#107 - Jenny Johnson: Innovating at Trillion‑Dollar Scale

22:53Jenny Johnson:So I have to be honest, Alex, we feel really good with the breadth of capability we have. I don't think there's anything that we would add to that. What we might do is a little bit of a bolt-on transactions like we did with our private credit manager. We bought El Centro, which was a European private credit manager. So geographically, or we also bought one that had a particular expertise in certain types of mortgages or asset-backed securities, like bolt-on capabilities. But the broad category, I think we're covering all the broad categories. The one thing we don't have is private equity. We like the private equity space through the secondaries as opposed to being in primary private equity today.

23:37And how do you decide what to build internally versus going out and buying?

23:41Jenny Johnson:I think it actually depends on when you get into it. So in our venture business, the reason we got into the venture business is, and we've been doing late stage venture in our traditional growth equity mutual funds for over a decade. And the reason we did that is the team recognized that, hey, by the way, the old IPOs that we used to get as good return kickers, we're not getting today because companies are waiting so long. The average company in 2000 went public after three years. Now they're going public 10, 12 years later. And so those early growth years are being captured in the private market.

24:20Jenny Johnson:So our guys looked at it and said, hey, as a mutual fund, we can actually invest up to 15 % in private markets. We should start doing some late stage venture. We got into the late stage venture deal. The Franklin Equity team is headquartered in Silicon Valley. So they've got the benefit of a really strong network of folks. And so they're starting to get in those deals. And then we actually had clients say, we see the deals that you're doing. We'd love for you to actually do a fund. We'll seed a fund. And so that's what kind of launched our venture business there. So that made sense. Honestly, if we had decided to do private credit and launch it right after the financial crisis, that would have been the time.

24:59Jenny Johnson:By the time 2018 came around, now you needed scale. We weren't going to have scale launching it. It made more sense to do an acquisition. Secondaries, honestly, I think you have to have scale in the secondary space. I won't bother right now with why. There was just no way to compete if you weren't one of the big players with scale. And so to be able to compete in that space, we had to go buy Lexington Partners with scale. So it kind of just depends. If you think you can compete because you have advantages, that's great to launch it organically. But don't kid yourself. It's still hard to do. And so sometimes it's easier to buy.

25:35Jenny Johnson:as long as you get the right team with the right culture. If you do an acquisition and, you know, I always say investment bankers will tell you why it's great price, great strategic fit. They will never talk about the culture. Deals live and die based on whether the cultures mesh or not. Right. When you're acquiring an investment management firm, you're essentially buying the people and their investment process and their culture. So how do you ensure those core components remain intact while achieving integration? I go back to kind of the three C's. It's just said, you know, just like we look at it in our own firm, as we're doing an acquisition, we literally will listen in the due diligence process.

26:15Jenny Johnson:How quickly did they talk about the client? Are they talking about everything else? They're talking about their fees. They're talking about the client. Do they, is there kind of a culture within that firm of collaborating? Are they nice people? You know, you seem like they're good people because you want that kind of fit. I actually think a toxic culture can be a cancer in your firm. It can actually spread more broadly in the firm. So you really got to make sure and spend the time getting to know the people. And then are the people going to stay? Like that's really important to know who's going to stay on the boat and is incented to do so and who's going to get off the boat at the time of transaction and be really comfortable that you know that, that you have incentives to ensure that's the case.

26:56Jenny Johnson:Because again, you're buying people an investment process and that you're comfortable with whatever that looks like. And then the final thing is truly that mentality of continuous improvement. Are they looking, are they wanting to understand what the next kind of phase is in the industry and how they play in that industry and have that kind of mindset? And I suppose open-mindedness is part of that because you put two groups together, you know, group A may do certain things better than group B and vice versa. And if you're open-minded, then the two together can do something really positive. For sure.

27:28Jenny Johnson:For sure. And let's face it, like, I mean, so here, if I'm thinking like continuous improvement, right? So like I'd think, okay, what kind of questions would I ask? Well, you know what? I ask about AI. How are you using it? What are you thinking about? How do you think it's going to change the industry? Because if they're not already deep, it doesn't mean they have to be successful with it yet. Because honestly, we're all trying a bunch of things. We've got some successes. We've got some failures. You cannot be afraid about having a dead end on something that you try with AI. But you have to be in the game and be trying to build things with it.

27:59Jenny Johnson:And so if you're talking to somebody and they're not taking it seriously, it's been more of a check the box effort versus a genuine, how is this going to change our business? That'd be a red flag for me. An investment manager can ride different types of alpha, right? There's active management alpha, trying to outperform the markets. There's investment education. There's practice education, tax alpha. How do you generally think about it? Again, you start with the client and you say, what are the client's goals? Right. I mean, why has, you know, tax alpha become so important? Because look at, you know, if you live in New York or California and you add what your federal and state taxes are, you're suddenly going to go, gosh, investment returns matter, but tax alpha really matters here.

28:48Jenny Johnson:And so, you know, what is it that drives the client? As somebody gets older. So here's an interesting thing. If you're dealing with an ultra high net worth client, I would say they care about four things. They care about their investment performance. They care about tax efficiency because they're probably in the high tax bracket. They care about their trust in estate plans because a lot of them built their own business, built their own wealth. And they hate the idea of giving the government 40 percent of it. So they want to have a really good trust in estate strategy. And then if they really have enough money, they want to make sure their kids aren't bunching ne 'er-do-wells and that they're contributing and they've structured the future of their wealth to ensure that their kids are productive.

29:28Jenny Johnson:And the older and wealthier they get, their priorities first go, tell me that my kids are, you know, that I've got it structured right, where I'm giving them enough, but not too much, that my estate planning is really good, that I'm tax efficient, and then they care about their investment returns. So to me, that's that, you know, knowing your client's goals and what's important to the client. And that's why, again, I really believe the financial advisor is so critical. And back to your point on emotion, you know, when a financial advisor can sit there and calm their client in those volatile market times, that's really, really important to a long-term return.

30:04Jenny Johnson:So, you know, to me, having that advisor who's having the conversation with the client, understanding truly what motivates the client. I can tell you, my daughter, who's in her 30s, climate is really, really important. Now, you can say all you want to say about whether we care or not about it, she cares. And she wants her investment portfolio to express that. And she's going to want her advisor to talk to her about how her investment portfolio is making a difference there. And what the advisor should be able to say is, here's the outfits added, or actually, here's what it's taken away because we've been able to do these things.

30:41Jenny Johnson:And so again, it's understanding truly what those individual clients' goals are and being able to deliver the financial plan and portfolio that works for that. And the sequence that you just walked through demonstrates why client is first and how client is first. Because you just talked about how the industry and your firm has evolved through time and the tools that it's created. And it all goes back to the client and the different sources of alpha are clearly related to that. Yes, absolutely. I know you're a big advocate for blockchain technology. Why do you find it so fascinating? And what do you envision for its future and how it will transform financial services?

31:22Jenny Johnson:I actually ran our technology and operations group. So I have a lot of background and kind of what the guts are. I always kind of jokingly say that in the asset management industry, you know, it's like, I don't know, 8 % of the people manage money and they wonder what the other 92 % do. So a huge part of what actually people do in asset management is they reconcile data between systems. It's really complicated back there. And so what does blockchain do? So first of all, let's put aside Bitcoin and the crypto world just and talk about this technology. Because honestly, blockchain is just a technology.

31:56Jenny Johnson:It does three things really well. It has a source of truth. So if I own the token, I have all of the rights to that token. And when I talk about sort of the industry, when a transaction is done, we spend a bunch of money reconciling the data between the systems. In the case of blockchain, there's only one source of truth. You don't have to worry about that reconciliation. And then once we've reconciled it within our own firm, we actually have to go to our counterparty and reconcile it there. Well, in the case of blockchain, there's only one source of truth that both parties are reconciling that data to.

32:26Jenny Johnson:So that's a huge efficiency. The second thing is it has this ability to program a smart contract. So Alex, let's say you and I have this agreement. We're going to do a currency trade here. And if the dollar moves a certain way, you're going to have to post some collateral with whatever your currency is. And we're going to have people who are watching it and we have systems that tell us, and then we go to our bank and move the money. You can actually program that in to the smart contract in the token. And so whatever those rights are that are in that transaction, get programmed in. Think about the efficiency there.

33:00Jenny Johnson:And then the third piece is it has a payment mechanism. And so the payment mechanism can transact whatever it is that we agree with that smart contract. And I know that the right person on the other side is going to get it because you have the token and you have all the rights to it. And so my favorite example, and this didn't work, but I think it gives a really good example of what blockchain can do and open up from an investment standpoint, is still Rihanna's. She launched NFTs that gave you the right to something like 0.00033 % royalties to one of her biggest songs. Well, why could she do that?

33:34Jenny Johnson:Because when the streaming service played that song, the token could kick off and say, oh, Alex is a big Rihanna fan. I'm going to pay him some money. He's owed a fraction of a cent and it can credit your wallet with that. And so to me, there's going to be new, interesting investment opportunities that are uncorrelated to some of the traditional investments that are going to get unlocked and be able to be democratized because of this blockchain technology. So then you move into the crypto world. look, I think there's going to be blowups for sure, plenty of blowups in the crypto world, but there are also new businesses that are being created because they can leverage this technology that has efficiencies that are going to open up new.

34:20Jenny Johnson:There's a company, and all they do is they act as your internet service provider. And what they're doing is they're measuring your flow of when you're consuming a lot of data when you're not, and they're reselling that excess capacity. And then they're paying you for it. Like, that's pretty interesting. Like, if you could get that, you might go, well, why aren't I using that internet service provider versus the other one that I'm paying that's more expensive? And so, again, this is a technology that is going to open up new investment opportunities. And then I genuinely believe because it's more cost-effective.

34:54Jenny Johnson:And we launched our tokenized money market fund, our Benji coin, which is a tokenized money market fund. It's got some cool features that we can't have on our other money market funds. So first of all, our traditional money market fund, you need$500 to open an account, right? Because anything less than that, essentially other shareholders were subsidizing you because the servicing costs were greater than you were covering. Here, we're doing it for$20. Second thing is we calculate the yield every second. So if you actually sell your money market fund, your Benji money market fund at 4 p.m., You get paid the yield up to 4 p.m.

35:32Jenny Johnson:in the afternoon. And then the third thing is we post that credit, that money to your account every day. So for individuals, maybe that matters, maybe that doesn't. But if you're an institution, if you're a CFO and you're managing capital across your businesses, it's great if you get the credit for that daily in your account. And the reason we can do that is we can do it because the blockchain technology enables us to do it. And then it's going to be 24 by 7 because you can transact 24 by 7. And so you'll be able to transact on the weekend. All of this is just about the technology. And so I think as we talk about access to private markets, blockchain technology is going to be very important in enabling some of that as well.

36:17Jenny Johnson:So that's why I'm excited about it. And that excitement clearly comes through. I appreciate that. And if you just think about technological innovation through time, it creates new opportunities and it also closes inefficiencies. And this is just another example of that. For sure, for sure. And by the way, one other thing, like imagine adding AI to the smart contract component, like that could be really interesting in which the speed in which it's evaluating certain things. So I think we're scratching the surface on what innovation is gonna come out of these tools. And so it's gonna be really interesting to watch this evolve.

36:51I'd like to ask you a few questions about your market outlook. It's a very interesting world. Do you see a significant inflection point coming soon where perhaps the next decade looks very different from the last?

37:04Jenny Johnson:Well, for sure, right? Because we've definitely seen a certain one is from a geopolitical standpoint. There is certainly new alignments and greater divide. I mean, we talked about globalization and globalization for the last decade was all about the world was all working together. We're going to all figure out what our competitive advantage is, and we're going to play that role. Now you have things like China and the U.S. kind of dividing in areas. Now, don't kid yourself. China and the U.S. The U.S. needs China, and China needs the U.S. But we're going to figure out how we work together, and there's going to be areas where we're going to decide we don't really trust each other to work together, like in technology.

37:48Jenny Johnson:But there's going to be other areas where we're going to end up working together because it just makes sense. You know, China is a big buyer. U.S. is too. But China is a big buyer of U.S. treasuries. You know, they provide us with raw materials that are really critical to our technology. So, you know, there are things and they need the U.S. domestic market to be able to continue to support their economy. So we need to work together. But that is creating alliances that we didn't have in the same way in the last decade and supply chains that are changing. So I think those types of things from a macroeconomic standpoint definitely change.

38:23Jenny Johnson:You're never going to see rates go back to where they were. And I'm even a little bit skeptical of how much rate cuts we get in the U.S. because I think the economy is pretty strong. And I think that inflation is going to be hard to get below the 3 % that it's been for a while. And I think that there are a couple of things when I look at the U.S. economy, I think it's pretty strong. You're starting to see the market broaden out a bit. So earnings are broadening out beyond just that concentrated AI, six or seven companies that were real winners there. And so we're broadening out. That's healthy.

38:57Jenny Johnson:Listen, President Trump knows the midterms matter. Right. And so he built when you look at his his tax plan, the big, beautiful bill, he had a lot of things front loaded to ensure that 2026 has a strong economy. There's going to be a lot of money that gets rebated back in tax credits that happen coming this first quarter. That's going to be money that's able to be spent in the economy. There's things like companies can accelerate the depreciation of CapEx spend. And so all of those things are going to accelerate how quickly companies will spend. So I think the U.S. economy remains strong. And I think that we will see these geopolitical, and I don't know what all the surprises are when it comes to geopolitical.

39:46Jenny Johnson:So get back and say, really, really important to keep a diversified portfolio right now. Now, you know, it's always important to do it. I think particularly right now, it's really important. But I still believe, and we've kind of seen from a tariff standpoint, I know the Supreme Court's going to make a ruling right now, but the reality is tariffs in the US, it's a much smaller number. We've seen a lot of carve outs. It's not what everybody worried it was going to have an impact on the economy in a way that it was going to somehow slow things down. We're not really seeing that. And so I'm not too worried about that coming in.

40:18Jenny Johnson:And so I'm pretty bullish on the market. And, you know, again, as we're seeing, there's been a lot of earning adjustments that have gone up. So that's good, too. So I think 2026 is going to be a strong year still. Probably volatile. Probably volatile, but strong. Yeah, which is why it's important to be diversified. And at the same time, it seems that many investors are less diversified now than they were a decade ago because they tend to have more equities, more concentrated equities, both within the U.S. and within just a handful of companies. Yeah. Yes. And that's why I look and say people need to look at market beta and understand where it is based on its historical risk profile.

41:06How do you see AI evolving over the next few years? And do you feel like we're in an AI bubble, at least on the investment side?

41:14Jenny Johnson:So, look, it's a little bit hard for me to say are those, I call them the picks and shovels of AI, right? The Microsoft and the videos and others. Is that a bubble or not? A little bit harder for me to say on that. The CapEx spend that they're having to do to generate the energy to do this is massive. And so I don't know whether the multiples, they've certainly justified it in the historical earnings over the last few years. Can they sustain it? Is it worth it? But we'll see. I'm skeptical on the data center side of this over the long run. When you talk about a technology today needing to be the technology for the next 30 years, so we need X amount of energy, so we should put all this money in data centers.

42:02Jenny Johnson:I'm always skeptical when you think you can project what future investment spend needs to be on today's technology. I remember talking to a guy about quantum computing, and I said, well, how are you going to have the energy to support your quantum computing. And he said, oh, I'm in photonic silicon and we don't need as much. I have no idea if that's going to work or not, but there's going to be something like that. So the picks and shovels portion, which has driven the market through the last few years, I think is a little bit more unclear. What is clear to me is that AI is so significant in how it is going to impact companies' businesses that the companies in sectors that get it right and get it early is evolving so quickly that they will leave behind their competitors.

42:53Jenny Johnson:And so understanding how companies are applying it today, who's approaching it almost from a platform standpoint, also putting the agentic AI into the hands of their employees to evolve their companies, those are the companies that are going to be the winners in their sectors. And I think that's much more of the interesting AI investment opportunity going forward. And many of those winners may be under the radar because they may not be tech companies. They're not. They're asset managers who figure out how to put it in the hands of their investment teams. It's really important. They're energy companies who figure out how to be much more efficient in their deployment of energy and the grid and other things.

43:34Jenny Johnson:There are healthcare companies that are using it to help them find the next drug pipeline. So I think it's every sector is really, really important. You need to understand both who's going to be the winners and how they're leveraging it. And by the way, who are the losers because AI is replacing them? So where is AI really disrupting? And so that this business model isn't going to work over the long run too. But to me, that's the really interesting story around AI. If you had to name some potentially mispriced opportunities in public and private markets today, where would you focus? So I mentioned early on the call that two of our investment specialist groups were getting together and they found kind of a dislocation.

44:20Jenny Johnson:So let me tell that story because I still think that's going to work for the next couple of years. So our private credit group had managed$10 billion in real estate debt. And so they were like, gosh, if we end up having to foreclose on some of these properties, we've never actually managed the properties. All we could do is liquidate them in the market at potentially distressed prices. We should talk to Clarion partners because they manage real estate and just get their ideas on this stuff. So they started to do these calls where they were just talking through how to think about it. And the Clarion guy said, hey, wait, you guys do real estate debt.

44:53Jenny Johnson:Do you know that all the regional banks that used to be the big lenders in real estate debt are now so full with office and other properties that they're kind of having to roll that debt? They're not lending like they used to. So you can actually do these kind of development loans where you're getting low double digits, shorter duration loans, and they're a great investment right now. And so we launched our real estate debt fund because of what they saw as a dislocation. And I love it when investors, because investors are at the forefront, they're often going to see dislocation there. So I love it when investors kind of see that.

45:28Jenny Johnson:So I think you can find opportunities. And with that, it leads me to a point. I'm surprised by how people talk about private credit as a big block. You never look at your fixed income portfolios like, I'm investing fixed income. You'd say, I'm looking at high yields. I'm looking at investment grade. I'm looking at asset backed. I might be looking at mortgages. I'm going to find where there's opportunity in the market. Well, the same thing goes for private credit. So making sure that you're looking under the covers and saying, where can I get that spread that justifies being in an illiquid product?

46:05Jenny Johnson:So we like middle market. We still think that there's opportunity in middle market private credit. We like real estate. Asset-backed is kind of interesting there. So I'd say that's a place. I love secondaries from a PE standpoint because there's been$6 trillion deployed in private equity. We've heard the story about, and some people are skeptical when I say this, but we've heard the story about there aren't that many IPOs. Why are IPO markets slowed down? Why aren't we seeing as many? I think there could be a bid-ask issue, meaning that maybe some of the valuations of the private equity managers and what the public market's willing to pay aren't kind of aligned.

46:48Jenny Johnson:And so what's happening is these private equity managers are not able to monetize these deals. And by the way, historically, 50 % were sold to other private equity managers. And so they're not able to monetize it. And so it's opened up this huge opportunity for secondaries to buy these portfolios at big discounts. So There was$6 trillion plus deployed in private equity. You've got about, I don't know,$200 billion that's been deployed in secondaries. And it's a real opportunity today as the institutions are putting pressure on the private equity managers to create some amount of liquidity for these secondaries.

47:26Jenny Johnson:So I really like secondaries. I would say on the public market side, it depends a little bit. If you're, you know, the dollar's been weakening. if you were a European investor into the U.S. while we had a great bull market in 2025, you lost a huge portion of that gain because the dollar weakened. And so you have to kind of look today, I think, with all these geopolitical sort of where you're positioned with your currency and whether it makes sense or not. I think the U.S. is still by far the most innovative country. I think China is getting some interesting things on the technology side, So we're going to probably have some interesting innovation there if you can be an investor in that space.

48:09Jenny Johnson:So it depends, again, where you're located. And, you know, I think that Asia can be interesting. I think the Middle East is doing. There's a huge amount of effort in the Middle East to diversify their economies. Anytime you have that, you have a relatively young population and kind of the top down with these vision, like Saudi Arabia's Vision 2030. The UAE has a Vision 2030. Kuwait has some Qatar. They all are really focused on like, hey, we've been oil-driven economies. We know. We've seen people, one of the things maybe people don't understand about the Middle East, it's a very family-oriented mindset, right?

48:47Jenny Johnson:So what does that mean? They feel a responsibility when you talk to the leadership to diversify their economy because in three generations, oil may be gone and they have to have built out and reinvested. That creates great opportunity from an investment standpoint. So there's a lot of interesting places, I think, that have growth. India is an economy that has historically been driven very much domestically. And what has happened under Modi is we've really seen reforms that have made some opportunities. You could look at it and say, well, maybe it's a little expensive, but there's always an opportunity in those places where there's a top-down focus on reforms that are pro-capital markets.

49:32Where do you see major risks ahead?

49:34Jenny Johnson:I think that the geopolitical side is a big risk. I think we've all been surprised by some of the things that have happened. And we have to be really conscious of that. And you're not going to always know where they come from. And so being diversified is important. So I think that's a big risk. As I said, any time that I think people get so enthusiastic about one trade, like data centers must be it right now, that always makes me a little nervous because there's so much technology innovation that comes in. But on the other hand, I think probably the biggest risk is not being in the market because we are living in this time of great technological advances.

50:15Jenny Johnson:You want to be able to participate in that. And the final question I'm going to ask you, and I appreciate your time. What do you think are the top mistakes or the biggest mistakes advisors or investors keep making? Oh, I think you hit it. I think the biggest mistake that the individual investors make is their emotional response to something happening and they exit the market when the market has corrected down instead of staying through it. But that is the number one biggest mistake is that emotional response to investing. And that's why I think advisors tend to be very good about carrying their clients through the emotional reaction there to ensure they stay invested.

50:58Jenny Johnson:So that's the key is to stay invested. And then it's back to the things we said, diversification, the power of compounding, you know, all those are really, really important. Well, Jenny, I appreciate you sharing your insights on a broad range of topics today and also for expressing your passion for the industry and its continued evolution. Thank you so much. Well, thank you. It's been an honor to do this. I appreciate it, Alex. Take care. Thanks for listening. We hope you enjoyed this episode. Please visit our website at insightfulinvestor.org to access past shows and learn more about our podcast.

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