Interview With Matthew Weatherley-White: MIB (Audio)

White and he runs the cap Rock Group. Uh. He's kind of come to my attention because he specializes in impact investing, which is we we began the process of socially responsible investing as a thing some decades ago that morphed were evolved into e s g. Environmental sustainable governance or environmental social governance, and now what he describes as

impact investing. He defines in conversation really intelligent asset manager located in of all places, Boise, idaho um, running about three billion dollars, growing tremendously fast in the space that that he focuses on. This very much is the wave of the future. This is something that at one point in time was a teeny tiny niche as he explains it, Uh, all the money that exists that's investable is primarily owned by one group of people, and it is destined to

be inherited by a different group of people. Who are the folks that are really driving h E, s G and environmental social governance issues in the investing world. Well, they're they're women and their millennials. By the way, who's going to inherit all this money? Well, it's likely to be women and millennials. So you can expect this form of investing to become increasingly popular over the next uh a few decades, and his firm is in the vanguard

of this. I thought the conversation with quite fascinating. I pushed back, as I know many of you who are listening would have wanted me to to have some of the things he said about active and passive and models and what have you. But all told, I thought this was a fascinating conversation. He's a really really interesting guy. With no further ado. My conversation with Matthew weatherly White of the cap Rock Group. This is Masters in Business

with Barry Ridholts on Bloomberg Radio. My guest this week is Matthew weatherly White, co founder of the cap Rock Group of Impact Investing, and we'll get into specifically what that is. Born in Manhattan, a bit of a Globe Trotter before you settled in Boise, Idaho. Graduate of Dartmouth College class of eighty one, you co founded cap Rock in oh five after an eighteen year stint at Smith Barney, and you have been called the most fascinating investor people

have never heard of. Matthew weatherly White. Welcome to Bloomberg. Yeah, thanks very it's great to be here. And obviously you heard of me. So it's not that no one's heard of me, but I'm putting you on the list of people who have heard of me. So I read I read a really interesting article about you, and Kiki had reached out to me, and I said, oh, I know who he is. I read this about him, and really maybe she had previously sent me the link to it.

Normally I never look at anything that comes from pr people. But when when someone sends me something and I say, oh, I know who that person is, tell me more. So. So let's let's describe why you're such a atypical finance guy. So you play the bag pipes. You wrote an opera in sixth grade. You've published poetry. You've competed internationally in five different sports. You hold a world record in rowing

no longer hold. Oh it's it has been surpassed. I think it might actually have been the shortest world record holding tenure in the history of any competitive sport. I set the world record in the heats of an event that was then eclipse in the finals. So yeah, I hold the distinction, but not for much time. So I left out the fact that you are an accomplished chef. You worked as a chef for a while. Oh and by the way, you manage a three billion dollar investment funds.

So not the typical Wall Street definitely not. So so let's let's talk a little bit about, um, what you do. I want to begin with a quote that I read of yours, where you had said capital markets are the most powerful optimization vehicle on the planet. Explain that. Yeah, so, um, I like to think of capital flows as being driven by gravity. Capital flows to its most efficient utilization. But that implies a set of assumptions that aren't always explicit

in the statement. And but that, I mean, what is it that capital is optimizing for? Um? And usually it's for for returns? Right the old joke, Um, I think it was the former chairman of City Group. Capital goes to where it's treated best and stays where it's most appreciated. Yeah,

And I think that's actually true. And that's why capitalism, as both a sort of financial organizing structure and as a cultural underpinning is so fascinating because it is it is unarguable that capital flows where it is treated best and stays where it's most appreciated. Right. It's very difficult, if not impossible, to impose an artificial set of objectives that will violate that fundamental premise. And so the question that that I like to ask myself is not is

capitalism good? Is capitalism evil? Is capitalism intrinsically beneficial or intrinsically destructive? And I'm thinking about Picatis book capital for example. Um, I think that's not actually the right question. The question is to what end do we seek to optimize? And the question that I kind of keep coming back to

repeat that towards what end do we seek to optimize? Yeah, And I think it's it's easy to go back to that statement of the business of business is business and the highest end of business is not you know those And I don't like to say it that way, but

you're right. And the reason I say that is that UM as an example, I think that the science around climate change is crystallizing, and regardless of what one believes relative demands relationship to the climate, we recognize that the climate is shifting, and we recognize it on some level. The increased concentration of greenhouse gases and carbon is part of that, right and so and the more we know that, the less defensible the position that we shouldn't care about

it becomes. Um. As an example, I like to use, you know, the pricing of coal, and it's an easy target right now because of what's happened over the last couple of years in the coal industry, right, so you have more people working in solar in America today. So so it's a soft target, but nevertheless it's it's illustrative if you are the CFO of an aluminium company and the CEO comes to you and says, look, we need to find another one percent net operating margin. Go find it.

You're gonna look at your inputs, right and your single largest input in aluminium smelting process is energy, and so you're gonna look for the cheapest energy. And today the cheapest energy has been coal. That's why a lot of the aluminium smelters are in Appalachia now. Isn't that changing though? Aren't we seeing natural gas start to become more and more clost effective versus coal, Yes, we are, and that's part of the dynamics around the collapse of price and

the rate of bankruptcy filings among coal coal mining companies. UM. But where I was going was a little bit different, and that is that the price of coal to date does not price in the externalities. And I'm not saying climate change, just what comes out of your smoke stock, acid, rain,

everything else. Everybody everybody, And we know this right so we know it's it's it's it's It's not debatable that the Burningham coal imposes a cost on society, primarily in environmental and healthcare costs, and those costs are not reflected in the price of the commodity, so that the consumer of the commodity is not actually bearing the cost of consuming it. And I think that is a kind of a thing, that's a kind of dynamic that is shifting

right now in the capital markets. UM. And that's why when you think about optimization right now, the capital markets are moving away from coal for a whole bunch of reasons, some of which are regulatory, right, right. You also had people blame regulation too much. You also had a huge m and a spree at the peak of coal price, way too much leverage. These companies who a lot of people are blaming regulation for killing these companies just were poorly managed a lot of bed. So we're going to

continue talking about this because I find this fascinating. I'm Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio. My guest this week is Matthew weatherly White. Did I pronounce that correctly? He did? Yeah, channeling your inner Englishman

and you'll get it. Of the cap Rock Group who specializes in impact investing, So let's talk about the phrases that that people have are probably more familiar with green investing, Socially responsive investing better known as s r I, Environmental societal and governance e s G, and of course what you do impact investing. How do each of these relate to what you do and how do they differ? And will you laid it out quite well, perhaps unintentionally, from

a chronological perspective, sr I became e s G became impact. Um, think about it pretty simplistically as s r I investing was primarily about not owning companies that were perceived to

be doing something bad in the world. Gun companies, not military companies, not vice and to backup companies, and a lot of energy companies were thrown under that rubrical so sometimes more more recently probably um so, s r I really sort of had its um it's it's coming of age moment in the seventies and eighties where a lot of activists were turning to the capital markets and saying we should be investing companies that do a better job and we should not be investing in companies that aren't.

But that that was really in the seventies and eighties, that was a tiny slice. It was. It was a rounding error in the capital markets, and and in some regards s r I tightly defined is still kind of a rounding here in the capital markets because it's based

on exclusionary sometimes inclusionary screens. E s G was really the evolution of that environmental social slash sustainable and governance, and that really came of age in the mid nineties when the European government said that large pension plans had to incorporate E s G analysis in their stock picking UM came from Europe, not the United States. Now, it was really started in Europe. UM ubs did a lot of really cool work around that early on. And yes,

she's a little bit of a different idea. One of the one of the core tenants of E s G s it's around misk risk mitigation, Understanding the risks related to poor governance, understanding the risks related to climate exposure or lack of sustainability issues, and then embedding that risk mitigation into your discounting models to determine future castles for

a company, and making your stock selection accordingly. UM and so E s G in my mind, is really a little bit of a sort of a professionalization, as it were, of the s R I. Yeah, and then the E s G movement sort of became, you know, relatively mainstream. UM. I say relatively only because there's still a lot of

asset managers that don't do that. UM, what percentage of the total investible assets would you roughly guess plus or mind as E s G is running now depends on who you talk to and how deep you believe the E s G methodology has penetrated the organization give me a range, I would say somewhere between five and thirty five. Al Right, okay, so the low end was what I was expecting you to say. Thirty five is an enormous

self one out of three dollars has some s G relationship. Yeah. See, that's where it gets really kind of slippery, because um, E s G disclosure is being driven culturally at this point rather than legislatively or regulatory. You know, the there's no there's no government mandate you must do E s G. It's sort of not not a self actualized said of understandings that the finance community has kind of reached on

its own. Yes. And the reason I drew that distinction between sort of cultural applications of vs G versus the regulatory applications of E s G is that that determines how deep it penetrates an organization. I think that saying at this point that an asset manager is simply ignoring all environment on social consequences when making an investment decision, I think that's that's that's a that's an inappropriate assessment

of investment methodology. I mean even even even a firm that would be like intentionally antagonistic towards the concept of responsible investing might incorporate some kind of climate risk modeling in the way that they think about doing their analysis of oil and gas EPP exactly the whole run of things where where there's some potential exposure and if you don't think about it, you're adding risk to your model, exactly.

And that's why I think that the number could be even higher than thirty, because when we talk to asset managers, and we talked to a lot of asset managers, it continues to surprise me how many of them say, yeah, you know, we're starting to contemplate that we're starting to integrate that into our underwriting, for example, for fixed income UM we're starting to integrate that into our analytic models

around future discount of cash flows. You know, it's like that that that approach is no longer antagonistic to the notion of investing for finance return. Now how deep it goes and it's only there's only one firm that I'm aware of that does absolute sharp sharp thinking around the materiality of h G risks, and that's UM. Al Gore and David Blood's from Generation Asset Management, and they're they're really a private equity, venture funds, no long only equity,

long only equity, long only equity really ten billion? They capped their fund at ten billion. They probably got eleven or so. Now, Um, is it? You're talking private venture or publicly traded company, long only public equity. Really? Yeah, that's fascinating, that's fascinating. They do have a private debt fund, and I believe they do have a small private equity fund, but the core, their core competence is long only global private capital ten billion. If you want to really move

the neodle, it's an open question. I've had. I've had that conversation with them, and I think they capped a ten billion when they started the firm because they didn't want to have asked growth be the primary driver for their business decisions. Um, but I don't know what's interesting? Yeah, I don't know. Really really quite fascinating. Yeah, and their performance here's what gets really interesting. Five basis points compounded over the index. Really, Yes, when did they launch ten

years eleven years ago? Oh? So they launched right into the right into the mess, right into the mess. And what's beautiful about that is that it both allows an observer to discount their performance by saying, yeah, well, you know, they didn't have an exposure to carbon and they didn't have exposure to predatory landing because that's not their model. But that's the whole point. Oh, you know you're cheating because you're not exposed to all this bad stuff. Well,

by definition, isn't that what you're hoping to? That's the whole point And what is baffling to me. And I think this get this gets to the cognitive biases embedded in Wall Street and the city of London. Why are there no copycats? Why aren't I mean think about you have the e t F she that focuses on governance issues where companies with a decent exposure of women represented

in yes, senior management, in the board. I wouldn't say that's a direct cop copycat, but hey, black Rock put out an e t F that says, yeah, this is our our corporate governan CTF that's certainly inspired by it's got to be along the same lines. See, I would suggest that that's a market share capture strategy more than

necessarily in investment methodology. And I'm maybe cynical here, um, but I would suggest I would pose it that gender diversification in the c suite is an important reflection of the culture of a company, and it may parentheses or may not in parentheses not be immaterial, may not be immaterial. My guest this week is Matthew weatherly White of the cap Rock Group. UH. He is Dartmouth class of eighty six. He spent twelve years working in the trenches at Smith Barney.

Let's talk a little bit about Smith Barney before we get back to impact investing in and E s g Um. You don't strike me as a bulge bracket, big firm sort of brokerage guy. How did how did that come about? Part of it was timing. I joined Smith Barney immediately following the Shearson merger. So Sheerson Sheerson Smith Barney when I joined them, so it was pre Travelers Group, PRECD group. Sandy While wasn't even there. I remember on the NASDAC

level three Sebashi was Smith Barney. Uh Shearson was was there for digit code on on the on the trading desk. Yes, it was much smaller firm then. I think they had about seven hundred brokers across the country and he had a small office in Boise, which is where I joined them. Um and not long thereafter, Sandy while went on his acquisition spree, and by the time I left, I think they had ten thousand brokers and it was a relatively

small division of City Group at the time. So when I joined them, it wasn't really a bulge bracket firm and it became one. And that that that that journey was really just heartening for me. I just sort of personally and and you know, part of it was my naive te when I entered the business. UM. But I remember when I went back to training, my first training session, and in my imagination, training was going to be learning how to be an investor and an teach us how

did the markets? What is modern portfolio theory? And it was a month and they had us in this hotel in Hartford, UM for a month and it was cold calling and scripting, was all sales. And I remember leaving at the end of that month thinking, Wow, this is really not what I had expected. UM, But I figured, well, I signed up for this, I'm gonna kind of plug

plug my way through it. And I got through the first six months and then qualified for the next level of training and went back to next level of training things. This is where this is where investor you were. You were an army grunt and now um, all right, now I'm an officers training school. Now I'm a lieutenant. Um more sales. Yeah yeah, And uh, I realized that as much as I am fascinated by and compelled by capital markets, capital formation and aggregation, etcetera, I just didn't really like

the job. Well it's a sales job. It's not. It's not an intellectual pursuit. It's a sales which has its own intellectual aspect, but it's not the same as capital formation, correct, And it was. It was a great experience for me just to really be in the belly of that beast for for so many years. And along the way, I was tapped to join the leadership development program, which was really about uh, finding guys that was in the firm

that we're gonna move on to management. Um. And so I got a two year crash course in big bald bracket broker dealer management. And at the end of it, I was I stepped off that train and I said, not only do I not want to be a manager, I don't even want to stay here. And it took me about five years to figure out how to exit in a way that worked for me. So when you were at Smith Barney, did you try to say, hey, here's an idea. So previously we um also a Smith

Barney alum was was it Smith Barney? Was is Rick Ferry who turned around and said, hey, I have a great idea, let's do low cost indexing and pitched them on it. They said no. When it took him a year or two before he said all right, I'm gonna go do this on my own. Did you try to move the dial there with hey, we could do something interesting here and the clients will love it. I can't believe you asked that question. We did not prep for this, Um. Yes,

I did. Actually wrote a white paper to senior management where I said, look, there's these embedded conflict conflicts of interest in this business model where you've got four primary revenue streams, all riding on the backs of one or two consumer basis, and those embedded conflicts of interests are going to be revealed at some point, and here's one way to strip that conflict. And I I suggested an asset based account rather than a commission bay ssed account.

They called it Asset one and it became the fastest growing account structure at Smith Barney. Nine months or so into that pilot project, they terminated it because not not because it was they were pulling money away from more productive brokerage accounts. No, it was because the brokers were using asset one as an excuse to get paid on

an account without doing anything. So what they realized was that brokers were converting commission based accounts to fee based accounts so they could basically ignore the client and still get paid. Huh, that's fascinating. Yeah, it was really it was a really interesting and you know, somewhat cynical view into the mindset of the company. Couldn't you really impose a set of conditions that if you're gonna run an

asset fee based thing, you're required to. If here's a financial plan, here's a quotally update, he's an annual review, you can impose exactly what they did. That's exactly what they did in the broker force sort of rejected it, and so let's work. It's actual it's actual labor. Yes, the account die. Huh, that's that's amazing. I'm Barry rid Hults.

You're listening to Masters in Business on Bloomberg Radio. My guest today is Matthew weatherly White, who specializes in impact investing and is the co founder of the cap Rock Group. So let's let's talk about running a business that specializes in in what you do. First question, I know your background. I know you've been all around the world. You were

born in Manhattan. Where did you go from From New York Tuna as one does, um, and then France and then England and then Colorado, which is where I think of as my home. And I went back east to go to Andover and in Dartmouth, and then I lived in Australia for a while, and then I moved to Idaho. Um. Which so that's a natural progression that all roads leads

to boys. We've heard that, although I'm told that that parts of Idaho are just big sky, spectacular country fishing, skiing, mountain hiking, if you like doing anything in the outdoors. Idaho is Colorado was like when I was a kid, really just not as developed as Colorado has become. It's a remarkable state. And I'm not getting paid by the Ido Teamber of Commerce for this endorsement, but I chose

to live there. Um. It's been a it's been a Hindrance in many ways professionally, but not a big financial community. In Boise, it's the other center of the financial world. It's the beating heart of the London, New York, Tokyo. Boise. Absolutely it rolls off the tongue. But but for an outdoorsement, it's a fantastic place. Yeah. Yeah. So, so let's talk about running this business to begin with. So you're an investment firm. When clients come to you, is it all right,

here's what we're gonna do with your investments. And by the way, we'll put this much into impact. Is it a what what drives that process and that decision? Yes, that's probably a much deeper conversation than than the format of the show we were all right, um so first of all, um, you know, we have grown from a relatively modest beginning. We had about four hundred million dollars

in assets under management in two thousand and eight. We launched in two thousand and five and spent three years basically building systems and capacity, started started marketing in two thousand and eight and went from roughly four hundred million to three billion now so ten years, ten x almost in eight years. Yeah. So it's been gratifying growth um and I think we can attribute that to a couple of things. I mentioned a moment ago that you know,

being based in Boys has been hindrance. It cuts both ways. We have had some families say to us they intentionally want to work with us because we're not from New York. They think that that leads to the capacity for independent thought, which I think is accurate. And we also have had some perspective clients who have said no to us because we're not from a financial center and they think that we're not going to be able to tap into sort of the sharpest and best thinking. So that geography cuts

both ways. I think broadly it's been more of hindrance than help. However, the way that we've chosen to structure our business is based on a question that the six founding partners asked ourselves, if we were to hire a firm to manage our own capital, what would that firm look like? And we spent three years answering that question, using a combination of partner capital and of residual business that we lifted at Smith Barney for operating revenue to

basically build the answer to that question. And one of the things we did right away was rejected notional model portfolios. And as soon as you as soon as you sort of go through that intellectual process of understanding why a model portfolios exist, i e. To optimize for the profitability of the asset management firm, not necessarily to drive for best solutions for your clients, then you realize you can't

use model portfolios. So let me let me push back on that a little please, because I know half the audience is pushing back. Oh, absolutely, this is a really

this is a uh, confrontational almost stance. Um. So the counter argument is, look, people looking for appreciation relative to the risk they're assuming, and depending on their personal risk tolerances and depending on what their financial goals are, they want either a lot of risk or a moderate amount of risk, or a small amount of risk conventionally known as conservative, moderate, and aggressive. Uh. We get compensated for the risk we assume in the capital markets up to

a point. There's the efficient frontier and a point where you are optimizing how much risk you're taking relative to your expected returns. And everybody, while theoretically being a unique individual and we're all butterflies, the reality is most of us have some similar financial goals, be it saving for college graduation, buying a home, generational wealth transfer, go through all the usual things, and most people more or less full into I am very risk averse, I'm moderately risk averse.

I'm not risk averse at all. And so the various portfolios we could tell people were creating a unique perspective for them, but really they all end, they all fall into the three buckets. Fair fair bit of pushback, which I assume you've heard before. Yeah, absolutely, that that's a logical and defensible position. However, well, our experience is that

that's not actually true. And here's why. Um First, we don't think that investors can articulate their risk tolerance in a way that is reasonable, and there risk tolerance shifts with market performance. In two thousand and seven, everybody had high risk tolerance. In two thousand and nine, nobody had high risk tolerance. And you can't flip portfolios, risk structure, risk bucketing effectively to matt to the viscis tudes of the market. But let me push back right on on that.

Right here, it's not that their risk tolerance has has changed, it's that the headlines have changed and suddenly they're scared, and their behavior and they're cognitive issues. The fact that they're fearful and they're expressing that in a way they think is restolerance. Really they're just saying, what's going on, I'm nervous, And it's the advisor's job to say, look,

we had this conversation, here are your financial goals. This too shall pass, but you can either change every six months or you could ride this out for again, totally agree. The problem is if you're basing your assessment on what the client has told you at that moment, at that moment, then you use automatically enter this really strange world where you're not really sure what you should doing. But but but that's one of the words they're what they're telling you.

The risk assessment is is only a function of what just happened, not the next ten years, frequently and the

and that's part of it. But the bigger part is when we go through this pretty brain cramping exercise of doing lifetime discount of cash flow modeling, and when you do that and you um derive from that process a present value calculation on your future anticipate paid it in known liabilities, and you compare that present value calculation against the assets that they have, you can derive a target

after tax inflation rate of return. This is a big exercise, but by doing that, you can then say to the client, Okay, given the assumptions are in this model, and here they are, here's our discount rate, and here's our rate of inflation that we expect, and here's how old your kids are. And you know it's it's a pretty logical exercise. You can then say, we believe that you are after tax inflation target rate of return is one and a quarter percent, so you have a lot of wealth and a relatively

low burn rate. That's a modest rate of return. That opens up a really interesting conversation because from that a client can say, oh, you mean I don't have to hardly take any risk, and I can have an enormous sense of confidence that I've inoculated myself against the future

uncertainties of the market. Or somebody might say, oh wow, I can swing for the fences because I can lock down that one in a quarter percent with fort of my portfolio and give sixty percent of my portfolio a really high risk profile, even though they might not consider them elves high risk but as soon as you unlock that conversation, it suddenly becomes grounded in this like in this, in this sort of hyper real relationship between the money that they have and how they want to live their life,

rather than its abstract well, what's your risk tolerant? Mr. Investor? You know, they don't they don't know. When you ask people that they don't know. They obviously don't. They don't know you have to. And yet that is the that is the fundamental assumption that almost all of these risks, that all these model portfolios are based on what's your risk tolerance? Mr. Investor. You talk to a real estate

developer and you'll say, I'm really conservative. All I want is and you'll talk to over ten years, not over ten years, not compounded annually, because if you're or, you can talk to somebody else and says, I'm super aggressive, I want to get like eight percent. Well that is as it is these days. It is these days. Yeah,

but I definitely understand the point. The thing that I find fascinating and I wonder if you could talk to this is there are people who, in the early part of their career are, uh, go go go acquire, acquire, take embrace risks and suddenly they find themselves with a huge pile of money and getting them out of that former risk embracing headspace sometimes could be a challenge because hey, Mr Jones, you have a hundred million dollars, you don't

have to keep swinging for the fences. You can throttle back and take less less risk. And that's where that lifetime just kind of cash amo really helps. And it's super detailed. I mean it can take us six months sometimes to build that totally out, and it's an iterative process and all the assumptions get tweaked and revisited. But once you take somebody through that process, the conversation shifts, and I want to get back to one of the questions you asked, impact funds versus Yeah, so we are

not an impact investing firm. We are an investment firm that has an interest for it. And I would argue and expertise in impact investing, it's not the same thing. There are a handful of firms that are exclusively impact investment firms. We don't do that for two reasons. One, we think that you cannot simply throw a switch and

just convert to impact overnight. So by definition, all of our clients, even those who are passionate about impact investing, have some conventional investments in their portfolio, so we wouldn't be able to manage the whole balance sheet. Um and the second pieces. We think that at some point in the future the term impact investing is going to lose its meaning, and we don't want a self pigeonhole into the future. We've been speaking with Matthew weatherly White of

the cap Rock Group. If you enjoy this conversation, be sure and stick around for the podcast aftrus where we keep the digital tape rolling and chat for another hour or so. Be sure and check out, By the way, where can people find your work, your research, your writings, your white papers. Yeah, so the best place is our blog site, which is www I three impact dot com. That's integrated Impact Investing impact dot com I and the numeral three Impact Investing dot com just I three impact

dot com. And then my Twitter feed is uh at I three impact I three Impact. Be sure and check out my daily column on Bloomberg View dot com. Follow me on Twitter at rit Halts. I'm Barry rit Halts. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast. I do this every time. I don't know why I'm talking with Matthew Weatherley White. It's it's a different segment. So I feel open and free and not I don't have to worry about the time. Matthew,

thank you so much for doing this. This has really been quite quite interesting. Yeah, I love your questions very It's great to sit with somebody who knows the fancom markets as well as you do. And for those of you who obviously everybody's listening to this everybody. Barry just did this like I'm embracing the world gesture And if anybody's seen an Cutty's ted talk about how body language

informs like that's I just saw like her deal right there. Really, I don't know how I what how that came about. I just spread my arm. And the first time I did it was like, you have to understand, I'm not a professional radio person. I have no training, I have no background. This whole project was a skunk works exercise here at Bloomberg and it was kind of snuck in the back door. They were like, yeah, go ahead, kid,

go do that. And the next thing you know, it became the most popular podcast at Bloomberg and they've been nothing but supportive, encouraging. But it was how did this

come about so early? I was trying to signal in the first few podcasts this is a different segment, and it was just welcome to the podcast, because in my ear I hear the engineer saying halfway two minutes, one minute, thirty seconds, and I'm so when you see me sort of hurrying you along, it's because I'm trying to make the the guy who has to cut up my messy conversation into precisely seven and a half eight and a half six and segments. And now this is open ended,

so it's freeing. I don't have to, uh, but you of the first person who's ever commented on it. So I have a ba jillion or maybe twenty questions that I didn't get to, and uh, I wanted to push back on what you said, because I know there are

people who are going to push back on that. Listen, models or how most of I shouldn't say most on the i A side, on the investment advisory side, the academic studies show that very often passive beats active and models beat the sort of sector rotation, chin stroking I think now energy is going to be good and we rotate, or energy is gonna be bad and we rotate out

of energy. So the idea of models being more passive and less, less costly, less turnover, less taxes in the long only it's an improvement from what came before totally and in the long only equity world, which we would we would consider not only an asset class, but a subasset class um that's lonely. Yeah, of course, that's exactly right. It's exactly right, like active management. Really it there are people who who outperform, like Generation, who I mentioned on

the call before, and we do. We do have exposure to some actively managed long only public equity, but it's typically people that have high conviction, low low demonstrated correlation of the broad markets. Most of our long only equity is managed for beta right, and it's we we do tax matches essentially a model. It's a model, and that's why. And I wanted to get to that in the official interview, but I felt you hustling me along, and so I didn't.

You shouldn't feel that way. You should. You should always so media advice, Always get your answer out because they'll years ago big digression this is this shouldn't be about me, this should be about you. But I did Nightline and it was long after the glory days of the first direct Warren, and so I gave them an answer and I could tell. So here's the way they they shoot

these things to tape. There's a storyline that their writers and their legitimate writers think they're telling the media story, and they write this out, and they go out to the universe of possible pundits and they find people who will say different things relative to that storyline, and they sort of assemble this jigsaw puzzle. And when it works, it's great. And when their storyline is wrong or off

or diverging from reality, it's not so great. So and the way they the little trick that they do is if you give you them an answer that they don't like or it doesn't fit into their prefab storyline, um, they'll ask you the same question slightly differently, and they'll do it twenty times until you finally say what they want. But I I've been doing this long enough that I know the game, And so they asked me a question, how much is two plus two four? Let us ask

you this differently? How much is two plus two in the universe where it's four, you can ask me a different way. So the third or fourth question was asked, an answered, move on to the next question. And they're not used to I'm the guest, I'm not the director, but I know what the what they're pulling, and I'm not gonna say something and I'll believe. And I really deeply think that anybody who goes in the media should always say what they believe and not just respond in

a way that they think the Uh. So you should, I I apologize if I meant you felt hurried along. I wasn't my intention. You should always say, hey, part of what we do is this, and part of what we do is that. And so that was my bad. But I felt obligated to push back because I could hear a million listeners saying, hey, this model. Uh pushed back. There's a ton of interesting Yeah. And I think the other the other place where it makes a ton of

sense is in the endowment model. Because the endowment model, where you have clear, consistent, long term cash flows, you can discount that with an enormous amount of certainty, and you can build optimized models. They are going to be in place for decades. They don't have a specific funding that you'd beyond. They don't require flexibility, don't have to

worry about providing increased liquidity. They don't have to know whether or not your client is going to have a kid, or want to build a second home, or want to invent. It's like all the liquidity factors that you have to think about with individual clients that directly inform the construction, viability and durability of a long term portfolio allocation. That's not an issue. And so model portfolios work really well in that endowment model. And people like Katie Hall at

Hall Capital have taken the endowment model. And she's the CIO at Princeton, founder of Laurel Capital Management, wicked smart, super cool woman. She founded Hall Capital um. She's got twenty five billion, maybe more than that a U m um And the whole thing is endowment model. That's it just running a model and looking thinking long term and not not worrying about capital calls or hey, we're gonna

have to take time out of this. And she's in a great job with that, I think, and there are firms that have done that with really high i Q solutions around model portfolios. But they have a wickedly smart investment committee. They do a lot of work with you know, controlling steak and direct companies, lots of alternative um, private assets and real asset investments. They don't do a whole ton of sort of convention along only public equity investing.

And so the model portfolio looks more like Swinson's portfolio Yale than it would for somebody who has, you know, ten million dollars. So now what do you do? That's raised an interesting question close to the Swinson model was such a home run when it was a unique model, and the past ten twenty years, even though Yale has done well, when you look at all the Swinson imitators,

they've stunk to join up. Yeah, I mean, imitation is always hard in the capital markets, right, I mean, you chase performance because somebody found an opportunity for alpha and you arbitrage away the alpha b capital flows. I mean, that's how the capital markets work. And that's one of the things that I find so interesting right now out E s G materiality because there's not very many firms

I mentioned generation asset management. There's not very many firms who are doing E s G with an eye towards materiality rather than E. S G with an eye towards let's say responsibility. Look unpacked. The two of those sore. The eye towards materiality means they think it's topical and interesting or they think it's it's material to the operations

of the business. So so Coca Cola the largest consumer of water, largest corporate consumer of water worldwide, right, so Coca Coca Cola needs to be thinking about how they manage that resource everywhere in the world, all the time. It is material to the operations. Makes sense. Conversely, I would suggest cautiously that gender diversification the C suite at Co Coca Cola might be relevant to how they think

about their consumer base. It might be relevant to the conversations that go on about strategic direct to the company. It might not be material to the net operating profitability

of the company. Flip that look at Mabeline, for example, water is not a material factor for them, but it might be that having a diverse gender base in the C suite Mabeling is actually central to their operation viability because their consumer base is going to be buying products that are designed by the C suite team, right, and so buy women for women? Yeah, And I don't. I don't. I don't want to imply that only women can make good marketing decisions for women. That's a reductionist exercise that

I think breaks down with relatively shallow scrutiny. But I think that having a a homogenized management perspective in a company that selling consumer products doesn't make any sense, and it might be material. And so from a reporting perspective, from an investment perspective, if you are looking at Coca Cola and they're not paying attention to their water exposure,

that's a material right. Conversely, if you're paying attention to Coca Cola because they great gender diversification at the C suite, that might not be material to the profitability of the company. And so what's happened in the s R I E. S G Impacts sort of translation is that a lot of the early practitioners who really built the discipline were and they say this with an enormous amount of respect and affection, um were activists. You know, they were saying

doubt about that. They were saying the capital markets need to be a more just system. Remember, a lot of this goes back to the diversification of South Africa in the seventies. I mean you could you could trace S R, I, E s G and impact too handful of Yale. However it was mostly I VS. Where the agitation to our endowments, which even back then were enormous, are investing in a system that supports apartheid. How can we support that that success.

We've got a whole run of subsequent uh subsequent thing. Yes, And I am in no way saying that that is an ineffective or irrest onsible or corrosive force in the capital markets right. However, it's evolved. It's evolved a lot.

And I don't think that even a a committed E. S G practitioner would look at divestment of investments in South Africa and say that was the exclusive cause of the collapse of the apartheid regime, nor that it led to some influence on performance, because that what happened was I mean cynically, there was an asset transfer, you know, into the hands of people who are willing to do antities are willing to do business in South Africa and at a discount. People forget that when when you sell

your South African investments. The thought of the trade right, it's and it's the old joke about cash on the sidelines. Well, how is that cash on the sidelines? I sold my stock, someone bought the stock. What we did was transferably. And that's where I have a real, real um, a quiet but sincere objection to the notion that s RI E s G investing will transform corporate behavior. It draws at tension. I think the diversification, the the diversifying away from South Africa.

It created a whole lot of awareness and a whole lot of media coverage. How much it actually influenced the government in South Africa. Really, it's a tough correlation. So so let me bring you back to the issue about diversification and governance and looking at companies that have more women represented on the board in c suite. So there was a study that just came out. There was a Bloomberg article not too long ago that talked about and

they didn't make the causation argument. They only brought up the correlation, which was, in general, on average, firms that have more women represented on the board and in the

c suite tend to outperform firms that don't. So The question I'm gonna ask you is are these firms better managed and because they've been managed, they have a more diverse corporate governance, or do women at the higher levels of corporate governance not suffering from what my trader friends call testosterone poisoning, helped make better decisions and and make a more intelligent long term strategy. I think that's a loaded question, a super loaded question. I think it's a

yes and yes, and that we don't know. Okay, that's that's a fair answer, because it could go either way. We really don't know. Sometimes it's here, sometimes it's not. But ultimately nobody has been able to demonstrate it one way or another. Well, I think that the demonstration is UM is coming. Um. There are a handful of really interesting, super focused research institutes that are focusing on this issue. Criterion in Stude is one that I think is doing some really cool work. UM. And I was just I

was just musing. The first time I read about this out performance due to gender diversification in the C suite was the Lord Davy's report to the House of Lords UM, probably going back ten years ago. I was gonna say, that's not a recent report. YEA as I think it's about ten years ago, and he's he's they've they've done follow up reports to that, and it's long and forgot that I'm not going to remember these act numbers, so I'll just I'll just claim that I'm making this up,

but it'll give you a sense of the numbers. But they looked at they did a twenty five year regression analysis of companies in the foot see that had more than I think it was ten or fifteen percent of their C suite were women, and the our performance was shocking. It was like it was like company. It was like it was like one of those eyeball rollers. It's like, yes, somebody blew their math right. But even if you discount that by right, it was still it was still a

huge difference. And so I started asking myself what could account for that? Right? I mean, really, by having ten of the C level be a woman, is that going to really make that much difference in the operations of the company. And you know, one thought that came to mind was if you had risen to that level as a woman, you had to be extraordinary, and so perhaps the influence that you would have over the strategic direction of the company would be outsized effectively because if you

made it there, you were exceptional. Okay, maybe that's part of it, but I think when you look at some of the research is being done around behavioral science and group science and group i Q, it becomes suddenly more clear that gender diversification is actually about making better decisions. You're not dealing with the homogeneous decision making group less, group think less. Everybody was in marsh depth and generally speaking, probably a hipper savvier approach to buy that company, um

to their entire worldview of investment. Pretty square women. No, No, I don't mean the women, the company itself. The company itself that is engaging in that means they're fairly cunning edge, They're up to speed on all the latest management things.

They know what works, they know what doesn't. And if they're that self enlightened, yeah, you gotta think that, Hey, these guys have already checked off all these guys have already checked off all the other I use that as a gender new phrase, but I know it's not interpreted that way. UM. I could say hey, guys to a group of men or women and it shouldn't make any different. But they've checked off all their other boxes. And if

you're up to okay, let's make you know. When we look at the prediction markets, when their uniform they don't do that well. And when you have a prediction market where you have a diverse group of traders, both in terms of geographic location, politics, economic strata, you get much better outcomes because you don't have you know, whenever, what's the line when everybody's thinking like, nobody's thinking so so I I'm inclined to think that smarter companies making better

decisions will tend to have this box checked off. And so it's really an interesting is it which came first, the really good company or the diversification. It almost doesn't matter, you know, it's a of into the to the final performance. But it's interesting to think about what's driving that. Yeah, And I would take even one step further and say, for those companies it's it's explicitly not a box checking exercise.

That's right. I think it's a really important point to make that for these companies is not about what we have to have women, but instead, let's make sure that we get the best people. And frequently they're not looking for gender, they're looking for the best people and build in a lack of homogeneous thought that will give us our process should give us a better outcome if we make the process better. And here's one way to make them.

And it's hard. I mean, we're we're you know, our company was founded by six middle aged white guys, right, um, And I think our natural instinct is to hire in our image. It's a comfortable hiring decision. It's certainly your network of your networking to look like yourself. And so to make that decision to hire somebody who is really different from you, they have to it's harder to do. There has to be a level of intentionality in there

that is not commonly reflect did in corporate America. And I think that's the obstacle that we face, this um

cognitive bias for hiring in our likeness. And it's it's as simple as you do an interview with somebody and you know he played lacrosse at Duke whatever, and you had a brother that played lacrosse at U n C. And so you think of him as a really good guy, right, And that that that that commonality becomes self reinforcing and your hiring practices and so you do have to bring a level of intentionality to sort of dismantle that, and it's not easy to do. And so I think your

point earlier about companies that are more enlightened. It's a bit of a loaded phrase, but more enlightened companies they're going to do that naturally because they recognize that strength comes from a diverse view disagreement in the C suite leads to better decision making. But you have to do that intentionally because it's hard. No, it's definitely, it's definitely not easy. I know, I don't have you for for forever. There's a runic questions I want to get that I miss. No,

not at all. This is really I find the stuff to be absolutely um fascinating. So so let's talk a little bit about your investment process, not so much for the passive beta portion of it, but for the active impact portion. How do you decide what what? First of all, what do you're buying. You're buying stocks, you're buying mutual funds,

you're buying ETFs. What what's the vehicle of choice? Yeah, so, in the public equity markets and public fixing income markets, we use separately managed to counts with specialty managers that focus on those markets. So it's mostly unhedged long only equity. In our fixed income allocations, mostly relatively short duration, very high credit quality. We don't like taking intest rate risk. We don't want to take a ton of credit risk with our fixing come portfolios because we think they serve

the roles boust in the portfolio. It's a pool of aquidity, a little bit of income. It's not where we want to take a lot of that investment grade. That's pretty much pretty much a lot of meetings. So let's go back to the equity side, um individual stocks, So we don't pick individual stocks. Were not pick the pickers of

individual stocks. Yeah, and what we look for is either as I said earlier, demonstrated capacity around data with a tax managed overlay, or proven low correlation to the rood equity markets with a defensible investment thesis that we think can play out over time. That's a relatively small part of our overall public equity exposure. But right now, I mean, so I don't know if this is a disclosure or not, but I'm gonna, I'm gonna, I'm gonna run the risk here.

So um I said, we don't use model portfolios, So The way that um we sort of get around that in terms of talking about it is that we aggregate our twenty largest clients and we consolid all their portfolios in a sort of a hypothetical exercise around what our exposure across the firm is. And right now, we are skeptical about the public fixing come markets and we think it's it's basically in an environment of return free risk um and so so our public fixing commallocations right now

are primarily for liquidity. And so we're sitting at about across that turn of the largest clients. Our public equity exposure has been steadily coming down over the last year and a half and we're down in the mid teens

right now for that as well. So we've got about of our assets in the public markets, which leads about se in the private alternatives and real assets market, which is really real you're talking real estate or something real estate, it's real estate, timber, um agg um commodities that that are all tied to a specific property. Yeah, we don't do a lot of futures. So it's not it's the timber, you're it's the land that the timber is harvested from, not so much the timber itself. Yeah. Um. And so

that alone is a pretty unconventional approach. Rantham has been pounding the table on timber for what fifteen years now. Yeah. And you know the thing about timber which is interesting is that the yields from timber are basically dependent upon the rate of growth of the trees. And maybe you get maybe you get a little bit of a little in the land value if you're in the middle of a construction boom um. But you know, basically, over the

long haul, you're gonna get rate of timber growth. So in Canada, as the planet warms up, that's actually good for the yield. It could be. Yeah, I mean it has My mom, who's a who's a wonderful golfer, likes to say every put makes somebody happy. He's got to look around and see who's smiling, and you know you're gonna laugh. But I spoke not long ago with a

fund that is raising capital to acquire farmland in Siberia. Uh. There was just an article about the Northern Passage, which has always been a dream, is now open and cruise ships are going through the Northern Passage this summer. That a hundred years ago was frozen solid. You couldn't get from from Newfoundland to Russia that way. Um. And now apparently there's a fairly clear passage for three months of the year that that used to be frozen solid all

year round and that's no longer the case. And you look north of the Crimea, for example, and if you can extend the growing season by just a couple of weeks on either end spring and fall, suddenly an enormous amount of that land becomes arible. That is a huge wind for holders of arable farmland in northern climbs. There's a wonderful book called Windfall. I don't know if you mean you've read it, and um, the the author's uh is escaping me at the moment, but I'll find it.

And the book basically tracked a whole bunch of um uh here it is. Wow, that was really impressive. Um. Windfall by Mackenzie Funk. How did I forget Mackenzie Funk's name. That's a great name. So anyway, he he tracks all these Deutsche Bank goman sacks, all these private funds that they had set up and following the money and seeing

where people were investing based on expected climate change. Now in the United States, one of the two major political parties doesn't believe in in climate change, but they're pretty much the only major party around the world that is doesn't doesn't accept the science of climate change. Windfall doesn't even talk about climate change. It says the world is changing. Where are people putting their money to make a bed on it? And they find some in what you just

reference farmland. There are now funds that are accumulating farmland that they expect will be arable or more arable years from now. Monsanto developing a salt resistant grain of rice, and you could grow you know, when you have salt come in on some of these marshes, you no longer can grow food there. You're so there are there are winners and losers. According to the book, what's dry is gonna get dryer, what's wet, it's going to get wetter, and parts of the world are going to be underwater.

If you're a real estate investor and you're thinking about making investments into the coastline of Florida, I would imagine that you're view of global warming would be material. It

would be material. And now it gets right to what I was saying earlier about capitalism being a fantastic optimization mechanism, the fact that people are thinking about that it's going to drive capital in that direction, and it may they may be right, they may be wrong, But it's a capital allocation decision based on however you're discounting the risks

around climate change or the opportunities around climate change. Do we have do we have any really well understood way to actually figure out what what the appropriate discounting mechanism mechanism is for or it's really just a rational guest and it's it's a lot of I mean, you can look at all the climate modeling and yeah, you know, maybe there's some guiding you know, sort of guiding factors in those, but I think of them more like guardrails

rather than train tracks. Right. The climate models are subject to revision, their subject to an enormous amount of variability, particularly on a year to year basis um and so directionally, I think they're pretty clear um and so directionally, if you're aggregating capital to acquire a potential future arable land, I'd be pretty diversified in my geographic FOOTPRINTE. But yeah, you know what's gonna happen in the next ten years.

And how do you discount that value? That's a challenge. Yeah, so let me get to some of my favorite questions. I asked all of my guests because I know they're gonna come for you for TV and and momentarily. Um, so you talked about your background. You went right into finance right at a at a college. No, I did not, actually, so let's let's go over that. I No, I didn't join Smith Barney. Stuff was thirty So, uh, what did you do for the decade between college and Smith Barney.

I was adventuring. I was writing, I was skiing, I was bike racing. I was a private chef. I worked at the Sun Valley Athletic Club. I mean, it was just cobbling together a life. They'll let me have as much adventure as I possibly could. And it sounds like you put in a good ten years of Uh Where were you in Australia? So I lived in Melbourne. After the World Championships of Rowing, I got invited by a couple of ASSI buddies that I met there to come

and row with them. They really are serious when they party. I can't keep up with those guys even in my youth I could not keep So the best party is I joined Mercantile Rowing Club in Melbourne, which was sponsored by Carlton United Brewery, makers of Fosters. So Fosters so on our team, on our team Jerseys, we had the Foster's logo and it was it was that you couldn't

make it up. So after every race the Fosters struck could show up with kegs and on you know Boathouse Row and Melbourne, right along right below Princess Bridge, on on the on the on the era um all the boat crews would come to Mercantile after the race because that's was that sounds uh And by the way, nothing like a solid workout and then tapping a keg that sounds interesting. So at third do you say, okay, no, I need to get serious. You joined Smith Barney, not

just at Smith Barney but across your career. Who do you think of as your mentors? So when I was living in catch um Um, there were two guys that were really my mentors. One um catch them catch him, Idaho, which is where Sun Valleys located. Um one was was a retired pretty young guy who was a bond trader, at Solomon UM and he had made enough money to punch out relatively young, lived a very modest life and catch him but had a lot of adventures UM and he and I spent a lot of time in the

mountains and he just got me super inspired. He was a crusty, salty I mean, you knew the solid guys from the ages, right, Yeah, not pgrated, not PD rated at all, and he was just this oddly inspiring guy like I just I just really liked hanging out with him,

and his worldview was was really compelling. And then this other guy by the name of Tom Campion, quite older than me, but he had gone to and over in Dartmouth, super educated in his had a parallel background, very much so, and he was a bike racer and we sort of ended up going along bark rides together and his family had a multi hundred million dollar private foundation that he was running. And so I had these two different, completely

different views of the capital markets. And I'd go out and climb mountains with Martin Adams and I'd go out and ride bikes with Tom Campion, and between the two of them, I just got completely fascinated by it. And so when UM Tom turned to me after working with him for about two years, he said, you need to leave catch him, because you don't leave now, you're never gonna leave. Um. He basically kicked me out to catch

him become a scheme bomb and that's up. And I was super piste for a few months, and then I was really grateful because I realized he was right. And he set me up with a couple of interviews at Merrill Lynch and UH and Smith Barney and Prudential UM in Boise, and that's sort of how I started there.

So the Merrill Lynch training program, I recall your your Smith Barney story, so I know someone who used to run that and it was one of the few on the street where they actually went through here's what capital markets are and here's how you converse fight bo It was so the first half what they actually educated people, and then the sales side came up and they felt that made them better salespeople because they understood it better.

But they were the only ones I've ever heard that integrated what what you were looking for and didn't get it. And we had a little bit of that, but it's all product pitches, right. We'd have the head of theory. It was, let me explain why this fond is so good? Totally. Yeah, No, I I've witnessed enough of that. UM. So you mentioned, uh, the mentors. What's talking about investors? What investors influenced your approach to investing? You mentioned David Swainson at Yale? Who

else has influenced you? You're gonna laugh at this, but everybody says Warren Buffett, So I won't laugh at anything. Well, I could probably get to warm Bufett, but at a really cool story about Warren Buffett, which I'll get you in a second. UM. I think that anybody who was thinking about entering the couple markets for a career needs to read Reminiscences of a Stock Operator, a classic like UM And there's a new annotated version of it that's beautiful,

that's updated and annotated that a friend UM did. But I'll get I'll get the addition. Name of that UM. I think the two um um money Master's books. I think they were called by John Traine. I think it was, yeah, John Traine, and he basically interviewed guys who had built long term, really attractive rates of return in the in the public equity markets, and then basically published those interviews.

And then you know, I got with an odd to Warren Buffettum, so, my grandmother's best friend, she's she's English. Her best friend was really good friends with Charlie Munger, and I was visiting them when not to dinner with them. And I was young, and it happened to be with this older guy who was involved in investing, and um I asked him. I said, so, if you were a young man thinking about getting in investing, what would you do? And he says, I would call this number. He wrote

down this number. He call his number and asked the guy who answers to send you the bound copies of the chairman's reports for his company. And I did know anything about Berkshire Hathway. I've never heard of Warren Buffett. No idea. So I called the number and it's Warren Buffett's number. He answers the phone himself. He did not he was his assistant, but it was his office. It was like the direct line. And I say, yeah, I

met this guy at dinner. His name is Charlie Munger, and he told me to call this number and asked for the bound copies. And it was like a combination of silence and laughter on the phone. So you have no idea who Munger was? You know who you're calling us? No idea. So this is like nineteen eighties, seven or eighty eight probably, so my Warren Buffet stories. I'm in grad school. I'm working with this guy named Lawrence Cunningham, all right, he's a year ahead of me, is one

of the editors of the Lore Review. And he decides to take all of the annual letters from Warren Buffett and bound them in a book and published him. He's the first guy to do it. I got that. I think I went to school with him, and at the time I had I had. So I'm in law school. I have no idea who Warren Buffett is. I have no idea any of this stuff. And I'm like, Lawrence, you're you're going to be a lawyer. He's now a law professor. What are you doing? Well? He specialized in

in corporate governance and things along those lines. And who better an example of the right way to run a company that they warn't Buffett, by the way, Reminiscence of a Stock Operator by Edwin lefev John Markham Markman has done uh. The updated version, and it's it's a beautiful book. If anyone wants to read that book, I think it's as a light. So we're talking about books now we've kind of viewed into that. What what other books, uh

do you find? Um are interesting? Worthwhile? Finance? Nonfinance, fiction, nonfiction? So if you measure it by the books that I've given away the most in my life, that's an interesting question. But let's let's hear that that uh too come to mind immediately? Um me Amato Musashi's Book of Five Rings or Go Ring No Show, which was the Book of Five Rings and Book of Five Rings. It's it's just for the Japanese version of the Art of War, um

because they don't love the Chinese version. They well, it's it's a different it's a different approach because you know, I'm Sun Zoo wrote really about strategy as applied to military maneuvers, and Musashi really writes about strategy as a as applied to one's life and everything is a metaphor. So it's a it's a very zen book. I love it and considered a classic treatise on military strategy, much like sun sus Art of War. Don't there we go Um, either you know it really well or you just read that.

I just read that outstanding, quick quick, quick Google. I don't know the book at all. That's the first time I'm hearing of it. I know Sun Sue and everybody does, and I got it, used to get it. So I started as a trader, and every year someone would give me Sun Sus Art of War for Traders. Sure, so it's sat on my desk and then someone would bar throw it and I'm like, I finally get rid of that. Else it was like the book that was gone on my shoes? What was the other book? You? You've given

away a lot of Marcus Relius his meditation? Um was it? I have to remember who just referenced that book and a previous show. It might have been Charlie Ellis or it might have been Burton. I have to go back and find but not so as a former philosophy major that that book has originally applied math and physics senior year. A little bit of a switch. But um, that book is fantastic, Tindal, because you could pick it up, read it for as long as you want, and put it

down and start right where you left off. And it's like, oh, I'm right back into this. That's really interesting that you, uh, you like that anything else, non fiction or non or finance. Was everything you've mentioned other than reminiscence of the Buffet book. Um. I guess we have to consider fine, it's a master's class in investing, is the way I think about that. You know, the collection of his letters. Um. When you ask bibliophile what his favorite books are, you run the

risk of paralysis, right, because there's so many. There is no favorite. It's many. Yeah. But one of the things that I like to think of his whether or not when I've read a book, if I wish I had written it. Oh, that's interesting, you know. And there's not that many books that I've read that. Even as I'm reading it, I'm thinking, oh, damn, I wish I had written that. And Anthony Doers All the Light You Cannot

See comes to mind on that one. And Anthony Dors is a Tony Doors, a boisey guy, So I've got a little bit of a bias there. Um. But that book is just lyrical and beautiful and heartbreaking. Um. All the Light you Cannot See, All the Light you Cannot See fiction. Um. And then in the non fiction world. I mean, I'm always I'm always reading. I'm halfway through Sapiens right now that all the light we cannot see, all the light we cannot see. Um, Sapiens is really interesting,

really interesting. Halfway through I'm really enjoying the badass librarians of timbucktwo, which you gotta check out. I've heard that. Um, I'm it's probably third of the way or quart of the way into Um. The hard thing about hard things Horowitz is book. Um. Yeah, I mean, this is just just and those are just the ones that I'm just

reading recently. Yeah, the funny thing about Sapiens. So I read a book I really enjoyed called Last Ape Standing about who are we know of twenty nine human Like, yeah, primates, We're the last ape standing. And I referred the book to a friend and he liked it so much. It's gotta go fishing with. That's the next thing I know.

Sapiens shows up on my doorstep. So when I'm interviewing Danny Kahneman a few weeks ago, I asked him the book question and he comes out and says, the best book I've read in the past five years of Sapiens. So now I have this book sitting on my night table that I literally just started. I went home and I just started plowing. If Danny Conneman said this is the best book you read in the last five years, that said, how do you not? And it's really quite fascinating,

it is. I've been enjoying it. Um all right, So you reviewed a lot of the shifts you've seen in the world of UH S R, I, E S G impacting. So we know how that's transition. What sort of shifts do you see in that space over the next let's

call it ten years. I think the biggest shift is the professionalization of impact investing, and we have moved out of what I like to call the anecdotal evidence collection phase, where there's a bunch of interesting people are doing pretty cool things and we've got, you know, exits like Tom's and Warby Parker and uh you know grouped An's acquisition

of Happy Family Food. There's a there's a bunch of those sort of anecdotal evidence phase that you can run a business and exited at an attractive valuation that has a clear environmental or social mission embedded in the operations of the company. Tom's Toothpaste and all the no. I was thinking the um, yeah, who buy Tom's. Um, it wasn't Clorox. It was something like that. It was a big company. Yeah, big company, Claroxbot Bees, I remember which. Well,

I was thinking actually of Tom's, the shoe company. But yeah, Tom's the toothpaste as well. You know, Tom's the shoe company with the one that invented the buy one, give one model. So for every pair of tom Shoes that a customer buys, Tom's gives a pair of shoes to a kid in in a frontier emerging market that needs a pair of shoes. Um. And and that by one give one model has become much more common over the last few years due to the success of Tom's. That's

really fascinating. Barb warby Parker is another example of that by one give one model. Um. So, I think, I think the professionalization of impact as we move out of the antecdote evidence phase and move into the thesis validation phase before we move into the ubiquitous presence phase, right, um And I think that is starting to happen because you've got firms like Bank Capital raising an impact fund.

You've got Blackstone hiring Deborah and black Rock excuse me, hiring Deborah win Shell and in the organ chart, you know, you know, Debora is former executive director of the Robin Hood Foundation. Super smart tutor, very data driven, understands sort of this world really well. In the organ chart, what's interesting, and she reports directly to the CEO. She doesn't report like the head of structured products. So that's a pretty clear statement. And when you think about the letter that

he wrote to this last year. Last year, guys just stopped drinking around with stock by backs and do some R and D and some capital spending exactly. And that's the largest ascent manager in the world. Yeah, it's them in Vanguard are one and two. So so I think that when you know, when you have firms like Goldman acquiring Imprint Capital, black Rock hiring Debora win Shell and really elevating the role of their impact team in the company Bank Capital rolling out a fund and having hundred

and fifty internal people apply to work on it. Um, I think that's a serious commitment of time and serious commitment or you know, even um what's his name, Vincent Mai, the former chairman and CEO of a e A he launched as a fund. Craney Mere Capital based here in New York to focus on private equity and light stage private equity investing in firms that have sustainability components to their business model. I mean, it's like it's just happening

at a pretty quiet level. I was on the call on a phone yesterday with a woman from the World Economic Forum, and she was really interesting adjective to describe

the conversations that she's having clandestine. She said that she is having this conversation with sovereign wealth funds, large pension plans, institutional pools of capital all over the world who are fascinated by and compelled by this notion of impact investing, but they don't want to go public with all down there, and they're talking with asset managers trying to figure out

how to talk about it, how to integrate. I think it's just one of those subtle and pervasive conversations that nobody's really admitting to yet because it doesn't fit with the self schema that we as investors hold for ourselves. You're a philosopher, you know what, you know what that means um and as a result, and this is a kind of this is such a tangent, but I think it's a it's a relevant tangent to keep going. I think that because there is this cognitive bias against that

valuations are more attractive. You're not getting a ton of money chasing these deals. And I talked to impact that makes a lot of sense. Possibly it's a it's a thesis that I have see see my um my view of self schemas that everybody creates three six degree worldview And the question, the most important question investors need to ask themselves is how far has my subjective worldview deviated

from objective reality? And for most investors it's an enormous deviation, and for for some people it's close here off there. You know, I picture am I picture like when you go into the old imaxes that were the circular or planetariums and they're composed of all these octagonal shape path how many of those panels actually are are hitting reality?

And so you could create this three and sixty degree view. Uh. We learn a lot about about cognent of issues as as brains deteriorate or have have trauma involved, and so where different parts are off, Like we all have a blind spot behind us, but most of us have a blind spot in front of us, were wholly unaware of where you're two. Uh, And that's just a fascinating metaphor. So the idea that these giant sovereign wealth funds are embarrassed to publicly explore this space, that means that it's

really early days. It's really it's really early days. And I think that when you have a firm like Generation Asset Management who is demonstrating repeatedly durable, persistent alpha right in the market that in theory shouldn't really offer that you know, is ten years sufficiently long sample. Maybe not, Maybe they're gonna blow up, but you still have the argument that is compelling and maybe it's a narrative and we all love stories. Is that nobody has embraced this

yet fully. Look that my own so full disclosure, we run an asset management shop, and we run models, and we have clients occasionally ask us, what are you guys doing s g wise? What are you doing socially responsible wise? And and not even twenty or ten years, a year or two ago, we really couldn't construct something. We're not thinking what we were doing, and and the glib answer

was tell you what, let it make more money. And then you'll have more money to to donate to your favorite charity and and that should be your e s G. But between the way things have changed in construction, constructing, ETFs, mutual funds, the availability of items as the costs of execution of compressed So we will eventually be able to say to clients, yes, we could give you nearly idea. It's not identical to the poor model, but we could give you an e s G compliant model that is very,

very similar to our main portfolios. So instead of five thousand holdings, it's thirty. Instead of hundred countries, it's eighty countries. But it's so close you couldn't even be anywhere near that. Forget twenty five years ago, you couldn't even come close to that. And now it's just a function of technology that's available at a cost that wasn't two years ago. It's astonishing. So I don't want to talk. I want to ask you questions. When you guys were spending three

years and I know I failed miserably at that. Today, when you guys were spending three years building out all of the infrastructure to this, I assume some of it is legal accounting, clients, administration, pay roll. But what was the process like building out the mechanisms, the process to

put the portfolios in place for all clients. Are just for impact peace with the impact piece, Yes, so we're we're what we call finance first impact investors, and by that we simply mean that any investment needs to be viable, like it needs to be a good investment. First. We're not going to make an investment just because it has

a sexy environmental story. So we start with our totally conventional diligence and determine whether or not this is likely to return the capital they say they're going to return right um. And then maybe a little bit in parallel, but we also focus on the intentionality around the impact strategy, either an environmental peace or you know, more of a

social piece. And the social piece can be something like affordable housing, which is not particularly revolutionary now, but there's some really interesting cognitive biases around Section eight housing for an example, UM, which are just simply wrong, um and

are demonstrably wrong. And so if you're thinking about affordable housing with a Section eight component that actually can be a performance enhancer rather than a drag on performance UM or environmental piece of it, you know, you might be looking at alternative renewable project finance, right, so project finance,

there's no technology risk. Your counterparties are typically investment grade utilities, sometimes with very long power purchase agreements, and you're underwriting that based on the variability of the power rather than

on the credit worthiness of the counterparty. And yet despite the fact that the sun shines pretty consistently and you can look at long term patterns, um you're seeing you know, even three or four years ago, uh, you know, double digit returns being backed by a public trade utility with a three handle under debt, and that asymmetry made no sense to us. And now you're seeing that cost of capital for the project finance being driven down by the

amount of capital flowing into the space. And we're even now starting to see these you know, pretty high capex projects without power power purchase agreements backing them up, which three years ago would have been unheard of. And that's just shows you how far the capital markets have evolved changed totally. They're just underwriting these like conventional it's a conventional energy source. So they're they're yelling at me because you're they're they're coming to take you away to TV.

So I'm gonna jump to my last two questions before uh uh and it takes thirty seconds to get ready for makeup and what have you. But what advice would you give to a millennial or someone just starting out their career in finance? I would say, develop an awareness of impact investing and expertise. You can be fluent in

the language. Go to Wall Street and get your investment chops down cold, and then find a relatively small shop that is focusing on impact investing because in my mind that's the future, because right now there's a talent hole in impact investing that's really quite fascinating. Final question, what is it that you know about E s G Or impact investing today that you wish you knew when you started? However many years ago that was I wish that I knew?

This is the question, by the way, that stumps people. What do you know today that? What would I tell myself ten years going back in time? What would you whisper in your own ear? Be more bold? Really? Yeah? No risk aversion here? Why does that not surprise me coming from you? It's not about the risk aversion with

the capital allocation. I mean, I think you know whatever investment discipline you have in place to invest responsibly and well not from an riarty perspectively, just invest capital responsibly. You don't want to drop that, right, You don't want to just start swinging for the fences from an investment, but you mean be more bold in in your pro too,

launching a business, embracing a different approach. Not hey, just let's leverage let's leverage up on these three x et s. I just think about how cautiously we talked about impact investing, and how hesitant we were to even let many of our clients know we were doing it, because we were afraid that our embedded client base would find that we were, you know, wandering off into the weeds building out our capacity impact investing where was. What we've discovered is that

every one of our clients. That's probably a dramatic statement. Um. What has surprised us is how many of our clients that we perceived to be conventional investors have expressed an enormous amount of interest in impact investing. Not necessarily Hey I'm all in flip my portfolio, but I like this,

I like the concept. Tell me more, tell me more, and you I've been getting a fair amount of press recently for the work that we're doing, and people read that and it gets passed around and suddenly they want to know about it. And I think that had I known there was gonna be this level of interest ten years ago, we would have been more demonstrative at the time instead of sort of hiding it. Yeah, that's what

I would say to myself. Matthew Weatherley White, Uh, thank you so much for being so generous with your time. This is really been quite fascinating and really very interesting, and I'm glad you made the time to see us. I hope this has been too painful, Verry, this is been an absolute pleasure. Thank you for inviting me onto your show. Well, well my pleasure for those of you

who are listening. I would be remiss if I did not think the team that puts this together, Reggie's our recording engineer Charlie Volmer, our producer Taylor Riggs, or booker Michael bat Nick is the head of research and does a yeoman job helping me come up with really interesting questions. If you have enjoyed this conversation, be suan look Up an Inch or down an Inch on Apple iTunes, where you will see any of the other one hundred or

so previous such conversation stations. That's that's a painful number to state. We love your comments, suggestions, feedback, and email right to us at m i B podcast. That's Masters in Business m i B podcast at Bloomberg dot net. I'm Barry Ridalts. You've been listening to Masters in Business on Bloomberg Radio.