B (2:51)

Brit Harris said it in one of your podcasts at that Scale, you've got the power of negotiation using your size to an advantage when you negotiate, but also by not change chasing the latest greatest idea. So often I would see investors go after new ideas here and there that prove to be very, very expensive. And by paying attention to the net cost, we did a lot more passive. We spent the money on active management fees where we thought it made sense. We ran our fixed income in house, we ran most of our passive equity in house. Very, very low cost. And even back then in private equity we were trying to negotiate. We didn't really get into co investments until later on, but trying to pay attention in real estate. We started investing in real estate operating companies literally before the 0708 crash. But that provided another opportunity where instead of partnering with a firm and paying them a fee to manage your assets, you could own part of that firm. Because one thing is clear in money management, they do make money up and down markets and you're going to pay fees.

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A (5:29)

Borrowed from the Canadian pension plans in terms of having in house, having some of those costs in house, you used your scale to drive down fees with co Invest, which professor Steve Kaplan with the Kaplan Shore index quantified that it's about 600 basis points, 2 and 2600 basis points. So doing 1 to 1, you're basically only paying 300 basis points versus 600 basis points. And then you also look to have stakes of the manager.

B (5:57)

Essentially better said than I could. I borrowed ideas from everybody early in my career. I'll give credit to Steve Myers in South Dakota, Matt Clark. Now I copied some of their ideas in terms of how to operate like a money manager inside the government business model, which is not easy to do. Government business model is not a good model for almost anything, certainly not money management. But learning how to operate, working with the board, we were blessed in that we had fairly good governance. Yes, our board turned over. I think I had over 200 trustees sit in front of me over my 20 years. But what I found by being a teacher system is teachers are focused on education. They think long term, they care about the future of children and they know what they know, but they also know what they don't know. So they were willing to learn when it came to the investment portfolio. Give us some latitude to operate. As I said, discretion. I can't hit it on enough. Governance really does matter. Whether you're a private firm or a public firm, institutional investor. The governance structure of how you make decisions, who has what role and are those clear and clarified literally adds a lot of value. We talk a lot about. You mentioned the Canadian model and the fact that it's a very different structure. Back in 1991, Ontario Teachers and California teachers were almost identical. California teachers was bigger, but they were very similar. But Ontario teachers at that point had a crisis of paying their benefits and the government said, hey, we either are going to take this full government or we need to go private. And that sort of branch in a tree. I think CalSTRS became more public unfortunately in government and teachers became the Canadian model.

A (7:48)

And you said that you stayed away from chasing shiny objects when it comes to asset allocation. Why is that upstream of paying more fees or getting worse returns? Give me maybe a concrete example of that.

B (8:04)

Wall Street's very famous for creating new products and new fancy ideas. Global G GT Global Tactical Asset Allocation was the idea that, you know, give somebody some money and they're going to pick the best market, the best asset class and the best place to be in the world. You know, we call them GTAA back in the early 2000s, 1990s now you probably call them Global Macro. But they proved to be incredibly expensive even though they were using index funds. And sure enough they couldn't time the markets around the world. Running an institutional portfolio is always a challenge. You see that with the turnover in CIOs. But for me it was about building a culture of a team. Brett Harris said it too empowering those people to outperform, giving them targets, get them the right tools and then get out of their way. You know, far too often on Wall street people get promoted because they're good at selling or they're good at transactions. That doesn't necessarily mean they're good at managing people. And this is still a human being interest business despite AI and all the futures. This is a people business and managing people and culture is critical.

A (9:21)

How does a CIO build a world class culture?

B (9:25)

You have to identify what kind of culture you want. On Wall street we have seen firms that have competitive cultures, dog eat dog and the the winner rises to the top. I wanted knowing my business model, I wanted a collegial culture. I was in Sacramento, I wasn't in a financial city center. I needed to home grow my talent. Or you have to go kind of with the superstar idea of I'm going to hire somebody, pay them to come here. They probably won't stay because I'll probably lose them to somebody else that will pay more. But what I found most critical is if a culture produced alpha, when that culture started to change, the alpha disappeared. And it's really hard to see that because you have to be on the ground with that team. But when you talk to people after a firm has blown up, you realize how things changed from talking about stocks to suddenly talking about wealth management and tax projects and that people get rich and suddenly that alpha disappears.

C (10:27)

There may not be a objectively good.

A (10:30)

Or objectively bad culture, but that doesn't seem to be the case with governance. There does seem to be a right model which is decentralized versus a wrong model versus centralized. Is that still debated? And why do some organizations still have this highly centralized model that doesn't seem to play out in any good way?

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B (11:44)

I'll push back on your idea that there are, you know, if you have a sole leader at the top, I can think of one that comes to mind and that's Berkshire Hathaway. And we all know up until this year who made decisions there seemed to be incredibly successful, but obviously not repeatable because there's not a whole lot of them. So a decentralized model I think brings the best of everybody's mind together and you get the best of the team. A centralized model does one thing protect the center. I found personally I didn't have God's single wisdom about which way the market was going to go. And what I found was valuable was constantly checking in with lots of different groups and different asset classes to get their feeling on the market. Where's the best opportunities because they were specialists in their reflective fields and bringing them together and smashing them together came up with some very clever ideas and some good thinking. I remember particularly In a crisis in 08 we created what we called the ER team. We had the fixed income team debating TARP transactions, we had the real estate team debating acquisitions. We had the private equity team figuring out their capital flows and exits or entrances. And I think that brought people together. It's difficult to be an expert in all the asset classes. It's better to specialize in one, but then to get those specialists to work together as a team.

A (13:13)

Could you build your portfolio in anticipation that there's going to be a crisis every so amount of years and build that into the actual execution of the strategy.

B (13:23)

Portfolio resiliency is exactly what an institutional portfolio should be and wants to strive for because you're long term. But it is one heck of a challenge to pull off because it's counter to normal psychology. I love to quote Warren Buffett's phrase, and it's simple, which is when everybody's greedy, you should be fearful. When everybody's fearful, you should be greedy. The reality is people are fearful for really short bits of time and people are greedy for, as we now know, decades. So it's hard to be patient. And what we tried to do, to answer your question, is put a little bit of that in portfolio, maybe 10%. Recognizing that because we're a 30 year horizon, we're going to capture and try to capture the beta of the market. And if we can just limit a little bit of the downside and still capture 90% of the upside, it is amazing how you improve the risk return profile of a big giant portfolio like that.

C (14:27)

During your time at CalSTRS you really.

A (14:30)

Focused on hiring the very best talent internally to manage different asset classes. What were you looking for from those LPs essentially that would be allocating capital for you.

B (14:43)

I wish I could tell you, you know, it doesn't. They don't come in with a flag waving it or a badge. They come in all shapes and sizes. They all come in both genders. They come in different colors, different backgrounds. I often challenge people is so much of Wall Street. It's not a complaint, it's just a reality is from the Ivy League schools. But that doesn't mean they're great investors. You can find people with all kinds of backgrounds. And that's kind of what I love about this day and age is that young kids are getting exposed to the markets. I remember in my generation growing up on the west coast, nobody read the Wall Street Journal. No, you couldn't even see the markets on tv. It was on a little bit of a show in public broadcasting. But now it's out in front of them and they've got Robinhood and they've got the opportunity to look at this. And I think we're going to find some very talented people in different places. And I would tell you that picking investments was frankly a lot easier than picking people. What you're trying to find is somebody who's self reflective because investing is hard. As I said, it's really about trying to anticipate the future. And you gotta be humble and realize you can't. It's taking all kinds of data. And you want some people who think literally A, B, C, D, 1, 2, 3, 4. You want other people who think tactically in patterns. So you need different types of. I always said I want somebody who thinks like Excel. Everything's relative and down and up. But then I need somebody who thinks like an access database who can take all these random facts. And I found that was true almost in every asset class. You didn't need just one discipline for one type of one asset class. You needed people who could think differently, had different backgrounds, different education styles, somebody.

A (16:34)

That'S good at Excel and somebody that's good at multidisciplinary thinking. It's almost never in a single person.

B (16:43)

I didn't Tend to find it. I tended to find people who, you know, like we said, you know, personalities and, and a mental process. When you study books about thinking processes, it is very rare to find somebody that can accomplish both very efficiently. You'll see people at the two extremes and they still could be brilliant. And it takes a culture then to bring those different people together with different thinking patterns. We tend to like people who think like us and act like us. Look at any accounting firm and you're probably going to find, you know, when you think about all those personality types, pretty similar personality types. I found the value which was having a lot of people who didn't necessarily think alike but could work together, could be collegial and support each other.

A (17:35)

Last weekend I spent 10 hours with a famous investor who wanted to be off the record. So we'll keep him off the record. But he had done multiple deals with Buffett, with Bill Ackman, with Tony James and all these famous investors. One of the things I realized very quickly that I fallaciously thought that these were very similar people. And what I realized is they were extremely different, distinct styles. And my theory, not his, is that if you had actually moved that investor into another space, they'd be maybe median, maybe they'd still be top quartile, but they would not be a Bill Ackman. They wouldn't be a Warren Buffett if they were in a different context.

B (18:13)

Absolutely correct. I was California, so I was a swimmer. It takes a certain body type. When you look at the Olympic swimming people, very similar. You look at people that are great trumpet players or great violinists might have certain characteristics. Not true of an investment. It comes in all shapes and sizes, both genders, all different backgrounds.

A (18:34)

And you mentioned quite a crazy form of doing diligence on the spreadsheets, which is sitting in on a PM meeting at the fund. What are other sources of what I would call diligence Alpha, which is how you could get to ground truth on when managing, when diligencing a manager that most people don't take advantage of.

B (18:57)

You know, I think when you look at David Swinson and Yale's success, part of it was their incredible due diligence. I, I have heard many times that they would talk to a money manager for over a year before in some cases they would consider investing in it. So two quick examples. In one case, we talked to a money manager who told us over and over and over that it was a team process. Everybody did every decision by the team. There was a team vote on, on and on. One of my staff, naively, we were talking to a portfolio manager and naively said, well, gee, what do you do when there's split votes? None of us thought to ask that. And the guy sat there for a minute and said, oh, you know, we never have split votes. It's always unanimous. And they're like, well, that's really interesting because my team's not unanimous. How do you vote? Oh, well, the CIO goes first and then we go around the table. And I said, you know, if they generate alpha, recognize it's coming from that cio, not the team. So if the CIO leaves, follow them. But let's not be naive here. It's not a team, it's one person led. And then another example is they told us that they were going to merge the team and move everybody to London. Again. One of my younger staff had done their homework and knew this person well enough from talking to them. And they're like, they have a pet. You know, London requires you to quarantine animals for six months. They're never going to go. And sure enough, you know, when the day of the merger came and all of that, suddenly RPM wasn't around anymore.

A (20:29)

What excites you most about asset allocation and investing today 2026?

B (20:37)

That I don't have to do it. I'm retired. No, I'm serious. I look out there at, at this new environment with, and I've seen industrial revolutions. I mean, I started out of college when the PC was just coming online and we knew computers were the future. The growth of cell phones. Goodness. You know, we were talking recently about the AI revolution. And I went all the way back to, you know, the railroad revolution. The steam engine. Well, the steam engine, then the railroad. Automobiles, cars, telecom, airplanes. You can just run through any kind of major revolution. It's very difficult to identify the winners at the start. There are going to be some big losers among those firms. Generally, these kinds of evolution revolutions last about five to six years. The good old 75, 25, 8020 portfolio in public markets has done extremely well relative to private markets over the last 10 years. I have no idea what's going to outperform over the next 10 years.

A (21:54)

I'm going to ask you a very difficult question. You got to in 23 years as CIO and before that, University of Washington, before that, also at County, State of Washington.

B (22:05)

I wish the university, but just the state.

A (22:10)

You got access to the greatest minds, the greatest GPS of that generation. If you had to pick one gp, that was the most special, which one.

B (22:20)

Would you pick wouldn't be in private equity. It would be Howard Marks, Oaktree Capital. I did business with Oaktree Boy starting way back in the 80s 90s. I love Howard's just plain speak. I used to take his letters and send it to my board regularly. You know, just his common sense language of, you know, if everybody wants something, maybe you should step away. And if people don't want something, that's an opportunity to look at it. I still have some of his famous letters that he wrote on my files here in my office now that I'm retired. Because to me, even to my, when I mentor people or my own children, it's like, you need to read this because this is time tested information and knowledge on Wall Street. I put him at the top. Just an amazing person, brilliant career. You know, the stuff they did in the original days of Oaktree with distressed debt was pretty darn amazing.

A (23:21)

I know you're only semi retired. Tell me about what you do with Ellman Advisors and what are you up to these days?

B (23:27)

You know, I serve on a board of a mutual fund complex and that keeps me pretty Busy. We have 160 funds and $800 billion, so that's quite interesting. Ailment advisors. I'm really doing a lot of coaching and education. I've been doing a few projects. I'm a senior consultant with a governance consultant, Mosaic, and I've done some work where CIO was close to retirement and the fund had to figure out should they replace the staff or should they outsource. I've been working with some people about strategic planning and really trying to talk to boards about governance and why that really matters. And then lastly, one of the things that I enjoy a ton is teaching and mentoring, doing things like a podcast, teaching at universities, dropping into teaching classes, and then mentoring some of the young investment people because I think there's tremendous opportunity in this industry. It's not well known certainly in the west coast universities that the money management business is there. Tons of firms and tons of opportunities. And so it's fun to build into young people and see them pursue the career.

A (24:34)

Awesome. Well, Chris, I've been very excited to chat. You did not disappoint. Thanks so much for jumping on podcasts.

B (24:41)

My pleasure. I enjoyed it. Encourage people to listen in. 200 coming up on 300 podcasts. You're doing fantastic.

A (24:48)

Thank you, Chris.

C (24:49)

That's it for today's episode of How I Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network. Who'd find it valuable or leave a.

A (24:58)

Short review wherever you listen.

C (25:00)

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