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- [00:02]
A
Welcome to a new episode of the Value Investing with Legend podcast. My name is Stano Santos, the Robert Heilbron professor of Asset Management and Finance at Columbia Business School and the faculty Director at the Hellbrun Center. I'm here with my co host Michael Mabusen, an I am professor at Columbia Business School and a faculty member at the Hellbring center as well. Michael, how are you?
- [00:21]
B
I am doing great, Tano. My only complaint is that the summer's going by too quickly. But besides that, all good. How about you?
- [00:28]
A
It's great. So I'm very sorry I missed the interview with Seth. It was a fun story. We warned Seth and his team that this may happen. I was in a soccer tournament with my son. I honestly thought they were not going to make it to the final. They actually made it to the final and as a result of that, I couldn't be in the interview. So a bit sad and a bit happy at the same time.
- [00:51]
B
We definitely miss you and that was a very fun conversation notwithstanding, I know
- [00:55]
A
it's a great episode. Congratulations. One of the great stories of the last few decades is the rise of the asset and wealth management industry, which we can define as the industry that serves institutions and families by providing them curated access to capital markets. In recent decades, we have seen enormous accumulation of wealth by both university endowments, charitable foundations, and certainly family offices. This wealth needs to be managed professionally and tactically in a world of increasing economic volatility. As important, each group has distinct characteristics with regard to taxes, flows, liquidity, and so on. The future looks very bright for the wealth management industry. For example, families with a net wealth of over one half of a million dollars are growing fast. They seek personalized advice and investment solutions that take advantage of attractive opportunities and diversification while minimizing taxes. And the industry has gone from a handful of private banks catering to the very few ultra wealthy individuals and institutions, to a global managing trillions of dollars. Challenges remain, of course, and including the risk that technology will make the industry more competitive, potentially leading to the winner take all outcomes as we've seen with previous technological revolutions. Now our students are increasingly interested in this field, and I have discussed that interest often with our guests today. So to talk about all these issues, we cannot think of a better person than our very own Kristin Gilbertson. Kristin is the Chief Investment Officer of Access Industries, a private global investment company founded by Len Blavatnik that also serves as its family office. She was previously the Chief Investment Officer of the University of Pennsylvania Endowment and a Managing Director at the Stanford Management Company which manages the Stanford's Endowment. She began her investment career at the World bank in Washington, D.C. and we'll talk about that episode of her professional biography. Christine holds an MBA from the Stanford Graduate School of Business and a BA in Economics from Harvard University. She has been an adjunct professor at Columbia business school since 2018, and she was named Institutional Investor magazine's Large Endowment Management of the Year in 2009 for what the magazine called her innovative strategies and fiduciary savvy. So let's explore all that savviness with her. Kristin welcome to the Value Investing with
- [03:18]
C
Lance podcast and thank you for having me.
- [03:22]
B
Kristin we'd like to start by asking our guests a little bit about their early life. So tell us where you grew up, why you chose to major in economics, and while you were in college, did you have any noteworthy courses or professors?
- [03:34]
C
I grew up in Tulsa, Oklahoma. I went to Harvard and studied economics. As Tana mentioned, I was interested already even before I applied in economic development. I'm not sure why. A book by John Kenneth Galbraith on economic development appeared in my hands and I read it and I subsequently met a friend off in some summer program who had two parents who are agricultural economists, one of whom worked at the World Bank. Heard a little bit about the bank and I knew I had found my childhood or my life dream at the age of 16. And so when I got to Harvard I thought I would focus more on economic development, but I found that I was much more interested in economic history because you had all of the data. And you know what happened. When I think of who were my more memorable professors, it would certainly be Peter Timmer. Peter Timmer was focused on food policy, applied economics, Jeff Williamson, not John Williamson, but Jeff Williamson, the economic historian. Very data driven approach. And then a very important professor to me was Carol Leonard. Carol Leonard wasn't an economist, she was a historian. And Peter Timmer introduced me to her and she very generously helped me with my senior thesis on Russian industrialization. I could not have done it without her and her generously sharing so much data from from the archives with me. And then last but not least was my Acton section leader. I promise you a little bit of a surprise in my podcast and my section leader was none other than Peter Navarro. And Peter was fantastic. He is a really great teacher. He had a gift for explaining basic concepts very easily.
- [05:31]
A
But it's interesting this passion of yours for if I can bring it back to this thing of economic history, this is something that my students I Know you do too. As. As well, Michael. Economic and financial history. And that you are kind of an economic history buff yourself because there are many, many lessons there. One can draw from that. If one knows how to read economic and financial history and know what is different today. There are many interesting things that can be understood. And the data revolution in economic history. We had a Nobel Prize granted last year to exactly that in that on acemoglu, Simon Johnson and Robinson. That was a remarkable moment of arrival for an economic history that is data driven econometrics founded and so on and so forth. So it's remarkable that you were there already with that inclination. You graduated from Harvard Economics, Kristin, what do you do next? You go immediately to Stanford. You went to work for someone. What do you do right after graduation?
- [06:31]
C
I had thought at the time I graduated from Harvard that I would eventually get a PhD in economics like yourselves, but that I wanted to get a job and experience the economy first. My father was a surgeon, my mother ran his office. I didn't really have a lot of experience with business and I got a job in consulting. I worked for a Bain spinoff called Corporate Decisions and that was where I got my first real introduction to business. I had a client in the pharmaceutical industry. I was working on salesforce management and incentive compensation design, not something I studied in Act 10 with Peter Navarro. And I learned a great deal from that experience and it awakened in me a real interest in business problems. And I got a lot of really valuable training. These analyst training programs, whether in investment banking or in consulting, you learn a whole framework for analyzing data and you also get introduced to the language of business as well as developing presentation skills and communication skills. It was invaluable training and I really owe a lot to my mentors. Mike Avanisco, who's one of the founders of the firm, and Dan Hawkins. They taught me so much and were just so incredibly patient with me.
- [07:54]
A
So if I can add one thing about this before we go to the next stage in your career, these training programs, whenever my students come back and have a conversation after the first or second years and they've gone through some of these programs, what is interesting about them and when I think about the contrast with academia is that they're very focused on first order effects in a way. In academia, because we're academics, we're interested in many things, even big or small, it doesn't matter to us that much as long as it is interesting. What is interesting about these programs? Investment banks, consulting companies. You have to focus on what drives say 50, 60% of the variation. That's the first thing you have to understand. And you have to have a good handle of this first order things before you can move into more esoteric or refined analysis of the issue at hand.
- [08:45]
C
In a way, one of the things that the partners ingrained in us was this concept of so what? You would present your data, your analysis, all of your Excel tables, and they would come back to you with the question always, so what? So what does this mean? What would you do with this?
- [09:05]
A
Exactly? It's that practical orientation of data collection and analysis that is so remarkable about these programs. I couldn't agree more with you, Kristen.
- [09:13]
B
From there, you do go to business
- [09:14]
A
school, is that correct?
- [09:15]
C
Yep. So I went to Stanford. I picked Stanford over Harvard because I was great as an independent contributor, but I really needed to learn how to work better in teams. And one of the appeals of Stanford at that time was that they didn't allow you to publish your grades. And as a result, you could experiment in your study group and you could experiment with the classes that you took because you didn't have to worry what your grade point average was going to be at the end of the day. And we would deliberately experiment with wacky study group formulations to just have the experience of working with different kinds of people, clearly.
- [09:59]
B
Value investing. The home is Columbia Business School with all our great luminaries. But there was also an individual at Stanford, Jack McDonald, who was probably the west coast great value investing teacher. Did you bump into him at all or know of him or take his class by any remote chance?
- [10:14]
C
I did not. The class I did take was Jerry Meyer's economic development class, which was a very odd class to sit in the business school. And he gave us a whole toolkit for doing structural adjustment loans and structural adjustment programs, which was incredibly important to me when I interviewed later for the World Bank.
- [10:38]
B
So that's a perfect segue. Tell us about your experience at the World Bank. How did you get there? What did you do for them when you initially started there?
- [10:44]
C
I started at the bank in something called the Young Professionals program. And the YP program is where the bank typically will bring in the future leaders of the bank. It was almost a miracle, honestly, given that I didn't have a PhD in economics, but it was 1992. I had an MBA. I had private sector work experience. I could read a balance sheet. And I happened to speak Russian. And it's not because I have Russian background, my family's mainly Scandinavian. But it was. I fell in love with Russian Literature as a child. And then I had the opportunity in a public high school in Tulsa, Oklahoma, to have Russian class. And by the time I graduated high school, I was proficient enough. I could read War and Peace in Russian. So that's how I ended up at the bank. There weren't that many people like me in 1992, and the bank was gearing up to help Central and Eastern Europe with the transition. And so for the first six years of my bank career, I worked in the western half of the former Soviet Union. My first project was in Latvia, where I worked on a municipal finance reform project. And we got to dive into intergovernmental fiscal relations, the same issues that we're hearing about today in China. It was all very exciting.
- [12:09]
A
I mean, it's a fascinating moment in modern economic history, that remarkable transition of Eastern Europe. And it seems to me that your interest in development finally took you there. You sought that job at the World Bank. Is that something that you wanted to do? After the Bain experience, you took courses again in economic development at Stanford. So you wanted to do that. Is that something.
- [12:35]
C
It was a dream come true that I was able to marry my interests in economic development with my interest in Russian studies, Russian history, Russian culture. And it was a historical accident that the Soviet Union had fallen apart. And I was given the opportunity to work for the World bank in what were the newly independent states and in Russia itself.
- [13:06]
A
What is striking about this, and this is where you finally get into investment management, is that the next stage in your career also happens inside the World bank, so to speak, when you migrate from the policy side to the investment side. So can you tell us a little bit about that transition inside the World bank when you moved to the investment side? How did that come about?
- [13:28]
C
Joined the investment department in July 1998. My intention was just to go there for a year to get a break from all the travel. I had spent probably 150 days outside of the country in the prior year, and I just wanted to be at home for a little while. I was going to help the CIO organize a conference in Asia on pension investments. In return, I was going to learn something about investing. And I ended up really enjoying it. I worked for Afsani Beschloss, who was then CIO at the World bank, and I was surprised how much I enjoyed working on investments. You meet a lot of smart people. It's interesting problems. The research process is similar to consulting. Three to six months to figure something out and move on to the next problem or issue. And I was good at It I enjoyed managing a portfolio and having a bottom line rather than advising people. And so I stuck with it. And I never thought I would leave that job either. But I got a call from Stanford. Mike McCaffrey was then CEO of the Stanford Management Company and they needed a new head of public equities. He had hoped he'd find a Stanford MBA willing to take the job. But it was 2002. The industry, as you'd mentioned, Tano, was just developing. There weren't that many endowments that ran like Yale or Harvard or Stanford. And there weren't a lot of people at Stanford MBAs who are working as asset allocators.
- [15:05]
B
So, Kristen, let's launch into university endowments. Once you got to Stanford Management Company, tell us a little bit about what you were actually doing. Did you sort of bring an investment philosophy with you to Stanford or is it something that was there? How did you approach that job when you took that set of responsibilities?
- [15:22]
C
So if they dial back to the time, it was 2002. So we had just gone through the TMT bubble bursting and September 11, and the stock market had dropped. The S and P was 667. Equities had hit lows. The value growth twist had already just happened. And so when I first got there, I had to review what I had, what was in the portfolio. Stanford did not manage money directly. We had a portfolio of external managers. And what I found was that Stanford had a very deep value tilt, which had not served it well in the 90s. Thankfully, they had held on and it served them very well during the TMT bubble bursting. But I felt at that moment in time that that deep, deep, deep bet on deep value had run its course and it was time to start moving the portfolio to maybe more balance. One of the big dilemmas at the time for the board was how much of a tilt and how much exposure to have to international equities into emerging markets. And there was a time when, similar to today, where US equities had dominated and having a large position in international emerging had been to the detriment of the portfolio. And when I came in, the board had actually been geared up to significantly reduce that exposure. And I came in and I made a very rational argument for why we should stay in that position on valuation grounds. If I remember correctly, the PE of emerging market equities was only 7 times. At that time, international equities were trading several turns less than US Equities. The growth differential wasn't as apparent back then as it has been more recently. And then in many instances, there were some really positive dynamics. So in emerging markets, they'd emerge from the crises of the 1990s. You had Mexico, you had the Asia crisis, you had the Russia crisis. But all those countries had rebuilt their balance sheets, rebuilt reserves, and were actually on a path towards sustainable growth. They had reduced budget deficits, they had improved the current account. And that was probably my first win, was arguing successfully with the board and convincing my CEO that we should hold on to those positions and if anything, we should amplify those.
- [18:00]
A
So that's an interesting story because I always feel that the crisis in the late 90s in Asia, Korea, which of course was a big story, Russia, Brazilian contagion, ltc. And they got a little bit obscure because of the run up in the NASDAQ and the burst and people kind of lost sight of what was going on in those emerging markets. How many years did you stay at Stanford Management?
- [18:26]
C
I was only at Stanford for two years. And I would not recommend that as a career strategy, especially as an allocator and as an investor. You build a track record over time and you can only leave quickly once. You can do it multiple times. But I had a rather unique opportunity. I got a call from a headhunter to interview for the Penn CIO job. And the Penn Endowment had been very undermanaged. They didn't have an Investment Office until 1998. So significantly after Harvard, Stanford, Yale, MIT, University of Virginia, Princeton, and you think of Penn, Penn has, Wharton has launched so many great investors. But the endowment itself was under managed. And that's part historical accident. They had had John Neff, who was not a Penn alum, but a very legendary investor behind the Wellington Windsor Fund. And John Neff had agreed in the 70s to run the Penn Endowment pro bono para passu with his. And that was a recipe for success in the 80s. But in the 1990s, things were evolving and Penn had not kept pace. So Penn didn't have any investments in private equity or venture capital or hedge funds in the 1990s up until 1998. And so many of our alumni were not just in the field, they were leading the field. So it presented a challenge for Penn in two ways. One, Penn didn't get the benefit of returns, early returns in those asset classes. And second, we were alienating our alumni base, our most successful alumni, because we weren't investing or even listening to what was happening in their asset class. So it held us back in two ways, both the portfolio and then also with our development efforts and engagement with
- [20:29]
A
alums and do you think that's the reason why universities started running their own portfolios? It's kind of a way of leveraging to some extent that extraordinary alumni network these great schools have produced over the years. Combined with the rise of private markets, the ability to invest that somehow was unique to universities.
- [20:49]
C
I think that's why the universities were really first. Granted, Penn was a little bit later than some of the others, but we got there and I'm so grateful that they hired me and gave me the opportunity to work with them to develop that portfolio. But I do think the reason the endowments were arguably first to really pursue this style of investing was because we had these terrific boards and these terrific investors who were out in the field furthering finance and investing. And it was with their help, their support, their urging, that we pursued these strategies.
- [21:31]
A
So can I ask you, before we go back to your own personal experience at Penn, Christine, for the benefit of our audience, can we describe briefly the job of University Endowment manager? What do you do? What are your responsibilities, a university endowment manager? What are the constraints under which you operate? Why don't you give us an overall high altitude view of university endowment and your responsibilities there and then we'll go back to your career, specifically at Penn.
- [22:00]
C
As the cio, you're responsible for liaison with the board. One of your most important responsibilities is setting the asset allocation with consultation with the board and, and then you have a team of four or five, six or seven investors working with you. These managing directors in turn would have a portfolio of managers that they had selected. And you spend a lot of time in your daily life is understanding what you have, being on top of your managers, understanding how they're positioned, making sure that they're focused on and doing what you hired them to do. The second thing is you're constantly trolling, looking for new opportunities and new prospects. So one of the things I did first at Stanford and then later at Penn, I was one of the early investors in Japanese activism, starting back in 2004. And it happened because I was sitting at my desk in Palo Alto. I got three requests for meetings the week before Christmas from people returning from Japan. I had John Elkire, who was the head of Morgan Stan, I had David Barnard, who was the head of Japan equities at Wellington in Boston. And then I had a hedge fund manager, Tom Niedermeyer, at Liberty Square, long short guy, all coming and wanting to talk to me about the very same thing, which was this opportunity and deep value, small and mid cap Japanese equities, where there had been corporate governance challenges. And it was just the confluence of having three people come and see me in one week and. And you could not have imagined three more different men with three different investment styles, all excited about the same thing. And then it started a process of digging into it. And I found Yoshiaki Murakami, who is then at Mac and really the father of Japanese activism. And that's what you spend your time doing. You're looking for a couple of great investment ideas, and then you're looking for each of the buckets that you have to fill. You're looking for the absolute best investment managers that you can find.
- [24:12]
B
So you get appointed as CIO at Penn in 2004. The endowment at the time was around $4 billion. You'd mentioned before that John Neff and Paul Miller were running the portfolio. So what did that portfolio look like that you inherited and what were your goals to reposition it for the future?
- [24:30]
C
On the asset allocation, my immediate goal was to start moving ourselves towards what I called Stanford 2000. So a 35% target in the illiquid alternatives to maintain our hedge fund exposure. We actually had a very nice hedge fund portfolio at Penn that Narav Narvikar, who's now at Harvard, had put together in the couple of years that he was there before leaving to go to Columbia. And then I retooled the public equity portfolio to reorient it. And I can talk a little bit more about that. But one of the first orders of business was to build out the venture portfolio. I was very fortunate in that I had an alum at Benchmark Capital, which is one of the premier venture capital firms, and he was helpful with introductions and helping me get networked into the best venture capital funds. One of the rules in venture capital is that you don't allocate towards a specific target. You allocate towards opportunity. You only want to be in the very best venture capital funds, and it really doesn't pay to invest in any of the others. One of my early wins was getting into Sequoia, which is kind of an interesting story. It gives you some sense of what a CIO does. It's 2004 and Penn has no allocation whatsoever. And everybody knows that Sequoia is the preeminent firm at that time. And so Andy Ratcliffe, my alumni mentor, venture godfather at Benchmark, got me a meeting with Doug Leone at Sequoia. And so I met with Doug and I must have said the right things. And I did pretty well because the meeting went on for an hour and I told him about myself. I told him that I had come from Stanford, even though I ran public equities at Stanford. The fact that I had been at Stanford, which has the best venture capital portfolio, meant a lot. They thought something had rubbed off on me and I understood how it worked. Part of it is building the relationships, especially with the investors who are very proven, who are running strategies that are capacity constrained. And as a lot of the VCs will say, you're picking investors that you want to help, the institutions you believe in, the institutions that they represent. You want to do good with your investing. And also you want people that you like. And I think having that client experience from my consulting days, having to work with ministers of finance and prime ministers at the World bank, it did give me some awareness that this is a people business and a relationship business. And you need to treat people with respect and with a certain amount of deference when they have greater wisdom than you do and build a relationship.
- [27:28]
B
So Kristen, I do want to follow up and ask you, people today are used to these multi billion dollar fundraises, how big are these early stage funds? I know the benchmark was $500 million with an M. Were these Sequoia funds the same type of size, relatively small given what we know today?
- [27:45]
C
It was at that time. And these things just don't scale. The one thing that has changed a little bit and what's interesting about investing is it's always changing. You can't rest on what you used to know at the time of Facebook. Mid to late noughts, these B, C and D rounds were becoming much more compelling and interesting because you had more visibility on the companies, it was easier for the companies to scale and so you could actually write larger checks behind a proven business model. And the game that the venture capitalists and the entrepreneurs were playing would be to be there first, get scale early. And so they were deploying a fair bit of capital and you could size up, but it wasn't in the A round, it was often in the later rounds.
- [28:38]
A
So Christine, I want to go back a little bit so I understand this point about this being a people's business where these personal connections. Now something striking about the moment you arrive at Penn is that risks were accumulating financial markets. You were going to do very well during the global financial crisis in 2008. So I want to know a little bit about what were you thinking, what were you seeing, what kind of support you had in order to build that risk management that you were building at the portfolio? How were you Thinking about the accumulation of risks that was taking place in the real estate market in the United States. And how do you position the portfolio at Penn to protect yourself against those increasing risks?
- [29:27]
C
I think it started with a couple of board conversations. Howard Marks was my board chair at Penn, and Mark Winkelman, who'd been at Goldman Sachs, was on the board as well as David Silton, also Goldman Sachs. And the three of them would talk about increasing risk. I would go out and I would talk to my hedge fund managers about increasing risk in the system, but I would find that they were running 40, 50% net long. They were running with gross exposure of 150 or 200%. And I wasn't seeing a lot of risk with my managers. I would ask the question, but I wasn't really understanding what was all this risk that everyone was worried about until I was cleaning my office. And it was early 2007, and I stumbled across an old Miller, Anderson and Sherrod. Now Morgan Stanley Fixed Income Report. And I kid you not, it was about 3 inches thick with all the holdings. And I'm looking through the summary and the exposures are approximately what I thought they would be, what we wanted. But then I'm digging into the holdings and I was stunned and surprised to find a whole lot of crap within what was the cash portfolio. There were Sieves, structured investment vehicles. There was New Century Financial. And we had just seen, I want to say it was Indie Mac had just failed earlier that year and a light bulb went off and I started asking questions and a lot of questions about fixed income. And so we completely turned our fixed income portfolio around, put it in treasury bills and Treasuries. We just tried to do what we could to bulletproof the portfolio. And meanwhile, I'm telling my board that I've discovered all this risk and I'm doing this and I'm doing that. And they actually reached out to the EVP of the university, who was my boss, Craig Carnaroli, out of concern that I might not be okay. I seem to be very stressed out, but I felt like it was a race against time to get everything in order to make sure our billion dollars of cash was safe, to make sure our hedge funds had appropriate prime brokerage arrangements, that we didn't have unintended financial sector exposure. And I got some great advice from Howard at one point. It was early 2008, Bear Stearns had already happened, and we were getting ready to put money into distressed debt. And we were trying to decide do we shift it out of fixed income or do we shift it out of equities? And Howard said to me, you've been right so far, and if you're worried as you are, wouldn't you feel better with a little bit more cash or a little bit more Treasuries, if things really go off the rails, than not? And so we funded from equities into hedge funds, which were less risky than our equity exposure, and we kept the treasury exposure a little bit longer than we had planned. I'd say during that whole period, the board trusted me. And I would say when things got most difficult after Lehman, when things started happening, that if we had squabbles in the boardroom about different views, all of that disappeared after September 15, 2008. We were all one team, and you couldn't have had a better team in your foxhole. The board was very experienced, very supportive, and it also helped that we were well positioned and we didn't have liquidity problems like some of the other endowments at that time. But we really function very well as a team, and the same with the team in the office, too.
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A
What is interesting about this, and this is a wonderful vignette on what a trip down memory lane. The months and years before the global financial crisis, when we were learning about these risks that until then we thought were small counterparty risk, or learning about structured investment vehicles and all these acronyms that we learned about during that period. It's really a remarkable period. So this is a good segue into the next question then. So can we shift a little bit? And now we want to explore a little bit more your investment philosophy. As an institutional investor, you are ideally positioned to tell us about portfolio construction. How do you think about exposure across asset classes? How do you think about that problem? How do you think about tactically reallocating away from some asset classes into other asset classes? Depending on what you see is the constellation of expected returns and risks across those asset classes. Why don't you tell us a little bit about that aspect of being an institutional asset manager?
- [34:34]
C
The first thing to understand is that even the best managers in the world are only right 60% of the time. The reason they are still around is because they become very adept at portfolio construction, risk management, and so they can amplify the 60% of the time that they're right and can stay alive to continue to be right. That influences what you do as an allocator, because I'm not as smart as my managers. You know, I got to work with some of the great talents in the industry, and I'm not as smart as they are if they're only right 60% of the time in picking amongst a multiplitude of stocks, how can I be right in picking the direction of the US equity market or any other asset class? And so I think it's really important to approach the problem with a degree of humility of what you can know and what you're unlikely to know. And you're unlikely to know the direction of markets in the next six, 12 or 18 months or even three years. And so having a fixed asset allocation as a starting point is really important to all institutional investors and it's important to retail investors as well. As my CIO at Stanford used to say, the steady hand wins if you're not steady, if you don't have a default asset allocation, that you tend to buy high and sell low and you chase momentum. You need to work with your board and figure out how much risk you can take, how much illiquidity your institution can afford to take on, and then define an asset allocation that can survive in a variety of scenarios and then more or less stick to that. And yes, of course, you can be tactical. During the financial crisis, in the lead up to it, we were tactical. We overweighted quality, we underweighted financial stocks, but those were calculated bets and we knew the risk that we were taking.
- [36:43]
A
Christian, you mentioned this thing of quality. Can you tell us a little bit more about that? I mean, what were you looking at to assess quality in the public equity portfolio? What are the metrics that you use to assess qualities? Can you tell us a little bit about that?
- [36:57]
C
I really learned from Jeremy Grantham at GMO back in. I think it was early 2004, maybe early 2003. Jeremy, he does all this quantitative analysis and he identified an anomaly in the markets that quality should trade more expensive than the market was actually trading cheap to the market. And so he started to dive into it. And he defined quality as balance sheet strength, earnings stability and high margins, defensible moats. I studied the product. It wasn't even a product at that point. It was a couple of slides and I had pushed do you have a product? And so at Stanford, we were one of the early investors in GMO quality. I also invested in at Penn, and it was really through Jeremy and Ben Inker's research on quality and that I learned about it.
- [37:58]
B
So, Christian, you've been CIO at Axis Industries for about a dozen years. Can you tell our audience what Access Industries is, what responsibilities you have there, and finally how it's different than your experience with pension plans at the World bank and a couple of endowments.
- [38:15]
C
Axxess is a private holding company. Our founder is Lem Blavatnik. Len is actually a Columbia alum. He went to the School of Engineering, also Harvard Business School. And Len is an investor. So it is a family office and every family office is different, particularly a founder led generation one family office. Len has made a series of fortunes in large individual positions and what were buyouts. So Lyondell Bissell Chemical company in the Netherlands and in Texas, Warner Music needs no introduction. That was originally a buyout deal. And now Dazn, which is private. A growth equity investment in sports broadcasting. Len is one of the great investors of our time. Has made serial fortunes investing. He had reached a point in his wealth accumulation and had just sold one of his portfolio companies. And his advisory board of trusted peers had suggested maybe he think about getting an endowment cio. And so I joined Access. I can't believe it's been 12 years ago, almost 12 years ago. And I didn't know if it was going to be a step down job or a step up job. But I really like Len. I really liked his CEO Lincoln Benet. They're very straightforward people. If you ever go to a family office, the first thing you need to know is you're working for a family, you're working for an individual. And you really got to like and trust the people and be one with their culture. They're great people. And what I found is that it's both less stressful than being at an endowment because you have one client, you have your principal or your family, you have one client that you have to keep happy. You don't have multiple constituencies. And it's a step up job in that I am surrounded by direct investors. I've always hired them, hired and fired direct investors. But I've never worked alongside them and seen how the sausage is really made. And I've learned so much from my colleague. Jonah Sonnenborn, who runs our real estate portfolio, is a Columbia alum as well and involved with the Halbrand Center. Don Wagner, Pueo Keffer, Guillaume Daudeville. I have learned so much from my colleagues of watching them work on direct deals and I can bring that to my allocating. It's very different because I am not managing the whole thing as I did at Penn. I am managing a small sleeve of lend's net worth. It's still a significant sum of money, but it's not the totality. And I play a very particular position on the field. Because so much of what lend does is large, chunky strategic positions. I am managing a more liquid portfolio. So I'm focused on long only public equity. I'm focused on tax efficient hedge fund strategies. But I'm not allocating to 20 private equity funds across three or four different vintage years. I'm not allocating to real estate, not because I don't think it's a great asset class for a high net worth family. I'm not allocating to real estate because I have a colleague on the other side of the wall who's a direct real estate investor. And one of the advantages you have in a very large family office is that you can control your own tax destiny. If you're in a fund, it's the fund that decides when to buy and hold. And often the funds are indifferent to taxes because a lot of them are making money on the carry. And so they may drive a realization thinking only about their carry and not thinking about your after tax returns. We can affect our tax outcomes if we decide not to sell, if we just hold, if we have a longer term holding period, or if we invest in strategies that have more longer term capital gains than short term gains. And so the biggest difference being in a family office is that you play to the skills of your team and you adjust to what they need from you. Because every family office is different. Unlike the endowment world where they're all managed the same way now there's virtually no diversity. Every family office is different and we all have specific roles to play on the team to complement what Len does. And then we have to think about the after tax return. Very different.
- [43:05]
A
So I want to shift gears as we get into the end of this interview. You teach for us one of the most successful courses in the program, the seminar in wealth management with Andrew Gunlach. And as you know, you and I have discussed this before, our students are getting increasingly interested in this area and I wanted to know a little bit about how you see career paths for young people in this space. Whether you have any word of advice. How do you manage your career to end up having the extraordinary career you are having? What can you tell our students on that score?
- [43:42]
C
Well, it's really easy to get an entry level job now in the endowment world because we're all sold on having analysts and associates. So those first jobs are very easy to get. Gets a little bit harder in the middle ground post MBA and higher. The best advice would be to go forth, get some background in investing, learn something, become an expert on something, and then save Some money. Don't get used to the lifestyle because if you're going to join an endowment, you'll get paid well, but you're not going to get paid top dollar. So don't get too accustomed to your Hamptons beach house and then start networking in the space, getting to know people. And I think the best opportunities are often with the bigger institutions where you may have a very experienced CEO or cio, you may have very experience managing directors and they have room to bring in someone at the director or the associate director level and to give you that time in place to learn because it is a different skill set. Let's say you're coming from public equities, you've worked in a hedge fund, or you've worked for William von Muffling at Cantillon, and you suddenly decide you want to be an endowment cio. Well, you know stocks, you know, a portfolio of stocks, a universe of stocks. But you don't know all of the managers. You have to learn the managers. Just like if I were to switch gears, I'd have to learn the stocks. And then lastly, on the family office side, I think that is particularly interesting for people who are a little bit later career and may have been at a hedge fund or a private equity fund and don't want to go out and raise money or manage a business at that later career stage. Going to a family office, particularly a mega family office, could be a really interesting career option and could be incredibly rewarding and a nice change of pace. Not having to raise money, not having to manage a whole business, being able to focus on investing and being aligned with a good family and with good people, many of whom, like Len, is extremely charitable. You can feel proud working at an institution like this.
- [46:19]
A
We're getting then to the end of our interview. Christine, Michael and I always ask the same two questions to finish our interview. Let me start with mine. Which is what worries Christine Gilbertson about the future and what excites you, what keeps you awake at night as well.
- [46:34]
C
The biggest question that I'm trying to solve right now from my portfolio is how to think about about that handful of mega cap stocks that's been driving returns. When I was leaving, Penn Howard and I collaborated to maintain and fight for our public equity exposure at a time when everyone was arguing for more and more privates and more and more funky illiquids. And that has been a good call. And if you think back to that time, you could buy Microsoft for 12 or 13 times earnings. You could buy Google for something similar. Apple for something similar. And now all Those stocks are 30 plus times earnings. They're still great companies. They're arguably greater companies than they were before. But are you going to make 15 times your money from this time forward? I don't think so. If anyone has any great advice on that one, please let me know. And then the opportunity I think one things I'm spending time on is on this question of tax efficient returns is more time on ETFs and institutional ETFs. ETFs are a great product for retail investors, but they really haven't broken through in a big way to institutional investors. You've got the passive ETFs, but you're seeing increasingly active ETFs. And I just think it's a great product and a great vehicle and trying to see if there are ways that I can use that in my own portfolio here at Access.
- [48:12]
B
So Kristen, what are you reading or listening to these days? And are there any books or a book that you would recommend to our listeners?
- [48:20]
C
So one that I particularly like, and it's a little bit nitty gritty, is something put out by the Greenwich Roundtable and they have a best practices series. And my absolute favorite is the report on due diligence for alternative managers. It's fantastic. It's about 50 pages. It's a checklist of all the questions you should ask when you're hiring a manager. That would be my number one. And my number two for historical perspective is David Swenson's book on pioneering portfolio management. It's a classic. I think you have to read it now almost as a historical piece, but that also adds a degree of complexity to it that makes it even more interesting than it was at the time it was written. It's a classic.
- [49:13]
B
That's excellent. And some of those papers are available on greenwichroundtable.org, so if people want to go check that out, they may not find all the things you just described, but they'll find a few pieces they put out.
- [49:25]
A
So this is what this podcast is all about. It's not that you only have to listen to a wonderful guest, but you have to do your reading too. Kristin Gilbertson of Access Industries, thank you so much for coming to the Value Investing to Glean podcast. It's been wonderful conversation.
- [49:39]
C
Thank you. And Tano, I have to thank you for letting me be part of the value investing program at Columbia. I've learned so much and I love being part of the Columbia community. Thank you.
- [49:50]
A
We're so lucky to have you thank you so much, Kristin, and to all of you, thank you so much for listening and we will be putting a new episode very soon.
- [49:59]
B
Thank you for listening to this episode of the Value Investing with Legends podcast. To subscribe to the show or learn more about the Halbron center for Graham and Dodd Investing at Columbia Business School, please Visit Graham and Dodd.com thank you.