“I’m very optimistic on Bitcoin. I think it should be in institutional portfolios. It’s a great complement to traditional portfolios for those in the pension or endowment space.”
Sean Bill is the CIO at the Santa Clara Valley Transit Authority (VTA) where he’s responsible for the management and oversight of its multi-billion dollar, multi-asset class portfolio. He also served as trustee for the city of San Jose’s pension plan and senior advisor to the San Francisco employees’ retirement system.
Being solely responsible for managing $3B in assets for the Santa Clara Valley Transit Authority requires utilizing financial institutions’ resources. Artificial intelligence and machine learning also are vital in providing the analysis when investing an employee system fund. Being able to trust the existing market research analysis of an institution makes it possible for one person to oversee such a big multi-asset class portfolio. “I’m running $3B without any staff, it’s just me… You can kind of view a fund of funds as an extension of my staff.”
Bitcoin represents a major opportunity for institutions and should make up 1-3% of a portfolio’s allocation. Metcalfe’s Law makes it easy to track its pricing when predicting returns. Bitcoin is best understood to institutional investors as digital gold.
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SPEAKER
Sean Bill
Chief Investment Officer
VTA
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 that we launched in 2020, uh, with leading investors, creators and thinkers. In our goal on these salt 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 we're very excited today to welcome Sean bill to salt talks. Uh, Sean is currently the chief investment officer at the Santa Clara valley transit authority of VTA where he's responsible for the management and oversight of a multi-billion dollar multi-asset class portfolio. He also served as a trustee for the city of San Jose pension plan and as a senior advisor to the San Francisco employees retirement system, prior to entering public service, Sean was a principal at a global macro hedge fund based in beautiful Newport beach, California.
John Darcie: (01:11)
He began his career on the agriculture floor at the Chicago board of trade. Sean has invested in dozens of seed stays technology companies and has been a frequent guest on Bloomberg TV, CNBC and Fox business news. He's a graduate of Indiana university currently replacing their head basketball coach. Again, trying to recapture former glory. Sean, I'm a, a, I'm a university of North Carolina fan grew up in chapel hill. So we're experiencing sort of a low on our program as well. So I can sympathize with you there. Uh, but he's also a graduate of Stanford business school, uh, and now still resides out there, uh, in Northern California and hosting today's talk, uh, is Troy [inaudible], who is the partner, uh, co-chief investment officer and senior portfolio manager at SkyBridge capital, which is a global alternative investment firm. That's affiliated with salt. And with that, I'll turn it over to Troy to begin the interview,
Sean Bill: (02:01)
John. Yeah, thanks so much. And thanks everyone for being here, Sean. It's really great to see you. Uh, John did an excellent job reading out that very, uh, impressive resume, but you know, when you think about your backgrounds, uh, could you walk us through, you know, the journey that you made coming from? You know, I think like myself, like Anthony, like John humble background to be in a position of so much respect and authority in the investment community today. Yeah. Yeah. So, um, you know, um, first and first generation of my family to go to college. So definitely from very humble beginnings, uh, started investing when I was probably about 13 years old, uh, played hooky from school, took a bus to downtown Houston, uh, went to Putin to open an account and he was, my mother had to come down and co-sign that account cause I wasn't old enough to open it.
Sean Bill: (02:50)
And so she, uh, she signed off and I think my first trade was, I bought three shares of Mobil oil using a paycheck from the Houston Chronicle, delivering papers. And so I started investing at a pretty early age and by the time I was in Como in college, Indiana and I started investing in commodities and started treating quite a bit commodities. Um, and after college I ended up at the Chicago board of trade, uh, working for Ratko, um, down the floor, the, uh, corn wheat soybeans and Milano oil floor, which was a great experience. I, I, I really wish that those floors were still open for younger kids to get that experience in the markets because it is, it's kind of like driving a formula, one car, you're learning at such a rapid rate. You know, you just barely turn that steering wheel and you're in the wall.
Sean Bill: (03:39)
So you really, you really do learn a lot faster down there. Um, after about four years in Chicago, um, I decided I wanted to get back to California. Uh, we had, we had lived in California when I was younger in high school and, um, I just really kind of missed the weather and a lot of friends that were out here. So I ended up going back down to Southern California and of course in Southern California, uh, it's all bonds. And so I ended up going into the bond space, um, you know, had immediately before I got there, you know, I sent some resumes out, had an offer from PIMCO and Bradford MarTech and a couple other places. And I ended up going to Bradford and Mars' neck and becoming their senior corporate bond trader on about, you know, think about, about 10 billion. Um, and then left, there started a hedge fund, which was seeded by Panco, uh, and ran a hedge fund, uh, all the way, jeez, almost all the way through 2011.
Sean Bill: (04:32)
And so with quantitative easing and zero interest rates and all that, we were well relative value, fixed income fund. So, um, you know, while those trades went away, so we gave the money back and I wasn't, I, uh, decided that we wanted to get back up to Northern California. That's where she's from, that's where we have a lot of friends. And so we ended up back up here and just very randomly. Some of my classmates from high school were on the city council in San Jose and asked me if I could help out with the pensions. Um, I was basically kind of twiddling my thumbs, so I thought, sure, why not? And so I ended up going over and joining the San Jose board as a trustee, um, for a buck a year. And then, um, uh, the San Francisco asked me if I could help them out with their hedge fund program.
Sean Bill: (05:18)
So I became a senior advisor to bill Coker and the board administration of San Francisco, and then, uh, the CIO spot, um, and Santa Clara was available. So I ended up doing that. And so that's kind of how I went to the pension space. So it wasn't really planning on, you know, going into pensions. But I do think that, you know, pensions are a super interesting area because you get to touch so many different asset classes. So if you're kind of a macro oriented investor, you know, it's a pretty interesting seat because you're investing in public and private equity, you're doing public and private credit, you're doing, uh, you know, real assets, uh, all kinds of different, you know, uh, markets that you get to touch. So I really enjoyed that. And it's been, it's been a pretty, pretty neat experience overall. Yeah. Thanks for giving us color around that.
Sean Bill: (06:07)
Sean, I'll tell you one thing I found fascinating from that re recounting your background was that you voluntarily recognize that the opportunity set for what you did compressed and you gave back the money, right? How often do you see that in this industry? Usually people always try to get blood from a stone and then struggle for years before recognizing that, you know, their expertise just is out of favor. And as you laid out, a lot of it had to do with unconventional monetary policy that took away a lot of those traits. I kind of look at it like as I've had like kind of three iterations on my career, you know, the first one being done in the open outcry system of the floor, you know, the Chicago board of trade. And it was kind of becoming very clear that that would be coming to an end and that this was going to be, you know, uh, digitized in time.
Sean Bill: (06:54)
So I left that area and then I ended up going into what I'll call the alternative asset management area, right. And hedge funds. And, uh, the area that I was in evaporated over time and the zero interest rate policies came into play. And then it was like, okay, well, you know, we're going to evolve and shift and we'll, we'll go this direction. And so I ended up in the, uh, the pension space. So I kind of, this is like my third act. I think, I don't know what the fourth act will be, but I'm sure at some point I'll get phased out here too. Hey, it's still a young man. You won't be a algorithm or algorithm to way, or how is it AI at away anytime soon, given, given your background, it's really fascinating. You're obviously a proponent of investing in front of hedge funds for certain plans.
Sean Bill: (07:42)
Um, and for certain investors, could you walk through who you think they're appropriate for and why, and if there's certain folks in particular that should focus on that path. Yeah. So I, I, I, you know, coming from the hedge fund background where you do have a lot of resources at your disposal and you can do things pretty quickly, um, and then moving into the government space where you don't have a lot of resources. So I, you know, I'm running $3 billion today without any staff. That's just me. I do have a part-time accountant who will book in the month end closing values of the funds into Sal, but that's literally the only support I have. So if you're in that situation, which a lot of public fund managers are, um, you know, you can kind of view a fund of funds almost as an extension of your staff, right?
Sean Bill: (08:33)
So, you know, the fund of funds are going to do the research. They're going to do the risk management. They're going to handle the back office, you know, subscriptions and redemptions and rebalancing and all these things within that, that space. So for me, that was a primary motivator, I think, for smaller asset owners, you know, sub $1. Um, this is an area that makes a lot of sense because you can really, up-skill the quality of the team that you're working with. Um, and you can, you know, you can actually also benefit from the scale of the fund to funds, uh, and they're negotiating with the underlying managers. So if I was to go out and try and build a fund to funds of my own internally, you know, it's probably going to be a five to $10 million ticket per manager, which is very different than say yourselves at SkyBridge or our other partners who are going to be making much larger allocations to those managers.
Sean Bill: (09:28)
And they're going to get a much better B uh, fabric than we could get if we went direct. So I think there's a couple of different, you know, areas to consider there. Um, the other, the other thing I would emphasize, you know, is the speed at which you guys are able to move versus what we can move. You know, if you're in a, uh, it's called a bureaucratic organization, which has a lot of checks and balances by its nature, and a lot of sign-offs that are needed to get money moved around, it can really slow you down. So, you know, that can be somewhat critical. Uh, you know, it can take me six months to get through the process to onboard a new manager or to offboard or offload a new manager. So, you know, I'm sure for you guys, it's probably four weeks or something, uh, very different in terms of the elements of speed that are available.
Sean Bill: (10:16)
And the redemption is always tougher than the entry point, right? Sean, by definition. So hardest thing to get right. Exit points are definitely more challenging. Um, absolutely. Yeah. And, you know, along those lines, I know we've chatted recently about what our favorite strategies are and there was a lot of overlap, but could you talk to the audience about some of the favorite hedge fund strategies you have now, or unique opportunities that you can access necessarily they're just vanilla fixed income or equity markets? Yeah. I mean, I think there are a couple of different, interesting spaces. Um, you know, I think one that's really hot right now is obviously with what's going on with suspects, right. And, uh, you know, also convertible debt funds those two areas. But what I'm probably most excited about, like if I back up and step up to a higher level, look would be investment managers that are deploying AI machine learning, you know, um, I think that, you know, these quantitative strategies are slowly going to be morphed into more AI and machine learning based strategies.
Sean Bill: (11:15)
And it's not going to be just about speed anymore. It's going to become more also, it's also going to become about inference, right? And the ability to, to learn, uh, and predict. And I've seen examples of this here in the Silicon valley with different managers that are pursuing these approaches. And, um, you know, I'm thinking of one in particular, that's a, um, a consumer lending fund. And what they do is they buy loans off these various platforms and, you know, they'll download, you know, a million loans off a database they'll relay a thousand economic barriers over top of it. And then they'll let the machine learning, crawl the data and determine what is, you know, what are the factors that we should be taken into consideration when we're extending unsecured credit to a consumer? And the things that it comes back with are very different than what you or I might think of in a traditional sense, if someone, uh, capitalizes, uh, you know, Chicago is all caps all the way through, and they'll say, Hey, the data shows that that's a 2.4% higher default rate.
Sean Bill: (12:16)
You know, if the guy is agonizing on the payment meter between 2 85 and 3 0 5 a month on his payment versus the guy that just goes directly to max, not the payment, you know, we can show that there's a very different, uh, return characteristic on who pays back that loan. Right? And so there, there are managers in that space, you know what I mean? You know, there's sweeping these, these loans that fit their criteria off these platforms within 20 milliseconds. So, you know, that's where I w I was sat in with those guys years ago. That's our boy, you know, it's like, Marc Andreessen says, it's like, you know, it's like the most evolved dinosaur. And you see the meteor coming in as like, holy crap, you know, uh, by, by the time that I would be selecting a loan off these platforms, they've already picked the vest, you know, or we're the what's left is the second tier, um, for the traditional credit guidance that's going through there.
Sean Bill: (13:06)
So I really think there's huge advantages to be gained, uh, by using, uh, artificial intelligence and machine learning. And that those advantages can be used in equities and fixed income credit, uh, convertible debt all over. So it's more, that's kind of more of what I'm looking for, uh, what I'm looking about and thinking about the future of who's going to have an edge in investing in these markets. And I think it's great. Yeah, that's really interesting that I just had a chat with one of our long-short healthcare funds this morning about that very topic. And that was a, an unrelated to the audience. This is the first time Sean and I had spoken about it. And that's one of their big projects for this year is trying to apply AI to particularly phase one and phase two biotech companies where, you know, many of the factors that lead to approval, the analyst inherently knows, and the portfolio manager inherently knows, but this gives a much more speed for making a determination on whether the price is appropriate or whether they should hold off for a few more weeks.
Sean Bill: (14:04)
So, yeah, that's going to be a big topic. Uh, first, really, as far as the, I can see Sean, I'm glad you here. Uh, I think that, you know, I mean, um, you know, it is the speed at which AI moves is, you know, it's almost incomprehensible to a human, right? So they can, they can review, you know, millions of pages of a document before we can finish reading 20 pages. So, you know, they're going to go through and they're going to look at these, uh, [inaudible] violence earnings filings, or what have you, and look at the scientific research papers, and they'll come to conclusions on, Hey, you know, this is, what's worked in the past, and this is what we should be looking for. And, you know, we should be basing decisions on this. So that's why I say that, you know, AI brings a whole new level of inference and prediction, and I think dad's going to become a big Hodge for, for money managers.
Sean Bill: (14:54)
That's pretty fascinating. And, you know, in the meanwhile, back in, uh, the more vanilla world of asset allocation, you know, clearly the big challenge for everybody today is how low interest rates are, how low bond yields still are. I mean, obviously it's been a really rough go for bonds really since April and the Barclays agg down over 3% year to date. But when you think about that world, what it means for plans like yourselves or endowments, or, or, or larger pension funds, is that a challenge that can be overcome? Or is it just about ramping of your risk appetite and hoping for the best, or, you know, how do you think about that? You pair it on? Yeah, I mean, you know, I definitely think that the first thing that you have to do is you do have to understand where the central banks are coming from.
Sean Bill: (15:39)
And it's like the old Martins Zweig used to say, don't fight the fed, right. Well, if it's the fed the European central bank, the people's bank of Japan and the central bank of China, uh people's bank of China. Yeah. You definitely don't want to be on the other side of that. And, um, you know, with zero interest rates and quantitative easing and the flood of liquidity, we've seen what's happened. There is, you know, that going back to our Chicago board of trade days, right, you learn very quickly, you have to let your winners run. You have to cut your losers quickly. Right. What does that mean in a practical, uh, an a practical way is, you know, it means letting our equity positions tilt further overweights in what we might normally, we want to stay within our bands, but we, we may want to let those things run a little longer and a little harder.
Sean Bill: (16:28)
Um, we refer to that as kind of intelligent rebalancing. A lot of people will just say, Hey, we're going to rebalance straight up the quarter, and we're just going to bring it back to target wherever it is. Well, you know, we, we let our equities run. Uh, we did hauling back in, uh, late January, early February, we took about 8% of the portfolio from overweight equities that have built up and we rang the register and we said, okay, we're going to, we're going to pull that in. Um, that was, you know, um, really a function of what was going on in China and COVID, um, but you know, when it came time to go back in and we wanted it now we had, okay, the markets have sold off, we're overweight on our fixed income. Well, let's get back into our, our equities, right. And so this is where it is pretty critical to have board buy in on these things.
Sean Bill: (17:17)
Um, you know, our board got a little scared and will nervous when they had him. So we had set up very well for the sell off, but it was very hard to move quickly to get back in. So, so I think, you know, um, kind of straight a little bit off a tangent there, but, but, you know, it's important to what the winners run that's important to, um, uh, you know, cut the losers from, so that, that takes us to fixed income. Our fixed income allocations moved from 35% down to 14%. Uh, we have been steadily trimming that over the last five years and what we've done is we said, okay, you know, we are, you know, we still need to make six and three quarters for our assumed greater return. We're not gonna expect to pull more than three, three and a half out of core fixed income.
Sean Bill: (18:02)
Where can we go to achieve our, our goals? And so one of the areas is private credit. So we we've increased our allocation to private credit in that same period to 12%. Um, we have increased our allocation to hedge funds from zero now up to 6%. Um, you know, we basically said, okay, uh, you know, we need to look at fixed income, basically as a balanced to the risk that we're embracing elsewhere in the portfolio. And we'll use it as a counterweight, but it doesn't need to be 30, 40% of the portfolio anymore. Um, 14 is probably about right. We did put a 3% allocation to a pure treasury fund, uh, with the idea that that could cover benefits for a quarter. We got into any real, real nasty markets actually. So, so minimize fixed income, obviously ramp up alternatives, including private credit and hedge funds and allow your equity portfolio to, uh, play momentum driven by the fed.
Sean Bill: (19:01)
Right, right. That's right. That's right. And we, you sit at a 4% allocation to private equity, uh, with the idea that we want to capture some of the illiquidity premium. There that's a new allocation. Do you think a lot of that illiquidity premium still exists? Sean? I think it is harder to capture than it used to be. I don't think it's as, um, prevalent or as big as what it had been. I think it used to be pretty much a four to 600 basis points of illiquidity premium for some of these assets. Um, you know, as investors like ourselves have been pushed out the risk curve, there's more money coming into these asset classes. And by nature, they become more efficient and the, the liquidity premium shrink. So I don't think it is what it was. Um, but I do think there's still some very interesting opportunities in that space, particularly in venture and, and what happened.
Sean Bill: (19:51)
Yeah. You just asked to be much more selective, right. And focus more on growth as opposed to, you know, these bloated workouts, right. That are just levered. Uh, we're not allocating to large numbers, buyout bonds, or anything like that. It's like if we were doing elbows would be smaller, mid middle market elbows. Um, and we're, we're really more excited about what's happening in the innovation economy and in the venture space. Hey, so shifting gears a little bit, uh, you obviously are aware that we've taken a Bitcoin allocation and, you know, it's something that folks like Michael Saylor and Elon Musk and other insurance companies in Dallas, uh, focused on recently, you know, what's your professional view on, uh, Bitcoin Shaun or, or cryptocurrencies in general. And how do you think they could potentially fit into a portfolio? Yeah, so, I mean, this is an area that I was very excited to hear that you guys took that position.
Sean Bill: (20:44)
Um, we had started trying to educate our board on digital assets back in 2019. And we're trying to really kind of present this as a new uncorrelated asset class. Um, now, you know, as more money has come into Bitcoin as the on-ramps have become, uh, more available for retail, I do think the correlations are going to increase relative to other assets. So, so what we saw five years ago, or the last five years, a correlation of 0.1, 4% of the S and P you know, over the last 12 months looks more like 0.3, four, right? So that's, that's a function of, you know, these on-ramps like PayPal or square cash, or what have you. Um, but I do think that, um, you know, it is still a very uncorrelated asset overall. I think it adds a lot of value when you're, when you're putting together a portfolio.
Sean Bill: (21:36)
We always, I always explain this to my board that, you know, it's like baking a cake, you know, we need some flour, we need some sugar, we need some salt and any one of them individually may not taste that great. But, uh, you know, when we put them all together, we're gonna get this beautiful cake and Bitcoin model, all three of those sounded pretty good to me. Shout, I'm not sure if you mentioned rights, but we were going to leave that one out. Yeah, yeah, yeah, yeah. So, so, so from the institutional perspective, Bitcoin might be that raw bag, right? It's a little, it's scary, right? I mean, we, we've all seen Rocky drink it, but we're like, Hmm, I don't know if we should. Um, so, you know, uh, we did, we did, uh, talk to our board about this and we said, Hey, listen, you know, a one to 3% allocation could really enhance the overall return profile of our fund.
Sean Bill: (22:21)
And if you are following McAfee's, you know, law in terms of, um, how the Bitcoin network becomes more valuable as more participants, uh, enter the network, then it's pretty easy to actually track where the pricing of Bitcoin should be. Uh, Dan Morehead and Pantera. And those guys have done a lot of research on that. And, you know, you guys have also done a lot of research on that. So there are several big institutional investors that are, are looking at this, cause this is one of the big questions, right. Is how do you value Bitcoin? It's, uh, you know, uh, there's, there's no intrinsic value, right? We don't have a bunch of industrial assets. We can go down and place a value on this is a, um, it's a digital asset, so it is tricky to value it. Um, I do think that McAfee's law really does stand out as a great way to think about it.
Sean Bill: (23:10)
Uh, we saw at work with telephone networks, we've seen it work with social networks. We've seen it work with all kinds of different, um, network type entities. So, so we, um, we thought that, you know, one to 3% was our official recommendation to the board, uh, in 2019, uh, as Bitcoin began appreciating, uh, you know, we think it should be probably at least half to one and a half percent still in an institutional portfolio. That's great. Yeah. And the other aspect too, that we like is it's liquid, right? I mean, it's small, so it's liquid in most alternatives that can generate attractive, which we'll segue to in a second, you really have to move down liquidity spectrum. Whereas this is one of the few that stands out as, Hey, you have a realistic chance of being a 50% or a hundred percent even from here and it's liquid at the same time, because you might have a different view, but we don't see how equities are up more than 10 or 15 this year, maybe 20, if everything goes well, but given high valuations potential higher taxes, obviously higher interest rates, uh, that, that will serve as somewhat of a break on equity.
Sean Bill: (24:15)
For sure. Yeah, no, I think, you know, we're in the same camp on the equity returns, we do feel like it's still pretty positive with what's happening with quantitative easing and continuing to push investors out in search of return. Um, you know, but, um, Bitcoin, we do basically look at it as like a digital gold, you know, this would be kind of similar to holding gold. Um, I do think that Bitcoin is a little better positioned because I think that, you know, there is a finite number of coins, 21 million, I believe, uh, 4 million of those are out of existence. Right. We don't think they're coming back. Um, so we have about 17 million and we know that the float that actually trades is very small. So, you know, um, I think that, you know, it's pretty realistic that we will probably see Bitcoin at a hundred thousand by the end of the year, just following McAfee's principle on this.
Sean Bill: (25:05)
Um, and that longer term, I think it will continue to appreciate quite a bit more so I'm, I'm very optimistic on Bitcoin. I think that it should be in institutional portfolios. I think it's a great, you know, compliment to traditional portfolios. I think for folks like myself and the pension or endowment space, you know, and this is something that you could put in either as a venture investment, uh, you know, you could put it in the venture bucket because it does have characteristics of a venture back company, or you could put it in as a substitute for gold, uh, in your portfolio. Gotcha. So segwaying from liquid alternatives to less liquid alternatives, you know, we know you're a big fan of angel investing and you focused on that personally and professionally for quite some time. Now, are there any particular areas like other maybe AI we covered already, or perhaps it's still your favorite?
Sean Bill: (25:55)
Are there any other areas that you'd like to particularly I would have invested in some AI companies, um, you know, for all the viewers out there, they should check out Chooch, uh, it's an app on the apple app store or the Android app store. And this is gives you a really good example of what is possible with AI and visual recognition. Uh, this is a company I invested in that when I was at a $10 million valuation, they just closed their most recent fundraising at a $200 million valuation. Um, and I think this will be a billion dollar company within two or three years. Um, but I think that is a great, um, a great way for the everyday investor to see just what AI can do even on your telephone. Um, outside of AI, um, the area that I'm probably most excited about is FinTech and really trying to use my background in finance, you know, having been on the floor of an exchange and worked in the hedge fund side, dealing with commercial banking and treasury operations, et cetera, I feel like I have a little bit of an edge in Vintech.
Sean Bill: (27:02)
And so I generally tend to focus most of my time in that space and the strategy that, you know, I approach or the way I look at it, the framework that I use to look at FinTech is I'm trying to say, Hey, who's going to become the Amazon of FinTech. You know, um, you usually have a winner in each category. Um, I think it's going to continue down that path. I think there will become a digital online entity, financial entity that will be the winner in the end. Um, you know, and so what I do is I look at, you know, the different verticals in lending and payments and asset management or investment management, et cetera, and just, you know, treat them as like a swim lane. And once you, once you begin to dominate that swim lane, they, they move on to the next lane, which might be mortgages and then the next lane, which might be investments and so-and-so, and so, and then eventually you create this a company that's almost like an Amazon of FinTech.
Sean Bill: (27:59)
Um, so that's, that's probably the area that I've spent the most time on, or I have the most, uh, personal investments and the area that I'm most excited about, because I do feel like I can, I can look through those companies and get a general sense of, of how they're performing, um, and how they're, how they're going to perform. Um, the, I, you know, so I, I have a syndicate on angel list, um, where I syndicated these deals. I've done about a dozen on there. And the IRR over the last six years is about 30% and we've not had a single one of those companies that's gone out of business. Every one of them stayed in business, which means we're probably not taking quite enough risk, but, um, but I do, you got to roll the dice more here, come on, gotta be a little more aggressive. I've only got two unicorns in my portfolio. [inaudible]
Sean Bill: (28:45)
Come on. Yeah, yeah. So I've got two, I've got lifts and avant are both in my portfolio from early investments in 2014. Um, but, uh, but yeah, I think, you know, that there's a lot of opportunity in FinTech still. I think it's still very, very early days. I think that this whole defy revolution that's beginning and what's going to happen with the blockchain. And, uh, you know, we can go into how AI works with the blockchain and the cloud and, you know, these things are all interconnected. Um, so I think there's a lot of runway there. Um, another area that I've been investing in, I just did a, um, investment with, uh, Portree Friedman Milton Friedman's grandson, uh, down at, uh, in Honduras. Um, yeah, it, it was interesting. That's like the most violent country in the world. And so the idea was for any new that I've seen the Milton Friedman series free to choose where they go through and talk about the Asian tigers know and Hong Kong and all these things.
Sean Bill: (29:43)
The idea was could we bring a special economic zone to central America and create opportunity down in central America for the residents down there? And so, um, we invested a quarter million down there and, um, I think the total raise was about 19 million. Um, but we got, you know, people like Peter teal and Joe Lonsdale and mark Andreessen that also are participating and really just seeing if we, if these principles can work down there and central America. So we're on the island of Roatan with 65 acres and starting to build, um, this little special economic zone, obviously central and Latin America in general could use help, right? Not only do the pandemic, but it's been an area of disappointment for quite some time for investors, hopefully you guys can, uh, uh, show the way or like the way down there it's
John Darcie: (30:32)
Like assault, destination shot, destination. It's, it's
Sean Bill: (30:37)
Actually like, I think like the fourth, most popular scuba destination, which I learned, um, and th and they do have direct flights from, I think it's Houston to, to the island of Roatan. Um, so I'm very optimistic about that. I mean, I think that, you know, if that, if we can make that model work in central America, um, then we can port that model to other places. So we've seen it in Dubai. We've seen it in Singapore, we've seen it, you know, and why hasn't it? Why not, why not have it, uh, you know, south of the border of the United States? Yeah. He's shown. So, you know, this touches very well with our conversations on Bitcoin being liquid and obviously equities being liquid, private equity and VC, but we've seen a blending to some extent recently between, you know, late stage privates, uh, for companies like chime or, or Klarna, you know, higher evaluations obviously than the early stage investors and still at reasonable valuations compared to the Republic comps.
Sean Bill: (31:32)
And also the emergence of the SPAC market is a unique way to take companies, um, public, w what's your overall period, is this an area, uh, too much risk right now? Or is it just a combination of, um, where we are in a market cycle and calibrating your risk reward objectives? Yeah, I, I D I, I think that, you know, take them separately. I think, you know, SPACs have been a really interesting way to go public, right. And I think that, um, you know, bill Gurley and, and some of the fellows out here in the Silicon valley have been pushing back on, you know, value that's left on the table from these IPO's and the fees they're paying, and what have you, I think this back fees will be con consolidating and compressing over time, and that it will become even more efficient. Um, so if you're, you know, if you're a Spotify or, or Airbnb or something like that big name, then Hey, you can just do a direct listing and, and go public that way.
Sean Bill: (32:23)
Um, but for some of the, let's call it 3 billion to $10 billion companies, you know, spat can be a really interesting way to get public. Um, so I'm, I'm very positive on specs. Um, the, you know, the late stage private investing, the way I view that is more of like, okay, you know, um, over the last 10 years, over the last decade, we've seen a real shift where, you know, when Microsoft went public, you would capture a very large portion of the appreciation at the IPO and, and going forward or apple or any of these others. Uh, in the last 10 years, it's become very difficult, you know, being a public company, right. It was Sarbanes, Oxley and Dodd-Frank, and all these other rules that a lot of them just have chosen stay private longer. Well that as a pension investor, uh, that's, that's something that we're missing out on in terms of, you know, how do we get exposure to this?
Sean Bill: (33:19)
So I view it as, and I've worked with our board on this. I think we're getting close to actually doing something on this, you know, um, I view it as let's look at late stage private investments as a substitute for our small cap, public equity exposure. So just slotted, slotted into that slot and say, okay, we're not expecting the return profile that we used to expect from small cap equities. It's now in this late stage bucket. So let's just shift over to that allocation report, part of that allocation to late stage private investing and treat it like it's sidecar our small cap exposure. That's really smart. And it's the first time I've heard that, but it makes complete sense given, especially the recent rally and small caps and broader equities in general. And from what we've analyzed, you still have far more growth prospects in many of the FinTech or other tech late stage startups than you would in know the Russell 2000 value or growth indices.
Sean Bill: (34:14)
Correct? Yeah. Yeah. I mean, I think, you know, I think we will see, I mean, look at Stripe, right. I mean, I could've, I could have been buying shares and Stripe three years ago at 15 billion. Right. Um, and the secondary market, um, you know, I mean, uh, I had friends that were buying those shares and I thought, boy, that's really expensive, but I'm like, gosh, you know, but that would be like, you know, that's a good example of a late stage fund. That's got a broad exposure to a lot of different companies is going to capture that run from 15 billion to a hundred billion, right before Stripe actually hits the public markets. Um, you know, we saw this with Facebook. I mean, that was probably the original, right. I mean, you know, Facebook kind of, you know, put that path, uh, showed the way of how to go down that path.
Sean Bill: (34:57)
And then now we're seeing other big companies doing the same thing. I think Stripe is a perfect example of that. So I'm a big fan of, of allocating to late stage private, private, right. And clearly the companies had been de-risked by the end, compared to when the earlier stages at lower evaluations as well. Sometimes we forget about that. Right? Absolutely. Yeah. I mean, I think a lot of these late stage companies, you know, 10 years ago would have been doing the IPO's. Um, it's just, now it's very, it's very onerous to do an IPO. And so they, they defer it. They don't need their capital. They can defer it for awhile. Last question, before I turned it over to my esteemed colleague, John Darcie to wrap it up. But yeah, the pandemic, I think taught a lot of us, some lessons, not that we're delusional and didn't understand bad things can happen, but I know from our perspective, what was surprising was not only the magnitude, but the speed of the market collapse, right?
Sean Bill: (35:53)
Unlike oh eight where you had 18 to 24 months, three position, this was everything's fine. Everything's not fine. And then, Hey, everything's fine. Again, courtesy of the fed and fiscal stimulus. So are there any take-home lessons, uh, for your investing craft or for asset allocation or is it just the tried and true? Hey, don't panic, bad things happen, manage your way through it. How do you think this, uh, pandemics effected, you know, you intellectually and how you look at, uh, various investments? Yeah, I mean, so, you know, I had a, you know, a shopping list of stocks. I actually published it on my blog. I'm like, Hey, you know, we're getting into some pretty hairy territory. Here's my shopping list. You know, let's buy square at 35. Let's, you know, let's get into some of these names, uh, Boeing, Disney, you know, great companies I'd love to own, but, uh, you had to wait for an, a real pullback.
Sean Bill: (36:44)
And I think that's one thing I learned in, um, at the Chicago board of trade is that you have to have your game plan in place before you get into the, in that case, the pits and by selling, um, you have to know what, what the, what the framework is that you're operating in. So I think I might've been Warren buffet that said, you've got to have your shopping list ready to go when Mr. Mark is having a breakdown and it's hard if you don't already have it prepared to do it on the fly. Um, if you have it already outlined and you're ready to go, then you can take advantage of these psychological or behavioral economics driven issues that create these dislocations, which don't last very long anymore. Um, you know, and the other thing I would say is, you know, I mean this most recent snapback really does illustrate the power of central banks and how, you know, they have learned from 2008 and nine and they are pretty unconstrained and what they can do and the numbers that they can throw at the market.
Sean Bill: (37:48)
So, you know, it definitely, you know, um, would not try to go against the central banks, um, and would definitely try to ride the wave while it's there to be re written. Um, now at some point, you know, they're gonna have to unwind all this stuff and that's another conversation, right? It can be quite a hang over the next six to nine months, but that's right. So to sum it up, it's more of a continuation or reinforcement of your investment discipline. You be ready to buy when opportunities present themselves. And this experience just reinforced that in not only that that's a thoughtful discipline, but that you have to move and move fast, uh, which is sometimes easier said than done. Right? Absolutely. And I think, you know, one of the things I would add to it is, um, you know, as I'm thinking about it, you know, for pension investors or endowments or foundations, um, one of the things we do is rebalance our portfolios, right?
Sean Bill: (38:40)
And individual investors can really benefit from that as well. So, you know, if you are, uh, following a rebalancing plan, uh, you are inherently going to be a value investor, right? So if you have some stocks and you have some bonds and stocks are down 30% and your bond portfolio is up 20%, you're going to be selling some of your bonds and then buying stocks at a discount. And that's a, that's a great position. It's, it's a, you know, a disciplined rebalancing approach should add between 40 to 70 basis points of annualized performance to your portfolio over a decade. So this is a lot better than the risk-free these days. Right? Sean. Yeah. Yeah. It's a good add on, you know, and we got to take those, those basis points wherever we can get them these days. That's right. That's right. Well, Sean, I just want to thank you for our investment team and the folks at sky Ridge from coming on. I'm going to turn up over to, yes, I'll say it again. John, my esteemed colleague say saying it was this isn't enough to, uh,
John Darcie: (39:39)
I want to have to get my shots in at the end of these interviews and, and pick up the, uh, the areas that I think were most interesting and, and ask a few follow up questions, but let's go back to Bitcoin for a second. So you're everybody's dream partner in terms of, uh, being an allocator who understands where things are going, looking around corners and the ability to take risks and do things that are new and exciting, but not every institution thinks in the same way as you go out amongst your colleagues in the institutional investment world, what are you hearing about views on Bitcoin? Is it still people leveling accusations about the fact that it's not backed by anything? It doesn't have any intrinsic value there's issues related to energy usage. What is the broader messaging that you're hearing today within the institutional investor world?
Sean Bill: (40:23)
Well, all right. So John, the first thing I do whenever I come sit down with another CIO of another pension fund, as I tell them that, you know, from my perspective, the most critical thing you can do is think like an entrepreneur with institutional resources. And part of that is driven by being here in the bay area and seeing the impact of innovation. Um, so, so you have to get them out of a traditional mindset, right? Because you know, it is a let's buy, you know, IBM. So we don't get fired type of mentality in general. Um, so to get them to think outside the box, you have to frame it for them. Um, now, you know, the big concerns with Bitcoin that I've found in probably the, probably the biggest concern is the custodian element in terms of custodian, those assets safely. Um, you know, that is something that a lot of people just aren't really comfortable with this idea that there's a private key and a public key.
Sean Bill: (41:18)
And jeez, you know, everybody's read the stories about losing the, the private key and then he can't get it back. And I've tried to explain that I'm like, look, there are, there are good custodians out there as Gemini and there's Coinbase, there's a, there's a lot of different options that you can go through, uh, or you can have someone like SkyBridge do it for you, right. And then that takes it off your plate completely, uh, from a risk standpoint. Um, but I think that probably shot by the way I liked that option myself. I think it's a good option. I think it's a very good option. I think, you know, I mean, I've been, I've been trying to really share that message that, you know, we have our Bitcoin exposure through SkyBridge and, you know, there are different ways of doing it. You don't have to be the CIO of saying, okay, let's go open that a coin, uh, account at Gemini or Coinbase, and I'm going to sign my name on here and we gotta figure out how we're going to store that key. I actually write
John Darcie: (42:10)
Down on a piece of paper and put it in your sock drawer and hope, hopefully you don't wash those socks. Yeah, yeah. Or the,
Sean Bill: (42:18)
Yeah, something happens. Right. Cause that one, you know, that would be everybody's worst nightmare. Um, so I am, you know, but again, as we talked about earlier, I'm a big fan of partnering with different firms and using, you know, the fund to funds model and, and just delegating authority to other asset managers and what have you to let them do what they do best. Um, you know, that's something I learned from Tom Dittmer, you know, he said he, he made as much money by allocating money to smart investors that he did on his own trading and investing. And so I think, you know, there's a lot of alpha to be had by finding those managers that understand the markets that we're in and understand how to protect the capital and, and allocate to them. Um, you don't have to do it all, everything on your own.
Sean Bill: (43:01)
Um, but there are, I think, you know, there's, um, there are two funds up in Virginia that, uh, uh, put money into digital assets. Um, you know, I think, you know, there were probably other pensions that are invested in funds like yourself that have assets in digital or have funds digital assets. Um, so I think that the acceptance level is, is getting there. I think the, probably the hardest thing now for everybody to swallow is the idea that, you know, Bitcoin's at 56 to $60,000 and who knows, they're late. I feel like they're living, you know, and, uh, um, that's a hard one to swallow sometimes now in my case, you know, you know, I think there's still a lot more potential and there's a, still a lot more upside from here. So, you know, I don't think it is a three to 5% allocation that I would've thought, uh, you know, in 2018 or 2019. But I do think, you know, uh, it is a half to one and a half pretty safe that have some money, have some exposure there. Yeah.
John Darcie: (44:02)
That's a narrative that we pushed back on a lot too, is we have some very smart hedge fund managers that we work with that have come to us and said, okay, I buy into the story, but I don't want to be the sucker. That's left holding the bag, buying it at 60 and it trades down to the 30 or something and we try to impress upon them how different the environment is today than it was in 2017. And if you look at caps laws, you were talking about and the exponential power of network growth, uh, still, still could be very early, but I want to go further down what you were talking about in terms of central banks. So you talked about, you know, don't fight, the fed has become don't, don't fight the bazooka around the world from the people's bank of China, from, uh, the ECB and a variety of central banks, but also there's this notion, especially within the crypto community that ultimately central banks might lose control, but there might be diminishing returns on the massive liquidity that they're pumping. Do you view, uh, Bitcoin and digital assets and other technology companies as sort of a hedge against inflation or a hedge against the idea that central banks and central planners might lose control. And do you see a future where there are central bank digital currencies that try to mitigate the impact of that?
Sean Bill: (45:10)
Well, I definitely think of Bitcoin more as a, um, as a digital gold than anything else. I think that the design is most efficiently represented in digital gold and as an, as a holding, um, but gold substitute. Um, I think it is very, very, very well positioned to be a hedge against inflation because it is unlimited supply. It's a finite supply, you know, I think, you know, uh, with all the currency printing that's occurring, uh, around the world, um, you know, that this is where Bitcoin really stands out. There's 21 million coins. Um, you know, you're not going to see more than that. So, um, from a big picture standpoint, you know, I don't see Bitcoin competing as a currency. I see it as digital gold. I think that, you know, it, it doesn't have sovereign authority, you know, there is, it's, it gets a little bit tricky on, um, taking it as a currency.
Sean Bill: (46:14)
Um, you know, it's not legal tender, right? I mean, you know, you still are getting taxed when you sell your Bitcoin to buy something, right. Uh, Bitcoin has been appreciating so rapidly that a lot of people feel kind of remorse every time they sell some to buy some right, that guy, the famous pizza I had bought the pizzas, you know, those pizzas were very, very expensive pizzas. Um, so I think that the, yeah, I think that the place for Bitcoin is really as the gold substitute and, you know, you can walk across the border with a thumb drive and, you know, have a hundred million dollars in your pocket and nobody knows, you know? Right. And there's a lot to be said for that when you're dealing with, uh, third world countries and things like that. And what we've seen in widespread Bitcoin adoption, I do think that, you know, the U S central banks, the European central banks, the Chinese central banks, are going to eventually figure out that they have to digitize their cartoon.
Sean Bill: (47:11)
And they really already are kind of digital right. In the sense how the fed works and how they give you credits and debits and all this good stuff. Um, but I do think that, um, you know, a digital dollar is kind of critical for national security. Uh, we're already seeing that, you know, China's working on a digital Renmimbi, um, you know, uh, hopefully, uh, the U S gets there first and, you know, it gets so widely adopted currency, um, a digital currency. Um, it could be one of these other currencies, like Monero or Zcash or something like that. But I kind of tend to think that, you know, it's going to probably be, um, probably either the U S probably the U S or China, that will, will be the, the digital currency of choice. And that's going to be based on whether you want an open or closed system, you know? Yep.
John Darcie: (47:59)
And then this is sort of down the same vein, but you talked about AI, how you're a big investor in AI companies and about the potentially disruptive potential of AI, not just in asset management, but across society. We had a very interesting guest on salt talks. Recently, his name was Jeff Booth. Uh, he wrote a book called the price of tomorrow, which if you haven't haven't read it, I would definitely recommend it. But he basically talked about how, um, AI is going to disrupt the way we think about employment, the way we think about jobs it's already happening. And COVID, I think accelerated that in terms of people not necessarily feeling so more to large corporations with being able to build out their own individual verticalized businesses through content creation, through, uh, syndicate investing through something like angel list, what do you think the broader implications of AI are for, for the investment community and for society, and as, as a steward of a public plan, how do you think about those implications when you're building your portfolios?
Sean Bill: (48:55)
Well, I definitely think that, you know, we're going to see AI creep into a lot of different areas. So I think, you know, you already see it on the backend, you know, in the back office and customer service, right. You probably have been on the phone with an AI, you know, you probably have talked to the chat bot and the AI and those make, you know, the back office more efficient, right. So that the AI can sort through a lot of the easy problems and then the more difficult problems come to the people, the humans, right. So the, the role, the role of people I think will change into trying to kind of figure out what are the right parameters to separate AI, and then, you know, letting the AI kind of take care of a lot of the, uh, I'll say groundwork, right. You know, um, in the investment area, I think we're going to see, you know, we're already seeing it where it's, you know, AI is being used to scan annual reports, earnings reports, uh, research reports, um, you know, um, I know a company that uses AI to scan satellite photos, um, you know, uh, to see what, uh, what's going on in shipping, what's going on in the, you know, we all know we've all heard the stories about satellite photos being used, uh, to determine how many cars are in the parking lot at the various retailers.
Sean Bill: (50:04)
Um, you know, uh, I think that we're just going to see more and more of this, and we're going to see, um, you know, see, uh, creeping to lending, uh, you know, we'll, we'll see where AI is making decisions on credit. Uh, it could eventually be where John, uh, you know, wants to lend some money and Sean must've borrowed some money and we do it through a smart contract on Ethereum. That's using smart AI to help determine if all the conditions are being met, to release the funds and to repay the funds and all that good stuff. Um, so I, I think that we'll see, um, continued steady progress in AI. Now, I think that there's another element of AI. That's also quite, quite interesting. Um, you know, I'm part of the Silicon valley defense group, and there we're working with the department of defense and while the technology companies here in the Silicon valley and, you know, AI is going to be pretty critical for, for future, um, combat.
Sean Bill: (51:05)
Okay. So, you know, there's a lot of money. The stuff that is going on in the defense sector is way beyond anything that we're seeing, uh, in our space and retail. So, uh, I do think that that technology will eventually trickle out into the consumer, into the investment space, into our daily lives. But, um, you know, I mean, right now, I mean, you can kind of think of it. Like if you think of the Gulf war in 1990 and the advantage of the United States had with night vision. Yep. That's going to be AI and the next battle. Right. Um, you know, the, the decision-making will be so quick, so fast that, uh, you know, AI will be the decider rather than human decision-making. Um, so, so I think, you know, we're going to see AI creep into all kinds of places and all, all sorts of areas.
John Darcie: (51:56)
Yep. It'll be fascinating to watch it. And then as we've all observed, COVID sort of accelerated a lot of that technology adoption and, uh, yeah, it's been fascinating to see, but Sean, thanks so much for joining us. We hope you can come to our, our salt conference, which we just announced the resumption of our in-person salt conferences in September, in New York city this year, as opposed to our customary a destination in Las Vegas. Obviously we love Vegas, but doing it in our home city for once will be fun. And we hope to have you there as we often do. So thanks so much.
Sean Bill: (52:26)
Yeah. September, I think. Right. So that'd be good
John Darcie: (52:28)
For yeah. Crazy weather in New York, everybody getting back to hopefully some in-person interaction for once. So we think it'll be fine. Well, Patricia, do you have anything for Sean before we let him
Sean Bill: (52:37)
Go? No, just thanks a lot, Sean. We really appreciate you sharing your insights particularly on AI and you know, the digital space and the challenges around fixed income stage say it's the biggest elephant in the room for every investor and it's not getting any better anytime soon. Unfortunately. Yeah, no, I think we're going to be in a low return environment for a long time. Uh, I always say, you know, I think in my last blog posts, blog posts and put, you know, we're all becoming Japanese, you know, so this could go on for decades, but all of us like sushi. I know I do. I'm pretty sure you do too. Sean. So alluded to John.
John Darcie: (53:12)
I love it. All right. Thank you, Sean. And thank you everybody who tuned into today's salt. Talk with Sean bill of the valley transit authority, uh, out there in Santa Clara county. 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@salt.org backslash talks and 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. And please spread the word about these salt talks. If you have a, an institutional investor in your family, who's not as enlightened as, as Sean is here, uh, make sure to send them the salt talks so they can free their mind to things that are happening within technology and within the digital asset space. But on behalf of Troy guy esky and the entire salt team, this is John Darcie signing off from salt talks for today. We hope to see you back here soon.