Elizabeth Burton on Liquidity in Pension Funds

This is Master's in Business with Barry rid Holds on Bloomberg Radio. This week on the podcast, I have an extra special guest. Elizabeth Burton is Goldman Sachs's Assets Management's client investment strategist. Previously, she was chief investment officer at various state pension funds, including Maryland and Hawaii. I found this to be really an intriguing conversation with somebody whose investment charge is unconstrained. She can go anywhere do anything.

I do have a degree in French, A little bit of a cheat there, unless you consider English majors cheating as well who speak English. But my grandmother's from Normandy, and so I've been speaking French since like as long as I can remember, and I love French literature. I actually have some relationship far far away to Jules Vernen. So how does that relate to finance?

It doesn't. But my parents told me college is the last time you can.

Study in our dime anything you would like, and so they were both in finance, and I decided that must be the absolute last thing I ever wanted to do.

So University of Chicago Booth School of Business. Was this just an inevitable, unavoidable thing your parents come from that it seems like you're getting a lot of your focus from your genetics. What led to Booth?

Well, so I will this will be the first time I'm telling honestly why I went to Booth Two reasons. One one is true, and I've always said is that I wanted people to stop asking if I could do math, And no one asked me if I can do math anymore? With a degree from both, particularly in econometrics and statistics. But the other reason was Booth rejected me an undergrad.

Oh really, yes, I'll show that of Chicago, so right.

And then the third and final reason was my dad got his PhD in econ from Northwestern, but he's so ancient. Back then it was taught at the University of Chicago, and so I.

Wait, so Northwestern grad students took classes at you see.

At you Chicago, and my dad lived in the International House. He's from Houston, so I don't know how he pulled that one.

Well, it's really like a different a different kind of humidity makes it feel in Houston, makes it feel like you're in the tropics. So it's close totally. That's very amusing. So people really ask you, if you take French, you do math? Is that like still the sort of thing that we ask people.

I think it's because I went into risk management straight out of school, on the risk side of fund of funds and various other industries, and without a formal degree in math and statistics. I think there was some hesitation on whether or not it was capable of doing it, which which may be fair, And I wanted to bolster my resume a little bit away from politics and French and so I thought, what better places to go?

And you know it might hurt a little bit.

Chicago's a pretty good place to learn some math.

And flance, I'll say for sure. So how do you go from coming out of Booth School in University of Chicago to getting named CIO magazines top forty under forty.

So that was kind of a meandering path a little bit. What ended up happening was I met my husband right before I went to business school.

He was living in Maryland.

My boyfriend during business school and he was living in Maryland, and so after school, I decided I should probably move there, not back to New York, not back to California. And the hedge funds down there looked like Post made off post GFC that they were really.

Going to struggle. So I had to switch industries.

So I actually went to work in M and A in payments, and I enjoyed that.

After three years, I decided I don't.

Love payments enough to continue to do consulting in M and A and payments, so I actually went and worked in economics. I was an econometrician. And then when my second child was born, I needed a little bit of a different lifestyle. I had two kids, they were both young. My father had worked with public pensions and he said, this is a pretty good place to be in finance if you want to raise kids. It's a little bit better, better of a lifestyle. Well, so I applied to Maryland

Got to work for one.

Of the most amazing CIOs in the businesses and a close friend, Andy Palmer. But how I got the award, I'm not sure. I think, you know, I was in my main thirties at the time, and I think I was a little bit outspoken. And I also believe that I have never really believed in bucketing very much in investments, and so I often look at investments in my portfolio that may be different from what most other people put in their portfolios.

So I have like a half a dozen questions that has led me to But let's start with bucketing, or what some people call silos, different types of investing. When you say you haven't been much for bucketing. Tell us what you mean by that.

Well, let me give you an example.

I don't know if you're in the market for a house currently, but let's say you're real at her goes and says, I talk to you, and you say I love Cape CODs, And he's like, okay, okay, I've also got this amazing condo that overlooks all of Central Park and it's only a one million dollars, right, or it's only two hundred thousand dollars. And you say, wow, two hundred thousand dollars for a condo overlooking Central Park. That sounds great. But I only have spots in my portfolio

Right?

So it's a problem that institutions often suffer from that Retail investors do not like you and me, we probably don't have this bucketing issue. And so I always felt an institutional management that we were hamstrung by these bucketing issues because we weren't able to invest in things because of these prescribed rules, which I'm not saying are bad, but they can be limiting. Anytime you have a rule, you limit your availability of option.

So let's stay with this. So when I think of bucketing. I think of a large institution that says, well, we're gonna we like this space, pick a space, private credit, venture capital, real estate doesn't matter, and we want to allocate ten percent of our portfolio to that particular space. What you're suggesting is regardless of whether they're fantastic deals elsewhere or this space is pricey. You think that that sort of bucket very much hamstrings the CIO to make the best decisions.

I believe it can. I believe it can save you from making poor decisions outside of your mandate. But here's a good example that's come up in recent years. Real estate that has been something in recent years that is something that we're seeing in institutional portfolios. So does that go in real estate or does that go in debt?

It can be a tricky problem.

Well, it depends on how it's financed.

It could It.

Could also depend on the bogie or the target return for either of the If the person managing those two portfolios are different, they may have different objectives, so it may slip the cracks even though it's a good investment. There's also some sort of some hedge fund structures that have private equity, like investments. If the private equity team doesn't feel that the return.

Is high enough, they will pass.

But if the hedge fund team feels like it has too high of inequity beta, right, they may pass on that.

So you may miss.

Out on a good investment. So I always try to find a way to not miss out on those investments. Plus, often those investments are some of the better investments because a lot of people have these constraints, right, so there's not as much capital flying flying in there, and when you have limited capital chasing you know these really amazing deals, you can often earn a higher return.

So before you said perhaps it was because you were outspoken and I was going to say, how do people work in public pensions? Not spoken, but I get the sense of what you're saying. You're pushing back at established assumptions of investing, that we can create these broad categories regardless of whether it helps our performance or not. In fact, it sounds like you think these rigid rules get in the way of good investors making good decisions.

I think sometimes.

But you could also take that and apply it to a company, right, So you could say that if you have a company that has people working there for twenty five years. They all have seen the same thing for twenty five years. When you get one person that comes in and has a year of experience in that industry, they're going to bring a new vision to it. And it may be wrong, but there might be parts of.

That that are really interesting.

And I feel that because I was only there for a year when I won that award, there might have been flaws in my argument. But because I hadn't grown up in the public pension spase, I had a different perspective of what might work, and that's what I applied.

Right, So not only diversity as we tend to think of it broadly, but diversity of experience, diversity of ideas, just different ways of looking at things. So let's talk about your prior experience. You worked at a South African based hedge funds or fund of funds.

But fund of funds, and they did have an F three product as well, if you can believe it, a fund of fun to funds.

Oh so that's fun to fun squared. Tell us about that experience. Were you actually in South Africa? Are you working in the States.

I was working.

So they had four offices, one in Switzerland, one in Johannesburg, one in Cape Town, and one in New York. And so the New York team was the Diligence team, and we had a couple of products. I had originally started out on the multi strategy product. I had gone to work there because I'd previously worked in mortgages, in mortgage backs, and as you know, that was around seven and eight tricky time.

Wanted to diversify this.

Something happened, Something happened.

So I wanted to try other strategies, and multi strat sounded like a good place to learn about a bunch of different types of strategies. I was really interested in hedge funds. Our clientele was mostly x US, almost exclusively x US, and it was great.

It was the best part about that job.

Actually, it wasn't even the investing and the meeting funds. It was actually that I worked on a team across multiple continents and like just trying to stay in touch and trying to work together on this portfolio and coordinate meetings. And we all had different backgrounds and different investment ideas and different clients. Like US clients are very different from clients in other countries, so it was really a unique experience.

So it was a great learning ground for me.

Was there a lot of travel? You were back and forth at Geneva or London or Johannesburg, Zurich.

Johannesburg and Cape Town the majority of the trips, and we tried to go a couple times a year to each of the different offices. They would come here as well, but at that point I was still fairly young, and it wasn't as much client faxing x US, not as much explaining, and because I was on the diligence team, so more research base.

That flight to South Africa is thy.

Two hours with a layover in Dakar, and I remember before the airline rules, I got stuck on the tarmac once for five hours.

Wow, no fun. So you end up going from the fund of funds to pension funds and what was first Maryland or why so Maryland's first.

I had two brief jobs between the Fund of Funds in Maryland and business school in between there, Maryland was first, and I never intended to leave Maryland. It was one of my favorite jobs. Probably my current job is probably my favorite job, but that is a very close, good safe.

For very similar reasons.

Actually, But well, tell us why why was Maryland and Goldman your favorite jobs?

I think number one the team my team at Goldman and the broader team even and the team at Maryland are some of my favorite people. Just really wonderful, smart, fun human beings to work with with a very clear mission. I also really like the access talking to really smart people at Golman. It's the internal access, talking to the traders and the pms and the CIOs. And we have so many offices across the world that are.

A unique vision of what's going on in the world, right, I mean, I have to think the intelligence that comes from that team in what they see everywhere has to be incomparable. It's just about anything else.

It is amazing.

I sometimes wonder if I would have rather having started with this experience and then got what I would have been better at Maryland having known what I know now, or am I better now having learned how things work on the clients. So I go back and forth. But I'm lucky to have had both. And at Maryland it was a giant pool capital fifty five billion back then. I'm not sure exactly what it is now. But you could talk to pretty much whoever you wanted to talk

That sounds fascinating. Let's talk a little bit about your time as CIO at Hires. Is that how that's pronounced, Yes, the acronym for the Hawaii Investment Employt Retirement System or where it's to that effect. How did that come about? That seems like such a fascinating position and so far away from Maryland's.

It is interesting how it happened. I guess I got lucky.

In January or February of twenty eighteen, Hawaii HA parted ways with their then chief investment officer and there was an article in a magazine for institutional allocators about it and how they were hiring. And I still have the email I sent to my husband and I said, ha, ha, want to move to Hawaii. And I forwarded it to him and I was very happy at Maryland. Wasn't planning on leaving, and I had a lot of ties to

How I care about risk, and so he put me in contact with a recruiter.

They reached out and they said, look, you're one of.

One hundred and forty. It's unlikely.

So I actually went on vacasion. I went to work in Asia. It was gone for a couple of months here and there. When I got back, they said, okay, that's STI unlikely, but you're down to about forty.

I was like, oh, oh, well, I like those odds. Thos are okay.

And then by June I was telling my husband I'm in the final four. We got to fly out there, and he said, I moving to Hawaii. He had he had a great job. He's very senior in his career. Both our families are on the Ease coast. She went out there for about a week and at the end of the week that I interviewed, got the job and we accepted by the.

End of the week.

Really, so what changed to make your husband say, yeah, I could live in tropical paradise if I have to.

I think, you know, he's a really good guy.

I basically said, I've been working in my whole life for something like this. I was thirty four, I was a female. It was, you know, a Hawaii pension. There's only so many pensions take pensions in the US. I said, who knows what the next one to crop up will be.

This is unique.

There's just there aren't that many young or females cee Ia is I have got to try this, And I think he could tell how badly I wanted it, and he sweetly gave up his job of fifteen years and wow followed me out there.

Wow. So, how long did you stay in Hawaii?

For four years?

You lived on the islands? We did, so part of me thinks of Hawaii as his tropical paradise. But I've spent time on other islands, and I know at a certain point you get a little island fever. You're stuck with your seeing the same things. How long did it take before it was no longer tropical paradise? It's just where we lived.

Well, I think COVID sped up the process a little bit. I also, I don't know if you've ever experienced this. There's like one day when your parents are really young, and then within thirty minutes they all of a sudden mamede and you miss them and you've got to take care of them. And so my parents, if they listen to this, are going to kill me for calling them old. But you know, I had little kids had when I

I totally get that. I know this is sort of old school, but it's true. Once you leave New York, you've left town. You really have And it's and I don't just mean waiting twenty minutes for an egg McMuffin in Richmond, Virginia. I mean I leave New York, I make a concerted effort to like take it down a gear because the rest of the world has a very different pace than New York City, and I imagine places like London and Hong Kong and other financial capitals where

It's funny that Hong Kong's my second favorite city in the world. New York is number one. No, it took all of thirty seconds. In fact, I very much wanted to live in Manhattan. I wanted to go back to the West Village where I lived in my twenties.

But my husband was.

Like, well, with two kids and a dog and a cat, maybe we should not do that. But no, I actually pretty long commute. I love coming in the city every day. I don't think for me personally, there's no better city in the world.

I love. Well, your commute is not bad. There are much worse commutes.

Than It's about an hour forty five.

Oh really, because you have to go down to Yes, that's why. See, they need to move into the space between right between Penn Station and Grand Central knock a half hour off your commute each other. Oh. Absolutely, So let's talk a little bit about risk management. How does that come into play when you're looking at a big pension fund that has all of these obligations for employees in perpetuity.

Right First, management is tough a pension and Goldman Sachs provides itself on being a good manager of risk. But Goldman Sachs has fewer constraints. We actually have a budget for risk management and technology and tools. That is not something your typical pension is able to do. And it's a critical need and they often have to find multiple tools that they can use, some free, some not free to try to make a good and robust risk management system.

Is it something that can be outsourced or does it have to be managed in house?

I think it would be tough to outsource all of it unless also the investment team was partially outsourced.

I think there needs to be.

Some marriage between the two. But I do think that you can outsource certain functions of it, or you can have a consultant assist with the risk management. But I think the most important thing that you have to do at a pension fund for that is get a hold on your You have to have good lawyers and good contracts. You have to have a clear view of your liquidity and your cash flows.

It's critical.

So let's talk a little bit about that, because that's kind of fascinating. When when I think of a pension fund, I think of existing employees contributing into the funds a source of liquidity, and retirees drawing down on the fund, which is the liability or the future obligations. When when the pandemic shuts everything down, does this mean the current employees are not making contributions? What happened during that period.

So we actually never fully shut down. We were always in operations, and we were I was in the office pretty much full time. But one thing I want to point out is that not all employees at all.

Pension funds contribute. Some don't.

There are certain types of employer sponsor plans where some portion of the employees are potentially all are part of non contributory plans. Now, their multipliers are different, their payouts are different. But that's a tough situation when you're not paying in and you're only receiving, right, but what you did mention So in COVID, a bunch of pension funds experienced or thought they were going to experience furloughs or

Especially in the middle of a crazy pandemic with everything associated there too.

So it's a very precarious position. Luckily it actually, as you probably know, the market turned around rather sharply. There was a good equity rebound. A lot of this didn't

So how do you think about I'm still looking at the liquidity issue. How do you think about under normal circumstances matching future liabilities with liquidity or cash flows. I'm sure there are all sorts of actuarial tables that you were working with, but you have to think, what are obligations going to be five years, ten years, twenty years out. Most investors don't think in those times, No.

They probably don't unless they're investing in private markets or in your house. You're probably thinking about how to afford those payments, So in the US and Europe or abroad, they're actually two separate things. So in the US, corporate pensions other than public pensions, right, corporate pensions tend to focus more on the liability driven side, meaning they're matching

So that means while the value of the fund is where they wanted to be, the liquidity in the ability to send out cash is somewhat compromise.

It's challenging, especially because private equity funds are not distributing as much as they used to because there haven't been as many sales in the market or exits, so they're getting hit on sort of both ends.

So in twenty twenty two, when equities were down and fixed income were down, they were both down double digits. Were you saying to yourself, I'm glad I'm not running a state pension fund this year, or like, what was that experience like from your perspective where you are now?

No, so, I you know Hawaii, It should have done probably quite well during that time. It depends on your asset allocation. I also don't think you should ever really beat yourself up for sticking to your acid allocation.

And your beliefs.

I also think that was a great learning experience. But more importantly, I have always struggled with why there seems to be some belief that equities and bonds will be negatively correlated throughout time.

Oh, it's simply not the case.

Go back to nineteen eighty one, you've had both stocks and bonds down. I believe double digits that year, and the year before was pretty close as well.

Right, And if you look at inflationary environments, a positive correlation between the two.

It's also not uncommon.

And I think, sitting back in twenty twenty, twenty twenty one, I was adamant that inflation was not transitory, adamant and super public about it. I had many people, super famous people telling me I was completely wrong. It's the one good call I made ever my entire life. But so I felt confident that I had prepared myself for this type of environment. It's tricky, though, because one of the things that can help you in this sort of environment

Not some sort of like intrinsic value.

And they took it out of their asset allocation in favor of other strategies. So when the pandemic came, they didn't have that as a diversifier outright. They might have had it through it's also hard to invest in start.

It would have been a good inflation diversified but it wasn't there.

And once you start looking for something when the ship's already sinking, right, it's.

A little late. So I was what I was most curious.

About actually in twenty twenty two, if when we saw asset liability studies come out in twenty twenty three for pension funds, where we going to see people putting commodities back into their portfolio. And no, but out of the cash allocations at some endowments and foundations, at some pensions there's gold allocations like the outright gold allocations, but they're not they're not in the investment policy statement. The interesting yes, in for the most part, this is not you know, ubigodius.

That's intriguing. Let me stick with either gold or commodities or both. How much of the large allocators a voidance of that has to do with the fact that academia is not a big fan of commodities. They are not just gold. But when you look at Kamali's general as opposed to trend following and specific trading systems, the academics I always look at it and say, we don't see a real return here over longer periods of time. There are specific short periods of time where they do spectacular,

Well I'm not.

I would love to agree with you that it is the academia, But academia a and always predict the best outcomes in I can say this because my dad's an academic don't always have the best outcomes in terms of investing. I do think there's some merit in staying that. But I would also point out that risk parity doesn't have a deep history in academia and doesn't have a ton of support. And yet risk parity was historically very popular.

And it's done fairly well recently.

Great So I don't know if it's purely academic based. I think part of it is a volatility, and part of it is that it is genuinely unless you're doing it through a hedged vehicle or a hedge fund or an alternative investment, it is hard to get access to commodities. Typically, it's just not the easiest thing to invest in. And a lot of funds historically were prohibited from investing in alternatives.

Meaning they can't invest in futures or anything with the liability components of it. So let's talk a little bit about what you do at Goldman Sachs's asset management, starting with how did you end up at Goldman? It sounds like things were delightful on the island of Oahu where you were working in Hawaii. Is that where you were living or yes? Uh huh not a terrible place to set up shop, right, No, it was.

A wonderful place to live. Yes.

I would have bet you money I wouldn't have ended up at Goldman Sachs two years ago.

So you weren't going to leave Maryland. You were never going to end up in a while. You weren't going to go in Goldman. I'm taking the other side of your trade, your career. So how did this come about?

Well?

I decided to leave Hawaii, believe in about maybe March April May of twenty twenty two, and I gave a couple months notice and I did not have another job lined up.

I did not know what I wanted to do. Wow.

So that is a common trend with me.

I usually yes, something will come up.

I just can't quiet quit, so I need to just say, hey, this isn't the right fit.

Something will happen.

And I evaluated what I wanted to do next, and I sort of just assumed, Okay, I'll go be a CIO somewhere else. We'll see what happens. And I was close to taking another role. And when I started thinking about we're at Goldman Sachs, I thought, this is again just like Chicago. This may hurt, this may be really hard. It's going to be a lot of very smart people. But I really, like I said earlier, I missed running at like one hundred and sixty miles an hour.

I wanted a challenge.

I was, you know, forty, and I figured I have a couple more moves in me and I wanted something different, and I thought, let's see if I can do this. And most importantly, like I said before, I loved the team. Some of my favorite investors right now are people that came out of Goldman Sachs, mostly hedge funds, because I

This would be amazing.

And I'm assuming you know a lot of these people through both Maryland and Hawaii, CIO, you're interacting with them on a regular basis. What made you think, Hey, I can I can keep up with these guys. I want to play on this team.

I think was the one that said you can keep up with us, you can play on this team. And the amount that they letting me come here and do this interview, the amount that Goldman believes in me every day. I had to tell you, it's it's like the best feeling in the world to wake up and put on the Goldman jersey, like they believe in me.

And it's crazy. I think they believe more than my family.

I'm going to tell you right now, I don't think it's crazy at all, given your history and your your track record. But at what point in the process was it who was interviewing, who were they recruiting you, or had you kind of quietly reached out How did this specific position come about?

You know, I don't even know if the position it self, Huven came about till very late in the summer until you know, I started in September, and I don't even know that it was fully ironed out like much before then. I think for me though, the opportunity to join the group.

That I was joining.

I have so much respect for this group and to be part of what they wanted to do, which was, you know, reignite their asset management business. I really like, I really like to join places that have something they need to get.

Done and that you can help contribute to making that happen.

Yes, And I thought, you know, why don't I try something different? And if you look at my career and all the next steps, they're all a little different and in some cases very different. And I think actually all those different careers I had led me to be a really good CIO. So I thought, if I add this in, what does that make me next?

I don't know.

So let's talk a little bit about what you do with the team you work with at Goldman Sachs. Are the clients primarily retail? Are they institutional? Is it a mix? What does that group focus on it is?

Well, the whole group of the client Solutions group is a mix of all different kinds of clients, right, But I mostly step in with the institutional clients. I don't own the client relationships, but I do help advise from the perspective as a former institutional allocator and occasionally have comments on the retail side that may be tangential. But it's mostly institutions.

So this sounds like this is a very unconstrained position. You can help clients work on setting goals, put together an investment policy statement, like you've done all the stuff from the from the client side, and now you're saying what can we what can we do for you?

They can ask confidential questions. They can say, do you think we should sell part of this portfolio? Do you like this private equity fund, do you like that? Do you like this equity in this country? Do you like emerging markets right now? Do you like local bonds? They can ask me anything, And because I'm not running my portfolio, I can have a more honest position on what I would do if I were them in that environment.

Huh. So this is much broader than the typical relationship with a client, So that sounds quite fascinating. You mentioned you really like hedge funds. Let's talk a little bit about alternative investments within a portfolio. What do you think of those various I'm gonna use a dirty word, buckets of different types of investments.

So I want to qualify that I don't know that everyone should be invested in alternative investments, and I don't mean you and me, I mean institutions as well. But I have to say I think their alternatives are the most fascinating part of the investment landscape to me, and it's why I love them.

So tell us a little bit. Why why are alternatives so fascinating? Here's the pushback? Let's start with this. The pushback is, alternatives are great. If you're in the top death style of hetche funds, venture capital funds, private equity, that stuff is awesome. But there's so much competition, so much delution of talent, so many people chasing so few deals, that unless you're really in the best funds, it's a challenge to generate alpha. How do you respond to that sort of criticism?

Well, I think that's true in the public equity markets as well, in the mid large.

Gap, right, it's certainly true in individual stocks. Rites what was it a best in Binders research? Two point three percent of equities or responsible for all the returns. It's not even top death style. That's a teeny tiny percentage. So you're saying that, hey, if you can be in a better fund, you want to be in a better fund.

I think that's true across everything. You always want to be in the best possible fund. Picking funds is very challenging. I think it is most challenging in the private market space. There's an information gap which makes it pretty challenging. But I think what I love most about it is so I think I've always loved credit, and part of that is that I love contracts.

I should have been a.

Lawyer, and for me, private equity, private credit, and some other liquid strategies real estate included, they have a complexity component to it and a lot of that is contract related and you have to get very Like my favorite class in.

Business school is taxes. I should tell you I like loopholes and I like figuring out unique.

Ways to structure its supposals right.

But for private equity, private credit, private real estate, for me, those make sense. Those are complex deals and there's ways to derive value out of them, and if you can get access to those, I think it's brilliant. If you can't get access to those. The other way I think it's interesting to play in those markets is to play the discrepancy and value between public equity and private equity, public real estate and private real estate, public infrastructure private infrastructure.

Is going to be critical.

Huh. That's really interesting. Let's stay focused on the complications of the private side, because you're touching on something that's really fascinating and a little bit contrarian to the consensus view, which is complications tend to be expanded and very often simple is better. What you're saying on the private side is if you have an ability and correct me if I'm getting this wrong, if you have an ability to manage through that complexity in a way that doesn't disadvantage

If that is.

Your edge, and that is the one thing I want to be very clear on. You should not be investing in complex issues that you do not understand. So if you do not understand technology, do not go do a technology co investment.

Right, we shouldn't all be piling my money into AI startups. You don't think that's that's a savvy thing to do today.

I have Plowing money into anything is usually a good idea. But I mean to use an example. So I did Killimanjaro a year ago, and I didn't get altitude sickness. And so to do hiking at high elevations when something isn't a challenge for you, it is a challenge for

Huh, know your skill set, know your blind spot, know your edge.

Right.

That sounds like very savvy advice. Let's talk little bit about institutional investing. What's happening these years. We had rates and yields on fixed income shoot up in twenty twenty two and twenty twenty three, and pension funds, especially in Europe, seemed to stumble around. That tell us a little bit what's been going on with institutions as you see it from the thirty thousand foot view. Why was last year into this year so challenging for many large institutions.

Well, I think in Europe it was some of what we mentioned earlier with the liability driven investing. They had, you know, rates go up precipitously as well for various reasons twice in a very short amount of time. And you know, because they had leveraged in some casions, bomb portfolio has been rates to go up as you know, prices go down. They had margin calls because they were trading on margin in a world.

Were their duration issues? Also because I know some areas seem to be in did very long and they're much more sensitive to rate moves than others. Is that part of the issue where they mandated to have longer dated bonds. What's to happen in Europe?

It's part of the liability matching, right, So if you have an infinitely lived asset or a very long lived asset, you're going to want to match your investments to that. So that's why they had some of these longer term bonds.

Right.

But the biggest issue that happened with both Europe and the US, and you can look up a broad elsewhere, was that when these things drop, when your equity portfolio which is supposed to be some return generating mainly, and you're fixing come portfolio which is supposed to be your liquidity provider, but then you don't have a job necessarily in your private markets bucket, you're in a really tricky position for funding new investments, for funding you know, retirement benefits,

Supposed to do.

These are supposed to be setting stone reviewed every couple of years in order to allow them to have wider bands in the private markets until things sort of reset.

Now, to be fair, you're not really getting marked in private markets what you are in stocks and bonds every tick, so you could kind of ignore that for a while.

And they actually might have liked to have been marked down right because it.

Would have reseent it would hurt yours as long as reset, but was a loser anyway, you might as well clear the decks, get everything off, and start fresh the following year.

You can't really do that with private equity.

But it also makes it challenging if you're an investor and you.

Decide, well, what do I do about the iniquity I'd like to sell part of my private market book? Well, then where are you pricing it? Because if you go with these inflated asset values and you try to sell them, and they know you're a force seller and they know that the value is likely lower, it actually made it a really tricky environment to kind of close those transactions as well.

No one wants to be a distressed seller now, boy. So let's stick with Europe a little bit, and I'm going to ask you to put your econometricians hat on for a second. Us are CPI peaked around nine percent a year and a half ago or so, and the last CPI print was what three point two percent three point three percent year of a year, it seems, and that's with this massive fiscal stimulus, the pig is still working his way through the python. Europe seems to be

I think that well.

I believe that they our US economics team would say that the wage pressures in Europe are part of the reason they still remain as much.

Greater than here in the US, where there seems to be such a shortage in almost every sector of people want to come in and work for a living.

We're seeing improvement and I think we're about four or five percent, It could be off on the wage increase number somewhere around there. So we've got stickier inflation still happening in Europe, and in the US we were starting to see signs of improvement. Who knows what could happen between now on the.

End of the year.

You can't Some of it you can't predict. But we're seeing improvement here and you've got emerging markets. We're seeing more improvement on the inflation front than you're seeing in the US.

Huh. Just kind of interesting that that's what's taking place there. So let's stay with the concept of we had inflation. We now have higher FED funds rates, and we have what a number of people have been calling very attractive yields, certainly much higher than they've been in decades. One of the ag funds of I want to say about seven years duration is five percent for investment grade. We haven't seen that in you know, ten fifteen years. What how

So if we just take the US public pension market and kind of separate it from the corporates and other institutional investors for a moment, five percent is still below most target returns. Most target returns are still around on average, like let's call it seven percent. It might be six

Down back half of twenty twenty four. Yeah, So, hypothetically, an investor has listened to you three years ago when you were screaming about inflation is not transitory. It actually turned out to be transitory. Transfory just took a whole lot longer than everybody expected. Everything in life is transitory, all right. So a couple of years ago you had said, Hey,

Of it, right, So I do get asked quite a bit, when can we start adding duration back to the portfolio.

It's probably the third biggest.

Question that I have been getting In twenty twenty three. A lot of clients weren't able to shorten their duration, some were, some can take advantage of two years, right, and you could get a pretty good return there. But some couldn't, not in their investment policy or they didn't want the reinvestment risk, right, So some are still holding onto those long bonds portfolio. But what I would say is I would look to see where you could add duration,

We could see and that you know, in the grand.

Scheme of life, grand scheme of history, maybe that's not exorbitant, but it is a higher cost of capital. Right, So if you think about where term premiums might end up off of that number one hundred and fifty two hundred basis points, you're still looking at a pretty high cost of capital compared to the last ten years, right, So for firms and for refinancing risks. So if you can add a duration, then where you can and take your pockets.

Months, aggressively neutral. I like that. And you know you're pointing out that it's a very different regime today. In the twenty tens, not only did you have cheap capital, but real returns were so low given how low inflation was. So now capital costs more, inflation is higher. So how do we think about real returns when discussing fixed income?

Right?

Interestingly enough, there's only you know, a handful of valcators actually benchmark themselves to real returns, and I think, really, yeah, it's not as popular as one would think, particularly when they're having to worry about that on the back end and their payouts and their liability side. But I think it's going to becoming increasingly more important, and it might very well to your point, I believe this is where you get It might change what you're looking looking at

All right, So you said the duration question is the third most asked question you get from institutional investors. I'm curious what are questions one and two?

So number one would be give me ideas on how to raise liquidity in my portfolio.

And this is mostly from institutions.

Mostly from institutional investment.

So when someone says I want more liquiditly is this because they're kind of tied up with long dated bonds or is it more because they're tied up with ill liquid investments looking for the illiquidity premium.

Typically it's because they're tied up in inliquid investments and they don't want to miss out on a vintage cycle, or they want to out they see good deals that they want to get done. Another option is that their pension is finite, and so they are not able in certain cases to make the same investments that they used to make. But they see interesting deals and they want to find a way to do them without hurting the

Two take twenty two of the most common ones.

There's a paper that Goldman has done on this, No two in these three periods, So there are no one in these three periods pre twenty twenty from twenty twenty through twenty to twenty twenty one, and then post twenty twenty two were positive. Huh, so you need more options than you think to kind of hedge the risk there, But more than I've heard probably in the last decade, investors are asking I would like to put a tail hedge on.

How can I do that? What should I be looking at?

Let's jump to our favorite questions that we ask all of our guests, starting with, Hey, what are you streaming these days? What kept you entertained during the pandemic.

So I don't.

Watch a ton of TV, I will say, I am a shark tank addict. I am a huge fan of Kevin O'Leary, I think the absolute greatest, But that is really the extent of my TV watching, other than, of course blow bird.

So let me throw a Kevin O'Leary thing at you that you probably haven't seen, okay, or if you have, I would be surprised. So there's a young watch geek named Teddy I'm gonna get his last name wrong, Balderas or balder Ass say something like that, and he is pretty well known in the time piece of community, and somehow he him and Kevin O'Leary became friendly and the two of them go on these watch shopping for lack of a better word, expeditions and they're just shockingly hilarious.

Number one would be my dad.

We are very close, we have had very similar career careers.

We look alike.

He's my best friend by far. We talk two or three tight times a day. I'm admittedly super codependent.

He's awesome. I was joking earlier.

I think Goldman believes me more than he does that I am totally joking. He is wonderful and he's the one person I can trust to give me honest advice.

Other than that, I think second.

Grade soccer coach, a guy named Jeff Easter. He actually told me to read this book. Golf is not a game of perfect, but he he taught me to like it was a good lesson for being a trader. He taught me to like, move on from your last you know, mystical and just stop stressing over it.

I finally.

Somebody I used to work with Hawaii, my deputy Cio. He has thirty more years probably an investment experience in me, but always treated me as an equal even though it's his boss, and gave me wonderful advice and to this day is a close friend that can ask anything else.

Let's talk about books. What are some of your favorites? What are you reading right now?

I just finish The Wager and Endurance and wait.

So the Wager I'm not familiar with. Endurance is the Shackleton the Stories, which is insane. I can't believe that's made hit into a movie that anyone knows of what's the Wager?

The Wager is a shipwreck actually around the same area, but it is a true story of a shipwreck, and similar to the reasons I like the Shackleford story. It's an interesting examination of leadership in crisis. And also it helps me when I'm running in the morning and I'm tired. I'm like, well I have and I've had water and not covered in lice.

Right or sub sub zero temperature with leopard seals.

Trying to use I know, it's incredible story.

I think I just read not too long ago that they found the Shackleford ship the uh No Way and it's the water is so cold, everything is preserved. Normally the wood would have wrought it away a long time ago, but nothing eats it away because it's barely of a phreezing most It's Unloubal.

The Shackleling story really struck me because if you look at the wager, I won't this is not a spoiler. They're mostly negative in this story and he is just like continually positive and it's incredible. It's just it's a great story in leadership.

Like if you would have told me, hey, you're gonna lose your ship and you're stuck somewhere in the Antarctic, my assumption is you're gone or you have no chance of survival. Yes, like the fact that if you if you've never read the book Endurance, it's just one of the most amazing. It couldn't be fiction because it just wouldn't be believable. The fact that it's a true story makes it really amazing, right right, Yeah, So two books, The Wager and Endurance. I'm going to have to check

I think I would encourage them to know the full scope of what jobs you can have investments. You can be in marketing, you can be in communications. We need writers. Everybody needs good writers these days. We need good public speakers. We also need traders, we need pms, we need leaders, we need hr need legal So it always strikes me how the young people seem to think you're just a banker or a trader.

Nope, there's a lot of other things.

And our final question, what do you know about the world of investing today? You wish you knew let's say, twenty years ago when you first got it started.

Then no one knows all the right answers all the time. They all act like they do, but they don't. And if you get it wrong, they've gotten it wrong too.

Really interesting, Elizabeth, Thank you for being so generous. With your time. This was absolutely fascinating.

Thank you for having me.

We have been speaking with Elizabeth Taylor Slash Elizabeth Burton of Goldman Sachs's Asset Management. If you enjoy this conversation, be sure and check out any of the five hundred previous conversations we've had over the past eight years. You can find those at iTunes, Spotify, YouTube, wherever you get your favorite podcast. Sign up from my daily reading list at ridults dot com. Follow me on Twitter at rid