[REPLAY] Ana Marshall – Applied Direct Investing at the William and Flora Hewlett Foundation (Capital Allocators, EP.111)

0:01Capital Allocators is brought to you by my friends at WCM Investment Management. To outperform the markets, you have to do something differently from others. In my 30-something years investing in managers, there may be no one I've come across who does that as clearly and as well as WCM. I've seen it up close as an investor in their international growth strategy for the last five years. WCM is a global equity investment manager majority owned by its employees. They believe that being based on the West Coast, away from the influence of Wall Street Groupthink provides them with the freedom to live out their investment team's core values, think different, and get better.

0:43As advocates of integrating culture research into the investment process and advancing wide moat investing with the concept of moat trajectory, WCM has delivered differentiated returns while building concentrated portfolios designed to stand out from the crowd. WCM is committed to defying the status quo by dismantling outdated practices, believing in the extraordinary capabilities of its people, and fostering optimism to inspire each individual to become the best version of themselves. To learn more about WCM, visit their website at wcminvest.com. And tune into this slot on the show to hear more about WCM all year long.

1:26This testimonial is being provided by Ted Seides and capital allocators who have been compensated a flat fee by WCM. This payment was made in connection with capital allocators testimonial and production of podcasts and does not depend on the success or level of business generated. The opinions expressed are solely those of capital allocators and may not reflect the opinions of others. Investing involves risk, including the possible loss of principle. Past performance is not indicative of future results. Please visit wcminvest.com for WCM's ADV and further information. Capital Allocators is also brought to you by Morningstar.

1:55What if data wasn't just a bunch of raw numbers, but a clear and decisive language to help connect investment strategies with long-term investor needs in a constantly evolving market landscape. Morningstar created that language, bringing order and utility to insight-rich data so you can prepare for your next opportunity, no matter the asset class or market. Visit wheredataspeaks.com to see what Morningstar data can do for you.

2:32Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can keep up to date by visiting CapitalAllocatorsPodcast.com. My guest on today's show is Anna Marshall, the Vice President and Chief Investment Officer for the William and Flora Hewlett Foundation, where she oversees the$10.5 billion pool of capital. Anna joined Hewlett in 2004 after spending 18 years as a direct investor in high-yield credit, emerging market debt, and international equities.

3:22Our conversation covers Anna's lifelong passion for investing, joining the super buy side, conducting company meetings to inform the manager selection and allocation process, portfolio structure, manager selection, monitoring and measuring risk, perspectives on peers, internal dynamics, and working through a big mistake. Please enjoy my conversation with Ana Marshall. Anna, great to be with you in sunny California. Yes, sunny most of the time, at least. How did you first get interested in investing? So I was about 13 years old when I decided this is what I wanted to do in my life. I wanted to invest and I wanted to manage money, which is really odd for most people.

4:12What does a 13-year-old girl interested in the markets do with that? Go to a shopping center, but instead of going like a typical teenager, stand by a door and look at shopping bags, look at shopping trends. How are things merchandised? And so that just started my love for the whole business. And then it started into sort of what's fixed income, what are bonds, what's capital preservation. And so I just started learning all of that. So by the time I went to college, I knew exactly what I was going to do. When you left school, how did you dive in? So even before I left school, one of the heads of the CFA programs was one of my professors.

4:50And she had me help her write part of her book. And so that just got me into the business all at once. My whole thing was I wanted to do everything. I wanted to do high yield. I wanted to do fixed income, normal fixed income. I wanted to do equities. I wanted to do currencies. I wanted to do everything. And so I set myself five-year plans. I had a plan for what to do in the first five years. and then the next five years. And that's kind of been the way it's been. We're 2021. What is the first five years? In the first five years, it was how to absorb as much as humanly possible from the greats of the business.

5:26So I met people that were willing to invest in me a great deal of time. So one of my first mentors would say, okay, you have an hour and a half with me once a month. Bring your questions. Come at me. Who is that? It was a man named Jim Cawood. So he worked closely in the high yield business. And he just said, the best way to do this is try to absorb as much as you can. And every time you have a question, just write it down. And then in an hour and a half, I can answer whatever those questions are for the month. And then we'll move to the next thing. So I did that first in high yield. Then I did an emerging debt.

6:07And then I did it in equities. And it just always seemed to be that there's always, I could find a mentor that was willing to spend the time with me to really answer all the questions. So I've done my best to try to pay that back. So what was your first actual job? My first actual job was as a research analyst of high yield debt. And from there, I moved to trading because they felt that while analysis is really important, unless you knew how to trade the bonds and how people were really pricing risk, all of the analysis in the world wasn't going to help you get to the answer. You needed to understand pricing of risk.

6:45And the only way to do that was trading. Okay. So next five-year plan. First was high yield. And then I moved into emerging debt. And then I moved into equities. And in equities, basically it was all international and global equities. And that's where I really discovered the passion. There's nothing quite like traveling around the world, talking to CEOs and connecting dots all over the place of what one CEO is doing, whether it's a trading company in Japan, a Latin American company, or a European company, and trying to connect what's really going on in global trends, especially because it was the 90s and it was the beginning of sort of global capital flows.

7:24And so understanding where the money was going to flow, because so much of investment is understanding where the puck's moving and moving there first. And with those varying lenses, so you start in high yield, sovereign debt, emerging market debt, global equities, what did you come to believe as sort of your own either core investment principles or style that suited you best? I would say my investment philosophy has always been about know the most you can. You're never going to know 100 % to where you're super confident in your assessment, but know enough, know when you don't know enough. And if you don't know enough, don't do it because you're never going to have the conviction to double down if it goes against you.

8:13Whereas if you know enough and you have enough of a sense or a conviction when something goes down, you'll double down. And those are the moments that really make your career. And did that come along with any particular biases like value bias or growth bias? It doesn't. And I think the reason I never had the growth or the value bias is because when you start in high yield, you're analyzing for intrinsic value. And then you move to emerging market debt and you're analyzing for like hope, basically. And then you move to equities and it's a mixture of hope, value, growth. and I never quite understood.

8:54There's a lot of growth guys that buy value stocks. There's a lot of value stock guys that buy growth stocks. It just seemed growth and value ended up being tags of how to justify a style or how to justify a bias. I think if anything, my bias was more about capital preservation because when you grow up in the world of high yield, emerging debt, and even growing up in Mexico City, You grow up understanding that capital preservation and trying to do your best to minimize that left tail is actually the best way for long-term compounding. You just touched on something we glossed over growing up in Mexico City.

9:33How did growing up outside the U.S. inform the way you think about investing? I am a global citizen. And so I've lived in Latin America. I've lived in Europe, lived in the United States. And so to me, there is no one perfect way or one perfect system. I mean, I pay a lot of attention in places for rule of law, but even then I'm far more aware of ease of doing business. What are the norms? What are the cultural norms in trying to understand why certain companies work a certain way? And why, if you take the case of like Korean equities, why do they always trade at a valuation discount? Well, in the American point of view, the structure of Korean companies is completely screwed up and there's no transparency.

10:21But in the way the Korean companies were built, it served a great deal of purpose for the whole society. So understanding sort of the differences in corporate governance in Germany versus Korea versus the U.S. And I think growing up in a system that's outside of the first one, if you just grow up learning the U.S. system, you think everybody else is wrong. Yeah. Just to dive in a little on that granularity. So to take that Korean example, the way the companies are formed makes sense from a Korean perspective. What does that mean? In other words, for them, it was more about reconstruction after a war and how it is that you got a corporate system that supported the re-industrialization of a country and it allowed them to hire a lot of people.

11:06And so the purpose of a corporation was different, very different. in Korea than it is in the United States. And so you have to understand those nuances to understand that they will never, no matter how much corporate raiders and campaigns are there, for the Koreans, their system makes sense. And for the Germans, their system makes sense. And you shared this view at the end of that prior sentence that the U.S. perspective oftentimes is, well, those people are wrong. What are some of those other lessons that you've taken out of sort of being a global citizen, as you said, that you think the standard US investor doesn't quite get how things work in the rest of the world?

11:47I think it's more, one, the role of the corporation, but also it's the role of regulatory systems. So in the United States, especially in the last 30 years, it's been basically very light regulation and the corporate sector gets to do a lot of things. Whereas in the rest of the world, that doesn't happen. And so you see in some ways, that's why multiples for US companies are actually higher because there is more freedom for that corporate sector. Whereas in other countries, there is a greater amount of limitation and the corporate sector pretty much understands that they're playing within those rules.

12:32And so you see like now that the Europeans are starting to do GDPR, they're starting to set standards for how US companies operate in Europe. And clearly US companies do not like this. But from the European point of view, every company in Europe has been regulated forever. So why wouldn't a company that has now become transnational also belong to the same rules. I mean, Coca-Cola has been playing by the French rules of labeling or whatever for years. So it's that type of environment. I think you see it most clearly with just the difficulty that Americans have and American investors have looking at China and this view that China, because it was becoming capitalist, would become like the US.

13:21Whereas what they have done is they have blended the system, the nationalist system they had with elements of capitalism, but without losing that element of control. So walk me through a little bit how your career progressed on the buy side. So I was on the buy side, as I said, in different firms. So in 2003, I decided that I loved managing money, but I wanted to do it for a charitable cause. And so true to everything else I do in my life, I researched it, created a five-year goal plan, went through the math of it, and sort of listed the best institutions. And at this time was right when Endowment and Foundation money management was undergoing its own level of professionalization.

14:17For decades before that, you had had sort of the treasurer of the university or the treasurer of a foundation serve as the primary person investing the assets. And in 2002, 2003, with the notable exception of Stanford and Yale, it really was this move to let's bring in professional investment teams and try to get just excellent investment results. So it was a way to marry my love for the business with actually giving back to the world. And so I call it the super buy side because now at the beginning, all I did was go to the first round of managers where all of the people that I highly admired as peers and competitors would be in final presentations against each other.

15:13And so I knew everyone. It was a really easy thing to go out and just pick the best managers out there. What did it feel like going from being a portfolio manager, a researcher of companies, making decisions in the markets every day to coming on the super buy side where those decisions don't happen every day? So I think the biggest lesson was how to not backseat drive. Because that is, I think, the biggest risk to having this model of people from switching from being existing portfolio managers to our side. It's really hard. So for the first month, my mentor who hired me here, I didn't have a Bloomberg, Laurie Hoagland.

15:59I didn't have a Bloomberg because he's like, okay, I need you to just completely disconnect. This is a long-term game here. You're not doing the same thing you did always. My managers actually ended up being very nice. And I still, for the first, I would say 10 years of being here, I still managed about 75 CEO, CFO visits a year of companies in the portfolio or companies that were adjacent enough to the portfolio that would help me inform how to manage the portfolio. Because when I joined in 2004, we were going from the donor stock that had almost all been sold to a fully diversified portfolio.

16:45And we were making a lot of capital allocation decisions. And getting just how things move from a strategic basis, I could talk with strategists, I could talk with economists. But really talking to CFOs on the ground and CEOs on the ground is really where you understand where the pressure points are in a system. And it actually helps you allocate capital better. As you're coming from this lens that's closer to on the ground, talking to CFOs, how did that inform how you went about thinking about the structure of kind of a multi-manager, multi-asset class portfolio? The first thing is I always ran concentrated portfolios.

17:23Once I moved to the equity side, I ran concentrated portfolios because the only way to have real conviction is to really know something and you only have so much of a brain to do that. And what did that mean when you're on the echo side in terms of number of names? 30, most, 20 to 30 names. And so when I started getting my network of people, once I moved to the side, it was how many points of information do I need. Do I need 10 economists? No. I need two guys I can trust. I need three strategists that completely disagree with each other. And I need to have a couple of guys that really see everything in Japan, a couple of guys that see everything in the US, a couple of guys that see everything in Europe.

18:06And that is how that network was built. Because what I realized was between the head of a bank in Japan and the trading house guy, you could more or less put together 80 % of what was going on in that region. And now the same thing, I've done the same thing to develop it in China and in Singapore. The same thing would happen in Europe. In other words, you needed Southern Europe, you needed Northern Europe. And then as you got those people and those points of contact, you could see how the capital was flowing from the Northern part of Europe to the Southern part of Europe all during the early 2000s.

18:45So you could then speak more intelligently to your managers. And the reality is, because I brought the concentration thing here, when we have an asset class, we only have roughly 10 to 12 managers per asset class. And so each one of those managers in and of themselves, for the most part, is concentrated portfolio manager. So in effect, you basically have a 100 stock portfolio, which I would say is still too much. But you have a granularity. And because I've owned so many of these stocks, as is my director of equities, we can have conversations where we go deep into a particular stock that we can have a conversation about how that management team behaved 15 years ago.

19:33And you learn, our job on this side is to judge how good a manager is, a generating excess return. Everybody has the same slides. I mean, one of the funny things is, I mean, I gave the same presentations for God's sakes. And so the only way to really know if somebody's good is to dive into a stock. And so you have to be up on what's going on in these stocks to be able to really have deep analytical conversations. When you started, you come at this with the perspective of a stock picker in international equities with experience in the fixed income markets, public equities tend to only be a certain percentage of one of these pools.

20:16How did you think about the breadth versus depth of this particular deep expertise you have in one part of the capital markets, and then a bigger world of a whole bunch of things that may or may not have the same applicability of tools to assess a venture capital manager or someone in real estate? So the fortunate thing is I'm not doing this by myself. And in no way would I ever claim to be doing this by myself. I am surrounded by an incredibly talented team. Everyone on the team, the directors on the team, all manage money. And then we're attracted to the supervised side. So they all bring their areas of expertise.

20:54Our director of privates, Christy Richardson, she is hands down the most amazing venture buyout manager selector. I trust her implicitly. We've been working alongside each other for 13 years. If she tells me a manager is good, I mean, I will go meet the manager. But for the most part, let's just say I trust that system. My director of public equity worked with me originally before I joined the foundation. So he came back. My director of the alternatives, and I don't have a hedge fund category. He is very strong. He understands these products, especially the complexity of the products extraordinarily well.

21:32So together, I would say, we have the breadth, we have the depth. There's no way I could do this without them. Before we take a step back, I want to dive in on one aspect of what you said about just the public equity side, which is for your first 10 years, you continue to do these meetings. What do you think the half-life of that information is from when you stopped doing those meetings? Okay. I still do them. I just spent two weeks in Asia doing these meetings. I can't stop myself. I am a highly intellectually curious human. I do them with a different purpose. It's less about where is the economics of the world going and more about understanding disruptive trends.

22:13So a lot of the focus of my meetings in the last two weeks was on the move to electronic money, monetary systems. so meeting with central bankers, meeting with banks, with insurance companies, with just not just technology. We hear the technology part here in the Valley, but how does that actually get adopted? And what are the impediments to adoption? And at the same time, you have an existing success story in Alipay and WeChat Pay. And what is the ability of those systems to actually permeate Asia? So that's what I spent the last two weeks doing. And we'll get into the structure, but you have a concentrated portfolio of managers.

22:57What do you do with that information that you gather in Asia? Oh, I have great conversations with my managers. I come back and I have spent for the last 10 years a ton of time in China and in Asia because we've had an Asian tilt in the portfolio. And so they only get to see their vertical in Asia or their vertical in the United States or in Europe. and what they're looking is to just have a conversation of like, the first question usually from them is, where were you last and what were you studying? And we'll go on a 20 minute rant on what it was we were doing because it informs them in some way of just what is happening out in the world around them.

23:40And so it's a partnership. Most of our managers, we have a concentrated manager roster. A majority of our managers have been in our portfolio for at least 10 years. So this is a partnership. It's a friendship. It's a partnership where it's not that I feel I have anything to prove, but if I can be additive in any way or make a help, make an introduction, then that's what we do. And how do you balance this sort of knowledge and information gathering about whatever it is you choose to focus on with the continual evaluative process of the managers that are in your portfolio? So the directors each are in charge of doing the continual monitoring of each of the managers.

24:21In any given year, I meet with probably 80 % of the managers in the portfolio. But I am there as a second chair entirely. I mean, I have to let my team do their thing. It's usually when we start talking with the manager about one of these very sort of esoteric conversations that you sometimes see where they're not seeing around the corner or they're missing the bigger picture. So you can try to talk about the bigger picture, see how open they are to it, or you can say, okay, no, this is a manager that just wants to head down and this is what they're going to do. And if something really disruptive comes around, I'm not sure how they're going to handle it.

25:07So my job is actually in sizing positions. that's where I make those calibrations. Is it really in the sizing of positions? As you roll up what you own, do you take these views that you'll develop about how payments are working in China and see, you know, there's a directional arrow of progress we want to be exposed to. We're not. Do you then do anything directly? No. Low cost overlay? So we don't do anything directly. There are teams that do it and they do it really well. we are eight people in an investment team. We're managing$10.5 billion. One of my first philosophies, know what you know, know what you don't, and where you don't have expertise.

25:52There is no competitive advantage on sitting in my seat to be able to make those kinds of calls. And the amount of attention it would require would probably take our eye off the ball, something else we needed to be doing. All right. Let's circle back to the structure of how you think about this pool. So we've talked a bunch about how you navigated from the buy side to using that expertise to try to find certain groups of managers and then bring people on your team that have that kind of same capability in other areas. What does the portfolio look like? So the portfolio is your classic endowment portfolio.

26:24You've got your public equity. What is different about our portfolio is we don't have a hedge fund category. So we run a risk management system and hedge funds just never fit into the risk management system. So I'm sure like everybody else made the mistake of having the wrong risk attached to the hedge fund portfolio when we were running our risk management. So in 2009, I said, okay, forget this. We're going to break it apart and look at the components of it and see what we like and what we don't. So one of the things that came out was most of the risk had been born by hedge fund portfolios taking much too much long short exposure because they wanted the beta.

27:06And what we decided is we can short cheaper than a hedge fund just based on our balance sheet if we ever wanted to. So why are we paying two and 20 to have somebody short beta for us? Why don't we just hire the best stock pickers on the planet and then we can figure out what exposure we want? So we pretty much blew out all our long short guys. No matter how talented you thought they were. It was one of those moments. We have given opportunity for our managers, if they want to short, they can short, but that's certainly not where they make their money at all. Then we then took what was the distress credit, the multi-strat guys.

27:48And we realized the multi-strat guys had a really good role in the portfolio. The distress credit guys too. So we put them together into an asset class. And my theory, which has proven, but I had no way of proving then, was that this group of managers could get me about 70 % of the equity return with half the volatility. And it was really important to get a significant pool of capital of the portfolio in something that still had growth component, but lowered the volatility. And part of the reason is because we sit on Sand Hill Road and our program has been in existence for so long, we have a spectacular venture portfolio.