[REPLAY] - Ashby Monk – Asset Giant Futurist (Capital Allocators, EP.29)

27:48It's about catalyzing boards of directors and trustees and fiduciaries to think of their organization in the broader context of producing a return stream and then resourcing them appropriately. So one of the tricky aspects of that, I started in the endowment world, and even if you have what's considered a big team at an endowment, it's not a lot of people. And yet you're trying to create global diversification across asset classes. So it's hard to look at that model and say you might be able to develop pattern recognition to find great practitioners, but you're not going to be able to compete with great practitioners that are covering all these different areas around the world.

28:29So how has – maybe we go to New Zealand. How have they changed that model so they can participate and compete in global markets? Well, I think you'll find out if you dig in there, a lot of the value add that it's generated over time has been based on three, four, five big high conviction bets for which they have spent an inordinate amount of time on and for which they are actively seeking to use their comparative advantages to get and to tilt the deck, tilt the table, whatever it is in their interest. So they're extremely good at strategic tilting. And how broad are those bets? Are we talking about a country bet, a style bet, or a security bet?

29:16Well, so I don't know what I can speak to in the public domain, but I mean, you'll notice like they were holding all this Portuguese debt, which then they had trouble with because the Portuguese bank defaulted and then the insurance company didn't cover it. So they got a short straw on that. But like, truth be told, New Zealand did everything right. And they'll probably get their 200 million back. But you'll see if you look at the structure of the deal, which is interesting because you can now go in and look at it. They were getting an exposure to kind of a unique banking asset in Portugal. And how did they source that deal?

29:48It probably came through a set of trusted intermediaries, but they owned it directly. And so I think that's part of it. But for a big bet, so$200 million, how big is that pool? It's huge, right? I mean, when they made that investment, it was probably$22 billion. So you're talking about a less than 1%. Yeah. Yeah, okay. But so like in my world, if you can have 100 positions, you are a highly concentrated fund. Like at UC, when we got there three years ago, I think this is all public, but we had about 340 fund relationships. And now Jeg Deep and the team has whittled that down to something like 120.

30:30And it's about concentrating the bets, having higher conviction. And so I would push back on you on your question about how do you get global diversification? Who says you need it? Does Norway, who is basically a global index fund, they own 1 % of the global stock market. Do they understand all of the underlying assets they own? Of course not. But Canada Pension Plan, do they understand it? Probably pretty deeply because they're just taking a different model. One is about active management and adding value and investing in illiquids. And the other is investing in liquids and hoping to get broad diversification and just participate in global growth.

31:07And by the way, global diversification through index funds is a fake diversification. Index funds and ETFs are often calculated on a cap-weighted basis, which is a fundamentally flawed way to calculate indices. And frankly, it's even worse in the emerging markets where you have single or multiple companies making up a huge portion of the index. So it's not like you're getting an exposure that anybody would describe as representative of the underlying economy. So a lot of what you're talking about with New Zealand, Canada, is just a different model from the traditional model, in this case, asset management and retirement systems.

31:46We were talking earlier about your interest in just financial disruption and innovation. I want to talk a little bit about some of the projects you're involved with more broadly? Oh, man. So few things. I mean, I love to work on projects where we're bringing long-term investors around a kind of an investment thesis and then designing a new investment vehicle to facilitate some unique access point. I mean, I have this hypothesis with this notion that we could unlock so much capital for things that are societally beneficial if we simply change the way we intermediated between the capital and the project.

32:30So if you take this example of aligned intermediary, which is what I would describe as a kind of a next generation deal sourcing, deal vetting platform for long-term investors, the whole idea was to say, actually, these long-term investors, they have deep pockets, they're interested in positioning their portfolios for an energy paradigm in the future that will have the energy inputs into the economy being more clean. Everybody kind of sees the writing on the wall, but they know how to get access to these assets. And when they look to the traditional private equity funds or infrastructure funds to see if there are exciting products there, they don't see any because the fee structures are too high for the underlying assets.

33:13Those assets won't support a 2-in-20 structure. They just aren't built for that. And so when I was working with J. Deep and New Zealand and a few others, we just came to realize that if we could design something from scratch where we could source deals on a no fee basis and almost build this as an extension of the long term investment teams, we could begin to move a lot more capital into climate solutions. What we call climate infrastructure, wind, water, solar, etc. And because we were going to be moving this capital, which is purely commercial and seeking out the highest possible risk return, we could go to the philanthropists that had for mission to catalyze the clean energy capital markets.

34:04And so weirdly, it was this really interesting syndicate of partners where we had these pension funds, fiduciary bound pension funds saying, I want to invest in those assets. I can't, but I see the potential for my portfolio to generate high returns with cash flow. And then we had the philanthropists who were saying, God, I would love to see these pension funds investing in these darn assets. We've been doing all these research projects trying to figure out how to get that to happen. But all these pension plans shut the door on us when we walk in. And this entity was basically a way to say, philanthropists, stop funding research, fund a platform that we can build incredible talent within.

34:42And that talent will then bring deal flow to the long-term investors. And so that's what we did. We launched it a year ago. We've got six employees at the AI. And so who does the due diligence on the deals then? Well, right now, the fiduciary obligation remains with the pension plan. And so the scope of funds that we can work with, they have to have some internal capability. Isn't that the problem in the U.S. that because of the$80 ,000 a year private equity guy, they don't have that capability? Yeah. So we have one American plan, and it happens to be UC Regents. We have New Zealand Superfund.

35:17We have Welcome Trust. We have CBUS. We have Wafra. I mean, we have like a bunch of OP Trust up north. but the reality is you need a little bit of an internal capability. I want to talk about a couple of different kind of more traditional asset classes and the asset managers and what you think it looks like out a couple of years. So, you know, start with hedge funds, which on the one hand, we've never seen more fee scrutiny and yet assets and hedge funds are all time high at North of three trillion. What's that puzzle and what does it look like, you know, five or 10 years from now? Yeah, I mean, I have like an interesting love-hate relationship with the hedge fund space because it appalls me that we are dragging some of the best and brightest minds in society, chemists, physicists, mathematicians, away from what I would describe as more traditionally value-adding activities and into the pursuit of basis points through a black box that is barely socially valuable.

36:22if at all. And so we are dragging all these remarkable people into this space, and they're not generating value. So I mean, I think, do the institutional investors need hedge funds? Maybe they need it for uncorrelated returns. I don't think they want it necessarily for alpha anymore. So in that sense, I think there is a future for hedge funds. And I'll define it in two ways for me when I think about what do I want to see hedge funds doing? One, uncorrelated return streams, very valuable. And especially if the hedge funds and the CIOs can develop working relationships whereby the hedge funds who are spending all this time understanding the sources of uncorrelated return can communicate that back into the long-term investment community in such a way that might affect the way they are allocating their risk buckets.

37:17Right. So that's very valuable. And frankly, challenge and probably won't happen, but it's a freaking challenge. It probably won't happen. But my the other dream I have is that somebody is going to build a knowledge management platform that can kind of better interact or interface between, you know, the knowledge of the hedge funds and the knowledge of the pension funds. Because, oh, by the way, the pension funds, they're at the center of so much knowledge. They just aren't capturing it. So the first thing is uncorrelated returns. The second thing is I have been working with countless entrepreneurs that want to build technology for investing.

37:55And the traditional model, if you're a technologist interested in investing, is go start a fund. Why don't you start a fund? You know, the economics are incredible. And I am in pursuit of a business model for technologists that want to focus on investing that is not a 2-in-20 fund. That is maybe not Bloomberg, but is something there, selling a signal, selling a risk management product, doing something that just isn't about locking it away in a black box and charging a fee stream. And so I want to find a way to have the current hedge fund industry cultivate this industry of entrepreneurs that are using technology to draw new insight out of the world we live in.

38:41orbital insight is a company in silicon valley that does satellite data of parking lots of oil wells and all those things it will be profoundly interesting to long-term investors it will be profoundly interesting to energy companies and governments but guess who its first clients are touch funds of course yeah well so all these alternative forms of data and i can probably rattle off a hundred startups doing alternative forms of data are now flowing through into the hedge fund community in new ways. And I think that's exciting. I think the hedge funds can play a role in building this industry of what I describe as invest tech without being threatened by it.

39:25Some will be threatened by it, but the really good ones won't. And so I think those Those are two places where I'd love to see hedge funds double down, working more closely with, you know, entrepreneurs outside of their organization. The problem that I have with hedge funds is, you know, they just have so much darn money they can do it themselves. The hedge funds initially are effectively funding the research of this data science. But maybe when the signal no longer impacts the market, those companies then can take the lessons from it and either bring it to industry or bring it to broader dissemination.

39:57I guess I'm hoping that we're pulling a judo move on the hedge funds in the sense that they are so good at funding research and building unique insight and identifying that insight in all these places around the world that they will, in effect, now I'm really putting my cards on the table, back, you know, plant the seeds of their own demise. by educating and communicating to all these technologists what it means to identify inefficiencies in the marketplace, what it means to build a portfolio that is perfectly exposed to this idiosyncratic risk factor. I mean, we're already seeing it in exotic betas and things like that.

40:37And then the hedge funds that survive are truly unique. And the one or 2%, you disagree with me, but I think one or 2 % probably deserve to be making all the money they're making. It's usually like that in any industry, right? Yeah. And that's kind of... I mean, would you say that about lawyers? I don't know. It's not like any industry. I don't know what the dispersion is, but my guess is there probably are a few lawyers that make... I mean, it's definitely like that. Not quite in the same way in financial services. I mean, we have 10x engineers in Silicon Valley that are worth 10 times the average engineer because that's just...

41:10They're creative and you treat them like artists. Yeah. Yeah. How about private equity? Well, I think private equity is only going to become more important because all of the big institutions around the world have this bogey, this expected return target they're looking at, and they're wondering, how in the world am I going to meet that? One of the answers that they get from their trusted consultants is, fill your boots full of private equity and maybe hedge funds. And so we are going to see this giant wall of money coming into private equity in the next five years, which is going to be very difficult to manage.

41:49I mean, my hope is this leads to the seeding of a whole bunch of new private equity funds. I hope it leads to experiments like the one we're seeing with SoftBank's Vision Fund. I mean, say what you will about it. You might think it's crazy to put$45 billion if you're PIF into a single fund, but at least it's innovative. You know, PIF is saying we're long-term, we're big, and that's about it right now in terms of technology, in terms of the competitive advantages. And so somebody said, well, shoot, why don't we write a$45 billion check, get great terms, and go out and acquire stakes in all the top companies.

42:28My hope is we'll see more experiments like that just by the fact that they're going to have to experiment. But by the fact that we've seen so much just sheer chasing of past returns by LPs and begging for access to top GPs, it's hard to see how this doesn't end poorly. But then again, I know this company up in Seattle that's doing big data and artificial intelligence for creating and assessing private equity track records, and that's really exciting. The idea that you can create on-the-fly indices that literally benchmark each company in a portfolio to show whether or not a GP actually added value.

43:07There are things like that emerging, which give me hope that the LPs won't be completely swallowed by the GP selling machine. But you have to be thoughtful and you have to have the gumption to be innovative to do any of this stuff. If all you're relying on is a fund of funds or a traditional consultant access point to a traditional GP, I don't think you're going to get the outcomes you want. So what's the most interesting company you're involved with today? The most interesting company is the, is a company I started. So I started a company with Lindsay Holden called Long Game. And Long Game is about trying to help people save money who struggle to save money.

43:46we started this company about a year and a half maybe two years ago and i met lindsey she was the first hire at formation eight which was a venture capital fund out in uh silicon valley i'm friends with the was one of the managing partners there joe lonsdale and joe introduced me to lindsey and we hit it off and and then she left f8 to go build an auction company that used this kind of behavioral trick to capture this GTLD space, which is the top level domains like dot ventures. And they did, I don't know what the exact number is, but it's 500 million or a billion dollars in auctions on this platform that she started.

44:26And she sold that. And she came to me at Stanford and said, listen, my next big project is to try to convert the money people are wasting, playing the lottery and gambling into a savings account. And I was like, that'd be pretty cool if you could pull that off. And she said, well, there's a way. It's called a prize-linked savings account. And the Congress just passed something called the American Savings and Promotion Act, Republican-led law signed by Obama that legalizes prize-linked savings in America. And I was like, my goodness. So not only do you have this opportunity to reward people with variable prizes for putting some money in a savings account, but if you just overlay on it a little bit of creativity, you could see how a huge amount of capital could be shifted from state lotteries and casinos and sports betting and beyond into people's personal savings accounts.

45:23And having worked at Boston College and seen the tragedy that is the personal finance landscape and the defined contribution pension woes, this was incredibly appealing. 63 % of Americans don't have$500 to their name. It's astounding to think that, but you wonder where the American dream has gone. Well, that's where it went. Nobody has any money to invest in themselves. You need some risk capital to be able to capture the American dream. And the average American debt is about$17 ,000. So what are we gonna do? Well, we're not gonna mandate them to save because that's not how we operate as a country.

46:04our defined contribution plans aren't working our auto enrollment into pension plans through corporate sponsors only work if you work for the kind of company that has a plan but in the era of the gig economy and you know lyft and airbnb and all these things that doesn't exist so what are we going to do and so when lindsey came to me and was like i want to do this prize link savings company and step one is convert lottery money into personal savings step two is gamify the process So people don't have to be so afraid of their personal finances that they actually want to engage with their personal finances.

46:41I was completely convinced. And so I told Lindsay her idea was brilliant. And if she wanted me to get involved, I would go on leave from Stanford and start the company with her. And I did. And she invited me to join as co-founder. So I went down to 50 % time at Stanford. I kept going with my PhD students and master's students. But I was in San Francisco with her three, four days a week, making copies and taking out the trash as one does in an early stage startup. And I did that in an incredibly intense way for over a year. And today, you know, we have a mobile app that's on both platforms. We have tens of thousands of people who are saving through the platform.

47:23And how does it work? What's a prized link savings account? Yeah. So a prize-like savings account is basically the more money you save, the more chances you get to win a prize. And the art here is in never, ever, ever touching the principle. The principle is sacrosanct. We just don't ever play with the principle. and so what we do is we partnered with blue ridge bank in virginia they pay our account holders i think it's 10 basis points for their savings account which at the time was more than the national average and i think it is around that national average now and they pay us a little bit of money and when we take that money they pay us and turn it into prizes and there's a few prizes one prize is like every week we do a million dollar drawing and we insure that prize You have a 1 in 240 million chance of winning, which, by the way, is better than the state lottery.

48:19But the idea is very simple, that if your numbers hit, your life will forever be changed through random luck. And that, as we learned from prospect theory and the amazing work of Kahneman and Tversky, is critical for low-income people who see the lottery as literally their only path to wealth. We've done all these focus groups. It's astounding. You talk to these focus groups and you say, okay, I want you all to picture yourselves as millionaires. Picture it. You have the house. You have the car. All right. Got it. Now, how did you get there? Without a doubt, the occasional person will say something other than I won the lottery, but 90 % say I won the lottery.

49:09Nobody says I saved my money and invested it wisely. Some people, because we're in Silicon Valley or like my stock options, you know, and you're like, oh, you're done. You're not the guy we're talking to. And so the idea here is you have these, you put money in the account, you earn coins in the long game currency. Those coins can be exchanged for games and we have i think six games right now one of them is a social game one is like a slot one is like a card game and one is a traditional kind of ball lottery game and they're they all offer real cash prizes that if you hit you'll change your life now i think we've had something like 40 or 50 500 and thousand dollar winners so far nobody's hit the million We're actually rooting for somebody to hit the million because we've insured the prize.

49:56How's the company grown? Is it word of mouth? So we were lucky in the sense that like we're taking such a unique take on financial preparedness that the big newspapers have written about us. So I don't know if you're familiar with like a bunch of companies like Digit or Acorns or some of these other fintech apps. So they're doing a great job, but their model is set it and forget it. or trust us, we'll do it for you. It's not engagement. So that is appealing to people who are busy, and it's appealing to people who know they need to, they're financial optimizers. They know they need to do something, but they don't quite know what, and this is nice.

50:37Every time I swipe a credit card, they'll round up, and they'll put some of my money into an index fund. Beautiful. The problem is 80 % of Americans don't even want to engage. They're afraid. They're stressed out. I mean, these are 63 % of Americans don't have$500. They're going to the pawn shop when they have a car problem. Well, so how do we get these people to engage? And rather than push financial literacy at them, which the research now shows does not work, we want to educate through doing. So we make it fun. We make it engaging. We build these opportunities for you to change your life through luck.

51:11But in the process, we put you on this path to develop a rainy day fund. And the rainy day fund is just step one. I mean, we have other products coming that will help you take control of a variety of areas of your financial life, to put it that way. How do you manage your time? It seems like you're involved deeply and broadly in so many different things. So I could only do all of these things if the core thematic, it has to revolve around fixing finance for individuals, for pension funds. It has to be innovation in finance. And the end of that innovation has to be a better deal for the companies and asset owners that rely on the industry.

51:53If you look at every single thing I'm doing, Stanford, long game, and there's a whole bunch of other companies that I started, which we didn't get into. And then companies I've invested in, sovereign funds and pension funds that I advise. And all of it, it's about fixing finance for them. And so the thing that is first and foremost is like, that's my passion. Like, it's so fun to help. You know, I helped Wafra, Railpen and Alaska Permanent, like launch a new private equity seeding platform called Constellation. It is my joy to spend time doing that. Didn't even get paid for it. It's projects like that, that kind of get me up in the morning.

52:36I mean, you know, I think if we had a more holistic and long-term financial services industry, would the country be as fractured and disconnected as it is today? I mean, you know, that's a question that flows through my brain, which is like, imagine the 40 % of corporate profit captured by finance was 15%. And that other 25 % was simply invested in communities to create actual value for people. Would everybody feel left behind? I don't know if I have the answer, but I know that it's a question worth asking. I want to turn to a couple of fun closing questions. All right. What was your favorite sports moment?

53:16Could be as a participant or a fan. So I was at the Palestra, which is the University of Pennsylvania basketball stadium. And at the time, I was a massive Princeton basketball fan. I met my wife at a Princeton basketball game. That was our first date in 1998. I traveled with the team to North Carolina, who at the time was the number one ranked team in the country. And I sat in the North Carolina student section, painted orange. And at the half, we were up by six. So that's the level of commitment. Penn at the time was our chief rival. And we had traveled from Princeton to Philly. and there was probably about five of us.

54:02And at the half, we were down, I think it was like 36 to 12. And then about eight minutes into the second half, we were down 42 to 18. I was sick. I felt physically ill to the point where I was like, I might just leave. And Courtney, my wife, was like, we are not leaving. We could be a quitter. We're going to stick this out. If we need to suffer, we're going to suffer. And they turned it around. They went on a run like you would not believe. Literally ESPN, when they did the highlight that night, they stopped the game with 13 minutes to go in the second half. And they were like, and Princeton is down 28 to Penn.

54:51Looks like Penn's going to go on. Oh, wait, this just in. The game is now over. And then they showed the second half. It was a joke, right? Yeah. But they won 53-52 Princeton at the Palestra. I mean, I don't think I've ever been that happy. I mean, like children being born, getting married. Like, I'd love to say those were happier moments than that moment. But it was just a different type of pleasure. Who's your favorite person outside of your family and why? Oh, my God. Who is my favorite person? I mean, I have, so I'm not one of these people who can like easily just be like, yeah, like Steve Jabs is red.

55:29You know, I'm not that type of a person. I think in my life I have people that I respect for different things. And you'll note that like I drag them into my lives and don't let go. So like I have a profound respect for Lindsay Holden, female CEO of a startup, fintech startup in Silicon Valley, navigating that world and watching her do it with grace and poise. and leading an engineering team that is practically all male. And it's incredible to watch, to be in investor meetings with her. And it happens where we're getting into the difficult part. Jagdeep Bashir, I think, is a profoundly unique human being in that he can do things in the context of bureaucracies and public agencies that I didn't believe possible.

56:21if you want to see somebody who takes stakeholder engagement and and makes it real not just like lip service to it but actually creates a value out of engaging with stakeholders and making them feel loved and cherished and not being fake about it it's unbelievable and there's a few other people like that in my life like gordon clark at oxford who dragged me into the pension fund space and served as a mentor and helped me and my wife get through two PhDs at the same time with relatively little debt. I mean, there are people like that for whom I owe an endless debt of gratitude. Yeah. What teaching from your parents has most stayed with you?

57:04You know, my parents were incredible role models in the sense that incredible loyalty, honesty, and integrity. You know, I think my dad, when I was young, would often talk about the higher interest and he would invoke the Steve Jobs quote all the time in our family. You just got to put a dent in the universe. If you really want to have an impact in this world, go out and find something you're good at, but make sure it's socially useful. And so I think in terms of the thing I'm most grateful for, it is having this broader, longer term vision and mission that is about building a better society, ecosystem, planet, whatever.

57:46You know, that comes from my parents. In terms of parenting, when my dad forced me and he forced me, I did not want to go row in college. That was like a black belt parenting move because when you're rowing, you can't drink, you can't smoke, you can't go out late. and at first I hated it and then obviously I fell in love with it and so for all those parents out there there's sort of struggling with unruly teens which I was I was like a skater flying off cliffs and skis and things like that rowing was this incredible and oh by the way like if you want to row at a high level you got to go to like an amazing school so it completely reshifts your your focus what life lesson have you learned that you wish you knew a lot earlier in your life how hard, I mean, how hard kids are.

58:40So if I, if I had known, I don't, I don't know what I might've done differently, but I have two kids that are amazing kids, you know, a seven-year-old boy and a five-year-old girl. And my wife and I both work. So both of us are kind of on, uh, you know, she runs like a data science team at a public company. So it's not like I Trump her and in many way she trumps me. And so it's this constant negotiation and challenge. And I think I would have just loved to have known that this insane part of your life is coming and you should sleep in and you should go to the movies and you should probably get ready for, you know, do a couple of volunteer gigs, travel the world a bit more, do those things.

59:26Because getting married doesn't change your life. I didn't find. I mean, I started dating Courtney when I was 20. She was 18. We were at Princeton. We lived together for 13 years. And then we had children. It was like, this is a totally new world. It was totally new. Everything changes once the children come. And it doesn't help that like my kids are extremely stubborn and I don't know where they get it. But, you know, it's that's what it's something I might have liked to have been told. Yeah, all right. Last question. You are in your waning days. I guess now we're talking about 150 years old because we're going to live a long time.

1:00:02Yeah, nanobots. What advice would you give yourself today? Oh, I don't know. I mean, how did it go?

1:00:12I mean, you know, there's all these things that get said to those questions. Like, hey, nobody's ever going to regret spending time with their family or, you know, Nobody's going to say I wish I worked more. But interestingly, why don't I just do the counterfactual? I feel uniquely privileged to be sitting in a seat where, for whatever reason, this community of pensions and sovereign funds and endowments and foundations seems to trust the words coming out of my mouth as being in their interest. And I don't want to screw that up. because I don't see a lot of people out there that are unconflicted in their thinking or remarks.

1:00:57And so I feel, whether it's true or not, and I could be a complete windbag, but when I do get the opportunity to meet with these people, I get the sense I can have an actual influence on them. And so I think in a weird way, the 150-year-old talking to the 41-year-old would say, take that seriously. and if you really do want to transform capital markets don't forget don't ever forget who sit at the base of capital markets and it's the asset owners and there's you know sit here we are in new york city surrounded by beautiful skyscrapers filled with hedge funds and private equity funds and every moment of every day there is a temptation to cash it in and so i you know What I'm constantly reminding myself is there's a broader project and fine to go build companies, fine, but never forget who you're serving.

1:01:54And I am serving the asset owners. Great. Ashby, thanks so much. Really enjoyed it. Thank you for having me. Thanks for listening to this episode. I hope you found a nugget or two to take away and apply in your investing and your life. If you've liked what you've heard, please rate a review on iTunes or Google Play to help others find out about the show. Have a good one, and see you next time.