← Capital Allocators – Inside the Institutional Investment Industry
Capital Allocators – Inside the Institutional Investment Industry
CIO Greatest Hits: Single Family Offices – Dawn Fitzpatrick (Soros)
00:52:33
This week’s Summer Series is another twofer, Dawn Fitzpatrick from Soros and Steve Rattner from Willett Advisors, Michael Bloomberg’s family office. We packaged these two leading single-family offices together to hear their different approaches to...
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- [00:02]
Ted Seides
Capital Allocators is brought to you by my friends at WCM Investment Management. To outperform the markets, you have to do something differently from others. In my 30 something years investing in managers, there may be no one I've come across who does that as clearly and as well as wcm. I've seen it up close. As an investor in their international growth strategy for the last five years, WCM is a global equity investment manager majority owned by its employees. They believe that being based on the west coast, away from the influence of Wall street groupthink provides them with the freedom to live out their investment team's core values, think different and get better as advocates of integrating culture research into the investment process and advancing wide moat investing. With the concept of moat trajectory, WCM has delivered differentiated returns while building concentrated portfolios designed to stand out from the crowd. WCM is committed to defying the status qu by dismantling outdated practices, believing in the extraordinary capabilities of its people, and fostering optimism to inspire each individual to become the best version of themselves. To learn more about WCM, visit their website@wcminvest.com and tune into this slot on the show to hear more about WCM all year long. This testimonial is being provided by Ted Seides and Capital Allocators who have been compensated a flat fee by wcm. This payment was made in connection with Capital Allocators testimonial and production of podcasts and is not depend on the success or level of business generated. The opinions expressed are solely those of Capital Allocators and may not reflect the opinions of others. Investing involves risk, including the possible loss of principle. Past performance is not indicative of future results. Please visit wcminvest.com for WCM's ADB and further information. Capital Allocators is also brought to you by AlphaSense. AlphaSense has become indispensable in modern investment research. It's the market intelligence platform trusted by the world's top institutional investors and for good reason. AlphaSense combines premium content with powerful AI to deliver clarity fast. From company filings to over 200,000 expert interview transcripts, it helps investment teams zero in on what matters most when deeper insights are needed. AlphaSense's expert call services provide direct access to high quality vetted experts on demand. Unlike Traditional Expert Networks, AlphaSense Custom sources experts to fill specific research needs. Whether validating a thesis, pressure testing an idea or gathering real time field intelligence, all without the friction or price markup of legacy models, what truly sets AlphaSense apart is its ability to surface proprietary insights combining expert access with AI purpose built to extract qualitative intelligence at scale. The result is differentiated perspectives and decision making confidence delivered faster than ever. See it in action at alpha alpha sense.com capital that's alpha-sense.com capital hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access Premium content@capitalallocators.com All opinions expressed by.
- [03:53]
Dawn Fitzpatrick
Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.
- [04:11]
Ted Seides
With eight years and over 500 podcasts podcasts under my belt, I'm often asked to recommend my favorite episode. But I can't really answer that question. I feel like I have 500 children and don't think I've disowned a single one. So when asked, I usually offer up a great recent episode to get a listener started. Finding the best episodes in a big library of content isn't easy, so we thought we'd help. Each summer going forward, we're going to share our best. Over seven weeks, we'll replay conversations curated from our favorites and yours, excluding those from the last 12 months. Our 2025 Summer Series focuses on CIOs. We're blessed to have an incredible library of long shelf life content, and we just couldn't pick seven. Instead, we'll share a dozen gems, canvassing every type of institutional asset owner. This week's summer series is another two Dawn Fitzpatrick from Soros and Steve Ratner from Willett Advisors, Michael Bloomberg's Family office. We packaged these two leading single family offices together to hear their different approaches to a similar investment challenge, with Soros leaning heavily on internal teams and Willett primarily on external. Before we get going, it's about that time of year when the summer breeds leisure activities. So whether you're an active participant or a fan, you've likely noticed a few memes spreading recently. First, there was Bill Ackman making his professional tennis debut. Now Bill's a solid player, right around the same level as me, but tennis has different levels. My level of play puts me squarely at the bottom of the A team at my club. My club's A team is fairly even with the C team at another local club, and that club has players like Peter Brozens at Jordan park and John Pastel at Alliance Bernstein who destroy everyone else at their John and Pete probably can't take a game off of Elliot Spazziri, a local kid who's now 132 in the world. And you don't see Elliott making it that far at the tennis majors. That's another level. I've often described Jen Prosek as a major league communications entrepreneur competing with little leaguers. It's kind of the same with tennis, so no ill will towards Bill, but jumping levels is tough to watch. And then there was the infamous Kiss Cam at the Coldplay concert. One moment in time, one poor reaction, and hundreds of thousands of replays already. If there's a moral to these stories, it's sometimes you have to stay in your lane. You might see me hit some balls at a pro am, but I'm not going to compete against pros, let alone head to head against Brosens or Pastel. And to the extent you see me on a Kiss Cam, that'll definitely be with my wife Vanessa. As for staying in your lane with content, what better way than sticking with the leading voices of institutional investing right here at Capital Allocators? Thanks so much for spreading the word. Please enjoy my conversations with Dawn Fitzpatrick and Steve Ratner, both from 2019.
- [07:30]
Steve Ratner
Dawn, it's great to see you.
- [07:31]
Dawn Fitzpatrick
Likewise, Ted.
- [07:32]
Steve Ratner
Well, why don't we just start and how in the world you go from a cross country star to trading right out of college?
- [07:41]
Dawn Fitzpatrick
So I had an interesting summer intern experience. It was 1990 and I was going to be an intern at Citibank. And if you remember, 1990, it was in the midst of probably the biggest banking crisis since the Great Depression. So we show up for the first day of the intern program and someone comes and asks for a volunteer to be an executive assistant. And the other interns around me are looking at this person incredulously, wondering why anyone would raise their hand. But I figured there had to be a catch here. So I raised my hand and long story short is they needed an executive assistant for John Reed's Chief of staff's chief of staff. But the good thing was back then Citigroup was run by the policy committee and they all sat at 399 park on the second floor. And believe it or not, the Chief of staff. Chief of staff sat on that same floor. But better yet, because he was the lowest ranking executive on that floor. My desk that summer was right outside the men's room. So you, you had a front row seat. You know, Citibank was the biggest bank in the country at that time to this crisis and it was incredible. And right then and there I decided that I wanted to be an investor and not an investee.
- [09:10]
Steve Ratner
Where'd that insight?
- [09:12]
Dawn Fitzpatrick
It was hard what they were solving for at that moment in time. And there was a lot of politics and you didn't necessarily control your own destiny. And being an investor and being a trader, it felt like every day I would have a report card and you'd live and die on the merits of the work you did.
- [09:27]
Steve Ratner
So what was that first stop out of college?
- [09:30]
Dawn Fitzpatrick
So right out of college I went to o' Connor which at the time was arguably the preeminent derivatives trading firm. They were actually a beta test site for Steve Jobs next. Because they were one of the first trading kind of franchises to really embrace technology and compute power. It was fun because it was run by a bunch of 30 something year olds, mostly from MIT and University of Pennsylvania. Very meritocratic, very entrepreneurial. And I went first to the American Stock Exchange where I was a clerk, and then I went to CBOE where I was a market maker.
- [10:11]
Steve Ratner
So what did technology look like, the use of. What did that look like in the 90s? In the early 90s I might have overstated.
- [10:19]
Dawn Fitzpatrick
So we had good computers. But the truth is when we went down to the trading floor each day to make markets, we had things that we called were pilgrims and they were paper sheets where you'd set off of spot price and they'd basically. And you could move around Vols and spot and you could use them to give you some context when you were making the markets. But it wasn't quite high tech when you were actually on the floor. But the models we used to make those sheets were pretty advanced.
- [10:44]
Steve Ratner
How were the models produced back then?
- [10:47]
Dawn Fitzpatrick
It was more advanced than black Scholes and it was just a lot of crunching of numbers and scenario analysis.
- [10:53]
Steve Ratner
Was either AMEX or CBOE an open outcry pit back then.
- [10:58]
Dawn Fitzpatrick
So the American Stock Exchange was a specialist system and o' Connor back there, we were the specialists for US Surgical, which was the most active option in the world at that time. So that was a fun place to clerk. And then the CBOE was open outcry. And that was a real education going from clerking in a specialist system and then going to an open outcry pit in Chicago. But it was Great.
- [11:20]
Steve Ratner
And for those people not here, how tall are you?
- [11:24]
Dawn Fitzpatrick
So this is a big family joke, because I come from a family of my dad's six' six, my brother's six' seven, five' four in the program, and probably five' two in real life.
- [11:34]
Steve Ratner
So what was that like being in that pit?
- [11:36]
Dawn Fitzpatrick
It was an amazing education. I think you learned a lot in terms of how to think on your feet. You learned to understand technicals in terms of how flows operated and how momentum operated. You learned to work as a team with the other members of the pit, and you had to earn respect. The interesting thing is, when you first go into those pits back in the early 90s, you were invisible, and they did not acknowledge you until you could prove you had utility value to them.
- [12:04]
Steve Ratner
What does that mean of working in a team with other traders in a pit?
- [12:09]
Dawn Fitzpatrick
It's about sharing risks. It's about sharing opportunities, helping kind of COVID blind spots for everyone. So it's an interesting kind of culture, but it actually worked pretty well.
- [12:19]
Steve Ratner
So how long were you trading?
- [12:20]
Dawn Fitzpatrick
I'd like to say I'm still trading or investing. I intermix the two words, but I still watch markets, I still put on positions. It's what makes me excited to get up in the mornings.
- [12:30]
Steve Ratner
So what were the formative lessons that you learned from those early trading experiences?
- [12:36]
Dawn Fitzpatrick
One of the first lessons you have to learn, and it's a painful lesson to watch, is gap risk, especially when you're an options trader. So I was down in the pits in 1994, and the way a lot of trading operations worked in o' Connor was one of them. You got paid each year. At the end of the year and December 1994, the peso devalued, and we went from having a spectacular year to having a horrendous year. And then one of the pits I was in, because you would cover more than just one pit. We traded a lot of Mexican ADRs, and that pit was. I was probably the only trader that was associated with an institutional platform. The rest were local, so they were primarily risking their own money and watching them get devastated by the peso devaluation was like a really formative moment in my career. And also, by the way, watching the opportunity on the back end of that, when there weren't too many people left standing and able to take advantage of that. There were two sides to that, but it was a pretty awesome learning experience.
- [13:48]
Steve Ratner
So as you roll forward from being in the pits, what path did your career take from there?
- [13:55]
Dawn Fitzpatrick
So from there, I went and I traded convertible bonds, which when you look across the hedge fund industry, it's kind of interesting because there's a lot of us who spent some formative years trading convertible bonds. And I think that's because first of all they're cross asset class security, but it's also a security where a lot of things can go wrong and right. So it's a great teacher. You also learn about the perils and benefits of correlations between equities and rates and what can happen when a dividend arrives or disappears. So it makes you think in a lot of different dimensions that I think ultimately has served myself and a couple of my peers pretty well throughout their career.
- [14:38]
Steve Ratner
So you're trading converts and keep rolling me through.
- [14:42]
Dawn Fitzpatrick
So I traded converts for a while and then over time I was parachuted in. When we had risk that needed to be kind of watched over, things kind of went off the wheel. So I ran our merger arb desk for a little bit and also I should step back. So a group of original O' Connor traders, myself included, reassembled in Chicago probably in 1998, January of 1998, to start what became O', Connor, the hedge fund. And we launched O' Connor as a hedge fund in June of 2000. And at the time that we launched, it was actually the largest hedge fund launch post Long Term Capital, which to remind you, blew up in the fall of 1998.
- [15:25]
Steve Ratner
So how big was that at the time?
- [15:26]
Dawn Fitzpatrick
We were a $3 billion launch and I guess maybe $3 billion is becoming big again.
- [15:33]
Steve Ratner
And what was that strategy?
- [15:35]
Dawn Fitzpatrick
So we were primarily market neutral equities and credit, and it was a multi strategy, but it's distinct to kind of a millennium type strategy in that we really were a team. And I think one of the things that I always loved about my time at o' Connor is that we were an incredibly cohesive team. We at kind of connecting the dots and looking at relative opportunity sets. I think that's really, really important and it's probably becoming increasingly important. And at O', Connor, I took over equities and credit in 2006, and I took over running all of O' Connor in 2007, right before the financial crisis, that strategy.
- [16:19]
Steve Ratner
So there's a lot of ways of thinking about a multi strat across equity and credit. What was the kind of risk and return framework you were trying to create?
- [16:28]
Dawn Fitzpatrick
We wanted to produce returns that weren't highly correlated with natural risk assets that clients would have in their portfolios. We were trying to keep a fairly high liquidity profile to give us the ability to be nimble from a return perspective. We were looking at something in low single, mid teens type of returns. And I think we did a really good job for a period of time in the financial crisis. I think we navigated as well as anyone, both in terms of truncating risk, but as importantly, taking advantage of the dislocation that was created. And we started to make money in November of 2008 just by kind of repositioning the portfolio and taking advantage of of areas where kind of the rubber band had really stretched.
- [17:21]
Steve Ratner
Were there seminal moments in that time that you remember? It's one thing to look back and say, hey, we were able to do that. It's another thing to actually step in when everything's falling off a cliff.
- [17:32]
Dawn Fitzpatrick
So a couple things, and again, this I think goes back to the culture that O' Connor has is in the fall of 2008, when things obviously were going pretty badly for markets generally, the group of senior investors and myself, we literally hunkered down in a room and we looked across the opportunity set and we were, instead of people wanting to hoard capital or point fingers, we really were able to evaluate and pivot to where we saw the best opportunity. And at that point in time, one of the things that was really key is you didn't know the next firm or bank that was going to get tapped on the shoulder and liquidated. So you wanted to go to opportunities where there was a catalyst that might not be market dependent. And you also wanted to make sure you weren't beholden to financing markets and leverage. And I think we did that well. And in doing that, we had to sell some things where we were basically crystallizing losses and pivoting to other areas. But it was, I think, the only way to execute on that is if you have a team that trusts each other and is communicating really well. The other thing I think we executed well in that moment in time is as markets started to recover post the first quarter, there was a ton of momentum and we didn't sell into that momentum. If anything, we added into it. Whereas I think a mistake some investors would make is taking their ball and going home at that moment in time.
- [19:09]
Steve Ratner
It always sounds great to say, hey, we have a group of senior people who were able to communicate together what did it actually take to get to that point in time. So when you were in the room where it was happening, that you already had that trust.
- [19:25]
Dawn Fitzpatrick
So I think it's the actions leading up to that point in time, the moments in time when Someone invariably loses money, but loses money for the right reasons. We're in a business where we make calculated bets and sometimes they just go against you. So I think that trust in moments like that had been built up over a long period of time. I'm also a really, really big believer in, like, physical proximity. So spending time kind of shoulder to shoulder with people over 20 years, it matters and it's really helpful. I'm also, I'm a pretty candid person and I have an Irish temper, so people tend to know where they stand with me.
- [20:07]
Steve Ratner
So you mentioned over 20 years, how many people on that senior team had been working together for a long time.
- [20:12]
Dawn Fitzpatrick
Our average tenure there was on the investment side was over a decade at that point. So we really knew each other well. We knew each other's strengths and weaknesses. We didn't hold back in terms of opinions, and it was really invaluable at that moment in time.
- [20:28]
Steve Ratner
You mentioned the risk of not knowing which domino was going to fall next. On the banking side, was o' Connor part of UBS at that point in time?
- [20:36]
Dawn Fitzpatrick
We were. So we were wholly owned by ubs and we actually had prime brokerage kind of assets exposed at that point in time. And actually, one of the somewhat controversial decisions I made was I pulled from a number of different prime brokers, but UBS was one of them. You know, and again, that from my perspective, I had a fiduciary responsibility to protect our clients. And I also felt an obligation to the team members if something had happened to UBS during the financial crisis. We all had a lot of deferred that depending on what legal opinion you believed may or may not have been money good anymore. So I felt a real responsibility to both stakeholders. I knew that politically it could be dangerous, but I didn't think that should be part of my calculus.
- [21:24]
Steve Ratner
And when you were in that room making the decision to step on the pedal when things started to turn, you still had to have that overhang of, yeah, but we're sitting inside a bank.
- [21:33]
Dawn Fitzpatrick
We did. And to be candid, we attempted a management buyout at that moment in time. And we got close, but we were recovering too quickly, as were financial markets. So the trader, me and my peers actually tried to extract ourselves at a good price, but ultimately they decided they wanted to hold onto us.
- [21:53]
Steve Ratner
And so then a few years after that, you got moved into being head of asset management for ubs, Head of investments.
- [22:01]
Dawn Fitzpatrick
So all of the investment teams within UBS Asset Management reported to me.
- [22:05]
Steve Ratner
Okay, and how did that role shift from what you were doing kind of stewarding a hedge fund.
- [22:11]
Dawn Fitzpatrick
It's an interesting topic and it's something that, that we talk about a lot here. I think in the asset management world, the difference between quote unquote, traditional asset managers and hedge funds, those worlds are blurring. And it's really all about what's the value you can deliver above and beyond what I can do for myself. And in that context, I think what we wanted to do with our products we offered clients at UBS was exactly what we had been doing at o'. Connor. And it was about delivering valuable set of returns in the context of kind of opportunity set and risk. So it felt like a really natural progression. And I also think from my perspective, it was a moment in time when the asset management industry overall was going through a lot of transition. And that usually creates a lot of opportunity.
- [23:00]
Steve Ratner
Yeah. And did your day to day role shift from being on the desk making the investment decisions to kind of running this big global business?
- [23:08]
Dawn Fitzpatrick
Yeah, it definitely shifted. And there was aspects of that that I didn't enjoy as much.
- [23:14]
Steve Ratner
What were those?
- [23:16]
Dawn Fitzpatrick
You spend your time doing non investment tasks and not an insignificant amount of time. And it was one of the reasons coming to Soros was so appealing because it really kind of got me back to what I'm passionate about.
- [23:31]
Steve Ratner
And what did you learn in that time about motivating and managing people in this space that you might not have been exposed to before when you were running the hedge fund?
- [23:39]
Dawn Fitzpatrick
So I think a couple things. First of all, communication. I talked about the fact that I'd worked at o' Connor with people for such a long period of time when I took over running investments at ubs. Yeah, I had to earn credibility with people who I didn't know as well and they didn't know me as well. And to do that you really have to spend time, you have to communicate. So those skills actually were transferable when I came here. And I think that was really interesting. I also, it was good to understand the utility curve of the client who allocate traditional asset classes. I had a big passive business under me in that role. Given the increasing dominance of passive players in markets, I think that was really, really helpful.
- [24:27]
Steve Ratner
Okay, so you get the big call to come over here at Soros. What was the structure of how the investments had been run before you showed up?
- [24:38]
Dawn Fitzpatrick
Somewhat concurrent with me coming over here, George transferred the bulk of his wealth to the Open Society foundations. So before I came here, these assets, it wasn't managed the way you would think in a traditional foundation. Because it was a family office and they didn't have to think about solving for the things that you need to solve for when you're a foundation or endowment. So we had to lay all that groundwork and build that kind of foundation of thinking and the foundation of organizing the portfolio. That's been a lot of work, but it's also been a fun problem to.
- [25:13]
Steve Ratner
Solve for when you came over. There's probably a common outside view that George and Soros, certainly he made his money from macro trading and taking big bets and lots of portfolio managers. And what you described in coming is this risk controlled, market neutral background with some oversight of a beta shop. How did that framework about thinking kind of shift and what does it really look like today?
- [25:40]
Dawn Fitzpatrick
So the interesting thing is the portfolio when I arrived was actually over diversified I'd argue. So there weren't enough big bets in the portfolio. And one of the first things we set about doing is putting in place kind of a top down architecture that would inform our bottoms up asset allocation. And in doing that, we really reduced the number of allocations we made to managers to try to increase the concentration and give ourselves the ability to make more big bets. And in terms of that top down architecture, we have two important kind of constructs. One is for the long term and one is for the more short and medium term. The long term is we've set kind of a neutral risk level.
- [26:34]
Steve Ratner
Neutral to what?
- [26:37]
Ted Seides
Neutral to markets.
- [26:38]
Steve Ratner
Is it neutral?
- [26:39]
Dawn Fitzpatrick
It's not neutral to markets. This is neutral to what we expect to exist over kind of a five to seven year period. And for us that equates to about a 6040 portfolio. So definitely not market neutral. That's fairly high octane, although it's less than your typical foundation or endowment.
- [27:01]
Steve Ratner
In terms of equity risk.
- [27:02]
Dawn Fitzpatrick
In terms of equity risk. And there's a reason for that. When you think about your typical foundation, they tend to have fairly elastic spends. The Open Society foundation has a less elastic spend because it's a huge global organization. So the ability to maneuver spend very quickly, it's just harder. And in that context you can't take as much risk. One of our board members is a big fan of yours, actually, someone named Ben Inker. And he introduced me to a gentleman named John Hagler. He's kind of a understated luminary in the industry in my opinion. So in the 70s and 80s he was the CIO and treasurer of the Ford Foundation. And can you think of a worse time to be CIO of anything? So you had the oil embargo you had Watergate inflation hit 12% S&P went down 45% and took a decade to recover. And so when he got to the Ford foundation and he started to have them think in the context of the interrelationship between risk in the portfolio and spend and he introduced concepts and this by the way, this is 40 some odd years ago, he introduced concepts like if you have forward foundation commitments, that is effectively leverage in your portfolio. So really, really interesting and obviously I think correct thinking, but those are things that I'm working with, the investment committee I report to and the foundation to really think about how we want to flex risk in one aspect relative to risk in another aspect.
- [28:52]
Steve Ratner
You said it distilled into this some risk structure that looks like 60 40, but it started with this view of what you see in the world three to seven years out.
- [29:05]
Ted Seides
Talk a little bit more about what.
- [29:06]
Steve Ratner
That view is and how that translates into a longer term structure that kind of resembles 60:40 in risk.
- [29:12]
Dawn Fitzpatrick
A couple things on that. So the reason we define it as risk allocation instead of just saying 6040 is because this platform is pretty incredible in terms of the investment horsepower we have in house and the degrees of freedom we have with the $25 billion. And we want to be measured against a passive 6040 portfolio over that cycle. But the truth is we can grab a lot of other building blocks that play to our competitive advantage. So when we think about how we want to get risk, we want to really think about what are the different pieces of risk we can grab and what's the best at this moment in time. That's part of the thinking. And then the other thing we have is a shorter and medium term policy portfolio. And that speaks to what blocks, what risk are we grabbing at this moment in time and also where we are relative to what we think that average risk level is over the longer term. So we don't expect always to be at the risk of a 6040 portfolio. We'll expect to be above that at times and we'll expect to be below that at times based on the opportunity set.
- [30:26]
Steve Ratner
Yeah. So I'm really curious to ask how you get into there. So you're starting with a normalized or kind of a policy risk framework and you want to grab all these attractive pieces of risk. How does that happen?
- [30:38]
Dawn Fitzpatrick
Again we have this top down framework, but we also bottoms up and we look externally and internally. And again it goes to the amazing advantages I think this platform affords. So we allocate to 20 external hedge funds, we allocate to over 90 external private equity funds. And internally we have 28 portfolio managers and 17 kind of strategies or netting units. But we're thinking about building that portfolio. We're looking at those opportunities, we're thinking about when we look at a given external or internal strategy, we're thinking about what's the persistent beta of that strategy, what do we think the excess return looks like, and how does that excess return look relative to both the beta in our portfolio, but also the other excess returns that we have available to us?
- [31:32]
Steve Ratner
Let's start at the individual manager unit, whether internal. External. How do you decide if a manager is right for your portfolio?
- [31:43]
Dawn Fitzpatrick
And I know this is one you hear all the time, alignment is, is a really big deal. And like that, without alignment, you don't get out of the box. So I think it's first about alignment, then I think it's about process and them being able to articulate and us being able to believe that they really do have edge and something persistent in terms of how they can extract that edge over time. Internally, it's really important. One of the things that we've been trying to do is really connect the dots. So when we think about the competitive advantages of this platform, and you think about kind of the asset management industry overall or the hedge fund industry, allocators tend to allocate capital in very, very tightly defined ways and tightly defined boxes and being able to kind of connect across asset classes and across geographies. There's not a lot of places that can do that with internal investment expertise. So when we think about allocating internally, we want to make sure that manager is going to make the other team members alongside them better at what they do. And by the way, that also makes the bar for an external allocation that much higher. Because if we can do it well internally and get that mind share, I'd rather do it internally.
- [33:11]
Steve Ratner
What rough percentage of the assets are internal versus external?
- [33:16]
Dawn Fitzpatrick
In public markets, we're about 75% internal and 25% external. And when I came in, we were about 50, 50. One thing I'll say, Ted, is our internal managers, because we're trying to play to our advantages, which are again, I think are pretty distinct relative to typical asset managers and hedge funds. They've persistently produced really, really attractive returns. And even when you look at kind of the hedge fund industry returns this year or traditional asset management returns, they were pretty good going into May. It's been lackluster, might be kind since then. Internally, our excess return, and we kind of measure it on A you take out beta and then you normalize for a 5 volatility. They're up about 6% year to date. And it's been a pretty steady March. That's 6% excess return, 6% excess on a 5 volume. So we kind of normalize and it's been steady. And I think it's because we don't need to solve for the same things others are solving for. And one of the things that I think is really notable is the platform shops are becoming really, really dominant and they're solving for pretty similar things. And one of the things that was really kind of notable to me, we have an internal consumer staples portfolio manager and that's been a tough place to make money for a while. So year to date, coming into September, he was losing money. Not a lot, but painful. And if he was at a platform shop, he doesn't make it till September. He had an epic month in September and I don't think there's anyone else standing in that space. So it's an easy example of playing our own game.
- [35:09]
Steve Ratner
How much of that internal book is equities and credit?
- [35:13]
Dawn Fitzpatrick
The majority is equities and credit, and we do have a macro book as well, but the majority is equities and credit. We also have been building in a fairly focused way an internal private credit book. And in private credit, we've been very focused on going after. Obviously, every day you see a story on the crowdedness of private credit, but a lot of the assets that. This goes back to our competitive advantages. The assets that are being raised for private credit tend to be being raised in dedicated private credit funds. They usually have some kind of term lock and they need to produce something like high single digits, low teens returns to keep their investors happy and to justify both their fees and their lockup. What we've done is we've gone after lower yielding private credit that has hard asset coverage that isn't sexy enough for those private credit funds. But for us, it gives us a really attractive return. We can lever that return to get to a double digit because we have this, this incredible set of assets on our balance sheet so we can borrow against our public equities at fed funds plus 20 basis points, lever up this safe but esoteric private credit, and it works really well. And the other thing is, when we're kind of underwriting that private credit, we don't want to be in a deal where there's 20 other people around the table. Because invariably in a moment in time when something goes wrong in a credit deal, if you're trying to solve for 20 utility curves, forget it. It's going to be lowest common denominator versus when we do deals, it's only us or us and one or two trusted partners. So that if you get to that moment in time when you need to seize the collateral, it's not hard to solve for how to create the best outcome.
- [37:07]
Steve Ratner
How do you think of the sizing and duration of that particular private credit opportunity set for you?
- [37:13]
Dawn Fitzpatrick
So the duration of our book on average is pretty short. It's about 2.2 years. Sizing wise, that book 15 months ago was less than 2%. It's about 8% right now. And given the quality of the deals we're able to source, I would expect that to double over the next 12 to 24 months. The hard thing with a short duration book like that and a lot of the deals amortize is that you have to kind of run to standstill.
- [37:42]
Steve Ratner
How do you think through the private equity opportunity set you mentioned there's a big roster of managers externally, so private.
- [37:50]
Dawn Fitzpatrick
Equity, first of all, I have seen and we have some truly exceptional managers. That said, in aggregate, if that industry feels really frothy to me and it feels like there's some bad practices that will come back to kind of haunt the industry, I also worry that it's maybe been oversold to retail. Because if you think about it, I think people take false comfort in kind of marks that don't necessarily move without actual asset value changes. And if you're a financial advisor and you're recommending private equity, first of all, it's the thing you can sell where you get paid the biggest fees usually. And nobody's going to know if you're right or wrong for 10 years. So I think you have to be really careful. There's things that the industry as a whole does that we've been slowly trying to push back on. So borrowing against LP commitments, we can borrow at fed funds plus, like I said, 20 basis points. I don't need you doing me any favors and taking, taking out a loan to goose your irr. So things like that, we get picked when you get picked, you get picked based on the spot. So when a company goes public, they sometimes obviously don't sell. There's lockup. But then they pick you the stock. They take their performance fee off the moment in time when they pick. But by the time everyone gets their stock stocks down 10 or 15%, it doesn't seem totally fair.
- [39:26]
Steve Ratner
As a whole, your pool of capital is big enough so you could make big commitments and try to exert some of those desires on a general partner. The flip side is, well, maybe you don't want to be big when those practices are out there. So how do you kind of address that in practice in the market with the relationships you have?
- [39:45]
Dawn Fitzpatrick
So I think it's just in conversations. And I think you pick your moments in time when you are going to be bigger and you ask to address them. I have talked to some of our peers that, you know, we're not the only ones who are, who are focused on these issues right now. Private equity firms are able to dictate a lot of the terms because there is so much money chasing that opportunity set. But I think starting these conversations now is important and acknowledging that the issues exist. We just had a firm that asked for an extension. The results so far have been poor. It's like a 6% IRR. They're asking for an extension where they want us to pay a management fee while they extend the call option of their performance fee. And it's funny, I was talking with our team and they're like, let's just consent. It's not worth it. And I'm like, wait a minute, let's have a conversation about why we will be happy to consent, but why they should not charge us a management fee since they're extending the duration of their call option. So I think it's having those conversations and not shying away from them, I think is pretty important.
- [40:46]
Steve Ratner
And do you have an internal team so that you don't have those same.
- [40:50]
Dawn Fitzpatrick
Kind of misalignment issues in terms of internal private equity? We do it. So one of the things, and this goes about making us kind of a more unified team, we have sector specialists and we have regional specialists. And really one of the things that we've tried to do is better connect private and public markets because again, it's something that, that generally it's hard for people to do. Even the big sovereign wealth funds, they tend to be siloed between public and private markets. So one of the very purposeful things we've done strategy wise, is take down those walls between public and private. So when we see a private direct deal now, we'll Tap, we have 70 investment professionals internal at SFM will tap the professionals who are best suited to evaluate that versus having a generalist private equity team, if that makes sense.
- [41:46]
Steve Ratner
In the same way that you've kind of shifted the public equity more towards internal. Do you try to do that on the private side to over time to address these Structural problems.
- [41:55]
Dawn Fitzpatrick
The private equity allocation that I inherited, and this goes back to our spend and what we're solving for being a little bit different than your typical foundation or endowment. We were overallocated to private equity generally with money in the ground and forward commitments. So we're in a situation right now where we're still making allocations, but we do want our portfolio to naturally roll down. So I don't want to build up a big internal capability. And again I mentioned we have 90 external private equity allocations. Some of those firms are really spectacular at what they do. And one of the things that I constantly push myself and the team to be intellectually honest on is we should do internally what we're good at doing internally. And when there's people who are outstanding and have a niche, they deserve our capital and we should be allocating to it. And specifically in the private equity space, the people who I see doing the best job are the middle market type private equity firms who've really carved out a niche where they do add a lot of value to the companies they buy in their portfolio.
- [43:05]
Steve Ratner
As you look at other, I don't want to say traditional, but say endowment or foundation type asset allocation structure portfolios, are there other things that you think you do or approach sort of meaningfully differently?
- [43:20]
Dawn Fitzpatrick
So I do think our ability to invest directly is really, really differentiated. And it's one of the things that we're spending a lot of time trying to leverage. And I can give you an example of that without naming the company's name. Publicly traded company, $20 billion market cap, but it's regulated and it has a certain amount of CapEx that it has to spend each year. The company needed to raise $300 million. They were also in a situation where they were potentially going to be downgraded from investment grade to junk. So they're a little bit in no man's land. You're not getting a bad enough yield for junk bond investors to focus on it. Investment grade investors, generally, if something's downgraded, they have to sell right away. So they don't want to buy it today and have to sell it tomorrow. That's not good for their job security. This past summer, it's a Friday and the bankers thought this was going to be easier than it turned out to be. Our public market equity portfolio manager owns the public stock. He gets a phone call and the banker is saying it's Friday. We need to solve for this and we're struggling mightily. Is there any chance you guys can help? He quickly Turns to our investment grade credit trader who says, yeah, you know, it's a little dicey. It's potentially about to be downgraded and it could end up in kind of that no man's land, but there's a price for everything. And the banker said, but we need $300 million literally committed no later than Monday afternoon. So they come to me and say, hey, can we do this at the right price? And we have 48 hours effectively to figure it out. So I turn to our third portfolio manager, private credit, and say, all right, if we own this for the next 10 years in our private credit portfolio, are you fine with it? Because if we buy the whole issue, it's a level three asset, it's never going to trade. But by the way, we have the ability to do that. There's not a lot of pools of capital that can solve for that. We agreed on a price with the company, agreed on a price with the banker, but then we said, you can feel free to shop our kind of backstop as long as you guys remember we helped you out. Long story short is it ended up being the best investment grade deal in years. They got it done, they upsized it. We did very, very well on buying it. So it was win, win, win. We did something that I don't think any other investor in the market could have solved for in that time frame, in that size. And we did it by having three portfolio managers who are in really different disciplines working together. That's where I think we really are differentiated. And it's the strengths we're really trying to play to. There's other examples like that.
- [46:08]
Steve Ratner
Yeah, so it's a great, specific example. And as you're walking through it, I'm kind of rolling my head up into how do you think about risk across the portfolio? Because you have traditional asset class buckets, and in this case, you've got a nominal dollar size that you're going to commit or maybe commit to this one issue. So when you come in in the morning, what does your risk sheet look like?
- [46:30]
Dawn Fitzpatrick
We have it relatively simple. So we have kind of our public market equity beta, private market equity beta, public credit, private credit, real estate. And then we have idiosyncratic, which is a little bit of, I admit it's a catch all. But in that bucket, we try to be intellectually honest about really taking out the betas that we think will persist over time. It doesn't mean within that bucket there isn't beta from time to time. Right. Because manager might have skill, macromanager will have skill in moving around that beta. So there will be beta in the idiosyncratic. But that at a very high level is kind of how we think about it given the sophistication of the platform. I can see real time ticking P and L. And one of the really important games you play is you should be able to look at a Bloomberg and know pretty well what your P and L is. And if you're off by too much, something bad is going on in markets. That is a huge advantage that we have given. Even with our external allocations, we get real time price feeds on the vast majority of them. It's pretty easy for us to know where we are and where by the way, the portfolios where we don't have perfect ticking prices, we estimate what that ticking P and L is and true back up to it. So we have a pretty good idea of where we are at any given moment in time.
- [47:57]
Steve Ratner
So you mentioned at the outset that you've got this sort of long term structural portfolio and then there's this short term and tactical piece. Where does that fit into the equation.
- [48:05]
Dawn Fitzpatrick
From a tactical perspective? We have our long term where we think we're going to be over the cycle risk wise. And then we have our policy portfolio which can deviate from that. Right now we're lower risk than where we expect to be long term because we think we're late cycle.
- [48:21]
Steve Ratner
And how often does that policy portfolio get reviewed?
- [48:24]
Dawn Fitzpatrick
So the policy portfolio is set by the investment committee that I report to and we have quarterly board meetings. And then to your question, the investment team and I can deviate from that policy portfolio and the investment committee actually encourages us to. But I think it's really important that we're measured both against that policy portfolio and then over the longer term against where that kind of 60, 40 neutral risk portfolio.
- [48:53]
Steve Ratner
Okay, and so does that tactical piece end up being where most of that deviation occurs?
- [48:59]
Dawn Fitzpatrick
It occurs both at the beta level relative to the policy portfolio. Our public market beta is lower right now. You also see it flow through in the idiosyncratic liens. The interesting thing is that in the idiosyncratic bucket, I value the beta moves I get from macro portfolio managers. When you look at equity long short managers, when they move beta and we've looked at this a lot of different ways, we don't think there's real value added. I actually consider that rolling that back up into where I am in the aggregate versus the macro managers, I'll pay them to make those bets.
- [49:35]
Steve Ratner
What's been the most Challenging aspect of.
- [49:38]
Dawn Fitzpatrick
Taking this role, I think it's just earning credibility. I was at UBS for 25 years. I had earned a lot of credibility. You have to kind of start all over and re earn it to some degree. When you come to a platform like this, that was probably the biggest challenge. And then putting a construct in place in terms of the overall portfolio construction was also a bigger task than I anticipated. Probably the third thing was cleaning up the portfolio. I didn't always make friends doing that.
- [50:13]
Steve Ratner
How do you calibrate the degree of concentration? You talked about coming in and saying, wow, we're over diversified. Where are you trying to get to?
- [50:21]
Dawn Fitzpatrick
We're trying to get to returns that are durably better than what you can get from a passive portfolio. And when I say we're over diversified, one of the easy tells is that when you aggregated our external managers and you took out kind of beta, which isn't hard to kind of approximate, we were not getting an excess return. It was zero. And that's you're paying a lot of fees and you're adding a lot of complexity and not getting compensated for it. So I think that's an easy tell. The interesting thing is I've been asked, like, what's the right number of managers? And if you can find really, really differentiated managers, maybe there's not an answer to that question, but it's really hard to find those differentiated managers. And I think it's gotten harder over time. So we're at, as I mentioned, we have 17 or 16 internal strategies, 20 external. My guess is over time, internal grows a little bit and external probably stays around here.
- [51:32]
Steve Ratner
What are the inputs that you use to try to make the decision of, say, shifting from the policy portfolio?
- [51:40]
Dawn Fitzpatrick
I think it's watching pressure points in markets. We have a head of macro here at sfm. He and I sit right next to each other. So there's conversations there. It's watching what your external managers are doing and seeing if there's anything in there that could be a tell. It's trying to connect all those dots and seeing if you think there's vulnerability either to the upside or the downside. It's hard, though.
- [52:06]
Steve Ratner
And when you look at yourself and you're evaluating that differential performance or the policy portfolio, what kind of period of time do you think is fair to say, well, we deviated and we've added value or we were too early or whatever the case may be?
- [52:18]
Dawn Fitzpatrick
I think it's probably a couple years? I don't think it's as long as the five to seven year period, I think it's probably two to three years, I think is the right period of time. We made a strategic decision to take out Beta in October of last year, and that looked like a really good decision going through December and then basically between here and there. Now, I think the MSCI is up just over 3%, but it's been a pretty wild ride.
- [52:47]
Steve Ratner
Is there anything that you wish you'd be able to do here that you haven't been able to do yet?
- [52:53]
Dawn Fitzpatrick
I think just get our message out. I mean, this platform is really, really extraordinary, and we get to serve this amazing foundation. And the competitive advantages this place has, if you're a portfolio manager, they're enormous. And I think I appreciate them that much more. Having spent the 25 years back at O' Connor and UBS and understanding what other hedge funds and asset managers have to solve for, my biggest goal is just to get. Get that message out and to make sure that we have kind of the best portfolio managers in the world working here.
- [53:31]
Steve Ratner
Yeah, well, hopefully we've done our little part in that process today. So I want to turn to a couple closing questions. What's your favorite hobby or activity outside of work and family?
- [53:42]
Dawn Fitzpatrick
So I ran track and cross country in college, and I love trail running, and I think it's the contrast of being in this beautiful, serene nature and just really pushing yourself physically. And it's really where I do my best thinking. So whenever I get frustrated or caught on something, that's where I go.
- [53:59]
Steve Ratner
All right, what's your biggest pet peeve?
- [54:02]
Dawn Fitzpatrick
Healthy people who walk slowly.
- [54:08]
Steve Ratner
How about your biggest investment pet peeve?
- [54:10]
Dawn Fitzpatrick
People who quote multiple uninvested capital while pounding their chest and give no regard to time, value of money or opportunity costs.
- [54:20]
Steve Ratner
Oh, nice one. All right, what reading do you almost never miss?
- [54:25]
Dawn Fitzpatrick
So there is a web scraper called the Browser and they curate five articles a day from really diverse set of magazines and newspapers. And you can't help but read it and learn something that you would otherwise never know.
- [54:42]
Steve Ratner
That's great. What teaching from your parents has most stayed with you?
- [54:46]
Dawn Fitzpatrick
Probably the power of persistence and perseverance.
- [54:51]
Steve Ratner
Was there a particular way you got that lesson?
- [54:53]
Dawn Fitzpatrick
They never let us quit at anything. It definitely stuck with me. I came from a super kind of athletically and academically competitive family, and as I mentioned, I am the runt of the litter. So you had to be, you know, I had to be tenacious.
- [55:09]
Steve Ratner
Yeah. All right, last one. What life lesson have you learned that you wish you knew a lot earlier? In your life.
- [55:15]
Dawn Fitzpatrick
Always bet on the home team getting points.
- [55:18]
Steve Ratner
Always bet on the home team with the points. All right, fantasy football players. Don, thank you so much for taking the time.
- [55:26]
Dawn Fitzpatrick
Ted, thank you so much.
- [55:28]
Steve Ratner
Thanks for listening to this episode. I hope you found a nugget or.
- [55:31]
Ted Seides
Two to take away and apply in your investing and your life. If you'd like what you heard, please tell a friend and maybe even write.
- [55:38]
Steve Ratner
A review on itunes. You'll help others discover the show and I thank you for it. Have a good one and see you next time.