, of a high yield index, when it was at 108. Going to have maybe four times the risk of the high yield index, when the high yield index was 15 points lower. I don't even know that the PM believed it, but it was true. And so you need to, because modeling is really, really important to get the risks right at various times, not just now. Because, it's one thing to model risks, local risks, it's another thing to model risks for big moves. And it's not so easy, especially with moves that you haven't seen before. There's no way to know that you're going to be exactly right.

Micheal Vranos: (20:26)
Another thing I think, is it's obviously no small feat to get investors to come along with you. Investors have their own stresses at these times A. And B I think, even when an investor is looking to invest with you. And we've been around for 25 years and we're easy to check out and all that. Sometimes it takes months or even years and then the opportunity's gone. I think it's almost a little crazy sometimes. I understand how we got to that point in this industry, but I think it can hamstring investors at times too. That's a separate issue. Anyway, so-

Troy Gayeski: (21:04)
So definitely a culture of strong risk management, having clients that will stick with you in draw downs and actually add capital are very key. And it's very interesting you bring up the point of doing your in house modeling, right, which I think is a key to all success for investors is that they're not relying upon third parties to provide them with information sources, they're taking the raw data, and actually compiling outputs that make rational sense for informed decision making. You'd agree with that right, Mike?

Micheal Vranos: (21:30)
I do agree with that. I also think there's some great independent research that goes on out there. And you don't want to have the hubris to think you have all the answers and things. But in the end, you need to control your own data set, you need to know what's going into the cooking, if you will. So I think it's very important. It's expensive to do that by the way, of our 155 people roughly a third, or so or more. Are so how investment professionals have a high order, right? So the way we do things Ellington, it's a very collaborative environment. So we have the PM, and the assistant PM, and the desk analyst, and the researcher all sitting together. They're all part of a team. But any breaking that chain can be tough, if you're looking at some point, if you're just relying on an outside vendor, maybe that particular chain might not be necessary. But that's just not the way that we've chosen to do things.

Troy Gayeski: (22:35)
So Mike, let's segue into today's opportunities. Obviously, there's still areas of dislocation and structured credit. There's a lot of discussion on where pre-payments means are going to be on a go forward basis. So touch upon some of the favorite areas that you see for opportunities the next 6, 12, 18 months.

Micheal Vranos: (22:54)
Okay, sure yeah. So basically, there's two general sets of opportunities. And this is a very, almost a dumb statement. But there are the fundamental value investments. And then there's relative value trades, let's say. And the Fed has really engineered a broad tightening of almost all assets, right? So I think going blindly long is probably not the best prescription right now. And it is harder to find fundamental value investments, but they do exist. And I think one is in non agency mortgages still. And I can go into a little bit of detail about that if you'd like. But if you look and see, so what was the provenance and the opportunity. Was again, this massive selling of these assets on Sunday, basically on March 22nd by REITS.

Micheal Vranos: (23:54)
Leading up to that you would seen a lot of same day selling from really well known, long only managers leading up to that week, looking to raise cash. So this was a cash grab. And the selling by the time that week ended was rather indiscriminate. It was a selling of all structured products, but mostly legacy non agency mortgages, and later on NPL and RPL mortgages, but unlike 2008, like I said, mortgages were not the cause of this problem, and then selling them was not going to be the solution. I believe that was a big technical move, and that there's a lot of value. So what's happened since then? And why do I think that?

Micheal Vranos: (24:38)
Well, there's technical and fundamental reasons why I think that, first of all, is in response to what happened. And maybe everyone knows this, but it's really important to say nonetheless, that the Fed has had tremendous impact on the mortgage market and structured products. They've increased their holdings, net of pay downs, and you mentioned prepayments Troy, so net of pay downs, that's not a small step fee of 600 billion. And so they'll they own two trillion of mortgages, which is like 30% of the $6.7 trillion pasture market. Okay, and to think that-

Troy Gayeski: (25:12)
Yeah, all agency pastures right, Mike?

Micheal Vranos: (25:14)
Yeah.

Troy Gayeski: (25:14)
I [inaudible 00:25:15] to specify for people.

Micheal Vranos: (25:16)
Yeah, agency pastures exactly. And their balance sheet has increased 2.7 trillion since March. So it's the rising tide, is that lifting almost all boats at this point. And this is a substantially faster increase in balance sheet than other of the QE programs. So there's a lot of technical support, let's say for this market. And so what's going on right now, in non agency RMBS. So first of all, from a fundamental standpoint the housing market right now is incredibly strong, which is a positive for the securities. There's very little downside, I believe in legacy nine agency securities right now because of the low LTV. So the legacy RMBS house price appreciation, adjusted LTV is right now, are 50% or less. Meaning that for a typical borrower the outstanding loan value is only about half the value of the house itself.

Micheal Vranos: (26:22)
And these loans on average have been in existence for 15 years, and they were being paid through during the great financial crisis or have been rehabilitated and such. And we can still source that product outside of 250 basis points. Sometimes it's wide as 300, also sort of as a cousin to those securities, we saw some interesting bonds recently that have been subordinate trenches off of re-performing deals at 500 basis points to libor. In each of these types of securities are really insensitive to delinquency. And I think you'll see that the delinquencies in that market are quite high, they're probably like 18% or something like that. But even if you were to double those delinquencies and take into account what the existing defaults would be. CDR is almost at 20, and such like that, you'd still get your capital back. And you'd probably get a decent spread to libor, what we calculate in many cases 200 to libor.

Micheal Vranos: (27:24)
So it's a great risk reward. And that's with the backdrop of the Fed, and the backdrop of the strong housing. And I mean housing's just really been incredibly strong Troy. You've got house prices went up a lot in July, I think it's 25% month over month in July, and they're up eight and a half percent on-

Troy Gayeski: (27:46)
Annualized, annualized.

Micheal Vranos: (27:50)
Annualized.

Troy Gayeski: (27:50)
Yeah, that's quite a move.

Micheal Vranos: (27:51)
Right. But eight and a half percent since January, I believe.

Troy Gayeski: (27:56)
Oh, it's incredible yeah.

Micheal Vranos: (27:58)
Yeah, big jump in July. And supply is very tight also, right now we have the lowest July supply if you measure by month of inventory in housing, since it's been measured in 1982, going back to 1982. So these are really great fundamental and technical support for non agency mortgages.

Troy Gayeski: (28:29)
And so Mike, that's a great summary of opportunity and legacy RMBS, you want to talk briefly about the non QM market, because that's another area of opportunity you're saying?

Micheal Vranos: (28:36)
Sure. So the non QM market and this ties into REITs because I think the non QM it is an investible market. It's not as nearly as big as these other markets. But I do believe there's an indirect way to get exposure to these markets also through REITs. But nonetheless, let me talk about non QM and then tell you about different ways to access that market. Because, a lot of the value in non QM goes through the securitization from origination through the securitization chain. But the non QM market consists of borrowers who have over 700, FICO that are making healthy down payment. So these are 75 LTV borrowers who are paying coupons close to 6% right now, which is double that of an agency mortgage, and more than 500 basis points over the 10 year treasury. So, you can imagine that there's an incredible value in that chain.

Troy Gayeski: (29:41)
In amortizing securities too, right Mike.

Micheal Vranos: (29:43)
Yeah, amortizing 30 year secure... So it's almost a little crazy. So anyway, and what's interesting to me is that if you look at REITs in particular REITs, that house originators. They seem to be the ones to me that seems to be the most undervalued. So they're owning that supply chain and those securitization profits, and they're being valued in many cases at 60% price to book. And I think if you look at the REIT market in general, and that's why I think it's an indirect exposure, if you will. But I still think it's something to talk about because the backdrop is what just happened with Rocket and you'll ever know where did Rocket come in, 20 times earnings or something like that. And most REITs are owning their own originators about one time margin. And I understand these originators aren't Rocket, but there's a big chasm there, if you will.

Micheal Vranos: (30:40)
So if you look at the $1 billion REIT ETF REM right now that's down 40%, almost year to date, but almost like 62% of the constituents of that REIT are RMBS type hybrid RMBS REITS. So you've got these REITS that have mostly exposure to residential mortgages that are comprising this index that's down a lot on the year. Okay, so you can say should it be or shouldn't be. But the average price to book that we find of the 10 hybrid REITs that we follow is around 70%. So I believe you can buy today's assets at last month's prices or two months ago's prices, by getting into some of these REITs. And again, with the REITs with the originator arms, the price to book is even lower. And you want to look for these REITs that are functioning now like Ellington financial, for example that are taking advantage of this origination and refinancing boom that's going on right now.

Troy Gayeski: (31:49)
And then Mike, really quick before we turn over to John, for questions from the audience. Sort of get your thoughts really quick on CMBS, as well as CLOs because that's another area-

Micheal Vranos: (31:56)
Yeah.

Troy Gayeski: (31:57)
Both of those sectors, you're very active in.

Micheal Vranos: (31:59)
Sure. So that's actually dovetails with what I think is the second set of opportunities, which is more relative value. Because there are some headwinds in the corporate and CMBS market, that's obvious. But there's also some very good news, like in CMBS for example. Troy it's important to realize that that markets blessed with great hedging indices. There's substantial relative value opportunities with CMBS hedges that exist right now. And there's some pretty wide bases just between cash and the index itself. Sometimes as wide as 250 basis points, also a lot of the marginal dollars left that market, a lot of hedge funds can't participate anymore.

Micheal Vranos: (32:43)
And so we recently committed to buying a first class B strip at a very attractive levels were 300 basis points wider than pre-COVID. And we were also able to shape the collateral pool which is really important, and that brought it that strip to us it meaningfully wide spreads outside of 17% no loss, those are generally zero to eight or zero to seven and a half scripts. So it was we see opportunity there in the basis, in-

Troy Gayeski: (33:14)
Mike what do you think that is loss adjusted with the cleaner collateral 12, 15?

Micheal Vranos: (33:19)
So that's, a complicated question because generally, it's not a question of... I don't know, ultimately what the losses will be. It's the timing of the losses that matter most, we generally look to sell off the mezzanine tranches and own equity in those particular cases. And so knowing that we don't value the principal part of the equity very high, but that we value the interest payments rather high because we feel that there'll be an attenuation of losses, but ultimately it's very possible to have these high single digit losses. I do think it's possible without a doubt. But that's why again, I espouse more of a relative value approach to these markets. The same thing in CLOs for example. Do you have any other questions about CMBS?

Troy Gayeski: (34:14)
No, I think it's great if we jump to CLOs.

Micheal Vranos: (34:17)
Yeah, so for CLOs again, it's the same idea. The Legacy CLO market right now is all over the place. Tier one managers with on the run bonds are really enjoying some pretty good execution on their collateral but for other managers, especially where you've got shorter to maturity de-leveraged structures out of the reinvestment period. Sometimes the price discovery is horrible and there's a lot of negative price pressure there, I think. Some for selling and we're able to buy de-levering post reinvestment CLOs like 20, attach 40 detached at 750 to libor unlevered and these things have 115% NVOC. So they're covered for now, it would take an extreme stress for the high yield index for that tranche to take loss, tranche like that.

Micheal Vranos: (35:08)
So hedging with the high index on a sort of a collection of those types of securities. We think that's a great relative value trade.

Troy Gayeski: (35:17)
Yeah. So that's a great way to end our segment and turn over to John. I got a new nickname for you, though Mike. It's 395 Mike, you like the sound of that? I like that.

Micheal Vranos: (35:27)
400 sounds better, but-

Troy Gayeski: (35:29)
It's sort of come on, man. I like how you kept it real and kept it honest-

Micheal Vranos: (35:36)
Yeah, I'm going to be honest-

Troy Gayeski: (35:36)
Didn't squeeze in that extra five pounds.

Micheal Vranos: (35:36)
Not going to round up, no.

Troy Gayeski: (35:37)
Good man. John, why don't you take it away with questions from the audience? Okay.

John Darsie: (35:41)
All right. We have a few in the queue here. If you have additional questions, please submit them in the Q&A box at the bottom of your screen and we'll try to get them in before we let Mike go. The first question is just about technicals in the mortgage backed securities market, and whether you think there will continue to be a recovery through the end of the year, or what risk factors you're looking at are for a potential pause in the recovery in those markets?

Micheal Vranos: (36:03)
So the latter part of the question is the best part, and there are things that one needs to be concerned about, as you see this slow recovery in residential non agency. I assumed the questions about non agency. With agency, you've had a massive recovery because the Feds bought everything right.

John Darsie: (36:24)
Yeah.

Micheal Vranos: (36:25)
So, you know that the Cares Act, which is providing for this enhanced income. Sorry, I'm moving around has really basically expired on July 31st. And only a few states I think have adopted taking up these payments. So you will see, I think rising delinquencies, which will cause people to stop. Investors to pause and we're sort of counterintuitive but lower balance loans have a better pay stream track record over since the COVID crisis than higher balance precisely because of the enhanced income benefits from the government. And when that goes away, you're going to see that reversal and our extrapolation is that you will see much higher delinquencies. Nonetheless, it shouldn't affect the ultimate prepayment of principal to the securities.

Micheal Vranos: (37:25)
But that will cause applause, no doubt. The other thing is that there hasn't been a real back filling of collateral to the marginal dollar like say, in hedge funds that normally buy these. And I'm thinking that real and long only managers real money and long only managers will pick up the slack a bit, but that that could take time and it might not happen, might not happen at all or right away.

John Darsie: (37:53)
Thank you for that. The next question is given your experience firsthand with the CLO, CTO and CMO dislocation in 94 and 98, as you explained earlier. What lessons are you taking from the first quarter and second quarter of this year in 2020, of how certain large credit shops, ran their models ran their leverage or ran their business platforms.

Micheal Vranos: (38:18)
History just tends to repeat itself when it comes to leverage, it's just amazing. And I do believe that what led up to it was... I mean I wouldn't say excusable, but somewhat understandable. What happened is that there was just such a fight for yield for so many years. And credit had almost monotonically gotten better, since 08 and there have been some hiccups without a doubt 2018 and late 2015. But every time that that happened, those hiccups happened. You were rewarded, to take more risk and it's just added to it. And then you saw volatility go down, as people started to look for yield that way by selling covered calls and all that. And when you sell volatility to somebody who has nothing to do with it, you actually make volatility go down more.

Micheal Vranos: (39:13)
And so the market kept grinding into this pick up pennies in front of the steamroller thing. And it was just bound to happen at some point who knew would be this something else. So you just really do need to keep that cash aside. I guess that's it. It's a sort of a repeat of what I said.

John Darsie: (39:30)
Yeah. What are your thoughts on inflation on the RMBS market? And are you modeling any inflation risk into your models?

Micheal Vranos: (39:38)
We don't right now model anything other than what would be I would say is rather benign inflation. I do understand that things have changed recently. I haven't reviewed any models recently. In terms of what the Fed has mentioned, I haven't really reviewed any models would take into account any significant difference from what we've had recently. I mean inflation in general does tend to help a lot of these assets that we're talking about.

John Darsie: (40:11)
Do you see an opportunity in a hotel CMBS and similar types of asset classes?

Micheal Vranos: (40:17)
I don't know. I'd have to talk to my PM. I don't have a strong opinion about that. I will say one thing, that a lot of people... The market is tends to be somewhat backward looking and even someone in your audience asked a question about what could cause a pause or a problem. I think all of us here need to acknowledge that the more subtle in one drawn out disaster scenario is that real returns go negative. And you're sort of alluding to that in your question, and that when the Fed has bought so much paper, and with inflation on the other end, outpacing the yield of the securities that it could be a slow death. And it's tough, especially for pensions and others. And that's a big concern.

John Darsie: (41:05)
I want to finish with a question about your philanthropic work, which I know is near and dear to your heart. You're one of the most active philanthropists on Wall Street you help lead the Help For Children Organization used to be called Hedge Fund Cares. Could you talk about a few other causes that are most important to you and the most satisfying part of all that philanthropy that you do?

Micheal Vranos: (41:24)
Sure, so there's a there's an intersection of philanthropy and science that for me, that's very interesting. I believe that we're going through a sort of a renaissance in the life sciences right now akin to what we went through in tech many years ago. And that you're seeing this happening now with different forms of stem cell research for example, I'm a big supporter of different kinds of stem cell research initiatives. Also, certain neurological diseases that may or may not have to do with stem cell research, the effect of the gut microbiome on diseases too. What we eat, things like that I think are really important. And it's more important to me personally than whether my phone works better or 5G or something like that. It's how are we going to live healthy for the rest of our lives? And I think it's very important. And I think we're going to see great strides, probably after I die, of course, but like I see great strides in that area. I'm very excited about that.

John Darsie: (42:34)
Well, you look great. You said your girlfriend gave you your haircut, but she did a fantastic job. So thanks so much for joining us, Mike. It was great to have sort of this long form format to be able to talk to you about all your experience, which I think is fascinating. Troy, do you have a final word for Mike?

Troy Gayeski: (42:50)
No, Mike it was great to have you on and again, I think compliments to just the breadth and depth of experience. And again, I keep saying the word longevity, but having invested in hedge funds for close to 20 years now, it's hard to stay in business over a long period of time and some of the most well known managers as recently as five years ago are no longer in business so compliments to you and your team for doing that for so long.

Micheal Vranos: (43:14)
Thank you, Troy. And thanks for the opportunity to speak today.

Panayiotis Lambropoulos: Risk Mitigation, Portfolio Construction & Seeking Alpha | SALT Talks #44

“Hedge Funds are at the forefront of innovation and flexibility.“

Panayiotis Lambropoulos, CFA, CAIA, FRM is a Portfolio Manager at the Employees Retirement System of Texas, a $28 billion retirement plan located in Austin, Texas. His responsibilities include sourcing, analyzing and evaluating potential third party managers deploying all types of alternative investment strategies.

“There is a lot of diversification and dispersion going on beneath the surface of the S&P 500.” This should benefit active managers and active hedge funds. Although passive management is getting attention, the recent rebound in the S&P is due to 4-5 stocks, which account for a quarter of the rally. More than 50% of the S&P is trading below its all-time highs.

Panayiotis finds Hedge Funds attractive because they provide risk diversification and downside protection. They are able to generate different sources of returns as a result of their adaptability with low beta.

LISTEN AND SUBSCRIBE

SPEAKER

Panayiotis Lambropoulos, CFA, CAIA, FRM.png

Panayiotis Lambropoulos

Portfolio Manager

Employees Retirement System of Texas (ERS)

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT, which is a global thought leadership forum at the intersection of finance, technology and public policy. SALT Talks are a series of digital interviews that we launched during this work from home period that provide conversations with leading investors, creators and thinkers.

John Darsie: (00:28)
What we're really trying to do during these SALT Talks is replicate the experience that we provide at our SALT Conference series. What we're doing there is really providing a window into the minds of subject matter experts and providing a platform to what we think are interesting and world changing ideas.

John Darsie: (00:43)
And today, we're very excited to welcome Panayiotis Lambropoulos to SALT Talks. Panayiotis is the Portfolio Manager for Hedge Funds at the Employees' Retirement System of Texas which is a $26 billion retirement plan located in Austin, Texas, the capital. His responsibilities including sourcing, analyzing and evaluating potential hedge fund managers, process and performance assessment, interviewing various fund employees and third party service providers and maintaining the due diligence efforts.

John Darsie: (01:12)
Panayiotis started in the alternative investment industry as a research analyst at Grosvenor Capital Management in Chicago. He later joined MCP Alternative Asset Management, a $6 billion Tokyo headquartered fund of funds and while he was working for that fund, he was actually still based in Chicago.

John Darsie: (01:29)
Panayiotis holds a BS in Business Administration with a concentration in finance and marketing from Boston College and an MBA in General Management from North Western University's Kellogg School of Management. So, as you can see, despite now living in Austin, Texas, he's very steeped in Chicago culture.

John Darsie: (01:46)
Panayiotis has earned his Chartered Alternate Investment Analyst designation, CAIA; Financial Risk Manager designation as well as the Chartered Financial Analyst Designation, the CFA.

John Darsie: (01:58)
And just a reminder for our audience during today's talk, if you have a question for Panayiotis, you can enter it in the Q and A box at the bottom of your video screen. And hosting today's interview is Anthony Scaramucci, the founding and Managing Partner of Skybridge Capital, a global alternative investment firm. And Anthony is also the Chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:17)
John, thank you. And I'm sure, Panayiotis, you'll love the way he pronounces your name. He's been working on that for the last month. So congratulations to you Darsie. That was well done.

John Darsie: (02:28)
Thanks.

Anthony Scaramucci: (02:28)
But I want to go to your personal background. How did you, we all have our different odysseys, to use a Greek expression. How did you get to Texas ERS? What got you thinking that that was the direction you wanted to take the career in?

Panayiotis Lambropoulos: (02:49)
Well first of all, thank you for inviting me in being part of this talk series and, given the pandemic and the times that we live in, I hope everybody's well on your side. Yeah, my arrival here is part life, part luck, part choices as is anything else with life. My personal background actually starts, if you want to start at the beginning of the odyssey, starts in Greece. I was born and raised in Greece. I was there until I was 13 years old.

Anthony Scaramucci: (03:18)
In Athens? Which area-

Panayiotis Lambropoulos: (03:20)
In Athens.

Anthony Scaramucci: (03:20)
In Athens, okay.

Panayiotis Lambropoulos: (03:21)
I was in Athens.

Anthony Scaramucci: (03:22)
Beautiful city.

Panayiotis Lambropoulos: (03:23)
Yeah, five minutes outside of downtown. And life kind of came at me unexpectedly. I lost my father when I was 13 years old. A family decision was to move to America. My mother's family was in Massachusets, hence my connection to Massachusets and Boston College. But I've always wanted to be in finance and investments and-

Anthony Scaramucci: (03:45)
Where did you move to, if you don't mind me asking? What part-

Panayiotis Lambropoulos: (03:47)
Central Massachusets, just north of Western Mass.

Anthony Scaramucci: (03:51)
Okay. Sure.

Panayiotis Lambropoulos: (03:51)
60 miles west of Boston.

Anthony Scaramucci: (03:53)
Yep.

Panayiotis Lambropoulos: (03:54)
Finished high school there as John alluded to. I did my undergrad at Boston College. Did a couple of years of accounting. Wasn't really my long term interest. Investments always was my real interest and passion and that interest actually was born from my grandmother who turned 100 last year-

Anthony Scaramucci: (04:15)
Wow. Congratulations.

Panayiotis Lambropoulos: (04:16)
Still with us. And she obviously, as you can guess, based on her age, she has seen a few things in her life. And the first thing she taught me was the power of compounding and saving. And when I arrived in the States, it was the advent period of mutual funds and markets were changing, so that's when my curiosity for investment really began. And through a friend, I ended up in Chicago, Grosvenor Capital Management was my foray into the alternative investment world back in 2000. That's where I got my start in this nuanced and new vehicle called hedge funds. I had no idea what it was but sounded interesting and different.

Panayiotis Lambropoulos: (04:58)
And to date myself, prior to my first interview, I ran down to a Borders, picked up whatever few books were available back then about hedge funds, just to prep myself a little bit for the interview. Luckily, they believed that the lights were on and somebody was home upstairs and I could pick up stuff quickly.

Panayiotis Lambropoulos: (05:17)
From there, as they say, the rest is somewhat history. Stayed in Chicago for 15 years. The big change from my time in Chicago was the financial crisis and the tsunami in Japan actually affected my life. MCP's business model is that to cater only to Japanese financial institutions and, in combination with the financial crisis and exposure to the tsunami that happened in Japan, there was a retrenchment in the company, there was a retrenchment in the industry. But I wanted to stay in the industry. I love this industry. I'm very passionate about it. And I ran across this growth here in Austin and the growth in the public sector. And my idea was that I could take my experience, hit the ground running, contribute to small teams right away; at the same time to learn and build on my investment acumen, my personal growth. And that's what kind of brought me here to Austin as they were building a new program.

Anthony Scaramucci: (06:19)
Your foray into hedge funds. Let me, because I'm face with this dilemma every single day. Why hedge funds? Active management, passive management, yea, why hedge funds Panayiotis?

Panayiotis Lambropoulos: (06:35)
The value-

Anthony Scaramucci: (06:37)
Make the case for me and then obviously John as he's making the case, please record it two times and so this way we can give it to our sales force. Go ahead, make the case.

Panayiotis Lambropoulos: (06:46)
Well, in terms of hedge funds themselves, the overall how we view hedge funds here at ERS, we believe that it can be utilized to protect and preserve investment capital, provide risk diversification and provide that downside protection that everybody talks about; downside protection that became valuable this past February and March. And hedge funds overall, we think of as businesses as investment conduits, not as strategies. And so we're talking about individuals that are able to take advantage of massive dislocations and the accompanied volatility and uncertainty that comes up with those massive dislocations.

Panayiotis Lambropoulos: (07:29)
The other thing I would say about hedge funds is that, and [inaudible 00:07:34] enough do about this, is they're always in the forefront of innovation and flexibility. Markets change, investment opportunities change and hedge funds offer that opportunity to generate a different source of returns by having that flexibility and innovation on their side.

Panayiotis Lambropoulos: (07:51)
At the end of the day, what we really focus on, for example, is a clear purpose, an expectation of what hedge funds are intended to do within our portfolio. That sends to the foundation of whether or not we are successful or not, how we measure success. If you enter into a hedge fund saying, well, I just want high returns or I want a hedge fund that always beats the S&P, more often than not, investors will be disappointed.

Panayiotis Lambropoulos: (08:19)
First of all, the word hedge is in hedge funds. Unless you're 100% at long, you're not going to keep up with those returns. So for us, we set a purpose and expectation of what is it we want this tool, in our overall toolbox, to do for us and do we succeed. For example, in our absolute return portfolio, one measure of success is whether or not it truly provides diversification to the rest of the trust. We have quantified that success by targeting a beta of 0.4 or less for our portfolio to the rest of the trust. Inception to date, which is almost eight years now, we have succeeded. Why? Because our data is less than 0.4. Are we targeting returns? Yes. Just like everybody else. And we have met those returns. But the primary purpose has been met. And that's how we measure success. And anecdotally, that success was met in March. So that's one way to measure success; what is the success, what is the purpose, what is it that you want to do.

Panayiotis Lambropoulos: (09:26)
In terms of active versus passive, obviously the last 10 years have been unusual and since the great financial crisis, I think that you have to figure out what is it that's been present in his worK or not for his active or passive [inaudible 00:09:43]. So, for example, since the financial crisis we have definitely seen managers being challenged by the fight that we've had a higher concentration of opportunities. Less number of opportunities, higher capital changing the same number of opportunities. At first glance, you may say that the recent rebound in the S&P from the March lows is probably the same issue. We are driven by five or six stocks, at most two sectors, and anecdotally we can see other data that lead us to believe that this is a very thinly traded breadth type of recovery.

Panayiotis Lambropoulos: (10:23)
But, there's a lot going on below the surface. The five or six stocks are only the tip of the iceberg. If you look below the surface and under the water. For example, we see that almost a fifth of the S&P companies are now trading more than 50% below their all time highs. The average stock in the S&P index is about 30% below its peak. Three out of the 11 sectors in S&P are in the green; the rest are in the red. And as I mentioned, about five of the largest stocks that are driving this recovery account for a quarter of the rally since the March lows. And those five stocks, in aggregate, have close to a $7 trillion market cap, which is larger than the Japanese TOPIX index. So there's a lot of diversification dispersion going below the surface which should benefit active management and active hedge funds. We saw high pairwise correlation since the financial crisis that seems to be reverting itself. Again, a lot going on below the surface if you're just looking at equities.

Panayiotis Lambropoulos: (11:31)
The same story could probably be said about the credit market as well. So, overall, and the last thing I'd probably mention is momentum. We've seen growth factor outperform value for the better part of the last 10 years. Now we've seen a reversal and whether you believe we're coming out of the current recession or eventually we're going to grow out of it, or perhaps fall in a double dip recession, value factor, which tends to be a contrarian play, should outperform growth.

Panayiotis Lambropoulos: (11:58)
So there's a lot going on here in terms of dispersion, in volatility and uncertainty that should benefit hedge fund strategies.

Anthony Scaramucci: (12:07)
So, listen, that's music to my ears. And I totally agree with you, particularly with the concentration level. We've both been doing this a long time. What do you think happens to those five stocks, even if the fundamentals of something that's trading at 170 times earnings are strong, isn't it possible that you could see multiple compression and have a stock trade to 80 times earnings and still be growing at 15 to 30% but lose half your money?

Panayiotis Lambropoulos: (12:36)
Before I address that question, to tie the knot about the active versus passive argument. At alpha and beta, because that's what, at the end of the day, what we're really talking about, in my opinion, they're often spoken, or too often spoken in absolute terms. It's either one or the other. First, I think there's room for both and you can allocate to both types of factors, but more importantly I think, I think of alpha and beta as bookends. I don't think of them as absolute terms. And what I mean is, if you have beta on one end and alpha on the other, you have a spectrum of other strategies that could benefit. It's not easy to quantify alpha in main point.

Panayiotis Lambropoulos: (13:15)
So, given where we are right now in the cycle, for example, we might anticipate that distressed investing should do well a year or two or three years from now. Distressed investing, I think, is a form of alpha. You need a good team to source, a good team to work out these opportunities. It's not easy to generate the alpha. But it is a form of alpha that should be accounted for in your portfolio.

Panayiotis Lambropoulos: (13:41)
So that's another argument for active and alpha [crosstalk 00:13:44].

Anthony Scaramucci: (13:45)
It's well said. And we know, the passive for the cycle, we know that that trade is very, very crowded. It's the S&P five. And as you're pointing out, it's the S&P 495. And so what do you think happens there?

Panayiotis Lambropoulos: (14:02)
So I think at the moment, in conjunction with that, there's a lot of conversation about valuations and there is definitely bifurcation between the financial market and economic reality. Whether it's the stock market and the real economy. There's definitely a bifurcation between the two. And right now, what I would probably do is to separate first and foremost the market between technicals and fundamentals. At the time, I think at the moment, technicals are definitely outwinning fundamentals, in serving as heavy tailwinds for the current market. And part of the technicals I would allude to or point out to are first of all, M2. Money supply provided by the Fed. If you overlay the current Fed M2 Saint Louis Central and Bay graph with the S&P, it's a one for one relationship. The other favorite acronym, TINA. There's an alternative. We have lower rates and investors need yield, they need returns, by default, they're looking for a more return seeking assets, like stocks.

Anthony Scaramucci: (15:16)
Sure.

Panayiotis Lambropoulos: (15:16)
We have FOMO. Right now, we have at the lowest percentage of shares outstanding being short in the last 20 years. Even the most bearish of skeptical investors have to turn bullish so they're not being overrun in their short book.

Panayiotis Lambropoulos: (15:33)
And so, the technicals, I think are definitely overwhelming. On the fundamental side, price seems to definitely have run up ahead of earnings. The question is, at this moment in time, how much have been priced in, looking ahead, and what type of key assumptions are anybody on a fundamental case is making about COVID, about earnings growth, about unemployment rates, about GDP growth. It seems like a perfect storm of normalizations has to come in play in order for everything to work out and justify the current fundamentals and valuations.

Panayiotis Lambropoulos: (16:16)
What I would say though is, two things. One, the valuations that we're alluded to again is concentrated to one part of the market. It's close to $5 trillion of cash, sitting on the side. We could see a rotation once we get more validity of some type of recovery and stability in the market, so that cash could find its way in other parts of the market, again perhaps cheaper parts of the market, sectors that haven't participated in this recovery or rally.

Panayiotis Lambropoulos: (16:45)
The other point I want to make is, although we're making the argument that the market is perhaps frothy or expensive; we have been in` a new regime of rates in the last 10 years and we're most likely going to remain in the same regime for the next 10 years. Unless we have unexpected, unforeseen spike in inflation. So if we're looking at a valuation matrix of any choice, compared to a historical mean, I could argue that, given the new regime and lower discount rates, that mean eventually will have to come up. And so whatever absolute valuation you're looking at, to the new mean that should come up, the market is probably not as expensive as you may think. If participants think that the market is 15/20% overvalued based on a valuation matrix, I could argue it's probably far less, maybe five to 10 range. So it may be not be as extreme as we thought.

Anthony Scaramucci: (17:41)
It all makes sense. John is chomping at the bit here to ask questions. We're getting a lot of audience participation and so I'm going to turn it over to John in a second. And everything you're saying makes great sense. But I want to go to an area of the market that was an epicenter of the March sell-off, which was the structured credit area of the market which has been a little bit of a recovery. Do you have an opinion on structured credit, one way or the other?

Panayiotis Lambropoulos: (18:10)
We have an internal team that focuses on structured credit, internal credit. We were quick to put some capital to work. As you alluded to, we saw the big sell-off in March. Within structured credit, we haven't seen a rebound but there has only been a rebound in the AA, AA. The lower credit rating hasn't recovered as fast, so there might be still opportunity there. The problem has been the Fed. The Fed has acted as a backstop to a lot of the credit migration that we thought we were going to see and the CCC buckets were most likely going to violate a lot of their interest coverage or OC coverage and that's what we were expecting. But for the time being, the Fed has acted as a backstop. The only thing the Fed had to do was announce its intention of getting involved in the market and we saw a rebound. It hasn't even put to use all of the capital it announced for various programs.

Panayiotis Lambropoulos: (19:08)
And so, I think there still needs to play out. We're keeping an eye on it. Other than the early buying opportunity that we saw in March, we haven't put yet additional capital to work. We've seen some rebound but we're in the wait and see mode.

Anthony Scaramucci: (19:25)
And why do you think the Fed hasn't really, they obviously focused or at least directed attention to high yield and they did direct some attention to investment grade, but why do you think they've laid off of most of structured credit except for the new issue market that's AAA rated?

Panayiotis Lambropoulos: (19:43)
It's hard to say. I think, overall, the Fed's intention was to stabilize the market, provide liquidity, take advantage of the lessons learned from OA and make sure we didn't have a liquidity problem that turned into a solvency problem. And so I think they wanted to bookend the market to provide some comfort that at least the market would function, companies would have access to capital, and at the very least, again, not that I completely agree, but by that technical backstop, at least for investors not to start tricking out paper simply because they had to keep up with indices or they were violating any credit rating allocations that they had in their portfolio. And so, in a way, we migrated from you're too big to fail to nobody's allowed to fail. That's I think the big difference that we've seen in the last 10 years.

Anthony Scaramucci: (20:35)
Yeah, it'd make sense. We're in very different territory than the market that you and I grew up in where the Fed had a light touch and they did some monetary policy lightly and they did some currency intervention but now we seem to have a very big macro-trader in the market, known as the Federal Reserve, frankly the global central banking system.

Anthony Scaramucci: (21:00)
But John, I know wants to ask some questions, so please interject John. I know you've got some-

John Darsie: (21:05)
Anthony, just because Panayiotis has a very distinguished beard during the work from home period doesn't mean he's as old as you. He just doesn't use the same type of hair dye.

Anthony Scaramucci: (21:17)
First of all, it's not quite hair dye. It's shoe polish. And I can send you a case of it any time you want. And I would recommend when you get to be our age, you don't want to have a lot of snow on the roof, okay. And right now, you look like you've got a lot of snow in the basement there. We can talk [crosstalk 00:21:35] when this is over. See, he always comes in and tries to give me a karate chop to the Adams apple. See that?

John Darsie: (21:41)
Have to keep him honest. So we talked about structured credit Panayiotis, but I want to talk about more broadly the hedge fund space. Obviously there's a lot of technical dislocations in March in response to the pandemic and the economic fallout from the pandemic. What asset classes to you became most attractive during that period? What asset classes within the hedge fund space still look attractive? And what are others that you think'll be more challenging in the near term as we try to rebound from all the effects of the pandemic.

Panayiotis Lambropoulos: (22:12)
So, really quickly, on the liquid space, one area that we might begin looking at and it may sound a bit contrarian, might be the equity long short space. The one argument is the one I've just made in terms of increased dispersion despite the massive run up in the markets. The other argument is that whether you believe we're headed into a double dip recession or that we might eventually be part of the next economic cycle. Either way, again, we'll either see dispersion or we may see a rotation in the market. We may see value overtaking growth. There should be a lot of activity within the equity long short space.

John Darsie: (22:52)
The latest letter that they're describing the recovery with is a K shape recovery. So that sort of fits with your theme of dispersions. There's going to be winners and there's going to be losers. You just have to find talented managers that are able to pick those out?

Panayiotis Lambropoulos: (23:05)
Correct. And obviously there's a big challenge again on that side will be the short side. But we believe eventually that we may be able to find those managers that have that long history, sustainable history and persistent history. Given the anticipated choppiness of the market, I know it's been mono-directional essentially since the March lows, but we do anticipate choppiness and increased volatility. I think we're seeing signs of it now. We have seen the massive V shape bounds, albeit of extreme lows, you would expect that. But we're starting to see a sideways movement in the market as unemployment benefits are now on the wayside as more uncertainty continues with whether or not there'll be more hotspots, how long it's going to take for some type of medical solution for COVID.

Panayiotis Lambropoulos: (23:57)
Again, that should increase uncertainty and volatility so relative value strategies and global macro-strategies should benefit from that type of environment, especially our discretionary lower macro. But again, the Fed is the big elephant in the room. And our discretionary global macro has been fighting that headwind for 10 years and that will be, again, the big challenge.

Panayiotis Lambropoulos: (24:19)
On a less liquid side, we have an opportunistic credit portfolio and we are taking a look there within longer term, we're going to look at the stress. But we're also looking at some niche opportunities like bank risk sharing and bank regulatory capital sharing. Compared to OA, financials are not the epicenter of the problems that we have today. Conversely, banks will be expected to be liquidity providers and help in the economic recovery. The market itself, the BRS market has grown. The latest 2019 figures show that it's up to $100 billion or so.

Panayiotis Lambropoulos: (24:59)
And so we believe that that will be an interesting strategy. It's a strategy that we've had some exposure to. We're looking to perhaps increase that exposure in terms of a strategy. And we are looking, potentially at distress down the road. In the immediate future, the one area that I believe might offer an interesting opportunity is direct lending, but not in a good way. Following the financial crisis, we saw, partly because of the [inaudible 00:25:27] rule, partly because of the economy, a new market being created, a new vacuum coming in to provide that credit which was direct lending.

Panayiotis Lambropoulos: (25:34)
And we've seen unprecedented growth in the last 10 years for that market. The problem is, it's a market that hadn't been really tested. And one thing that we saw, there's obviously a lot of money being put to work, raised and put to work right away. And I think this type of a market environment is going to show the true underwriting skills, the true ability for our teams that should be in the direct lending market, those that shouldn't have been in the direct lending market. And one area of concern is that we're not seeing in docs right now, one area that a lot of our managers pointed out, is the lack of maintenance coverage within the underwriting standards.

Panayiotis Lambropoulos: (26:15)
And so it's a bit of reap or rhyme if you will with the subprime trade of 06/07. It maybe take a different turn this time around. But we may have a secondary distress to direct lending market to take a look at. And I thought that would always be something interesting to look at.

John Darsie: (26:36)
If you wait long enough, everything becomes an opportunity, right.

John Darsie: (26:40)
So you spent almost your entire career in the hedge fund space evaluating other managers in a multi-manager type of format. When you're evaluating potential investments in hedge funds or other alternative funds, what type of organizational characteristics do you look for and personal characteristics do you look for in the investment team?

Panayiotis Lambropoulos: (26:58)
First and foremost, it starts whether it's our absolute return program or merger manager program that we revamped a couple of years ago. It starts with the philosophy that we're looking at businesses and not funds. You always want to think of it that way, whether they're managing a portfolio or building a widget. Doesn't matter. You think of it as a business first. Given who we are, who we serve, the amount of capital we're putting to work. We need to partner with institutional caliber type firms.

Panayiotis Lambropoulos: (27:27)
Obviously from an investment or operational due diligence point of view, we look at qualitative and quantitative factors just like everybody else. On the quantitative side, we'll look at various sources of return, key periods of performance, both good or bad. It's not simply about the quantity of returns but we want to assess the quality of returns as well. And we overlay that performance with key investment or risk management decisions and opportunity sets.

Panayiotis Lambropoulos: (27:54)
On the quality side, obviously we want to look at the quality of experience of team members, honesty, that's obviously much more important post-Madoff. We want to get an inside look in a roadmap of the thought and the process. It's not always about the answers you get. But it's also about how somebody gets to those answers. And that's something I really pay attention to.

Panayiotis Lambropoulos: (28:17)
And obviously culture and opportunity. The goal of our process is to try and tie performance or statistics back to the stated strategy, the risk constraints and the opportunity set. At the end of the day, are they doing what they said they were going to do.

Panayiotis Lambropoulos: (28:35)
At a high level, that translates to probably two words that come to mind. Consistency and adaptability or flexibility. We want to see consistency in thought process, the investment decision making process, risk management and the team itself. We want to examine the throughput, not just the output. And in terms of flexibility, I'm not talking about strategy drift, but somebody that's able to adapt to new market conditions, opportunities, new tools that become available to them.

Panayiotis Lambropoulos: (29:06)
At the below level, at the PM or team level, some characteristics that I think make investment hedge fund managers or investors are rather simple. The desire to succeed or build something that matters to them and their team or their legacy. The ability to communicate, both internally and externally to key stakeholders. The drive to be better and do better every day, driven by strong analytical skills.

Panayiotis Lambropoulos: (29:32)
High emotional IQ. You need to have no fear in making decisions, making investment decisions, taking those risks. The ability to listen and put together a lot of information from various sources and come together with some type of outlook. And the self-awareness, to be aware of your strengths and exploit those strengths, but also mitigate your weaknesses or work on your blind spots.

Panayiotis Lambropoulos: (29:58)
At the end of the day, what is due diligence? We want to make sure that the foundations that made a successful hedge fund in the past are present today to give us and them the ability or higher probability than not, to be successful in the future.

John Darsie: (30:15)
Yeah. I think at Skybridge, that's something that we certainly concentrate on as well. I think the post-2008/9 period there were a lot of investment managers, to use a Greek word that were apotheosized, where people were assigned genius to them because of bets they made as a result of the crisis, but haven't necessarily performed in the 11 years after that. It's very important to continue to drill down on consistency of process and adaptability to different market conditions like you mentioned.

John Darsie: (30:42)
In your emerging manager program like you mentioned, why is it important to you guys to have an emerging manager program? What do you look for in emerging managers and what advice would you give to managers that are starting out that are looking to distinguish themselves and bring that institutional quality process to their investment team?

Panayiotis Lambropoulos: (31:02)
So the thesis to start or revamp our investment emerging manager program was actually twofold. One, as Anthony alluded to, we've been doing this for a while. We've seen a lot of names come and go. We know who the names are. But I thought that we were reaching an inflection point of what I call a generational gap. We start seeing a lot of the successful managers of yesterday either shutting down, retiring, turning their businesses into family offices. So there had to be a transition, a passing of the baton if you will of that next generation. I thought it was becoming increasing in terms of its infrequency. So we wanted to take advantage of the fact that we wanted to find the future manager that is going to be successful, earlier and today.

Panayiotis Lambropoulos: (31:51)
The second part of this thesis was, and this was pre-pandemic, capital raising environment was extremely challenging. And so if we were in a position to provide that capital and be that liquidity provider, we could come from a position of strength and leverage in terms of what type of terms and conditions we could ask for, what type of inside look we could get from the manager themselves.

Panayiotis Lambropoulos: (32:16)
Third, given the amount of capital we're going to put to work, we thought that if we could establish a relationship very early on, then we could get an inside look of what their strengths and weaknesses are, we can then, down the road, perhaps form or put together some type of solution based product that builds upon that strength to either take advantage of that to solve a problem for us, the trust, or offer them the market in general.

Panayiotis Lambropoulos: (32:45)
So that was kind of the general thesis about three or four years ago when we kind of started this process. And we announced the partnership with PAAMCO Prisma in June of '18. We also wanted to offer the market a unique structure that was a little bit different from other seeders. We believe we have achieved that in the form of the fact that ERS is willing to invest in the co-mingle structure in order to build a new or upon existing track record. By agreement and by definition of the business model, PAAMCO Prisma will invest side by side with ERS, will match minimum dollar for dollar what we're willing to put into work and it will do so through the SMA. We get the transparency of that account, because PAAMCO shares that transparency. We negotiate our own terms and conditions but we also offer and ask for operational and financially focused parachutes, if you will, to protect ourselves, which collapse to those of PAAMCO.

Panayiotis Lambropoulos: (33:46)
So in a way, for ERS, we've created, if you will, a synthetic SMA, without having to open SMA. We get the benefits of SMA without having to open and SMA. So that was the idea. That was the execution. And at the end of the day, what we're trying to do is create a farm system for ERS. We're looking at each individual strategy on a standalone basis; we're looking at each manager on a standalone basis. And the idea and the hope is that if this manager is successful, we will put them either in our absolute return portfolio or find a home for them somewhere else within the trust, as long as they're bringing some type of skillset, some type of exposure that we can't replicate in-house and that will be their value proposition to the trust.

John Darsie: (34:32)
That's fascinating. Again, I have some echos to the way we tried to build a farm system at Skybridge as well, because you never know when you're going to need to call on certain strategies or funds with certain profiles to exploit an opportunity set that presents itself in the case of a surprise pandemic.

Anthony Scaramucci: (34:47)
Let me interrupt for a second because I'm very curious as to how these guys think about the pandemic and the impact that it's having on their investment strategy and the long term prospects for the US economy. What are your thoughts there with your economic team?

Panayiotis Lambropoulos: (35:02)
In terms of the pandemic?

Anthony Scaramucci: (35:03)
Yeah.

Panayiotis Lambropoulos: (35:05)
We don't have necessarily economists in house. Obviously each team has its own view. We talk, obviously to a lot of managers and [inaudible 00:35:17] to gauge what the general consensus is. Obviously there's still a lot of uncertainty. I think the markets, by the hour, by the day, sway between hope that a new vaccine is on the horizon, that a new vaccine was announced in terms of what stage it's in, or a new technique to deal with a lot of the symptoms. And then will we trace back to some type of uncertain despair if that hope turns to be untrue or misguided or misrepresented.

Panayiotis Lambropoulos: (35:47)
At the end of the day, the big unknown is when some type of medical safety net is going to be provided. That's what we're all waiting for. And assuming we get there within six, 12, 18 months from now, I think the bigger question is well, what paradigm shift have we all witnessed at once and which paradigm shift becomes temporary and which becomes permanent. And the big question is the consumer. How will they change their behavior? How will their spending change? Is it going to normalize? It is going to take some time to go back to normal? Airlines could open all they want, but if you and I don't feel safe getting on the plane, it doesn't matter.

Panayiotis Lambropoulos: (36:28)
And so, that's how we're taking it very cautiously that there is a lot of noise, the signal noise ratio is high and we're taking it very slowly. We're trying to adjust our due diligence process just like everybody else and thinking about the long term. But the economic uncertainty is still there. But at the end of the day, we are long term investors. That's why we have an IPS in place. We're sticking to it. We're not trying to panic. And we're taking it week by week, month to month, as the new information becomes available. But as long as we stick to the IPS, I think you should be fine.

Anthony Scaramucci: (37:06)
Absolutely great advice.

John Darsie: (37:08)
And in terms of the pandemic, before we let you go, you haven't lived through quite as many financial crises as Anthony, but how do you think the aftermath of this crisis plays out over the next five to 10 years in the hedge fund industry. You've commented on that a little bit earlier in the context of your response regarding active and passive management, but if we look out five to 10 years, what do you think the landscape is in terms of the hedge fund industry is in the wake of this pandemic?

Anthony Scaramucci: (37:32)
Before you answer that, come on, that was an ageist shot at me from a Millennial. So, the two of you are going to take me in basketball when this is over. Okay, we'll see how that goes.

Panayiotis Lambropoulos: (37:44)
[crosstalk 00:37:44] his boss. Most unheard of.

Anthony Scaramucci: (37:48)
Oh my God. All right. Go ahead. Answer the question.

Panayiotis Lambropoulos: (37:53)
If it had to vision about the industry, first of all, I think the AUM we're roughly $3 trillion and that's been stalling and has plateaued in the last couple of years. I think assets under management I think are actually going to increase. I think that alternatives in hedge funds are going to be able to offer a different source and a different type of return, again, most likely would be lower yielding environment and a lot of liability driven or liability based portfolios are going to struggle to meet those targeted returns that are still somewhere in the area of 6.5/7%. Unless, we either concentrate a portfolio or you lever up. The math is very simple.

Panayiotis Lambropoulos: (38:37)
And so I think alternatives will, again, prove their value and assets will increase. I think the number of hedge funds that are out there will shrink as I think they should. I don't think there're truly eight, nine, 10,000 hedge funds out there. I think if we were to take an honest look at what makes a hedge fund, we're probably in the area of 1,000. And if we really filter in terms of quality, we're probably far less than that.

Panayiotis Lambropoulos: (39:01)
And so I think the number of hedge funds will probably decrease as it should and we might see actually more consolidation in the industry of hedge funds and firms coming down within a greater umbrella, for greater economies of scale, greater opportunity to offer variety of solution based products. I think technology's going to play a bigger role in the hedge fund industry. Technology has pulled forward a number of theses that we thought it might play on the next five or 10 years, and fast forward them to today. Perfect example, look at how we're communicating between the three of us today with such ease. But I think technology will become a bigger part of hedge funds. And I'm not talking about AI and machine learning. I'm talking about greater efficiency in use of risk management, greater use in terms of operational efficiency, back office to front office.

Panayiotis Lambropoulos: (39:56)
I think technology will become a bigger part and should be embraced. It'd be used greater in due diligence. I can see more data rooms being opened. A lot of virtual visits becoming the norm and part of the due diligence process. I call it the humanizing of due diligence. I can see us binge watching a bunch of IDD videos as opposed to binge watching Netflix and we just hear what the manager's doing and saying, as opposed to reading the typical email DDQ.

Panayiotis Lambropoulos: (40:26)
In terms of strategies, I think ESG, impact investing is here to stay. And I think it will be a bigger part, of not just the general market, but I think portfolio investing and portfolio consideration.

Panayiotis Lambropoulos: (40:41)
And lastly, I think because alternatives are already a bigger part of portfolio construction, I think the modernization of risk of portfolio construction will probably improve. And what I mean by that, for example, right now we're still kind of stuck in your typical two moment portfolio mean variance optimization. Expect a return in standard deviation. We might have to add other moments in that portfolio construction, for example, a [inaudible 00:41:10] ratio, to consider a more optimal portfolio construction as we account for alternatives. So I think that's a few things that might change in the future.

John Darsie: (41:21)
Well Panayiotis, I think that's a great tour de force on the hedge fund industry. It's been a lot of fun getting to know you a little bit better over the last few months and comparing notes and hopefully we can get you to one of our live events once that becomes the norm. But for now, we'll settle with some fun Zoom conversations.

John Darsie: (41:37)
Anthony, you have the final word?

Anthony Scaramucci: (41:38)
No, that was a brilliant exposition of what is going on in the industry and I think you made a very compelling case to have that solid diversified asset allocation plan and what we're learning about markets, they're moving so fast, we're not going to have time to change our plan. And so I tried to tell the retail investors, some of which are on this Zoom call with us, everybody has a long term investment plan until they have short term losses. And then once they have short term losses, they start setting their hair on fire, running around in a circle.

Anthony Scaramucci: (42:12)
You made an amazing case for people just to stay disciplined and then the different buckets and I really appreciate you doing that and let's get you back at one of our live events soon.

Anthony Scaramucci: (42:23)
Thank you again.

Panayiotis Lambropoulos: (42:24)
Thank you and I appreciate the invite and hopefully the first event might be Dubai, I've never been.

John Darsie: (42:29)
Hey, [crosstalk 00:42:30].

Anthony Scaramucci: (42:30)
We're going to get you out there. We did a great even in Abu Dhabi last year, so, that's a deal. You're on.

Panayiotis Lambropoulos: (42:36)
Well, thank you again for the invite. Appreciate being part of the talk series.

Peter Mallouk: How to Accelerate Your Journey to Financial Freedom | SALT Talks #38

“High net worth individuals deserve the expertise without paying the price of conflict.“

Peter Mallouk is the President of Creative Planning, which provides comprehensive wealth management services to its clients. Peter is a pioneer of the Independent RIA model, with clients in all 50 U.S. states and abroad.

"Why is it that a company is selling a client its own product and charging a fee to do so?” With Peter’s background in tax and law, he’s able to offer clients a comprehensive overview of their wealth management picture while adhering to a conflict-free philosophy. However, he warns, “Yield without risk does not exist.”

Turning to active vs. passive management, he notes that the latter has indeed outperformed the former since 1980. “Large tech companies make up almost a fourth of the S&P 500,” he explains. Should their performance change, it will have a profound effect on passive management’s appeal, and there may be a move away from yield-oriented assets to alternative assets.

LISTEN AND SUBSCRIBE

SPEAKER

Peter A. Mallouk, JD, MBA, CFP.jpeg

Peter Mallouk

President

Creative Planning

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello, everyone, welcome back to salt talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and public policy. We've been doing these SALT talks, which are a series of digital interviews during the work from home period in lieu of our global conference series. What we really try to do is replicate the type of thought leadership that we provide at those conferences, which is providing our audience a window into the minds of subject matter experts as well as providing a platform for what we think are big, world changing ideas, and today, we're very pleased to welcome Peter Mallouk to SALT talks.

John Darsie: (00:45)
Peter is the president of Creative Planning Incorporated, and its affiliated companies. Creative planning provides comprehensive wealth management services to clients, including investment management, financial planning, charitable planning, retirement plan consulting, tax service and estate planning services. Investment management is at the core of the services of Creative Planning, and they have almost 50 billion in assets under management as of July 30.

John Darsie: (01:13)
Creative Planning is customized tailored portfolio solutions for clients in all 50 states and I know some international clients as well. Peter's leadership in the industry has not gone unnoticed. He was one of the pioneers of the independent RIA model. He's the only person to have ranked number one on Barron's Top 100 independent financial advisors in America list for three straight years in 2013 through 2015. He's also appeared on the cover of Worth magazine's 2017 and 2018 issues of the Power 100, which is a list of the most powerful men and women in global finance.

John Darsie: (01:47)
In 2017, New York Times wrote that, "Creative Planning is at the vanguard of a profound shift in finance." I know we had Stephanie Link from Hightower on last week if you caught that episode of SALT talks. Peter is one of the pioneers of that independent RIA model that Hightower is another player in that space. Peter and his wife, Veronica are passionate about giving back to their local community in the Kansas City area. They're involved in many local and national efforts mainly focus on providing help for the less fortunate.

John Darsie: (02:16)
They've been honored for their tireless work with many causes. Peter graduated from the University of Kansas, so he's a homegrown star there in the Kansas City area, in 1993 with four majors, including degrees in Business Administration and economics. He went on to earn a law degree and an MBA in 1996, also from the University of Kansas. He's also earned his Certified Financial Planner practitioner designation. So in addition to being a business executive, he's also a CFP.

John Darsie: (02:46)
Peter and his wife Veronica reside in Leawood, Kansas with their three children, Michael, JP and Gabby. A reminder if you have any questions for Peter during today's talk, please post them in the Q&A box at the bottom of your video screen and hosting today's interview is Anthony Scaramucci, the Founder and Managing Partner of SkyBridge Capital, a global alternative investment firm, as well as the chairman of SALT. With that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (03:11)
John, thank you, Peter. It's great to have you on even though I'm still sore at you for the 2015 World Series situation. You guys just ripped through and destroyed my Mets. So I just want you to know that that feeling is still with me, Peter. It's still with me. The pain is still with me. I want you to take it back. My colleagues often say to me, don't ask people about their backgrounds, because you can find it on Wikipedia but I find that to be the most interesting part of people's stories. You tell us something we're not going to find on Wikipedia about you, your family, how you grew up, how you got to where you are. By the way, congratulations on your great success, but tell us something that we wouldn't learn from Wikipedia about you.

Peter Mallouk: (04:01)
I think probably what you wouldn't learn and I think this is not really my story, but the people I'm most impressed with are immigrants, like people that come to the United States and have a lot of success. If you really look at that group of people, they're off the charts in terms of what they accomplish. Because if you can leave India or Southeast Asia or Africa and find your way through all of that and come to the United States, it's kind of a cakewalk when you get here because someone else has done a lot of the hard work and then you've taken that leap.

Peter Mallouk: (04:35)
So I'm fortunate that two people did all of that for me, my parents. So you've got the kind of the best case scenario I think, as an American is to not have had to be the person that had to have the guts to do all of that and I really question, I think I would have never done that. I grew up 10 miles from where my church, my school, my office, 40 minutes from I went to college. Wherever I was born I was going to be, but that wasn't my parents attitude.

Peter Mallouk: (05:05)
That's the story of millions of Americans. So when they came to the States, it really became the kind of the best case scenario because you got to see people that really appreciated all the things that the United States has to offer that really understood how tough it could be in other parts of the world and has sacrificed everything. Like all our friends, all their family. They were the only ones to come here.

Peter Mallouk: (05:30)
So it really gave me a different mindset growing up. That mindset to me, if there was one thing if you took it out of me I wouldn't be where I was, it would just be that, was just that good fortune and that to me is the difference and I'm forever grateful for that and every year that goes by, I appreciate it more. It's also given me incredible insight into our clients.

Peter Mallouk: (05:54)
So many of our clients that have reached the top of their professional United States in business or medicine or whatever, they're immigrants. It's interesting to watch what they invest in, versus just third or fourth generation Americans. They will pay every penny of education all the time, from whatever they need to do all the way through if the kid needs help, or it's advanced tutors, tutors, when they're in college will pay for all of it. Four years, eight years, six, whatever. It's just the things that they value and invest in, I can understand it better as well. So it's helped professionally too.

Anthony Scaramucci: (06:30)
Well, I mean, you are also the pioneer in many ways of this independent RIA model. Your firm is one of the fastest growing in the space, but the RIA model in general is a very fast growing concept. You were an early pioneer. So tell us about your early vision, what came to maturation for you, and where are things going now for RIAs and for your firm.

Peter Mallouk: (07:01)
So there were some very delayed aha moments for me. So I was an advisor to other advisors for the first six to eight years of my career. I would do legal work for them, give tax advice if someone was selling a business, and I really was doing that for other advisors. So I'd go to an insurance company, a brokerage house or an independent firm, and I would do that for them. After six years of that, eight years of that, depending on how much you count of my first years, I realized that hey, sometimes products are being sold that don't make sense.

Peter Mallouk: (07:34)
Why is it that this one company is selling their clients their own products? Just really got a first hand seat at the conflict, like in a really big way. I saw it, I had probably worked with over 50 to 100 firms and I really thought, this is an interesting space. There's just embedded conflict. Somebody comes in, pays an advisor a fee, and then gets sold their product or then also buys a product on commission or winds up with an annuity.

Peter Mallouk: (08:01)
It just seemed strange and I didn't have a vision of I'm going to fix the space, I just said, I don't want to be a participant in that space anymore. So I'd like to have a firm that's independent and doesn't have their own products and doesn't work on commission and so on. I also knew that it would be nice to be able to look at a client's entire wealth picture. So if you've got somebody who's worth a few million dollars, or 10 or 100 million dollars, it's nice if you can earn 1% more for them or 2% more for them, but if you can save them, hundreds of thousands or tens of millions and estate taxes or capital gains taxes, that's where you're really moving the needle and that was really my background was that tax and law component of things.

Peter Mallouk: (08:42)
So the idea was to have a firm that really did everything it could to grow and protect and transfer the wealth of our clients and also manage the money in as conflict free away as possible. That's how we got going here and really didn't have our sights set on being the leader in the industry. As time went on, it became clear that we had an opportunity to do that.

Anthony Scaramucci: (09:10)
Let's talk about that independence and that lack of conflict and how it balances up against others that you're competing against. So, go ahead, pitch me. I'm your client, I'm coming in with 100 million dollars and go ahead, Peter, why am I using you guys?

Peter Mallouk: (09:26)
All right. 100 million dollars. You're probably looking at, you've got two choices-

Anthony Scaramucci: (09:30)
If I was John Darsie, I'd be coming with 300 million but since I'm only me-

Peter Mallouk: (09:34)
I'll take you and your 100 million. That'll work great.

Anthony Scaramucci: (09:37)
Go ahead. Go ahead, Peter.

Peter Mallouk: (09:38)
All right. You just saw the Mets, right? We could have some big cash coming in, and we're going to have a conversation later.

Anthony Scaramucci: (09:44)
Amen.

Peter Mallouk: (09:46)
All right, what we do is you basically got two choices. You got the brokers world and the independent world. The brokerage world is the JP Morgan's And the Goldman Sachs and great companies and they've got some great products. You're going to go pay them a fee to manage your money, and you're probably going to wind up with their products. That's just what's going to happen, or in the products of people that pay revenue sharing. Or you might go to the independent world and say, hey, I want a fiduciary. I'm going to go hire an independent wealth manager, and 95, 99% of those firms don't even manage as much money as you have.

Peter Mallouk: (10:19)
So there's not scale or breadth and depth. So here, you've got Creative Planning, that had 50 billion in assets under management, clients in all 50 states, 100 people that come to work every day that work just in our legal and tax teams. We are going to be able to give you that breadth and depth that somebody like you requires but we're not going to be selling your own products. We have access to all what we consider the top investments in alternative investment space and other spaces, if they're applicable to you.

Peter Mallouk: (10:47)
So the key here is to a high net worth investor, really any investor deserves to get the expertise without paying the price of conflict and that's where I think we sit today.

Anthony Scaramucci: (11:00)
You're doing a lot more private equity as well.

Peter Mallouk: (11:03)
I just pitched you. Are you closed or are you going to sign on now?

Anthony Scaramucci: (11:07)
I'm going to call you afterwards. By the way, I think your pitch is very compelling. I'm just teasing you. My problem is because I deal with every single person in the universe, and all my money is stuck in my fund.

Peter Mallouk: (11:24)
I was just joking.

Anthony Scaramucci: (11:27)
I appreciate what you're saying, a lot. I want to go to another question. Darsie's itching to get in here. So before he steals all of my thunder, Peter, I got to ask a few more questions. You're doing a lot more in private equity, and private equity is flowing through RIAs and through Creative Planning. What's your thought there? Why are we doing more there?

Peter Mallouk: (11:53)
Well, I think that first when we started, we couldn't go get our clients top shelf private equity. We couldn't call a private equity firm and say we managed 5 billion dollars, we want access to your fund. That's a conversation where we had to be at 25, 35, 40 billion to be able to say, hey, we have enough very high net worth clients to have access. We really couldn't offer a best in class until recently and that's a part of it. We don't want to offer anything unless we think we can really offer best in class.

Peter Mallouk: (12:17)
Now, I think in terms of the space, what's happening is people are scared of the stock market, but they feel better in alternatives and private equity is considered an alternative. Now, I don't buy into that on its face. They're all equities. Some are public equities, and some are private equities and this idea that you're safer if you go from public equities to private equities is on its face ridiculous, but for whatever reason, pensions and universities and so on, don't think so.

Peter Mallouk: (12:44)
I do think private equity adds value. I do think that their managers matter a lot, and if you get a good history, a good management team, you've got a pretty good chance of doing better than the public alternatives. So I like having private equity if you have access to very, very tough funds and top managers. You see more demand from that from especially more affluent, at least we do for more affluent clients.

Peter Mallouk: (13:10)
Now there's 8,300 private equity funds. That was a statistic from a few months ago. So today, there's probably 9,300 because they're just sprouting up everywhere because of the demand. I think we're going to see a bloodbath across the space, at some point, with all of the leverage that's taking place and all the money that's chasing deals is driving up valuations. I think people need to be really selective about who they're partnering with in that space if they don't want to be part of that.

Anthony Scaramucci: (13:36)
Well, we agree. In your firm, do you sometimes do special purpose vehicles for your clients as well if opportunities come up?

Peter Mallouk: (13:50)
We don't package deals ourselves, for our clients. So we're always looking for a third party and that way we are never married to a manager. If we don't like one place, we just remove them and go somewhere else.

Anthony Scaramucci: (14:04)
That goes to your conflict free philosophy. Okay, so that totally makes sense. When you're looking at the fixed income space now, the yields are obviously very, very depressed and you have older clients that need income off of their corpus. What do you say to these people?

Peter Mallouk: (14:23)
I just tweeted this morning that yield without risk does not exist. I just keep getting this question from clients now. Hey, how do I get more yield without taking additional risk? How do I get more yield without taking additional risk? It simply does not exist. Everywhere people think it exists, they are someday going to pay a price. So I think the premise for this is you have to start by accepting, you're not going to get more yield without taking more risk. So now all of a sudden, I'm moving closer to equity like risk than I am bond risk and regardless of what the packaging of the product is.

Peter Mallouk: (15:00)
If you except that, you start to wonder why you're just not in equities or alternatives to begin with, because you're going to take the risk, you may as well pay capital gains instead of income, you may as well participate in all of the upside instead of part of it. I think that's the real story is that we're going to see a move away from yield oriented investments that are perceived as low risk towards riskier asset classes.

Anthony Scaramucci: (15:21)
Well, how do you feel about a package of higher yielding stocks, dividend yielding stocks?

Peter Mallouk: (15:26)
I owned those before I owned high yield bonds, because I'm going to get the upside and I'm going to get the upside in a much more significant way and either way, I'm going to get the downside. I think you have interest rate sensitivity. So if you believe we're eventually going to have higher inflation, you can suffer there, and you tend to be more value oriented. As we know, there can be very long periods of time where value can underperform.

Peter Mallouk: (15:52)
So there can be some unintended consequences in terms of correlation with the market and everything else but for someone who wants income, they're very, very focused on income, if that's your overriding factor, then I like them.

Anthony Scaramucci: (16:06)
Makes sense to me. Active management, underperforming passive management, I ask everybody this question because I'm trying to figure it out myself. I don't honestly have the answer, but man, over the last 10, 12 years passive management has by far beaten active management. Is that a permanent thing now or is that going to be re litigated post COVID-19? What's your view?

Peter Mallouk: (16:31)
I think since, 1980, passive has beaten active most of the time for longer periods of time, but usually by a narrow margin. What I think is an anomaly that's happened in the last five to 10 years is these five or 10 very large, big tech companies that are in the S&P 500, the Microsoft, Google, Facebook, Amazon, we know what they are. They make up almost a fourth of the S&P 500. So that's 500 a day is about 505 companies, five of them are a fourth of it, the other 500 are three fourths of it.

Peter Mallouk: (17:07)
Those five have outperformed dramatically all the other stocks, lifting up the index. So passive management looks like it's not beating active. It looks like it's destroying active, but it's really not. If you take those few stocks out, it's just beating it by a little bit like it always does. So to me where you're going to see the story change and I think active will be oversold is whenever these five stocks underperform for whatever reason.

Peter Mallouk: (17:34)
They just simply can't become, instead of one and a half trillion dollar companies, let's say they can't become $10 trillion companies, they can't continue to grow at 35% a year. Eventually something will happen whether it's regulatory or market forces or whatever. When those stall or slow down or God forbid, go down, everyone's going to celebrate active and not only will they celebrate active, the passive people that own small caps will go back to celebrating small caps.

Peter Mallouk: (17:59)
Foreign investors will go back to celebrating foreign. This discrepancy between the international and US, large and small, active and passive, it's not really what it is. It's really a discrepancy between these five stocks and everything else and until those turn, then we'll see the narrative change.

Anthony Scaramucci: (18:15)
So let's talk about that perspective client again, because I think you have a fascinating read on all this. This prospective client walks in and says, okay, Peter, I get that there's a low yields. I get that there are five stocks driving the market, but I'm super worried about deficit spending. I'm super worried about the Federal Reserve's inducing markets the way it is. Should I be worried about all that? Should I be worried about $25 trillion of deficit spending at the US level? Likely a $3 trillion deficit next year as well. Is this stuff I need to be worried about or do deficits not matter and life just goes on for me and my family. What do you say?

Peter Mallouk: (19:00)
So what's interesting, I read a quote when I was a teenager and I was fascinated by it. I had written it down in a notepad I had at school. I can't even Google my way to who said this, but it was someone in Russia and it was in the 1900s. They said, we're not going to have to fire a bullet to take over the world because Great Britain is going to expand itself out of existence. Germany is going to militarize itself out of existence, and the United States is going to spend itself out of existence.

Peter Mallouk: (19:27)
What an amazing, two of those three things have happened now. It's not Russia that's there ready to take everything over. It's a much, I think, more worrisome, communist regime in China, but I think deficit spending is a real problem. Now, I think the Fed has gotten away with it and whoever the president has been has gotten away with it. They've gotten away with it first, because we had explosive growth because of the tech revolution that allowed us to carry this huge debt because just incredible innovation and growth.

Peter Mallouk: (19:57)
Now, we have these incredibly low rates. So yeah, the mortgage on the million dollar house has gone from 500,000 to a million but the mortgage on the house has gone from 6% to 0.6%. So that's a little easier to carry, but we're running out of bullets here, there's no way you can dance around it. The problem with our system is a democracy doesn't lend itself to fixing a problem like this. Because it's going to have to be fixed, really not by the Fed, but by president and Congress, all of whom don't want to control certain expenditures, because they would be voted out if they did it.

Peter Mallouk: (20:33)
So the way we solve things in democracy is we wait till there's a absolute crisis, then we do something because then all of the senators and congressmen and president can go back to their constituents and say, well, it's better than what the alternative was. Here it's too complex, it's too big to do something like that. I think this is a solvable problem. It's going to take some modicum of political courage that combines some common sense tax rates with social security reform and spending across the board that really makes both parties mad.

Peter Mallouk: (21:04)
All the way from Social Security to defense spending. It's actually remarkably doable. If you look at how easy it is to fix your Social Security, for example, it's almost crazy how easy it is to fix. You push up the retirement date a few years. When Social Security started, the expected date of death was the age Social Security started. Now when you get Social Security, you're expected to live 10, 20, 30 years longer. So just moving that data up a little bit, having it be taxed a little more on people like you and me, having the contribution rate go up just 2%. That's all you need to solve all social security.

Peter Mallouk: (21:40)
So we can solve all these problems. It's just going to take some combination of political courage. Neither party has that, or has shown that they can do that and even when you have one party want to raise taxes, they immediately allocate those dollars to new spending. You can look at Biden, he's saying if he wins, he wants to raise taxes a little bit, but he wants to allocate it to new spending. So no statement on the politics of that, but the money part of that, we're not solving any of that deficit problem.

Anthony Scaramucci: (22:08)
I'm very apolitical. I don't have a political opinion. I don't share my views with anybody. I appreciate you sending a statement of politics on that. Go ahead, John Darsie, go ahead.

John Darsie: (22:20)
I've been itching to get in here. I want to go back to Creative Planning for a little bit and operationally, what do you think has really driven your success and I want to use the pandemic as an example. I know that you've been somewhat outspoken about not taking PPP loans from the government and making pledges to your employees and sticking with your staff in a time of volatility. How do you think the way you operate your business translates to level of fiduciary care for your clients and how have you guys approached the pandemic, both internally from an operational perspective, and in terms of how you've communicated to clients? We talked a little bit before we went live about how your role as an advisor is sort of half psychologist, half money manager.

Peter Mallouk: (23:03)
I think in terms of like, if you look at a professional team or I went to KU, so let's say the Kansas Jayhawks basketball team. The way a team wins the game is most of it is recruiting. With sports, we acknowledge that. When the KU basketball team gets on the field to play Pitt State, the game is over before the tip. No one expects a different, it's not always over but it pretty much is. By having the most talented people.

Peter Mallouk: (23:30)
There's something about financial services in our space, where people just don't believe that. They feel like people are commodities, and you can swap people in and out. I don't believe that at all. To my core, I don't believe that. I think that's the big differentiator. So I feel like when our team is sitting with a client versus other firms' team, if we lose, we screwed something up, because we've got the better people in my mind. We've done everything we can to get those people.

Peter Mallouk: (23:55)
If you believe you have the better people, you want to do everything you can to keep them happy. So it was interesting in our space, when the coronavirus started, I didn't really think much of it. I just said, look, everyone's got their job. I don't care if this goes on for three years, we're not cutting pay for anybody, all the salaries are guaranteed. It was almost like, of course, this is what we're going to do.

Peter Mallouk: (24:19)
They're coming in, doing the right thing for the clients of the firm every day and I'm going to do the right thing for them. What it also does is it allows them to focus on the clients. They're not having to worry about other stuff. It allows them to focus on their clients. Now what wound up being nice is, to my knowledge, no other independent firm in the country, certainly of scale, made any kind of commitment to their clients like that.

Peter Mallouk: (24:41)
So I think it also gave me a chance to prove to our team, look, it's one thing for me to say to you, that I believe in you and I think you're great and I want to keep you here. It's a whole other thing for me to have an opportunity to prove it. I do the same thing with the clients going through the pandemic. When you go through things like this, and '08, '09 was another one of them. It's really an opportunity to show your clients, hey, I told you this is what we're going to do with your portfolio when the market's down and we're doing it.

Peter Mallouk: (25:09)
We told you that if there were financial opportunities available to you, we have a lot of restaurant owners as clients, a lot of people in the medical field, we help them figure out the CARES Act, we help them figure out the PPP loans, we did everything we could to be there for our clients. So I really viewed it as an opportunity to do those things. So for us from the very beginning to today, it's been offense, offense, offense, instead of just trying to hold the place together.

John Darsie: (25:35)
You started Creative Planning, obviously, as a businessman, you wanted to grow a business, but you started it really because it was the right thing to do and you were a pioneer in the space, as we mentioned in the open, but as of late, there's been a lot of investment capital that's flowed into the independent RIA world. There are some secular forces that are driving the flow of that capital. What about the independent RIA model do you think is so attractive? What are those forces driving the really rapid growth in the space?

Peter Mallouk: (26:03)
I think you have a couple different things, and again, in the private equity space, to your point, there's other forces happening that just make private equity a very strong space. More people are trying to access it, more institutions are moving money to it. They buy companies, they borrow money. So they benefit from lower interest rates. So you have a bunch of money going into private equity, it is easy for them to borrow very large amounts of money at low rates, which amplifies returns.

Peter Mallouk: (26:27)
So you have that in the background. So then they're going to buy businesses that are private, they want them to be of a decent size and they like to be where money is moving, where business is moving and money is moving from the brokerage world to the independent world. People are getting more sophisticated and they're going you know what, why am I going to pay this advisor to sell me a mutual fund or sell me an annuity or put me in their funds.

Peter Mallouk: (26:49)
So we're seeing market share move over to the independent world every year. We're also seeing it in the ultra fluid space happened now more than ever, where you have people worth 10 million, 25 million, 100 million, 500 million going to RIAs. Why were they not doing that five, 10 years ago? Because there weren't any big RIAs. Now there are a couple like Creative Planning that manage 50 billion and they feel comfortable coming over and going, look, I get that independence and I can get it with breadth and depth of services.

Peter Mallouk: (27:17)
So private equity is looking at this space and saying, well, we've got the market moving in that direction. So the market force is moving in that direction and there's no signs it's going otherwise. It seems like there's five choices. It's the broker's world or the independent world, and the money's moving to the independent world. So they love to be in a growth oriented space, they intuitively understand wealth management.

Peter Mallouk: (27:39)
So I think that that combination of things has attracted people. The other thing I'd say that's happening that's going to change is there really hasn't been a spectacular failure in this space. So most private equity in this space is buyout equity, meaning they come buy the whole company or almost all of the company, and they really started doing this after the '08, '09 crisis. Well, the market's nothing but go up for the last 12 years.

Peter Mallouk: (28:01)
So everybody at every private equity firm that bought an RIA, an independent firm, they're just high fiving each other within the five years, like that's something amazing. The reality is I think if this coronavirus crisis had stayed at March levels for nine months, we would have seen several spectacular blow ups in the RIA space from over leveraged larger RIAs, 10 billion and up, and I think the math of the space might have changed and the attractiveness of it might have changed but of course with the Fed coming in and the coronavirus, the mortality rate not being 3% instead being 0.5 or lower, really changed the math on all of that and then the private equity is stronger than ever here.

John Darsie: (28:43)
So we talked about how equity markets are pretty fully value. They've rebounded very quickly from that March sell off. So as you look at portfolio construction for clients, has the pandemic changed the way you think about the long term portfolio construction and also what do you view as the role of alternative investments? We talked about the rotation that happens cyclically between passive and active management. As you're building client portfolios, how do you look at alternatives like hedge funds, and other active products to diversify a portfolio?

Peter Mallouk: (29:14)
So in the public markets, we definitely favor passive investments. In the bond markets, a lot of our clients are individual bonds. Summer funds, summer ETFs. We are very big advocates of alternative investments. We lean very heavily towards private equity, private lending, private real estate. I think 60-40, we had sent an email out to our firm and had a call around that being dead over five years ago, when rates had dropped and now we're talking about 70-30 is dead. You just can't get the return a lot of people are trying to get when bond yields are between 0.6 and two and a half percent and where you're taking some serious risk to go beyond that.

Peter Mallouk: (29:51)
So I think what we're seeing at Creative Planning is we're seeing a strong commitment to the passive space, even though I think it's dramatically skewed by the Big Five, big tech companies. We continue to stay global, there will be a rotation back to international. We continue to stay invested in large and small, there's 100% of the time been a rotation back to small. I think that will eventually happen. I certainly don't know when and wish I did.

Peter Mallouk: (30:14)
Those things we're still committed to. We still believe in bonds. If you have to have money in the next five years, the reality is, if you have to have the money the next five years, we don't want to be reaching for yield, but we're more committed to alternatives than ever as we try to fill that gap in the portfolio to not have everything be so correlated, try to get returns from different places.

John Darsie: (30:32)
We have an audience follow up question regarding your earlier comments about private equity, how you have an expectation there will be some level of a washout in primary private equity. Do you think that, are you opportunistic in a way that you would try to find value in a secondary PE type of strategy?

Peter Mallouk: (30:49)
No. So I think for us, we've got a six to 10 key relationships with kind of the names everybody's heard of. We're committed to just working with them, reviewing there's, and I think we try not to get too spread out in terms of what we're looking for, although I do think that that viewer is onto something, that we're going to see more of a secondary market emerge and a lot more activity happening there. It's going to be interesting when this illiquid investment becomes more and more illiquid as that market emerges. I think that's an inevitability.

John Darsie: (31:22)
At SkyBridge, we've looked at a few opportunities. There's some funds out there that are sort of funds of closed end funds. You have a lot of closed end funds that are trading at significant discounts, given the turmoil in markets, and there's an opportunity to invest in that mismatch of underlying assets to market value. So why don't we talk about the fiduciary rule for a little while.

John Darsie: (31:44)
Again, you started Creative Planning and removed those conflicts of interest because you thought it was the right thing to do and you thought the business model was the best way to align the interests of the client and with the firm. There was a fiduciary rule under the Obama administration that ended up petering out and there's been no move to resurrected in the Trump administration.

John Darsie: (32:04)
In a Biden administration, if he wins the election in November, do you expect to see a revival of that conversation around standards of care and how do you think that would affect the industry and the acceleration of trends toward independence that we're already seeing?

Peter Mallouk: (32:19)
I do think it will come back if there's a Biden administration, but I also think, unless we just get a very clear global standard, it really won't do anything to change the industry. All these little changes do is confuse people. Everyone's got to be a fiduciary on an IRA, but not on another investment or on the certain products, but not other products. Sometimes you can be a fiduciary and sometimes you can't. The rules in this country are so unbelievably stupid that how is the consumer supposed to navigate it?

Peter Mallouk: (32:50)
I mean, our highest net worth clients don't understand it, because nobody can understand how stupid the rules are. So unless they change the rule and say every financial advisor is a fiduciary with investments all the time, it's not going to do anything to clear up the space.

John Darsie: (33:06)
Do you have an expectation of that might happen in the next five to 10 years or you're not holding your breath and you're just worried about what you're doing over there in-

Peter Mallouk: (33:16)
I'm not holding my breath. I think the financial services industry is an extremely powerful industry and you just imagine if these big private banks, these big brokerage houses, if everyone that went to work at their office had to act in the best interest of their client every day, 80% of the funds would be gone. They just wouldn't be able to sell them anymore. So no, I don't think it's going away anytime soon.

John Darsie: (33:39)
In terms of the makeup of the wealth management industry, you talked about the benefit of scale and the depth of expertise that exists at a large RIA like a Creative Planning. The industry was a little bit separated and there's been some consolidation among independent RIAs to create entities like Creative Planning where you have that at scale and expertise. Do you expect to see as you see a continued exodus from the wirehouse world, do you expect to see sort of new wirehouse type models emerge that just have fewer conflicts or how do you expect that evolution to take place in the wealth management world over the next five to 10 years?

Peter Mallouk: (34:18)
I think we're in the very early stages here. So you hear me talk about Creative Planning being large. At 50 billion, we're large in the independent space but compare it to custodians. Fidelity is 8 trillion and Schwab is 5 trillion, or compare it to the private banks. JP Morgan is five plus to 10 trillion in assets or the brokerage houses like Morgan and Merrill, trillions and trillions of dollars. When we say Creative is a rounding error, it actually is a rounding error.

Peter Mallouk: (34:45)
It's totally negligible in the wealth management space. The market share is probably one 1,000th of 1%. In the independent world we're big. To your point, the independent world. What you're seeing is you're seeing these firms, larger constructed by PE investors, where you have a firm that had 5 billion or maybe 2 billion, and then they bought 10 billion of other firms. So I call these firms Franken firms, where they might share a brand but it's not one culture.

Peter Mallouk: (35:15)
It's not one offering and it's just Morgan Stanley all over again. You go to the Chicago office and the guy's trading options, you go to the Dallas office, and maybe he's a passive guy and in New Jersey, they're the active guys. It's not one voice. It's not one philosophy. It's really just financial engineering, putting a bunch of firms together, buying them at a multiple of earnings, putting debt on it, putting it together and saying I've got a $30 billion firm and selling it to the next person.

Peter Mallouk: (35:42)
Private equity will play that game and keep selling it to the next one and the next, the next one till somebody gets caught with the whole thing falling apart. That's what's going to happen, I believe, in the independent wealth management space. There are very, very few independent firms that are actually a firm, where they've got a philosophy an approach of doing things. I think they're going to survive that washout, but I think that's where this side of the space is heading.

John Darsie: (36:09)
The last question I want to ask you before I turn it back over to Anthony, and I'm hogging the spotlight as usual. So Anthony, I'm sure will give me a mean phone call after the SALT talk but about your philanthropic work. I know you do a ton of philanthropic work. Like I mentioned, you went to University of Kansas or Kansas University, not just for undergrad. You got your MBA and other graduate degrees there. You and your wife, Veronica are very active in the community. Talk about some of your philanthropic work and why that's so important to you.

Peter Mallouk: (36:37)
I think that basically, obviously, you can't take it with you and I've gotten to see my client, kind of the book ends of seeing my parents come from a very poor country and then also seeing our clients. What happens is they save, save, save pile up, pile up, pile up, and then they die. So the clients that I've learned a lot from are the ones that they enjoy giving while they're alive. If they want their kids to have something, they give it to them so they can see them enjoy it. If they are passionate about a charitable cause, they do the giving themselves so that they can enjoy it.

Peter Mallouk: (37:11)
It's interesting, because you see people pile up their money, and then they might put it in a foundation for their kids to give away and their kids either don't want to deal with it, or they have causes that are the opposite of what the parents had. So essentially, the parents spent their whole life saving up all this money to see the money spent on things that aren't tied to them.

Peter Mallouk: (37:28)
So for me, Veronica and I look at it like 99% of whatever we wind up with is just going right out to causes that we believe in and from the beginning, I think at Creative Planning and both Veronica and I personally have been focused on those less fortunate. So I believe in the capitalist system, I'm a very proud American. Democracy is better than all the alternatives. I think Churchill said, it's a terrible option until you compare it to all other options. I'm sure I butchered that quote.

Peter Mallouk: (38:01)
Look, everything's not fair. We were born on third when we were born into the households we were born in and we're not oblivious to that. At Creative Planning, we work with a lot of people that are very successful, some of whom got there completely on their own, some with a little help, some with a lot of help. So at creative planning, we've spent our time giving to the part of the people that are never probably going to be our clients.

Peter Mallouk: (38:25)
So I'm proud of the fact that a very large percentage of our workforce is involved in mentoring kids that we provide full ride four year scholarships to, mentoring them sometimes from grade school all the way through college, covering them for all four years. All of the annual events we've had at Creative going all the way back to the inception have been focused on the inner city from 2004 to today, whether it's delivering 1,000 Thanksgiving meals every year or building a place to distribute basic goods and services to kids and people that need them that aren't covered by food stamps.

Peter Mallouk: (39:01)
Things like soap and shampoo that is unbelievably not covered by food stamps. We've just been involved in causes like that at Creative Planning from the beginning, and that's never going to change. Obviously, the events of this year, I think, have highlighted to a lot of people a lot of these things, but we're just going to keep doing what we're doing and trying to make a difference when we can.

John Darsie: (39:24)
Well, congratulations on all your great philanthropic work and your success, building Creative Planning, and that really cohesive culture that you've created. I'm going to let Anthony hop back in if he has any final words before we let you go.

Anthony Scaramucci: (39:36)
We're going to wrap up in a sec but Peter, I have one last question for you and it's really about the psychology of money. Because we have brilliant people that lose all their money and then we have janitors that are able to save and they die with $8 million in the bank that they give out to charities and their family. So if you were going to give somebody some advice about the psychology of money, what would you say?

Peter Mallouk: (40:02)
I think very, very few people have a healthy relationship with money and there's a lot of research that shows that how we all deal with money has to do with how we grew up in our households. So some people feel like they're not worth something and they spend the money on things that make them feel like they've got a sense of worth. Some people grew up in households where there was a sense of scarcity. So when they get money, they want to leave it in cash and they want to hoard it and they want to protect it and they live in fear of losing it.

Peter Mallouk: (40:35)
Some people, it becomes this narcissistic scorekeeping type of measure. So I really think that most of us have a problem with money. So having somebody who's capable of earning it and investing it without screwing it up, making a mistake like going to cash in March, which a lot of people that were invested, according to Fidelity study did in March, having people who can invest it well, who can then leave something to charities or their kids or are comfortable giving money away, and also able to enjoy it themselves.

Peter Mallouk: (41:09)
A lot of people just can't spend money on themselves. That person's very rare, and that person is a very happy person. So to the extent, we can help at all impact our clients, save better not make an investing mistake, enjoy their money for themselves and others, that's the most rewarding part of the job is helping people take the money to match the goal. That's what Creative Planning is all about.

Peter Mallouk: (41:32)
Most money managers, they're trying to get alpha all the time and obviously, we want to perform for our clients but for us, the primary goal of performance is, you want X to happen, and we're going to do these things to make it happen. So anytime you can help somebody realize that, is a beautiful thing but to me money it's like alcohol. Whatever you were before you took the five drinks, it just became amplified. So, to the extent that you can know thyself, and make better decisions, you'd be a happier investor and a happier human being.

Anthony Scaramucci: (42:06)
Amen. All right. Well, Peter, fantastic to have you on SALT talks. We got to get you to one of our live events and congratulations on what you build and what you're about to build. I think that for Creative Planning, frankly, the best days for you guys are ahead because you're right at the intersection of everything that clients want. So we wish you great success and I hope to see you at a live event.

Peter Mallouk: (42:31)
I look forward to that.

Anthony Scaramucci: (42:32)
I'm enjoying the picture of your kids way more than the fake George Washington poster behind John Darsie.

John Darsie: (42:39)
You had to get the dig in before-

Anthony Scaramucci: (42:41)
I had to get that in there before we left. Well, God bless you, Peter.

Peter Mallouk: (42:43)
All right. Thank you, Anthony.

Anthony Scaramucci: (42:44)
Give it back to John.

John Darsie: (42:45)
Don't let him convince you it's fake. Come on. Peter, thanks so much for joining us and thank you everybody who tuned in to today's SALT talk with Peter Mallouk of Creative Planning.

Benjamin Huneke: Mutual Funds, ETFs & Hedge Funds | SALT Talks #34

“The power of diversification is real… things are going to outperform in various market cycles.”

Ben Huneke is a Managing Director and Head of the Investments Solutions Group of Morgan Stanley Wealth Management. His responsibilities include product development, marketing and distribution of investment products. These include annuities and insurance, mutual funds, ETFs, hedge funds, private debt, equity and real estate funds, as well as individual equities, fixed income, and structured products.

The significant growth of JP Morgan’s wealth management business offers customers access to a wide range of investment solutions. It’s important for financial advisors to understand and leverage the full suite of tools available as part of the product platform within today’s markets.

“I just believe the more tools you can bring to that problem, the better solution you're going to get.”

Clients are advised on both the short and medium-term consequences in the market, but also the broader societal issues, like social justice and wealth inequality, and how they will play out in the long-term. A quick recovery out of this pandemic-caused recession is expected, but it is yet to be seen how the economy reacts to issues addressed in the form of taxes or reduced benefits (Medicare, Social Security etc.), so investment must account for those potential eventualities.

LISTEN AND SUBSCRIBE

SPEAKER

Benjamin Huneke.jpeg

Ben Huneke

Managing Director & Head, Investments Solutions Group

Morgan Stanley Wealth Management

MODERATOR

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Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello, everyone. Welcome back to Salt Talks. My name is John Darsie. I'm the managing director of Salt, which is a global thought leadership forum at the intersection of finance technology and public policy. Salt Talks are a series of digital interviews we've been doing during the work from home period in lieu of our global conference series, The Salt Conference to provide our audience a window into the minds of subject matter experts who are leading investors, creators, and thinkers, and also to provide a platform for what we think are big world changing ideas and also great investment opportunities. And we're very excited today to welcome Ben Heineken to Salt Talks.

John Darsie: (00:42)
Ben is a Managing Director at Morgan Stanley Wealth Management and the Head of the Investment Solutions Group. His responsibilities include product development, marketing, and distribution of investment products, including annuities, insurance, mutual funds, ETFs, hedge funds, private debt, equity, and real estate funds as well as individual equities, fixed income and structured products.

John Darsie: (01:05)
During his career at Morgan Stanley, Ben has held several previous alternative investments as the chief operating officer of investment products and services and the head of strategy and business management. He sits on the Morgan Stanley securities operating committee, as well as the firm's management committee. And he also sits on the board of several charitable organizations, including Invest in Others and the Expect Miracles Foundation.

John Darsie: (01:29)
Ben holds an AB from Princeton University and an MBA from Columbia University. And hosting today's interview will be Anthony Scaramucci, who's the Founder and Managing Partner of SkyBridge Capital, a global alternative investment firm. Anthony is also the chairman of Salt. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (01:46)
Hey Ben, it's a great honor to have you on. And you got a very impressive resume, not quite as impressive as John Darsie's ancestor, George Washington, but I think it is very impressive. So tell us something though about how you gravitated into the investment world though, Ben. With your resume and your acumen, you could have done anything, why did you come into our business?

Benjamin Huneke: (02:14)
Well, thank you [inaudible 00:02:15] and for having me. I'm excited about this virtual Salt Talk. I've been at Morgan Stanley for 14 years. I was a consultant at McKinsey before that for five years, I try not to reveal that too often. But I was a consultant Mackenzie. I have an MBA [inaudible 00:02:35] Columbia investment banking analysts for a firm called DLJ which is long gone at this point.

Benjamin Huneke: (02:41)
But in my time at McKinsey I did spend a lot of time in the financial services practice. I spent a lot of time in the asset management and brokerage wealth management space. And so just keep getting really intrigued by the industry, really like the proximity it has to the market and a lot of the interests there, but also the personal component of helping people and individuals take care of their financial goals. I love the fact that you get to be near the markets every day and that's an exciting thing to learn about every morning.

Benjamin Huneke: (03:16)
But then also you have this mission driven part of it, which is to help people deliver, help our advisors deliver for our clients in terms of delivering on their financial goals. So it's got a good balance for me in terms of both interest and mission.

Anthony Scaramucci: (03:32)
Go back a deal Jay for a second. What year did you start at DLJ? Some of us are old enough to remember DLJ Ben.

Benjamin Huneke: (03:38)
Yeah. I started in '96 and finished there in '99. So I was there three years in the investment banking group, in the high end group.

Anthony Scaramucci: (03:51)
How'd you make the transition from investment banking, high yield into where you are now on the asset management side?

Benjamin Huneke: (03:59)
It's actually at the time DLJ had a merchant bank or what you call private equity at this point, and it was actually attached to the investment bank. So I don't think he could ever get away with that now, but back then the merchant bank was actually part of the investment bank. And one of the last assignments I worked on at DLJ was for a company that DLJ actually bought.

Benjamin Huneke: (04:18)
And then the company was in trouble and we spent a lot of time down in Texas working with this management team trying to help save this company. And I really actually enjoyed that part of my investment bank and for the most, which was really less about financing companies and more about running companies. So when I got out of business school, I went to McKinsey to help see how different management teams manage businesses and just give you my background in financial services. And some of the stuff I did, I ended up working in wealth and asset management, and I would usually have steady now I'm assuming 14 years helping to run the wealth management division.

Anthony Scaramucci: (04:57)
Ben, in the 14 years, you've seen explosive growth, right? Morgan Stanley now 15,000 plus financial advisors, $2.7 trillion in financial assets. And you are obviously at the intersection of Smith Barney merging with Morgan Stanley. What are the keys to Morgan Stanley success in that space? Arguably, the best, or if not the best among the top two or three in wealth management?

Benjamin Huneke: (05:28)
Yeah. Look, I mean, [inaudible 00:05:29] you one big component of his commitment of senior management to the business. Obviously our CEO, James Foreman comes from wealth management business and knows and likes the business a lot. Obviously Morgan Stanley had its challenges through the financial crisis, but one of the best, if not the best thing that happened certainly to Morgan Stanley coming out of that was the ability to structure a joint venture with Citibank and eventually merged with Smith Barney.

Benjamin Huneke: (05:57)
And what that gave us, I mean, effectively more than double the size of the wealth management business, it takes when you add wealth and asset management together for Morgan Stanley, it's basically almost half the business, both on a revenue and profit basis. So the business is critical to this success of Morgan Stanley and it gives us a scale. On some level, these are big, complicated businesses that require lots and lots of investment. And the ability to invest across a bigger platform just allows us to build better technology, deliver better products. And scale is just so critical in terms of being able to do that efficiently and the scale that we've gotten through the Smith Barney merger, certainly in the advisor, led channel has done, got us to that scale. Then now we've made a couple of subsequent acquisitions, which maybe we'll talk about that have gotten us to scale in some other parts of the wealth management business, which we're super excited about.

Anthony Scaramucci: (06:57)
When you sit at the head of product platform at Morgan Stanley and you've got the pick of the litter. You can go in any direction that you want to go, as it relates to hedge funds and private equity alternatives and the whole bees wax, what do you tell your FAs about your world, the world that you're sitting in? Why should their clients have exposure to Ben Huneke's world?

Benjamin Huneke: (07:24)
Well, look, I think one of the things I probably endlessly... FAs are sick of hearing me talk about it, but I think I just believe that if you have a client problem, the more tools that you can bring to help solve that problem better. Too many of our advisors use narrow portions of our product platform, and aren't familiar with, or have a background in using the full breadth of the product suite.

Benjamin Huneke: (07:49)
So my mantra with my management team is like, we need to partner to help our advisors understand how to use, bring these tools to bear whether you're talking about a structured product, or a hedge fund, or private equity fund, the exchange fund, insurance, our clients have a myriad of different financial issues that need to get resolved. And I just believe the more tools you can bring to that problem, the better solution you're going to get. And yeah, it's critical, especially with where the market is today. You really have to be flexible and look broadly and invest in options because the public equity and public credit market, it's challenging right now.

Anthony Scaramucci: (08:32)
All right. So let me push back because Ben, as you know I deal with FAs every single day, and I know that you're wondering why my hair is not gray as a result of that experience. And that's a whole other topic for the E Channel, but we're going to focus on this. It's only pushed back. Let me be the typical FA, if you don't mind. Well, why do I need you? I mean, I can just buy those five grade technology stacks and I can own them in an ETF. And so give me the rationale to do anything other than that, Ben.

Benjamin Huneke: (09:05)
Well, look, I think one... I mean, if you listen to our global investment committee, I think they would say, especially now owning those five technology stocks is probably the exact wrong thing to be doing given just how concentrated the equity markets have become in those big technology names. So I think one, there's a lot of risk embedded in that investment strategy. And I think most of our clients need a mixture of fixed income and equity income. They need capital appreciation. They need some level of protection from an insurance perspective.

Benjamin Huneke: (09:41)
We're trying to solve to make sure that our clients have the best chance of delivering on what they need this money to do. And it's really hard to just put all the chips on the table and buy the technology ETF and hope everything goes up, [inaudible 00:09:53] it goes up, it might happen, but it's not just a sound investment strategy for retail clients to take that risk for their financial future. And the power of diversification is real. So things are going to outperform in various market cycles. I know it's hard to say that because these stocks that you mentioned have been so incredible in terms of performance over time, but you got to prepare for all different circumstances and having all your chips in one basket, I think is a poor investment strategy in the longterm.

Anthony Scaramucci: (10:26)
Well, I mean listen to four or five of those stacks are representing 25% of the market capitalization of the SMP. And so having done this for 32 years, that always ends in tears. It's not a question if it's going to end in tears, it's really when-

Benjamin Huneke: (10:42)
You always get nervous, which this time is different, right? Like the dotcom bubble, and it was those of us who weren't investing in those companies and we didn't get it somehow what was going on. And I think these are better, bigger, different companies than were in the.com bubble to a certain extent, but the same is true. I was getting nervous when people say this time is different.

Anthony Scaramucci: (11:01)
Yeah. Well, there's some of those names, 160 times earnings. So you could even just get slight multiple compression split, have good fundamentals and see a lot of evaporation of value.

Benjamin Huneke: (11:13)
One thing that you focused on with those companies because those issues are so broadly held and the appreciation is so significant in a lot of those positions. I mean, one of the big focuses we have is around how to hedge those positions because you have huge tax little gains, now that those companies have brought up so much. So helping our clients diverse lives, not necessarily by just selling, but also figuring out ways to estimate those.

Anthony Scaramucci: (11:37)
Well, listen, but the flip side is some of those companies are legendary heirloom like companies, as well as I'm not really necessarily just picking all the companies. I'm just pointing out that we need broader asset diversification. You clearly are at the forefront of doing that. Let's go around the horn for a second, equities have rallied back the NASDAQ's up 20%. What areas of the world do you like on an absolute, fundamental and relative value basis to what you see in the landscape right now?

Benjamin Huneke: (12:12)
Look, I mean, I'm not a markets person per se, but I mean, I do believe our global investment committees out with a pro stance towards active management. I think they are, you mentioned some of these stocks that have become as the market has run off, the market has become narrower and narrower in terms of where that appreciation exists. And I think that has made everybody increasingly nervous. That said, people tend to turn on CNBC and look at the SMP and think that's the whole market. There are pockets of the market that are not trading very well at all. And I think our view would be that active management and being able to pick those parts of the market that are potentially undervalued. This is a period in the market where that should be valued and it should pay off over the short to medium term versus just buying the index at this point.

Anthony Scaramucci: (13:05)
So let's talk about the global investment committee for a second. So what is their view of hedge funds right now? What hedge fund sectors do they like or dislike and obviously hedge funds, I mean, let's just face it, they've lost the argument over a decade between active and passive management. And so are they about to win that argument or is that our even permanently lost? What are your people on your global investment management committee said?

Benjamin Huneke: (13:33)
Well, I mean, we try to talk about... We believe that there's always a place in a portfolio for both active and passive. One side is not going to win versus the other in any fundamental way. I think what you've seen over the past 10 years, 20 years is just the introduction of this algorithmic computer based training, which is what an ETF is effectively. It's a computer buying based on a market cap weighted, or some other algorithm and the efficiency that that can bring to investing and how cheap it can be, I think that is something that's here to stay and it's going to be an important part of our client's portfolios.

Benjamin Huneke: (14:09)
However, I look at it as again, with the benefit of diversification, there are parts of the market that are less efficient whether that's geography, maybe outside the US or whether style box as you get down in the style boxes to small cap means, maybe there's less efficiency and more willingness to go active. I think there's not just market segments, but time in the market when it pays to go active.

Benjamin Huneke: (14:37)
I think our perspective is this, is one of those times where owning the index, given the concentration you talked about, it's you're owning the SMP just long. A, you're very concentrated. B, it's volatile. So a lot of our clients, it's not to have a new team for all equity portfolio. So hedge funds can do a great job of delivering absolute returns. They can do a great job of weathering certain market cycles. So I think both timing in the market, which we think is now a good time to be looking at active and also parts of the market.

Benjamin Huneke: (15:07)
So if you're outside the US, if you're in small taps, maybe better to be more active than passive. And certainly we haven't talked about fixed income, but I mean, it's certainly in the fixed income markets, I think active continues to win share over passive.

Anthony Scaramucci: (15:24)
Ben, you're doing this a long time, you've seen a number of different ups and downs in the markets. I thought that 2008 crisis was bad. I think it's a dress rehearsal for 2020 in terms of what's going on vis-a-vis the overall markets. What is your opinion of the current crisis? How is it differ from 2008, other crises that you've experienced in your career? And what do you think the aftermath is of the crisis?

Benjamin Huneke: (15:51)
I mean, look, I was working in New York city during 9/11 which I thought would be unprecedented. I certainly, I was working at Morgan Stanley during the global financial crisis, which clearly the epicenter of that crisis was right there in times square with leaving brothers[inaudible 00:16:08] right across the street from Morgan Stanley. I thought those two periods of my career would be the most unprecedented. And clearly this has superseded that by factor one, just the fact that it's global, and two it's because it's hitting every aspect of the economy at the same time globally. So look, I think the thing I would say is the severity of it upfront. So how quickly the world drove off into a ditch and how quickly unemployment went up and how quickly the world economic picture changed is unprecedented.

Benjamin Huneke: (16:41)
Certainly the global financial crisis was quick, but not like this. And then the other thing I'd say on the back end is the reaction of the government globally and how quickly the government stepped in and the scale with which they stepped in is completely unprecedented. When they did $800 billion of tarp in the global financial crisis, everyone thought that was just an extraordinary, we are most multiples of that already. And we're only five months into this.

Benjamin Huneke: (17:12)
So in Europe, jogging didn't say whatever it takes until 2012, so that was three years after the crisis had broke. So I think the severity of it to the downside, but then the extraordinary fiscal stimulus that's come into, and market support that's coming in from the governments globally, I think is why you probably see the markets trading where their trading, right.

Anthony Scaramucci: (17:38)
Yeah. And certainly Mike Wilson from Morgan Stanley, I think he's been spot on in terms of his dissertations on the market.

Benjamin Huneke: (17:49)
Don't tell him that.

Anthony Scaramucci: (17:50)
Don't tell him that. Okay. I won't tell him. We'll probably have to get him on here. I don't know if maybe we won't be able to fit his head in the Zoom screen, because I follow him pretty closely. I think he's-

Benjamin Huneke: (17:59)
No, he's been very [awful 00:18:03] at this, through this whole crisis. It's been great to have him and just call at least shallot out, talking to our clients about their views [inaudible 00:18:11].

Anthony Scaramucci: (18:11)
Well, and Lisa as well. No, I think the team has really been spot on in terms of identifying what is going on and why it's going on. But let me ask you an editorial question. You're watching this level of stimulus, this level of deficit spending. I'm sure clients call you or FX call you and say, okay, should I be worried? And am I worried about the right things? Should I be worried about the deficit? Should I be worried about the aftermath of the crisis and what seems to be a further divide in terms of the wealth gap in the United States?

Benjamin Huneke: (18:47)
Well, look, I think that's, I mean-

Anthony Scaramucci: (18:48)
the clients.

Benjamin Huneke: (18:51)
... Look, I think a couple of things. One we've been constructive on the markets this year because of the size, the physical stimulus and the reactions. That's a short to medium term call. I think there is concern obviously about how this unwinds. Clearly the United States as a society and you've seen this with the black lives matter movement, and the strength that that's taken on in the middle of this crisis, clearly are reaction to lots of the elements of social justice in our society, one being wealth disparity. So I think the United States has some real issues to address around that topic that we need to address. So what form does that take as we try to address that taxes benefits. So for our clients, over the short term it's instructive because we think we are going to work our way out of this recession in fairly quick order.

Benjamin Huneke: (19:54)
I don't know whether it's a V or a U or a shape of the letter, but I mean, by the fourth quarter of next year, we envision us being back to where we were for this whole thing started, but that doesn't fix the overarching longer term structural issues. You've mentioned wealth inequality, but also just deficit spending. And how does that eventually come back through? maybe we forgotten, we talk a lot about inflation, but inflation has not been an issue in a long time and the painful repercussions of that. So I think whether it's inflation or whether it's higher taxes, or reduced benefits to Medicare, social security, I mean longer term, we're talking to our clients about preparing for those eventualities. And as we try to work our way over the longer term out of what has been an extraordinary amount of spending that you've done in this country to help us get out of this mess we're in.

Anthony Scaramucci: (20:46)
Yeah, essentially we had a debt selling author. She's a university professor at Stony Brook University, Ben. Her name is Stephanie Kelton. She came on Salt Talks about a month and a half ago to talk about her new book called the Deficit Myth. And she's basically saying, she thinks that you can continue to create this deficit activity because there's a big hole in our economic output. And so it's not going to cause the inflation that people are fearful of and it's not going to be a tremendous drag on longterm investment spending. If she was here right now, what would you say to her?

Benjamin Huneke: (21:24)
Absolutely not. I mean, I'm not a marketing person, I'm certainly not an economist. So look, I mean, you read about modern monetary theory. I think there's a lot of debate about how [inaudible 00:21:34] wants. I mean, I don't think any economists don't understand when you pump this much money into the economy, why is there no inflation? All the equations that they've learned over the years around inflation have become untrue in the current environment. So I think there's a lot of uncertainty about this level of indebtedness globally and how that affects, and how that unwinds over time. But it has to at some point, but I think even economists who are highly more qualified than I am, don't really understand why the economy is reacting the way it is.

Anthony Scaramucci: (22:11)
No, listen, it's an interesting phenomenon that's taking place, is that we're trying to get our arms around it as well. I mean, we watched gold rise in value 2009 into 2000 late, 2011, then it collapsed. We're watching it rise again. Now it may or may not lead to or auger for inflation. We'll have to see, but go ahead, John. I know you have a couple of questions from our audience. Why don't you jump in here and start firing some questions at Ben?

John Darsie: (22:39)
Yeah. As the head of the investment solutions group and you're in charge of overseeing a lot of the products that are on the platform, how during a crisis like this, when things are moving very quickly, you have a meteor strike that no one saw coming? How do you balance long term risk management decisions on behalf of your advisors and your clients, and also the desire to be opportunistic and to try to buy things that might be on sale? How do you balance those two factors when you're looking at products during a crisis like this?

Benjamin Huneke: (23:09)
I mean, look, I think it's a great question. I mean, to me it is the reason why we believe in human advice and the importance of an advisor is that each client's situation is different in terms of addressing a situation like this. So even if the risk tolerance is the same, even if the net worth is the same, the way a client thinks about risk, where they are in their life, what's coming up in terms of expenditure, you have to react differently for each client. So what we try to do is provide opportunities for advisors [inaudible 00:23:42] protection and conservatism as well as opportunistic opportunity.

Benjamin Huneke: (23:48)
So it's all designed to help clients take advantage of this dislocation. That's not going to be suitable for all of our clients, but we definitely wanted to have the ability for advisors who did have clients who could step in to do that. And we saw that in alternatives and some of these private equities, special situation, distressed funds that we've launched. We also saw in the fixed income markets, like when the muni market really dislocated in March and all of the mutual funds were redeeming uni bonds, our RFAs were able to step in and buy some of those bonds that really attracted valuation. Mutual fund managers had outflows they had to meet, the market was very dislocated, retail was able to step in and get some really good bargains in that dislocation.

Benjamin Huneke: (24:36)
So I think it's hard to make a generic comment because it's so specialized to an individual client, but we certainly had a lot of advisors who were I think more open to stepping into this dislocation than they were maybe in 2008. And also, I think they learned a lesson in 2008 that they had been pressing enough to buy into the market in March, 2009 they would have looked pretty good. And so I think we had more appetite earlier on in this crisis than we did in '08.

John Darsie: (25:10)
Are there any specific areas of the market, you mentioned a few special purpose vehicle type of things that Morgan Stanley has done. Are there any particular areas of the market that your advisors have gravitated to and as an organization, you guys have spotted, what you think is tremendous opportunity as a result of dislocations coming from the pandemic?

Benjamin Huneke: (25:27)
Well, I think the credit market. I mean, honestly, the credit markets, I think look, the current rate environment is so challenging for our client base. We have on average, older client base, the capital base that they're managing, a lot of advisors need that capital base to generate income. We've had now 13, 12 years of low rates and now going even lower, it's been really challenging for savers to generate the income that they need off of their assets. So one big theme that has been true and it's continued to be true and probably even more true is the idea of being creative in ways to generate income. All that could be in real assets, infrastructure, private credit, structured products, like 80% of the structured products we sell today, have an income component attached to them.

Benjamin Huneke: (26:18)
So if there's one thing I would say is income. And the second thing that I think has become even more increasingly important is taxes. I mean, people have become much more aware of after tax return versus freebies attached. So being tax efficient in the way in which you invest is critical. And I think we talked about how this unwinds itself, I mean, I think everybody would expect higher taxes in this country. And so that's going to become even more critical in how efficient you are in owning assets from a tax perspective.

John Darsie: (26:52)
You talked about the need to replicate the yield that investors, especially older investors and Morgan Stanley, having a client base that's aging needs to replicate the yield that you would traditionally get from traditional fixed income. Are there areas that Morgan Stanley has emphasized in terms of trying to replicate that yield and more creative way?

Benjamin Huneke: (27:12)
Yeah, I think, look, one, I mean I mentioned structure, that's certainly become an income source for a lot of advisors and I think the other one is alternatives. You definitely have a big focus on income oriented real estate and other real assets. And I think in the fixed income markets, you can make money by taking credit risk. You can make money by taking duration risk, or you can give up some liquidity. I think it's tough to take on duration risk now with how flat the curve is. The credit situation, especially now that we're in the midst of this dislocation, I'm not sure that our client base is really well prepared to make calls on individual credits at this point. I mean, it's very murky, what's going to happen to some of these companies as we work our way through this unprecedented economic turmoil.

Benjamin Huneke: (28:05)
And so liquidity is one where you can give up some liquidity, you can hand the money to a professional manager who potentially has more insight into what's happening in the credits spectrum. So we've had a lot of interest in income oriented alternatives. And then you have to look, there's also just the annuity products. The math would say that including annuities in retirement portfolio for many of our clients, not all of our clients, but for some of ours clients deferred income annuity as a pretty vanilla way to provide some level of guaranteed income in retirement. And so that's another place people are looking to drive income away from just buying individual bonds.

John Darsie: (28:51)
So you're a strategy guy at heart. Having spent a lot of time at McKinsey, earlier this year, Morgan Stanley announced the acquisition of E-Trade to further bolster its industry, leading wealth management offerings. From what I understand from public filings that acquisition is moving forward with some regulatory approvals and E-Trade shareholders recently approved the acquisition. Why is that addition so exciting for the firm? Why did Morgan Stanley go out and make that acquisition? And where do you see the industry heading in five to 10 years in the context of why you made that acquisition?

Benjamin Huneke: (29:24)
So a couple of things. And then we talk, Anthony and I talked at the beginning about the party and how important it was for us to be able to get to scale in the adviser led channel. And so we were able to do that through the spiff Bonnie joint venture. I think when we talk about the next leg of our growth strategy, we bought a company last year called Solium, which was a stock plan administration company. We had had an existing stock plan administration business as part of the JV. So combining those two, and then acquiring E-Trade.

Benjamin Huneke: (30:01)
E-Trade [inaudible 00:30:01] was very we're very excited about E-Trade. They made a couple of things that are really exciting to us. One is they have a direct to consumer brand. So Morgan Stanley does not have a direct to consumer brand. I mean people know who Morgan Stanley is, but we do not advertise directly to consumers. We have always gone through advisors and their relationships to build our business in wealth management. So this gives us a separate brand, that's well-established brand in the direct to consumer space.

Benjamin Huneke: (30:28)
It also gives us a stock plan administration business that we can add to our existing Stock plan business. And so as we think about an avenue for growth, for us going to the workplace through the stock plan business, leveraging corporate relationships that we have both at the Morgan Stanley level, through our investment bank and corporations that we have relationships with on the private client side, there are huge opportunities for us to deliver wealth management services to the workplace and stock. The Stock plan administration is a way to get into that business.

Benjamin Huneke: (31:06)
But then once we have that participant as part of our stock plan business, we can offer a pretty broad range of financial services to that individual in financial wellness. And we can handle clients of any spectrum so they can choose what they want from us when they need that stock plan. They can say, you know what, I just like to trade my own equities and options. You will have a direct to consumer E-Trade account that will be best in breed in app. We have a global advisor that has all the insight from Morgan Stanley built into it, so if you say, I don't need an advisor, but I don't want to trade myself. I want a package packaged investment solution [inaudible 00:31:46].

Benjamin Huneke: (31:45)
We have a virtual advisor group that can service a client remotely through a phone based salary plus bonus advisor team. And then we have our 15,000 advisors. So from the most sophisticated wealthiest clients coming out of those stock plans to the ones who want to be the most self directed, we can offer a full spectrum of options. And so that will [inaudible 00:32:10] acquisition for us as money comes out of both the stock plan and 401k businesses in the workplace.

Benjamin Huneke: (32:16)
And as we thought about this strategy going direct to consumer, obviously you mentioned a Wealthfront betterment, some of the global advisors that are more new to the business. We looked at that landscape and thought it was going to be very difficult for us to compete with Vanguard, Fidelity, Schwab, E-Trade, Ameritrade. These are big, well established brands in the marketplace. They spend hundreds of millions of dollars marketing. They have 401k businesses in the case of Schwab and Fidelity. They have stock plan businesses. And so they have an inborn ear of clients. So it was really hard to think about how to get direct to consumer in a startup fashion for us, Morgan Stanley, so buying E-Trade, checks a lot of boxes for us in terms of filling out the spectrum of wealth services that we're able to offer as well as by giving us a view into the direct to consumer businesses, which we really haven't had before.

Benjamin Huneke: (33:20)
And a lot of our clients, they have accounts at one of the direct to consumer brokerages. So they have a Corpus of their money with their advisor, but they trade their own stocks with a Schwab or an E-Trade or an Ameritrade. So this is a chance for us to say, bring those accounts to unpack at Morgan Stanley company. We can aggregate them together. We can do a financial plan on the whole asset base et cetera. So lots of benefits in consolidating assets.

John Darsie: (33:49)
Yeah. You largely answered my follow up question and that's a great answer on the E-Trade acquisition and more in depth than I've been able to read in the public channels and it makes a whole lot of sense. In terms of technology you touched on it briefly, but obviously you've had insurgents from those lobo-advisors, like you mentioned. In terms of technology, where do you see the industry going? Do you see those robo-advisors taking a larger slice of the market share, or you think we just all arrive at the same place where it's robo-advisor like technology assisted by human advisors, the way that Morgan Stanley has scaled it in a variety of different solutions?

Benjamin Huneke: (34:27)
I mean, look, I think it's very client specific. I think there are a group of clients who want to trade stock themselves and don't want to pay for advice and we want to be able to serve those clients. There are clients that want advice in a robo fashion and don't want to deal with an advisor, and we want to have a solution there. And then there are a whole lot of special clients around what type of advice they want. My belief is, and I think you'll see this in the development on a lot of these platforms is that we think the winning combination is human advice and market insight that Morgan Stanley has with technology.

Benjamin Huneke: (35:06)
So technology enable our advisors deal with our clients every day in the solutions they are able to deliver. And it's very hard to imagine a computer or an algorithm or a five questionnaire, risk profile, being able to deliver the same type of results that our advisors are able to, or maybe if they just feel like it's not worth it to deal with an advisor, but we believe that there's tremendous value in having human advice and make huge investments in the technology to help our advisors.

Anthony Scaramucci: (35:40)
Well, we agree with you Ben on that. And I think it begs the question that I often get asked. I'd love to hear you respond to a question that's often asked of me, of FAs and potential clients and prospects of Morgan Stanley. How do I prepare myself and my family for the end of my business career? Meaning I've just sold my business. I'm coming into this liquid set of assets. I'm going to turn it over to Morgan Stanley. And how do I know you guys are going to make it bulletproof for me? Because frankly, as an entrepreneur, I'm giving up all of that control that I had in my business. And I'm now handing it over to you guys. What comfort do you give these guys? How do you set that framework for your potential prospects?

Benjamin Huneke: (36:31)
Look, it's hard. I mean, often it's hard because for those entrepreneurs in particular you mentioned, a lot of the source of their wealth to the extent they've been successful has come through concentration and ownership. So they had a lot of their network tied up in a company that was then sold and often extolling the virtues of a diversified portfolio cuts against everything that they've done in their career today, because it's exactly the lack of diversification and their success in that that has created the wealth to begin with. So I think there's an education of when you move to that next phase, it's more about staying wealthy than about getting wealthy again. And so that's sometimes a difficult discussion.

Benjamin Huneke: (37:18)
And I think the other thing that often is, far more when I go to meet with bug clients and prospects, I come often as the product guy, which I've been talking about, like all the products that are on our platform and some interesting private equity funds that we've been doing, et cetera. And oftentimes you'll see the client's eyes glaze over when you start discussing those products because they don't realize, a lot of folks don't really care that much. Where I see clients really get engaged is when I'm coming in at the tail end or the person coming in after me starts to talk about more the goals and aspirations for what you want this money to do. And I think that's where our best advisors are spending the most time with their clients in terms of helping them deal with multi-generational wealth.

Benjamin Huneke: (38:05)
Most parents, one of their biggest fears is if they've been very successful, is it somehow that success is going to mess up their children? And how do you handle passing wealth on a responsible way? How do you feel about charity? How do you feel about your children and how to pass that wealth on? So I find it interesting that a lot of clients... We in the industry think that clients are just really interested in what we've been showing to them over the years, which is your mid cap, US growth manager beat its benchmark by 80 basis points.

Benjamin Huneke: (38:36)
I actually have that different experience, which is a lot of clients that I've interacted with are much more interested in the personal side. They're much more idiosyncratic side of their wealth and how their family is handling it. And that's why our best advisors are so successful, is they have been able to be successful and use the platform from an investment perspective, but really to engage with clients on what's most important of it. And that's often not the investment side of the equation.

Anthony Scaramucci: (39:07)
Well, listen, you're making a great case for that holistic approach that Morgan Stanley provides. And I will say this I've been on calls with Morgan Stanley FAs, that even though I'm representing SkyBridge we're coming at the call from a very holistic approach, which I think the prospects do appreciate. Before we let you go Ben, one other question often comes up, I'm just curious how you would react to this. Well, the media or strike that has hit planet earth in March. I hear it all the time, it's a 10,000 year flood, but the problem on wall street is at the 10,000 year flood seems to happen every five years, Ben, and you know that. And so, what do you say to clients?

Anthony Scaramucci: (40:01)
What is the... Okay. Yeah, it's 100 year pandemic, the much performance certainly in certain funds, our fund, other funds, was a rough turn, but how do you condition clients for the long pool? How do you condition clients to recognize that the markets and asset prices from a fundamental perspective, they lurch upward despite the creakiness and psychological uncertainties and vagaries in the world. What is your message there?

Benjamin Huneke: (40:33)
Yeah, look, I mean, I think this one's an interesting one. It's almost like we spend the time after a crisis solving the last crisis, but not solving the next one. And so I think obviously the financial system itself, the GCP banks and the large banks in this country, whether the storm on COVID pretty [inaudible 00:40:57], and I think that's a testament to the fact that we've been working with regulators for the last 11 years trying to ulster the global financial adequacy and all of that. I think it worked quite well versus in the GFC where it clearly did not.

Benjamin Huneke: (41:19)
So I think we should give ourselves some credit as a society for addressing some of the issues that existed before, but clearly this one raised a whole another set of issues. I think a couple of things, one is the market disfunction what's tough. Certain parts of the credit markets really did not function very well during this crisis. And I think there will be a lot of scrutiny put on how these markets function and what we can do that help bolster them and make them more resilient. I think it is not good when the government has to step in and buy IO bonds, step in to save ultra short duration funds. That's not a great factor. And so there will be on the back of this. I made some posts for them around, how do we think about in particular the credit markets and how they function during the crisis?

Benjamin Huneke: (42:10)
But from a client perspective, we try very hard. It's difficult, obviously when you're watching CNN and you're watching the tone board on the right with all the people getting sick and dying from this horrible disease. I think we're trying very hard to get our clients to look past temporary interruptions in the market and become overly fixated on whether the SMP is red or green in a given day, and really talk to them about how they're doing longer term. And then to try to make sense it's feasible, is to try to convince people that this is exactly the time when you need this. You need to definitely stick to your guns from an asset allocation perspective.

Benjamin Huneke: (42:57)
The worst thing, and everybody is there's so many stats about this, the worst thing that happens is people sell and don't get back in and miss in the marketing. But at the very least stay invested and stay competent in the plan that we developed, that this is a temporary hiccup in a much longer term picture. And if you zoom out far enough, the market tide goes onto the bright pretty uninterruptedly. But also, maybe there's a chance to take advantage of this, and maybe we can upgrade some of our new portfolios. Some of these really good companies have been really garnished here over the short term, but maybe we this is a good entry point.

Benjamin Huneke: (43:37)
I think our best advisors were looking for opportunities early. And also very much cautioning clients. The worst thing you can do is go to cash right now. And that is something that I think, historically has been a slaw of retail, which is the market goes down and retail sells. And I think that's something really, really [inaudible 00:43:59].

Anthony Scaramucci: (43:58)
I think is great messaging. I think we should end it there because I think your message is the perfect one. You have to stay invested, not get kicked out by short term interference. And the people that are able to do that, and I'll just go back to Amazon before we finish. I mean, since its inception, its IPO in 1997, that stock has gone down 50%, six times Ben. If you got juked out of that stock at any one of those moments in your fear base, as your fear is taking over, you missed arguably one of the best stocks that have ever been created or better companies in USA.

Benjamin Huneke: (44:39)
They're amazing stats. If you missed the best a hundred days in the market in any given year, the value of staying invested and sticking to an asset allocation is difficult. So that's the overarching mantra we have with our clients.

Anthony Scaramucci: (44:52)
We'd love to get you back as we get to the end of the year. Certainly after November, the third Ben, there will be a new president or a new administration. It's one or the other, and we'd love to get Morgan Stanley and your take on what 2021 looks like post-election. So hopefully you'll come back on-

Benjamin Huneke: (45:11)
It seems far away, it just plain with everything going on, but I would love to come back. Thank you for having me.

Anthony Scaramucci: (45:16)
It does seem far away. There's no question about that, but it's only 90 days. And just remember, 90 days ago, it takes you back to May 8th. I mean, my God just think about how quick that flew by.

Benjamin Huneke: (45:31)
All right.

Anthony Scaramucci: (45:31)
Well, Ben, thank you.

Benjamin Huneke: (45:32)
[inaudible 00:45:32].

Anthony Scaramucci: (45:33)
Thanks for coming on. It's great to see you and we'll get you back on Salt Talks before too long.