Chris Brightman Discusses the Investment Industry

ways to approach constructing a portfolio? Research Affiliates their models run about two billion dollars worth of offerings. Uh. This is quite a fascinating conversation and I think you'll find it very intriguing. So, with no further ado, my conversation with Chris Brightman of Research Affiliates. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My special guest

today is Chris Brightman. He is the chief investment officer of Research Affiliates, whose investment strategies currently manage over two hundred billion dollars. He's previously he was the board chair at the Investment Fund for Foundations. UH. He was the CEO of the Strategic Investment Group and director of Global Equity Strategy at UBS Asset Management. Chris Brightman, Welcome to Bloomberg. Thank you for having me. So that's a really interesting

um resume. You've worked at some very storied places. What first attracted you to the field of investment management. I arrived at my university, Virginia Tech, having been accepted into the Liberal Arts UH School, and after listening to the dean of the Liberal Arts School address the auditorium of new students explaining why you'd made the right choice, I approached the podium and said, I think I'm in the wrong place. I want to go to the School of Business.

And without missing a beat or even seeming to notice the irony, the dean said, oh, yeah, well you walk down three you know buildings over that way, and and I changed before I even began classes to the business program, mostly because I figured, you have to understand, this is the seventies. I wanted a job when I graduated, and I felt like majoring in business would would be more

likely to lead to a job than Liberal Arts. I don't know if that was right, but that's that's what I did, and then I chose, and I chose finance because it was more interesting than accounting. And for some of our younger listeners, the nineties seventies was a period of stagflation, high inflation, and high unemployment. Um, what was it like coming out of school into that environment. The I graduated in the early eighties, and the early eighties were an awful time. There was a nasty recession and

I was really lucky. Actually right two was horrible. Eighty three was a little better, and I was lucky to graduate in eighty four and eighty five was boom times. It was great. But the but I graduated in eighty three. And what I think really got me into the investment management industry was an internship that I had with the

First Chicago in nine over the summer. And uh, my internship was with the institutional trust department at First Chicago, which later became First Chicago Investment Advisors, which later became Brinson Partners. And Gary Brinson, the founder of Brinson Partners, was one of my was really my first mentor in the business, beginning in two So you were working on

the endowment side of the street. How does the endowment side differ from working with retail investors and people whose money is with four O one ks and iras, etcetera. I've had about a three and a half decade career, thirty five years in the business of which I took a rather brief five year detour into the nonprofit area managing the University of Virginia Endowment, and it differs in a number of ways. Probably the m most interesting to an outsider is the access that one gains two elite

investment managers. How big was the endowment at the time, over five billion? Okay, so that's real money, I think, interestingly, though, it's less challenging. It's an easier job. I'm so surprised you say that. And maybe this is me projecting, but I would imagine that running an endowment, and and my frame of references all the craziness we've seen with the Harvard Endowment over the past twenty years and what recently happened with the Yale Endowment and Swanson, I would imagine

there are so many political constituencies to deal with. You were the c i O at the Virginia University of Virginia Endowment, and that covered what school or schools? There's just one endowment five billion dollars. Actually, fascinatingly enough, Uh,

it's much more complicated than that. The University of Virginia has dozens of nonprofit organizations, all of whom have their own fundraising staff, their own endowments, and the University of Virginia Investment Management Company, a five oh one three c nonprofit corporation with its own board and its own audit, its own charter, etcetera, serves as an investment advisor to those various uh pools of money. So in many ways, while I was there, I did have to address many

different clients. Uh. And it is very political. You're quite correct about that. Do they all invest the same way? Or does each of them have a different investment philosophy and in a different set of goals and therefore a different portfolio. Look, you VIMCO, the University of Virginia Investment Management Company, pools the money and invested in one, uh fashion. That said, all of the different pools of money don't have to invest with the University of Virginia Investment Management Company.

They can if they choose, or they cannot, or they can invest part of the money. For many years, the law school wasn't convinced that it wanted all of its money in the in the pool. So just part of the law school endowment was invested in yu Bimka. So I would imagine that investing on behalf an endowment today is even more challenging and complex, given everything we've seen with socially responsible investing low carbon pick pick your poison.

I can imagine that's what I meant by the constituencies UM, because when I would you and I are about the same age. When I was in college, I remember um divestment from apartheid and people wanted to pull money away from South Africa. I can't imagine what it's like today in the college atmosphere. It seems to be everybody is much more sensitive to specific causes than perhaps when you and I went to school. It was that was present when I was there. I don't know that if I

really can't say whether it's gotten better or worse. You brought up the interesting example of the Harvard Management Company. Uh Jack Meyer, truly a great investor, was essentially chased out by alumni who thought it was obscene that investment managers were at the Harvard Management Company were compensated as they were uh. And that's probably the highest profile political

UH snaffoo, but it's by no means um limited. I recall UH you Timco University of Texas investment management company renegging on their incentive compensation plan that they had promised to their staff that would be get litigation at least not now. The staff they were very high integrity people. They just they just sucked it up and took the hit to their compensation and really continued on. Yeah. See, I think you encourage bad behavior when you allow people

to not honor their it in contracts. So I don't want to be that moral hazard is a problem for me. I uh. But when I said, getting back to why, I said, I think it's a little less challenging. The job is very straightforward. You understand who is the beneficiary of the assets being managed, You understand what the objective is, and you have a very clear notion that I'm I'm investing for the university to generate funds to pay scholarships,

to advance research, to support the university's general mission. And you're not uh competing uh every day for a fickle group of UH clients and investors. The for profit investment management industry where I've spent thirty years as opposed to UH five years. You have all of the same complexities and difficulties and challenges of investing, which makes the job so fun and interesting, but a whole additional layer of complexity of competing in the business of the investment management industry.

My special guest today is Chris Brightman. He is the chief investment officer of Research Affiliates, whose strategies run about a hundred and seventy billion dollars in assets. Let's talk a little bit about smart beta, which is really a phrase Research Affiliates founder Rob are Not is credited with. If not inventing, will certainly um publicizing UH tell us what smart data is and why investors should be thinking

about it well. Smart beta is a fun and provocative label for a substantial and important evolution in the investment management industry. We are able today to take well researched and well understood principles of investment management and use that information to create simple, transparent, low cost investment strategies that deliver more of the return to the end investor and consume less of the return in the fees and expenses

charged to a typical active manager. So so here's the pushback that that the there's a group of folks who look at UM smart data and say, well, it's going to be a little more expensive than just straight up indexing. Up until the fourth quarter, anyway, the S and P five hundred, a market cap weighted index, has been on a legendary streak from the lows and oh nine until let's let's call it September. That's a solid decade, market

effectively tripled. Why should an investor go with a fundamental weighted index as opposed to a market cap weight and index like the SMP. That's a great question, and it depends, I believe, on what an investor is trying to achieve. The advice given by many, For example, one of my heroes, Jack Bogel from Vanguard, that most investors would be better off investing in a very simple portfolio of mutual funds that track capitalization weighted indices and do nothing else. Would

be far better off. If we look at what investors actually do, and there's considerable research on this subject, they tend to chase ads, chase performance, and generate returns that are approximately two per year below simple cap weighted indices Before high fees and expenses. They do that bad. That's what the typical individual investor does, and Jack vocals quite right that they would be far better off simply having a completely passive investment in low UH low cost capitalization

weighted index funds. However, there are people on the other side of that trade. Where does that two percent go That that that some investors are underperforming the market, somebody else has to be outperforming the market zero some gain for every loser that's a winner, and vice versa correct and we know where it goes. It goes to the re balancers, the people that are selling the market what the market wants to buy when market wants to buy it, and buying from the market what the market wants to

sell when the market wants to sell it. And the fundamental index is a simple, elegant way of automatically pursuing that contrarian trading approach of rebalancing against the market. So

that's very much a value driven strategy. You're you're selling what everybody wants, which probably means it's pricey and it's had a good run, and you're buying what everybody hates, which means it's probably cheap because it's so disliked fit fair statement, it's exactly correct, and the market has to pay a premium for that rebalancing, thinking of it as market making or being the house providing insurance. In order

for the market to clear, there has to be that premium. Now, it's easy to say, and it's straightforward to do, but it's not easy to do. It's not easily, it's not easy emotionally to do. And that's why having simple, transparent rules based process aids in that kind of rebalancing and and those investors earn a return over the market. But unless you understand and unless you can stick with the approach,

it's probably not right for you. So so let let me let me jump in here, because um I want to address that unless you can withstand, unless you can stay with it. Value goes through these periodic cycles where it's underperforming the broad indices UH and up until September, what was it a decade of underperformance by value over growth that seemed to have begun to reverse in the

fourth quarter. So first question is, is the under performance period of value always seeing that regression to the mean where value is going to catch up and pass growth. How do you see the an environment um for value given the long term under performance. And by the way, on a regular basis, valuable lag growth and then catch up and pass it. We've seen it in every bear market. What all the hot stocks get crushed? Value blows right

by it. How many times have we heard Warren Buffett is washed up and it never turns out to be true. I think you said it well. Over the long run, history teaches that a value investment strategy outperforms growth. That's been confirmed in every long term study of every market around the world. However, the market will test your patients. There there will be long and difficult periods of underperformance for a value strategy, and only by sticking with it

over the long run will you actually succeed. If you throw in the towel in and and I you know A O. L and Cisco, as lots of folks did right um to their great regret. What I can say is that the dispersion between the pricing of value and growth stocks reached in the last year or two extremes that we almost never see, not quite to the extreme of the tech bubble, but about as significant as we see.

That's perhaps an indicator that the cycle is about to turn, and then, of course we've seen a lot of market turmoil, uh, suggestive of an inflection point. So I I wouldn't confidently predict that the cycle has turned and value is going to go on a a long terror of out performance, but the environment does seem to suggest that that's a

distinct post ability and and less smart beta question. Some folks have said the advantage of smart data and fundamental indexing is that the outperformance comes from taking additional risk. Burton Malkiel other folks like that have said that what what are your thoughts on that? I find the debate about whether factor returns and of course the most uh, the largest, most persistent and longest discovered factor is value are generated by risk or generated by behavior and inefficiency.

The truth of the matter is it's both. They're intertwined. There's feedback. The real world is much more interesting than these dry theories and models. UM, and I guess I would say there is a risk component, and we should be thankful that there's a risk component to the value factor returned because it means that it can't be and won't be arbitraged away. So let's talk a little bit about institutional and retail investors. You've worked with both. You've

alluded that there are some differences previously. What is the most consequential difference between how institutional investors operate and how mom and pop retail investors. I think institutional investors operate in a governance structure and an environment that prevents the

worst investment mistakes UH. Retail investors don't. UM. There are many advisors that try to bring UH this sort of discipline and structure to the practice of retail investing, and I think some many have great success, but not as much as the institutional context. Let me give you a general concept of what the results look like. The results

look like. Retail investors, on average, through being too emotional trading too much UH, generally lose on the order of two percent a year of their returns relative to the broad markets. Institutional investors, after fees and expenses, generally get

about market returns. If you look at the returns before their fees, expensive and costs, they beat the market, but most of that is absorbed by the fees, expenses and costs, the staff, the investment management fee these UH that absorbs most, if not all, of the outperformance UM, but that's two percent better than the retail investor, and I think that's from superior government structures that prevent the worst mistakes. So now, there have been a number of studies that have come

out about both retail and institutional UM. I recently saw something out of n y U Stern School of Business about the underperformance of foundations and endowments versus a simple sixty forty portfolio. And according to to that research, the institutions are barely doing a whole lot better than individuals, at least at these nonprofit foundations, endowments, etcetera. So cost is clearly a factor. What else is the driving factor? You you brought up? It's a zero sum. So for

every win or there's a loser. Are the institutions winning at the expense of the retail investors? Or is there a um a win and lost component between different endowments. Some do well, some do poorly, but on average they get as you said, market based returns. Well, there's a cyclical and a secular UH time horizon. On the secular time horizon, I think we find nonprofits, particularly large university endowments,

tend to get the best results. Pension funds, UH, public pension funds get as I said just a moment ago, about the market return after their fees and expenses, and retail investors lose about two percent a year. That two percent a year is mostly paid to UH professional UH investors and value investors. Now that gets to the cyclical component. UH. If we evaluated the performance of the endowments up until the global financial crisis, UH, there were many books written

about their remarkable decades of outperformance. We've been in a cycle a ten year horizon where growth is outperformed value, and to oversimplify, most endowments are going to be value investors. So I think you've seen a period where value investors have struggled, and it's been a difficult time for the value oriented endowment model. But I think it twenty five years from now, looking back, you'll still see the success

of that model. So I'm gonna ask you to go a little outside of your comfort zone using that same secular versus cyclical time period. The pre crisis era, we are a lot of investments in venture capital and private equity and hedge funds that actually had done pretty well. And since the mid two thousand's, you know, the venture capital has lost a little bit of its shine. None of the big, well known names are performing as well

as they did previously. Same with a lot of the hedge fund guys that used to shoot the lights out, they seem to be struggling. What is it about this past decade that's been so difficult for so many different styles of investment invest Well, there's a couple of things. One, we've had just a stupendous roaring bull market. Uh, And so it just is easy to comprehend from first logical principles that a strategy that is a long stocks is going to outperform a strategy that is both long and

short stocks during a monumental bull market. So that basically explains the difficult perform it's environment for hedge funds. Uh. What has worked? What kind of alternative investment if you want to use that label, has worked over the last ten years? Well, private equity, Why, Well, because they don't just go a hundred percent long, They go hundred percent long with some leverage. So that works pretty well in

a roaring bull market. I would guess if I had to uh put my money on who outperforms over the next ten years, it would be on the hedge funds rather than the private equity UH funds because markets don't always go in straight lines. Up. A lot of your research and commentary um that I find quite fascinating. You're very good at crafting a headline that is intriguing, and I want to just throw a few of them at you and see what you, uh, what you have to say about that. One of them was are we at

peak profits? And I have to ask the question because people have been saying we're a peak profits for I don't know, four or five six years. This whole run up, we've been hearing people say that are we at peak profits? We we discussed all of the monopoly rents and the other issues with chrony capitalism earlier. Organically speaking, Have we

hit the point where profitability can't go higher? Or can this trend continue for the foreseeable future Until policy changes, the trend will continue, and I see no evidence of policy change coming out of the divided government we presently have in Washington. However, UH markets are forward discounting the amount of the value of the SMP five hundred or any given stock in the SMP five hundred, that is, the dividends that are going to be paid over the

next two or three years is trivial. Most of the value is discounting future cash flows over the decades. And I believe that we are seeing an increasing likelihood of a very significant change in policy, perhaps as soon as the UH one new administration, I would expect, And this is an interesting forecast. I if you want to, if you want a handicap, who's going to be our next president? Take a look at who seems like a twenty one

century Teddy Roosevelt, meaning a trust buster? Correct, someone who's gonna come in and say, hey, you know of the search being with Google? Who I'm okay welcoming Google as our new overlords, but I understand the antitrust argument against it. Or half of all on line retail transactions being with Amazon, that's an immense concentration of power in a in a very small number of hands. Uh There's been almost no appetite for antitrust enforcement. There's been no appetite for preventing

these giant mergers. The f When was the last time somebody other than CNN and I forgot who it was even the merger was with that UM the president was unhappy with because he doesn't like the CNN coverage, but that whole time Warner CNN, whatever, the last broadband merger. Um. Other than that one political example, has there really been much in the way of stopping big companies from becoming

giant companies in order to preserve a fair and competitive landscape. No, there has not been, and and we have a strange economy as a result, one that is not working for the average worker. Let's we're known at research affiliates for being leaders and factor investing. Let me talk to you about the most recently discovered factor and how it relates to this issue of monopoly profits and stagnating wages. Among academic researchers, we all understand this new factor called investment.

Not not many retail investors, I think are aware of this. The this new factor that was uh researched by many and popularized by Fama and French. Fama and French now the famous inventors of the three factor model the market value and size, now have a five factor model. They've had to two factors, profitability and investment. And investments the one I want to talk about, Investment, refers to a very strong empirical relationship but scientific finding that the more

a company invests, the lower the returns are meeting. Capital expenditure actually works against the returns. Right as Warren Buffett has been telling you for a long time, you don't want companies that have to invest to create their profits. You want companies that have a moat and generate monopoly profits. And the less a company invests, the more that rewarded in the stock market. And so we have don't have much investment. We don't have much capital investment. You get

some cash, what do you do. You buy back your shares or you buy your competitor, maybe you do a little both, but you don't invest for the future. That's this is a scientific finding that comes out of the academy, that comes out of finance professors. It's the new factor in the FAMA French five factor model is go find companies that don't do any investing. Uh. That's responding to

the environment that's been created. The the the environment, the rules of the game that we have is not competitive capitalism, where innovating and investing for the future creates wealth. It's manipulating the system to create monopoly rents. That's how you create wealth. And until we change that system, uh, we're not going to change the results? How do we change that system? Is it simply just a matter of saying, hey, your capex expenditure UM is a separate line that doesn't

affect your profitability, but your shared by backs does. How can the rules? How can the regulatory and tax environment. I'm assuming you're saying, we want more capital expendatory, we want more investment in the future. How can we encourage companies to think long term when the market is rewarding companies that don't. I don't know if I'm overstating it's sure. I think the biggest, the simplest way to describe the problem is regulatory capture. Uh the indo, pharmaceutical, oil and energy.

Go down the list finance for sure, finance and banking for sure, And I'll loop back to the longer version if you want to. If you want to understand the economics, I think you can do find no better uh discussion than Edmund Phelps mass flourishing. And if you want to understand the legal tools to address the issue, UH read Tim Woo Uh that there there are tools we can do this. I mean the robber barons were running the economy before Teddy Roosevelt showed up. There is going road

electricity going on the list. Yeah, Telegraph quite fascinating. I have to tell you, that's an intriguing um thesis you've laid out. I don't disagree with it. I'm I'm a little prized at how forcefully you articulated. I certainly think you're You're right. And I've heard this from both the left and the right. Scott Galloway at at and while you Stern wrote the Foreign and his recommendation was that Apple, Amazon, Google and Facebook get broken up they're too powerful. That's correct.

It's quite quite amazing. So let's jump to our favorite questions while while we still have you, um tell us the most important thing most people don't know about your background? Um boy, I was gonna go with you from West Germany Originally I was. I was born in West Germany, but I was born to uh my dad and mom who my dad was serving in the military at the time,

So that's really much less interesting than it sounds. How about I have never lived uh in one house for as long as I've lived in Newport Beach, California, where I've lived for eight years. This is the longest I've ever lived in a house in my entire life. Well, every Army brat tells the story of getting moved around from uh, you know, assignment to assignment, and I guess that that stays with you. So you met. Let's talk about your mentors. You mentioned one of your early mentors

who helped shape and guard your career over time. Yeah, i'd said. I have had the privilege of learning from a number of charismatic leaders. One and the first was Gary Brinson. I don't think I would be nearly as successful in the investment management industry today without without Gary's example. Uh.

Second was a fascinating woman named Hilda o Chewa. Hilda was a refugee from Venezuela who ended up at in the PhD program at Harvard University, ran the pension fund of the World Bank, spun that out into Strategic Investment Group, and when I left Brinson Partners, I ended up at Strategic Investment Group as the as the eventually the c

I oh they are held us in fascinating innovator and entrepreneur. Uh. And while I was the chair at TIFF, I had the privilege of working with a fascinating individual named David Salem, probably less known than some of these others, but nonetheless a fascinating figure in the nonprofit investment world. And now finally Rob are Not who uh quite well known, So I've really had the privilege of getting to know a lot of fantastic investors. Welcome to the podcast, Chris, Thank

you so much for doing this. We met some time ago and I've been looking forward to having this conversation. I know Rob are Not the founder of raffie UM for a long time. He's a fascinating guy. Must be fun to work with. Um you're in Are you here? Are you Newport Beach? Located Newport Beach? Yeah, that's quite that. That might be one of the most beautiful places in America to uh to go to work every day. I joke with people, I asked them, do you know why

we're headquartered in Newport Beach? Because you can? That's right. For For those listeners who may not have ever been to that part about an hour south of l A, maybe the little less depending on traffic. It's just this Balbo Island right over there. It's just this gorgeous part of southern everything you imagine southern California is, but nicer. I mean, it really is kind of ridiculous. Everything is wonderful except for the traffic. No, they traffic is almost

non existent in Newport. If you live in Newport Beach and work in Newport Beach, it's wonderful. The problems are the price of real estate and the Texas price of real estate. So funny you say that a friend who I won't mention, was having a conversation with Rob about you know, if you move to uh Nevada, you live in Vegas, you won't have to pay state taxes. And his answer was yeah, but then I have to live in Nevada, and he goes, I'm in what might be

the most beautiful place in the world. I'm gonna have to pay the the viig first thing there. You know, I spent a decade in Chicago, and I have a lot of friends in the business in Chicago, and I was there not too long ago, saying, boy, higher taxes are in your future. I I've been paying attention to what's going on with the pension problems in Illinois, sure, and the only Jersey and a few other places. So

you're gonna get California like taxes in your future. To fill this hole in the pension fun and he says, you know, we can't do that. Chris I said, whatnot. We've got we have the thirteen percent state income tax UH in in California. It's that high. Wow, that's a lot. And he says, you don't understand. You can raise the taxes to you know, ten fifteen percent in California and nobody. They're not going to move to Vada. Some people, of course, do move to Nevada. But but but there's a magnet

to the west coast in California. He said, Illinois doesn't have that. People will move to anyway, Wisconsin, they'll move to Indiana. We can't take taxes up to UH to that level. Chicago happens to be a very reasonable city. It's a reasonable it's big enough that it has whatever you want UM, but it's not as big as New York's, where it's completely overwhelming, and their prices are much more reasonable than the coasts. The problem is your weather is

much nicer. When you have southern California weather, you could charge and in Chicago. If they in Illinois they raised it. At a certain point, people will say, all right, I'm going to Arizona. This is UH, this high taxes plus terrible winter's equals I'm out. And and that's been the shift southward across the whole country. People have been making the argument it's political. I really think it's weather based. I think it's both. I think it's taxes. I think

it's a regulatory environment, and I think it's uh, the weather. Um, so let's talk a little about you mentioned some books. Um, you mentioned Tim Woo and Edmund Phelps books. What other books do you think are essential reading or what do you just like to read if you want to relax. By the way, this is everybody's favorite question. People want reading suggestions more than anything. They don't know which of the three hundred thousand books that come out each year

to read, so they take these very seriously. Yeah. Sure, if you want to understand the future of markets and the intersection of public policy and markets. The three books that I just mentioned are the ones of the dozens that I've read over the last few years that I think are most important Phelps, Woo And what's the third one? Jonathan Tepper? Okay, it's the myth of capitalism. Uh. When I want to escape, I don't read about economics and policy.

I read science fiction, but so nothing wrong with that. What do you like under sci fi? I guess under fantasy instead of sci fi. I loved the Game of Thrones and I loved to do it it so much that after watching the series, I then read all of the books, and then I went back and rewatched all of the series. Um. I also read uh, one of one of my favorites. Although you're seeing less get published as in a sort

of sub genre called cyberpunk. Are you a Neil Stevenson fan? Absolutely, I just got I haven't read it yet, but I have sitting on my desktop seven eaves, that's what is literally sitting on my night table. I read it. It's fabulous, really. And then also on my list that I'm going to throw you books that people have recommended to me that I haven't gotten to yet, The Three Body Problem. People have raved about that trilogy from the author out of China.

I'm really fascinated by by your list. So what are you most excited about right now? What? What is the part of the industry that has you really enthusiastic. I am very enthusiastic about the opportunity to use twenty one century technology, and part of it is financial technology. Part of it is financial modeling and predicting what's going to happen,

but importantly a lot of it is communication technology. What we're doing right now to help educate investors to achieve better outcomes, and I am very pleased to see the costs being reduced in the industry. The provision of investment strategies at a couple of basis points right. It used to be a hundred basis points. A hundred and fifty

basis points was the cost of investment strategy. Now it's twenty basis points or ten basis points are five basis points and providing the average investor the ability to compound wealth for their retirement without intermediaries gobbling up so much of the UH. The returns tell us about a time you failed and what you learned from the experience. I left UBS so Brents and Partners, where I kind of got my start what we sold ourselves. I was a

partner of the firm. I made a little money on that sale to ubs UH, and I learned after a time there that that was not the place for me. I'm I'm better off and smaller employee owned investment management firms than large UH institutions. God God loved the people that thrive in large institutions because the world appears to need them. But it's not a good fit for me. And I tried to start a UM quantitative equity market neutral hedge fund in UH thousand with some backing from

a firm called Greenwich Capital. Grantwich Capital isn't around anymore, but I had some friends at the top of that organization that we're interested in exploring getting into the asset management industry, and market neutral should have done not too bad, right, it would have been a wonderful time. But as the environment turned less conducive to risk taking UH or perhaps I was just not as persuasive as I had been the year before, they decided to pull the plug on

that endeavor. But I learned a lot in that period of time. UM, I'll give you a lesson about marriage and a a lesson about the structure of the quantitative investment management industry. After I determined I was going to be unsuccessful in starting that business, I just hung around the house for a while. I helped coach my son's soccer team, and I got a lot of cycling in and I just spent a lot of time around the house, and my wife explained to me, you know, Chris, for

better or worse, but not for lunch. You need to go back and get a job better or worse, but

not for lunch. UH. One of the fascinating discoveries as I was recruiting people to join my UH never to be quantitative equity market neutral global hedge fund was how many of the best staff I was recruiting, how many people I was interviewing didn't work at what you and I think of as an investment management organization, but worked at family offices right here in Manhattan, and family offices of former prop traders, people that would leave Goldman Sachs

Prop Desk or Lehman Brothers or Morgan Stanley with enough money that they didn't need to manage money for anybody else, and they would hire these incredibly gifted quants from India or from China. And I think people don't realize that most of the money that is made by arbitraging inefficiencies in the capital markets these days is not in funds that are invested. UH investing the money of Harvard University or the UH State of California's pension fund it's mostly

private money. Uh and and that's where those uh, those profits go. There's a new ormous amount of professional investment expertise applied to the management of individual family money, not investable to the public, not investable to the public. They're not even they're not even registered investment management companies. They're just the office. Uh and and they don't want to

tract attention. My favorite part of the Renaissance technology story with Jim Simons was at a certain point they realized their ability to generate alpha was limited and only scaled up so large. And when their own investments hit that point, they told their outside investors, hey, thanks so much for coming by, but we we don't want your capital anymore. We're going to take this ourselves. And that's a well

known example. What I found is that there are dozens, perhaps hundreds of similar outfits here in New York City that never took private money ever, uh, never took outside money. And these aren't giant, multi billion, necessarily giant multi billion family offices. These are fifty a hundred, two hundred fifty million dollars. And I on my bullpark, I don't think we know. They don't have to tell us Huh that that's quite fascinating. You mentioned cycling. What do you what

do you do for fun? What do you do to relax? What do you do to to stay trim and fit? I one of the benefits of living in Newport Beach in southern California is that I can cycle all year round. So I both get out on my road bike and I spend time on my mountain bike. Uh. And then I go to the gym a few times each week because I have to keep fit so that I can I can cycle, and I can ski and I can hike.

That southern California lifestyle sounds increasingly um attractive. So a millennial or recent college grad comes up to you and says, I'm thinking about going into finance as a career. What sort of advice would you give them. Here's some advice. My daughter Amy, when she was growing up, she wanted to be in fetching, merchandizing. But then she went to college and decided, you know, maybe I should be a little more practical, and she started her major in economics.

After a few years in economics, she decided that that wasn't really where she wanted to go. She wanted to and she switched to psychology, and one of the things that Amy found is that she had taken a full raft of stats classes for economics, and then when she switched to psychology, they said, oh no, no, those are econ stats classes. You need psychic stats classes. So she

had to take a double load of statistics. Amy started a digital advertising agency here in New York and when she was talking to her younger UH sibling, my son John Uh, when he was entering college, she said, you know what, you really need to take stats. That's been the most helpful thing for me in my career in digital advertising. And it's equally true. I think in the

investment management industry become numerous uh take statistics. The world has become the professional world puts a premium on numeracy. I think that's great advice. And our final question, what is it that you know about the world of investing today that you wish you knew thirty five years ago when you were first starting. Humility is enormously important to

professional development. Can't say I disagree with that any particular reason that led you to that, And you're not the first person who has mentioned it, but as I've a antst in my career, it has become more and more important to inspire other people, to build a team, to nurture and help other people grow. And one can't do that effectively without a humility. I for me to succeed, I have to lead a group of people, all of whom more at least many of whom are smarter, better educated,

and more productive than I am. And and one can't do that without a considerable a degree of humility. Quite quite fascinating. We have been speaking with Chris Brightman. He is the chief investment officer of Research Affiliates. If you enjoy this conversation, well look up and enter down an Inch on Apple, iTunes or Stitcher, overcast wherever your final podcasts are sold, and you can see any of the other two hundred and fifty such conversations we've had over

the previous five or so years. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. I would be remiss if I did not thank the crack staff who helps put together this conversation each week. Karen O'Brien is our audio engineer. Taylor Riggs is our booker slash producer Atico val Bron is our project manager and Michael Batnick is our head of research. I'm Barry Ritults. You've been listening to Masters in Business on Bloomberg Radio.