Detailed Summary of "GEMs of Risk, Asset Allocation, and Manager Selection (EP.419)" Featuring Matt Bank

Podcast Information:

• Title: Capital Allocators – Inside the Institutional Investment Industry
• Host: Ted Seides
• Guest: Matt Bank, Deputy CIO at Gem (GEM)
• Episode: EP.419
• Release Date: November 25, 2024

Introduction

Ted Seides welcomes listeners to the episode featuring Matt Bank, the Deputy Chief Investment Officer (CIO) at Gem (GEM), an Outsourced Chief Investment Officer (OCIO) managing $12 billion across 40 clients. GEM was established in 2007 by investment leaders from the Duke Endowment and Duke University Investment Management Company.

Notable Quote:

• [03:18] Matt Bank: "This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions."

Matt Bank’s Career Path

Matt Bank shares his unconventional journey into the investment world. Initially more interested in outdoor adventures during his college years, Matt pivoted towards finance after graduating. An unexpected opportunity with Goldman Sachs in 2005 marked the beginning of his professional career in principal investing. His tenure included navigating the global financial crisis, which profoundly shaped his understanding of risk and asset management.

Notable Quote:

• [05:08] Matt Bank: "I spent every break in college climbing mountains with friends... Never thought I needed to get an internship."

Transition to GEM

Following the unexpected passing of his father in 2007, Matt reassessed his career goals, leading him to pursue further education and ultimately join a private partnership in Boston with David Salem. This experience deepened his appreciation for a client-centric, disciplined approach to capital allocation. In 2018, Matt transitioned to GEM, attracted by its strong reputation, independent stance, and the opportunity to influence a larger platform.

Notable Quote:

• [14:04] Matt Bank: "I decided I should just go back to business school, pick myself up, figure out what perspective I needed to get on what the future looked like through serendipity."

GEM’s Business Model and Industry Positioning

GEM operates with a commitment to independence, avoiding consolidation common in the OCIO sector. This independence allows GEM to focus on investment excellence and deep client integration without the pressures of shareholder expectations or aggressive sales tactics. Matt outlines three phases of the OCIO industry evolution:

1. Governance-Driven Phase (2002-2015): Emphasis on robust governance models inspired by leading universities.
2. Death of Diversification Phase (2015 onward): Simplification of portfolios with heavy reliance on U.S. large-cap equities.
3. Current Phase (Phase 3.0): Focus on generating alpha through specialized manager selection and adapting to a more volatile, inflationary environment.

Notable Quote:

• [22:04] Matt Bank: "We've resisted those siren calls for consolidation and come to the view that our independence is actually critically important in our ability to do the right thing for clients."

Asset Allocation Approach

GEM employs an "enterprise assessment" to understand each client's unique risk tolerance and institutional needs. This assessment considers factors like budget reliance, operating conditions, endowment flows, and balance sheet health. By mapping these elements, GEM tailors asset allocations to align with each institution's specific goals and risk parameters, balancing equity exposure with diversification strategies.

Notable Quote:

• [09:37] Matt Bank: "One would be risk first in all things... you can't deploy their capital without understanding what types and degrees of risk they're willing to incur."

Manager Selection Process

GEM's manager selection hinges on three core criteria: skill, attractive market, and alignment of interests. The focus is on finding managers with relative skill—those who can consistently outperform peers rather than merely possessing absolute skill. Due diligence involves comprehensive behavioral assessments, reference checks, and early engagement to secure future capacity rights. GEM emphasizes the importance of manager temperament and long-term alignment to ensure sustained performance.

Notable Quote:

• [29:35] Matt Bank: "We're looking for skill, an attractive market, and alignment of interests... finding those games where relative skill is dominating the outcome."

Active vs. Passive Investing

Matt distinguishes between two types of passive management:

1. Anti-Active Passive: A belief that active management in public markets is inherently a losing game.
2. Indexed Exposure Passive: Using passive strategies to fill portfolio gaps, particularly in areas where active management is less prevalent or effective.

He argues that the bar for passive strategies has risen due to lower expected returns and higher valuations, necessitating greater alpha generation from active strategies to meet client return goals.

Notable Quote:

• [49:10] Matt Bank: "The bar on passive has just gone up... it's going to take more than 1.8 standard deviations from here to continue to meet the bar that a lot of clients have for their passive Equity exposure."

Venture Capital

Venture capital remains a critical component of GEM's portfolio, though it faces challenges such as high failure rates and increased capital cycles post-COVID. GEM focuses on partnering with disciplined, early-stage managers who can navigate these risks and identify high-potential opportunities. The emphasis is on strategic fund sizing and selecting managers capable of generating outsized returns to justify investment in venture capital.

Notable Quote:

• [51:45] Matt Bank: "The math of venture is just very daunting... you need one of five generational companies within that portfolio to meet the return bar."

Hedge Funds

Hedge funds at GEM are utilized primarily for their alpha-generating capabilities rather than for volatility dampening. GEM favors hedge funds that can deliver strong net returns and have robust strategies, particularly those that can leverage effectively to enhance performance. The industry trend towards consolidation and the dominance of larger platforms with sophisticated data capabilities is noted as a significant shift affecting hedge fund performance and availability.

Notable Quote:

• [55:31] Matt Bank: "Hedge funds for us have been a source of alpha in the sense that we want total returns."

Alignment of Interests

Ensuring alignment between capital allocators and managers is paramount for GEM. This involves intrinsic motivation alignment, fair fee structures, and appropriate investment terms. Early engagement with managers is crucial to establish trust and mutual commitment, preventing adverse selection and ensuring that managers are genuinely invested in the clients' success.

Notable Quote:

• [57:47] Matt Bank: "What motivates the person across the table from you? What is the intrinsic driver of their commitment to success?"

Future Outlook and Strategies

Looking ahead, Matt anticipates continued specialization within markets and an increased focus on generating alpha in a challenging economic environment characterized by inflation and volatility. GEM aims to maintain its investment excellence through proactive sourcing, deep client relationships, and fostering a collaborative and autonomous team culture. Emphasizing the importance of staying boutique, GEM seeks to avoid the distractions of scale and maintain a client-centric approach.

Notable Quote:

• [64:55] Matt Bank: "Continuing to lean on our client causes, amplifying the sourcing apparatus meaningfully and enhancing the decision making of the team."

Closing and Personal Insights

Matt shares personal interests and lessons learned, highlighting his passion for mountain activities and gardening. He credits his father and a mentor at Goldman Sachs for shaping his disciplined work ethic and leadership approach. Matt emphasizes the importance of building and maintaining personal relationships for mental well-being and professional success.

Notable Quotes:

• [67:13] Matt Bank: "I love being in the mountains... imbue in my children a sense of peace and comfort in the wild and the outdoors."
• [69:26] Matt Bank: "The idea that passion comes from the pursuit of mastery, not the other way around."

Conclusion

This episode delves deep into Matt Bank’s extensive experience in the institutional investment industry, providing valuable insights into GEM’s strategies for risk management, asset allocation, and manager selection. Matt’s emphasis on independence, alignment, and proactive sourcing underscores GEM’s commitment to delivering tailored, high-performance investment solutions for its diverse clientele.

Notable Quote:

• [70:16] Matt Bank: "Thanks so much, Ted, for having me. Appreciate it."

This comprehensive summary captures the essence of the conversation between Ted Seides and Matt Bank, offering a detailed overview of GEM's approach to institutional investing and the critical factors that drive their investment decisions.