David Isburg (4:46)

What does it mean to have high EQ in finance?

Anurag (4:48)

I don't think that. I think the high EQ isn't necessarily specific to finance. I can apply it to finance. I think it's really important in any business endeavor. One where you're making contact with a Customer or client or a patient in the case of doctors. Right. So I'll give you an example. I was an attorney for all of 11 months. I ran screaming from the profession, the proverbial round peg in a square hole. My wife was an attorney for a lot longer than me, worked at a big firm up here in Silicon Valley, and I have plenty of friends who are attorneys. As I was leaving this large law firm, I spent time with the managing partner for the Southern California offices and he was trying to convince me to stay. But one of the things that ended up popping up as an anecdote that he shared about having provided like, that he was a litigator, I was not. But he provided the best legal defense for a particular large client that we had out of the Midwest that built airplanes. And he said, you know, we lost. It was a tough case, but I just did amazing legal work. However, I didn't handhold the client well enough. And so when we lost, they were really angry with me and they held me personally accountable for things that, you know, I think the cards were stacked against us from a fact pattern perspective. And he said in another case, you know, he had seven or eight litigation matters going on at the same time, probably wasn't able to, if he was being honest with himself, give 100% to each and every one of the cases. And you know, there was one in particular that he lost, but he'd done a really good job with the client management. And when it was all over, the clients were appreciative. They said, you know, tough outcome, but we know you tried your best. You know, you're our lawyer, you know, we're going to hire you again and again and again. And you know, he's really trying to underscore the importance of emotional intelligence, although we didn't use that term so frequently back then. And it really comes down to just relationship building and understanding that if you take the time to bring people along with what you're doing, it creates trust, which was ultimately what Steve was talking about. And it builds long term relationships where people are going to want to keep coming back and working with you. And there's certainly elements of that in finance because it's our investment banking, because it's a client driven business. I live in the land of people exalting low eq and I don't know, maybe because I live around and work around people like that so often I'm just a little bit of contrarian. I kind of try and see where the pendulum is going and then it's My nature to be a little contrarian, to make sure we pull people back to some sense of equipoise.

David Isburg (7:42)

I never thought about it that way. There is a huge bias towards IQ and almost irreverence towards EQ or almost like it's a secondary skill or a lower class skill to be good with people and not not be good with maybe a spreadsheet or numbers.

Anurag (7:59)

I agree with what you said. I have the same observation that in the community I traffic professionally, it's almost considered a lower tier skill. And I think what I'm trying to establish is I don't think it's a lower tier skill at all.

David Isburg (8:17)

In that vein, I know you have an unbelievable network, which is how I got in contact with you and you know quite a few Goldman partners. What have Goldman partners told you about IQ vs EQ? When it came down to who became the partner?

Anurag (8:33)

What I have been told is the folks who are better at the facetime game definitely did better. So there was a premium on, you know, if I could be in the office 100 hours a week, but someone else could be in there 110. I knew one guy when emails were becoming prevalent, he would specifically write a bunch of emails, seven at night and then he would auto send them or schedule them to be sent at 1 or 2 or 3 in the morning to make it seem like he had been working all night. So I think the grind, I think the ability to differentiate yourself with your stamina and then I do think the client facing stuff, I think when partners see in young associates the ability to cultivate clients and to manage client relationships, I think there's a huge premium on that. I do know that there's a mythologizing like oh so and so is such a genius and blah blah blah. And the overuse of the genius word, which is not just specific to banking. I mean I think that word is generally overused. There's a great podcast. Am I allowed to talk about other podcasts on your podcast?

David Isburg (9:42)

Absolutely.

Anurag (9:42)

And Barry, Barry Weiss has a woman who's just written a book about, I think I don't know what the title is, but it's essentially unpacking genius part. The part that are that's myth and the part that is legit when it comes to banking. Just like law, A lot of these professions, you know, the people who are awarded are the ones who just want it more. And this might come back full circle to our conversation about the people who don't have the luxury of pedigree where doors will just be open for them a little bit more easily, they value the opportunity more. The bottom line to everything we've been discussing up to this point is I have just seen people excel with qualities. And again, you have to have some level of intelligence. But let's just call it baseline. And you know, your audience can disagree with me as to what that baseline could be. I'm just strongly in the camp that you don't have to be wicked smart in the CPU between your ears. You have to be smart enough for again, 98% of the world's jobs. And then the other things matter more. I grew up around people who were, who were brilliant. And so I thought that when you graduated college and you got a job, you succeeded by doing something that was pure intellect or a pure academic skill better than the person next to you. And I didn't really value networking. I, I didn't, I didn't. If anything it was the, the opposite was modeled in my family, not with disdain or not intentionally. I had a friend in high school used to really annoy me. He used to say, you know, it's who you know, not what you know. And I used to think to myself candidly, well, you have to say that, you know, you're smart, but you're not that smart. And it turns out he was right and I was wrong. It is who you know, not what you know, and not exclusively. I don't want to turn that into some kind of a shibboleth.

David Isburg (11:40)

So let's talk about your career as an asset allocator. You've been 10 years trustee at the San Jose Federated City Employment Retirement System. Tell me about how the pension has evolved during that decade.

Anurag (11:55)

Oh, great question. So, yeah, I'm nine years, so almost 10 a year into it, I was asked by the chairman of the board to chair the investment committee. When I took over the ic, we were the second worst performing pension plan in the country. And three years later we put up an annual number that was the second best in the country. So within those three years it was a pretty big turnaround. But we stayed top decile for the entire time period, which has been really rewarding and gratifying. If we talk about the San Jose pension system, we're going to come back to the concept of team a lot. It's been a really strong team. I've had some strong committee members over the years and then we were really fortunate to hire this world class CIO who's done a remarkable job.

David Isburg (12:41)

So you've gone from one of the worst performing to a Perennial top decile, top 10% performing pension funds. How did you accomplish this dramatic turnaround?

Anurag (12:52)

Someone asked me this last week, and I said if I'm interviewing for a job, it's because, you know, I'm so brilliant and my fellow trustees are brilliant. And our cio, I actually do think our CIO is brilliant. He's got some really smart people on his staff. But maybe we can tie this to the first part of the conversation. There's a lot of blocking and tackling. We did several things and the first thing we did was we cheated. And I say that tongue in cheek. We hired a consulting firm out of Canada to help us understand the best practices in the Canadian pension system. I consider the Canadians to be the gold standard. Now, there's some things that Canadians do structurally that we can't do, unfortunately, at San Jose, or I might even say across America. Within the pension systems. A strong cultural difference in attitude toward the way you remunerate CIOs and investment staffs and even trustees. And obviously we know when you're willing to pay more, you're going to get higher quality talent. San Jose could have had tons of candidates more qualified than me apply, but it's essentially a volunteer role. But there were a bunch of governance things that we reviewed and adopted. And so without getting into gritty details, I would say the key things that we focused on during that turnaround period was our governance model, our approach to the investment policy statement, the ips. We delegated manager selection to the CIO and staff and took the trustees out of that process. One of the most, if not the most thoughtful thing we did was a really exhaustive risk analysis on the amount of volatility our portfolio could bear. We have capital inflows, but we also have outflows. We have to pay pensioners their monthly checks. And there'd be nothing worse than taking disproportionate risk in a way where some kind of a black swan event, we were unable to make those payments, that we had to go to our plant sponsor, the city, and seek some kind of help or assistance, which obviously, obviously is a politically challenging thing to ask for. So, you know, we hired a risk consulting firm and they were fantastic. And we spent several months modeling. You know, we took all the worst drawdowns that have taken place in the US Capital markets back to the Great Depression. And then we did a bunch of stochastic modeling trying to figure out what the next black swan is not going to look like. The prior black swans and stochastic models don't predict exactly what they look like. But this is science and art combined. One of the things I did do is I did ask the plan sponsor, which is the city at joint sessions and also when we at some of their open meetings, I'd say give us a sense of our backstop. The more backstop you're willing to give us, the more risk we can take. Now we're an underfunded pension plan. We had a big divot toward our unfunded liabilities which we filled that divot quite a bit and I'm proud of that. But we still have a ways to go. But the way to really decrease that gap through investment returns is to take more risk. But we know risk is cruel. It can work on the upside, but it also works on the downside. It's not just the one way profit position. It's hard to get politicians to commit to. Yeah, we could raise taxes or we could float a pension obligation bond or we could go back and have tough negotiations with the unions. So we kind of took the silence as our right to go and do this analysis on our own. And what we, what we learned after doing the work was that we, we could add 50% volatility to the portfolio without injuring our ability to make those important monthly payments. And so we began a process of re risking the portfolio. I have heard so, and this is a podcast. I really wish I knew this to be factually correct. We have our sister plan up in San Francisco and San Jose. My understanding is prior to the great financial crisis, the two plans were roughly the same size. Coming out of the financial crisis to today, we have two pension systems in San Jose, the Police and fire and the Federated. And we share one CIO and one investment staff so that so collectively if I aggregate the aum, we're about San Francisco's about three times as large as we are today because coming out of the great financial crisis they were in a more risk on. I'm not saying they were cowboys, but they were more risk on and we were risk off. Our prior trustees and CIOs had gone into a defensive posture and it's a tricky thing to do to re risk a portfolio because I mean for the last 10 years multiples have just seemed really high. PEs have just seen like you always seem like you're buying into an overbought market. But we, we began that process of buying in and then we got a little bit lucky too with our timing. I don't ever want to underestimate the importance of luck when we Decided to re risk was late 2019, early 2020. And typically strategic asset allocations get set by April or May. If there's a lot of conversation at board meetings, it could linger into June. But what happened in 2020 at the beginning Q1 Covid and we had the steepest decline in the history of US capital markets in three weeks. We had massive drawdown. So our CIO called an emergency meeting and said, look, the investment committee was going to recommend this new asset allocation where we re risk and go heavier into growth and risk assets. But I want to do it now. Now we have a 30, 40, 50 year time horizon as a pension plan. We are not trying to get the bottom, more of the bottom could fall out of this market. But there's, there's sales right now at Bloomingdale's and I want to go shopping. He effectively said, and what I love about him doing that in particular is, you know, his incentive structure. He's not comped on, on performance. He's, he's paid a straight salary. And a lot of CIOs end up being a little bit more bureaucratic, bureaucratic and playing it safe. And he had conviction, he acted like a fiduciary. I supported him. I mean we had conversations before the emergency meeting and our timing was impeccable. I mean we rode a massive upside by the end of that fiscal year. And that allocation model, which we've tweaked a little bit, has continued to serve us well all the way to now.

David Isburg (19:15)

You studied the Canadian pension plan system and like you mentioned, might not be politically feasible to pay the same amount that Ontario teachers pays San Jose officers. But you double clicked on that governance and you took governance away from the investment committee in terms of management or selection to the cio. What does that mean? Does that mean that the CIO presents asset allocation to the investment committee or what does the investment committee do exactly?

Anurag (19:44)

Good question. And the investment committee is an interlocutor between the board and the CIO at some level. I think that's a good way to frame it. The board ultimately votes on all of these matters. The committee, we have delegated manager selection, but the things that are the province of trustees are covered by all the trustees. The committee is where we spend more time getting into the details and then, you know, in concert with the CIO, presenting decisions, decision points to the board. I think this is right. There can't be more than 20 municipal plans that have delegated manager selection to the the CIO and staff. So he and his staff get together they have their own processes, they do a committee meeting of their own internally. I think all the investment officers vote and they try to make team oriented decisions. The strategic asset allocation, that is the purview of the board. That's like one of the key fiduciary duties that we have. So we have consultants, we've got this great CIO and investment staff. They will start to gather capital markets assumptions at the end of a year, going into a new year, and then present that to us relatively early in the year. And we will use that information to make determinations on whether or not we want to stay the course or change our asset allocation. So previously all that manager selection stuff went through the committee and then ultimately also went through the board. It was just cumbersome. There are a couple of problems with it. It's not a nimble process. Right. And so you risk missing out on opportunities when you're that slow. And then the other thing is, you know, just to be blunt, not a lot of trustees are qualified to opine on investments and it can lead to a high degree of variability. And so, you know, there could be an instance in which it's not appropriate for manager, sorry to delegate manager selection, but we thought it was in the best interest of the San Jose plan and it's worked out really well.

David Isburg (22:00)

And you were at EFSERS before this change in governance in old model, did you find that there was like this reversion to least common denominator when it came to manager selection? Meaning you didn't necessarily find the best manager, you found the one that nobody had an issue with.

Anurag (22:16)

Fortunately, that was not an issue because our staff is great at sourcing and doing their due diligence. Quite frankly, a lot of managers are willing to wait. They're, they're used to the, the long diligence cycle. And then hey, we just finished our diligence and we really like this and we're going to go, and we're going to go promote this to our board. But our next board meeting isn't for 90 days, right. So we meet monthly. But there's some systems that meet quarterly. Right. So people sort of got accustomed to that. I think what, what I would highlight or double click on is that, you know, over five years, 10 years, there may be some managers who close faster than your process, who are really high quality managers and you just missed out on them. And you know, incrementally that matters over time in a portfolio because we expect our staff to pick the best managers in each of the sub asset classes. That we have allocated. Then the second thing is usually there are stronger voices on a board or an investment committee, people who have real expertise in a particular asset class that's being reviewed. And there's a fair amount of deference that's given to the CIO and his staff because they're the professionals. So these trustee meetings weren't necessarily always that controversial. They just weren't the best use of time.

David Isburg (23:45)

Today, your full time job, you're CIO at a family office. You've been doing that nearly four years. What lessons did you take from San Jose eftsers to that single family office? And what corollaries do you see between those two different types of asset allocators?

Anurag (24:02)

I really like that question. I thought a lot about that. So, yeah, to begin with, I brought a lot of the principals over. This was also accidental. I was on the advisory board of a company in the 2000s, and I stayed close to close to the founders. They found out I had left my venture, my most recent venture firm, I left in early 2022. So one of the two co founders of this company said, hey, you know, you can come use my wework while you figure out your next thing. By the way, we're selling our business. I said, wow, that's exciting. And they had William Blair, so they had a top notch bank doing the transaction. But my friend just said, you know, hang around, you know, I'm an operator at heart. I don't, you know, understand all the deal terms. And so it'd be great to have a second set of eyes and you can work on whatever you want to work on. When it became clear that he was going to sell the business by the end of the year for, you know, a healthy sum, I just kind of asked him what, what he was going to do with, with his capital, his newfound wealth. And he said that, you know, he had a plan to go start some new companies. He's an inveterate entrepreneur. He's a builder, he's an operator. It's. It's his joy, it's his bliss. And the rest he was going to sort of give to a wealth manager. And I kind of my eyebrow raised on the wealth manager piece. I gave him all the pitfalls and just be careful. He said, well, what would you do? And we were on a whiteboard. You know, we work in San Mateo. And I just kind of started sketching whether you have $500,000 in the bank or you have 50 billion or 100 billion as an institution or a large family office or Sovereign whatever. There's always two basic questions, at least in my opinion that everyone needs to understand. What is your time horizon? I mean if you want to do something with the money in five years, that's very different than if you have a 50 year horizon. And what's your risk profile? And we, I've just talked about risk ad nauseam already on this podcast. Now if you have $500,000, you're probably going to, you know, a Schwab money manager and they're going to do a bunch of check the box exercises. When you're San Jose, you spend several months doing a really sophisticated risk analysis. But you have to, you have to have a sense of that. And once you have those two things, I really feel like you can. Or I can sketch out an asset allocation for anybody. Now for the person with $500,000, you know, they remember Crayola crayons. You've got like a box of seven crayons and just one, one shade of blue, one shade of red, one shade of orange. You know, I. ETFs is probably what I'm mostly going to focus on for you. If you have a hundred billion dollars, you've got the 120 was, was it 128 crayons and you've got like seven shades of every color. And I'm helping you buy a company instead of investing in a private equity fund. Like we can cut out the 2 and 20 at that point. There's a saying in family offices that once you've met a family office, you've met one family office. I think that's largely true.

David Isburg (26:52)

Double click on tax loss harvesting. I've talked to the CIO of aqr, the CIO of Parametric, I've talked to Quantino, give me a lay of the land and who are your favorite. Maybe you could define a little bit what tax loss harvesting is in its current version and you know who are the service providers that you like.

Anurag (27:12)

By the way, we're talking to some of the folks you just mentioned because we do want to look at tax optimization, which I put as a broader bucket. And tax loss harvesting is something you can do within tax optimization. It's the low hanging fruit and right now we've been focused on the low hanging fruit. Fruit and tax loss harvesting is essentially figuring out what your losses are going to be as you're rounding into the end of a tax year. Selling to capture those losses, but because you don't want to upset the asset allocation is you find a proxy in the market that you invest in until you avoid the wash sale rules and stuff like that. And you can go back into that underlying asset or security that you sold. We do that pretty extensively. And since we're double clicking on it, what model delivery essentially allows you to do is there are many managers out there in public assets who will sell you their model. So instead of you investing with them in a pooled fund structure, you go to the manager and say, just sell me your model. The tamp we work with has a bunch of execution traders those traders will replicate. So let's say I've got a mid cap strategy with manager X. They sell us the model, we buy the exact same stock, we sell it when they sell it. I mean they're the ones with the intellectual property. And people have asked me, well, why would a manager do that? Because they don't have to hire any compliance people against it, they don't have to do any marketing. Right. It's, it's, think about it as a software business. If, if I can get you to resell me, I'm going to let you keep some of the margin, right? And you might say, well why now? Now I have less revenue coming in but my cogs goes down dramatically so my net margin is higher. So when you, when you do model delivery, whatever, we are willing to pay the manager and it's far less than their management fee. The champ we work with has specialized in this. So they have 56, I don't even know how many relationships they have. They have this great menu of managers who are, who have different strategies and different approaches. So we selected the ones that worked for our asset allocation. And then because we own all the shares, all of the equities directly, we don't have to deal with taxation within the fund structure. We now own the underlying shares so we can tax lost harvest. So we get the both, the best of both worlds. We have the underlying shares but we have these great managers who are the ones who are actually directing the way that the, the portfolio, the complexion of the portfolio. So that's, that's the level of, that's the level of sophistication we're at right now. But we are starting to talk to the community of folks you just mentioned.

David Isburg (29:57)

Is there an adverse selection that comes to this model delivery in that the best models aren't going to be shared or are they somehow obfuscated?

Anurag (30:06)

That was a concern I had early on that it might be adverse selection. But the founder of the firm who's actually on sabbatical now, he did Yeoman's work. He had been an asset manager himself. He had been doing model delivery at his fund. So you know what? I don't know how to answer that because I think it's a valid question. But all I can say is I'm really happy with the managers we're with. And I mean, we see their track record. I mean, and unlike, you know, in private assets, you're mark to market every day.

David Isburg (30:42)

One of the most unique combination of skills, your investor, allocator as well as operator. Those are three rare cases, rare skills to have in one person. How has having each of those skills made the other skills better?

Anurag (30:58)

I'm a big believer in synthesis. And to be able to synthesize information, you have to have different experiences. By definition, just within the allocator sleeve itself. It's even been interesting to do. You were just asking me about family office versus pension funds. I really would love to create a platform that combined the best of both I have found in my travels. And I'm newer to the family office world, but I spend a bunch of times with other families collaborating and understanding how they're thinking about their investment portfolio and their programs. There are some poorly run pensions, but I find the best run pensions. And I enthusiastically and full braggadocio, put San Jose in that bucket, have great process, great governance. You heard the approach that we took to our ips, our governance model, risk management, and ultimately asset allocation. I find that families tend to be a little bit more disorganized when it comes to that stuff. They don't even, sometimes don't even ask the basic questions of time horizon and risk because those are involved, intentional questions. But what I love about family offices, many of the ones that I've worked with, is they can be nimble and they can be more creative in the way that they build their programs. So if I could combine the creativity and nimbleness of a family office with some of the governance and structure and professionalism, I mean, more family offices should probably think about having some kind of a board of trustees. And, you know, that starts to get a little scary for them because it feels like authority is being taken away from them. But I think ultimately, if you want to have a family office that's thriving and has some maybe philanthropic goals or goals for future generations, and you're looking out 30, 40, 50 years, there's a lot you can learn from the institutional model and then across all of them. I mean, when it comes to evaluating managers, you know, I've swam with the sharks. I guess I've been one of the sharks. So it makes it a lot easier when you're an LP to how do I extend or end that metaphor? To prevent being chum in the water, but I'll pull back up to 50,000ft. I just think, you know, the more things you're interested in, I mean really widely. I mean, I think it's great that my father was into talking to us about poetry and nuclear physics. And the other thing is synthesizing data, right? Or synthesizing information. You know, going across disciplines to look and search for answers.

David Isburg (33:31)

Being a polymath myself, the two benefits I see from kind of cross functional experience. One is skill development. You have a specific skill that when layered into an entire new industry, is extremely lucrative. Andreessen Horowitz has now done that with media. Whereas if they just competed on media or just venture capital, they wouldn't be as effective if they did both as one. The second thing is first principles thinking. This is a bit of contrarian view, but first principles thinking doesn't come from actually having out of the box idea. In other words, that the brain is a fully encapsulated system. So you can't out think your own brain. What you can do is you could take a concept from physics and bring it into investing, or you take a concept from even poetry and bring it to marketing. So you can actually bring cross functional knowledge or information from what somebody else has taught you, but you can't truly out think your own brain. So true first principles thinking comes from being able to apply information from different domains.

Anurag (34:41)

I really like that. I'm a disciple. I like the Weisberg principle.

David Isburg (34:48)

We'll get right back to interview, but first we're looking for the next great guest. If you or someone you know is a capital allocator and would make for a great guest, please reach out to me directly@davidisburgcapital.com what would you like our audience to know about you, about Essers or anything else you'd like to share?

Anurag (35:05)

I always say that everyone's opinion, whether they realize it or not, falls on a spectrum of weak to strong. Weak is when you don't know much. Strong is when you know a lot. Right? So if I'm talking about venture capital, I feel like if I have an opinion, it's a strong opinion. But I don't think people often have an appreciation for where they're on the spectrum when they're contributing in a board capacity or in that kind of a leadership capacity. I think the goal is to be warm porridge I think the goal is to be as knowledgeable as you possibly can be about the endeavor, whether it's a nonprofit, social impact or corporate board or a pension board. But really trust the CEO or the CIO or the senior leadership and be a sounding board for them. Help them identify their top three top five most vexing problems. Be a part of the problem solving, be a resource wherever they need it, but be that warm porridge. That's the goal to strive for. And so if I wanted to leave the audience with anything, it's maybe to think about that a little bit more and apply it in their own professional lives. I've also been on the receiving end of difficult boards. It's a vital role done right.

David Isburg (36:25)

Reminds me of Ray Dalio's principle at Bridgewater is actually one of their most important principles which was the believability weighted index. And that the same principle which is anybody could opine on a certain topic, but their believability was proportional to their experience or knowledge in the space. Obviously they became the biggest hedge fund on the planet. So there's something to that principle that.

Anurag (36:50)

Works even better if we all have self awareness for our believability factor.

David Isburg (36:56)

Well, Anurag, this has been a pleasure. Thanks for jumping on and look forward to sitting down live soon.

Anurag (37:02)

Yeah, absolutely. Thanks so much. And I will be in New York soon so hopefully we can have that coffee or beer.

David Isburg (37:10)

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