“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity….”

Charles Dickens, A Tale of Two Cities

True classics never seem to age.

Think of Pride and Prejudice, The Iliad, and the observation that the general state of things is both bad and good. We also have Macbeth, Jane Eyre, and the assertion that markets hate “uncertainty.” But they have plenty of it now.

Our hope in this episode was to gain an understanding of the American consumer. Which really means the American Debtor. We hear from BCG that Chinese Consumer activity seems to be changed, but recovering. That could inspire some optimism for the future if we didn’t have to balance it with the fact that “it would take something on the order of divine intervention” to quell the rent crisis in New York City.

So we asked an expert to help us sort it out. Perry Rahbar is the founder of dv01, a data startup that offers investors access to accurate loan-level information and the tools to turn that information into investment decisions.

Their latest written take on loan markets in the era of COVID is available here, but it’s worth listening to Perry explain it. He paints a fascinating picture of a marketplace in the midst of profound transition, where upstart online lenders are running circles around their more established competition.

Read on for a few choice quotes after the break.

There are durable returns to be found in deep research.

So if you're taking the time to integrate a full understanding of environmental, social, and governance issues in your investments, you will tend to end up with innovative and enduring solutions just by doing the work. So in this episode, we decided to spend some time with a significant, oft-neglected issue: food systems.

We were fortunate to have Ambassador Ertharin Cousin on hand to direct our exploration. Named one of Time Magazine’s 100 most influential people, she was previously Executive Director of the UN World Food Program, which is the world’s largest humanitarian organization. She is also a visiting scholar at Stanford and the Founder/CEO of Food Systems for the Future, which invests in and provides services to market-driven food and infrastructure enterprises to improve nutrition outcomes for low income communities.

We’ve excerpted some of her comments after the message below, but you should really listen to the whole thing.

Here are a few choice excerpts from our conversation. You can also read the whole ai-generated transcript by clicking here.

On the types of investments that might be attractive to pension funds:

On what individuals can do to address food insecurity:

How have pension funds handled the last few months?

We’re told markets are in turmoil. But they’re also just an inch away at all-time highs. Retail investors are racking up triple-digit returns, and seem to be making an attempt at necromancy with the bankrupt husk of Hertz, the rental car market’s onetime global leader.

So we called Marcie Frost. She oversees a team of 2,800 professionals as CEO of CalPERS, the agency charged with managing roughly $400 Billion on behalf of California’s public employees, retirees, and their families.

We’ve highlighted a few of her choice observations below, but you should really listen to the whole thing.

One quick programming note before you do: we’ve partnered with Columbia University’s Center on Sustainable Investment and Beyond Alpha research on a study of the investment industry’s role in meeting the UN Sustainable Development Goals. If you are interested in participating, please fill out this form.

On COVID-related volatility: “Our liquidity position was much better in this pandemic than it was in '08-09. So we didn't have to sell assets to pay benefits. We didn't have to sell assets to make capital calls. And I think even more importantly, we had liquidity that we could actually take advantage of the market dislocation with opportunities, and we were able to do that. So we have to think long-term, we plan on being here for decades, paying benefits out over a member's, lifetime and their beneficiaries' lifetimes.” (11:16)

On operational changes stemming from COVID: “It is likely that, so we will have half of our workforce working remotely from this point on. We don't see a need to carry the cost of having, you know, an office or a workstation or having two sets the desktop computer. If you all having a docking station, there'll be times that we'll need people to come into the office. We'll have hoteling available for those individuals then.” (15:00)

On meeting a 7% return target: “it's a really strange group of expectations that we have, if you will, that it's expected to get the 7% return, we're expected to pay out 24 billion. And while we do that, we want to find opportunities where we can do well while we can also do good for the environment and for governance issues.” (21:00)

On recent pressure from Congress to divest CalPERS’ Chinese investments: “it wasn't any different than any other requests that we get from any other entity. It just happened to be a member of Congress. It happened to be on a television channel and it was done in a really horrific way.” (30:14)

On her career path: “the traditional way is you graduate high school, you go to college, you start working, and then maybe you go in for an advanced degree. I really didn't have the means at the time I, I grew up in a household that didn't have many financial options. I started working right out of high school. I started a family when I was quite young and those were my priorities. And I was able to work my way through these systems, if you will. I started as a typist in October of 1985 and worked my way through until starting here at CalPERS in October of 2016.” (41:38)

A computer-generated transcript of our full conversation is available by clicking here.

As is tradition, we also took questions from listeners at the end of the show. If you have a question, a comment, or just a wry observation, please write us at [email protected].

This week, we answered the following:

• A leaked British Petroleum brand document made headlines recently for asking how the company can be more like Greta Thunberg. How can they? 
• Private equity funds are often proud to mention that their investors include police pension funds. Should we expect that to change in the...
  
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Black lives matter.

And not just in the abstract. When given the proper space and support, Black investors can materially improve portfolio returns. But that almost never happens. In aggregate, only about 1% of the $70 Trillion managed by professional investors is overseen by minority-owned firms.

On this episode of Free Money, we were fortunate to speak with Daryn Dodson, a Managing Director at Illumen Capital who knows perhaps more than anyone else what needs to be changed in order to create a more equitable future. We spoke on Friday, June 5th. And because the perspective he shared was so valuable, we decided to dispense with our regular essay and include a transcript of the conversation instead.

Enjoy!

Ashby Monk (10:44):

We were just kind of talking through the issues of the week, obviously a pretty heavy week out there and wanted to connect with somebody who could really explain a couple of things. You know, why the asset owner community isn't doing more to support the managers that are people of color, but even before we get there, how are you doing?

Daryn Dodson (11:13):

I am a hosting a group in a conversation of a hundred billion dollars in asset allocators to put a through line from slavery to lynching, to mass incarceration, to tuck that into the asset management overlay so that people can understand how assets got to be so imbalanced and the huge disparities that lead to suboptimal returns for our portfolios. They also violate fiduciary duty. We have about 30 hours of work over the weekend. So

I just finished the opening session. We offer for a lot of our investors at Illumen Capital something called the Illumen impact experience to bring them together, to put these dots together. So I'm heartened by that work. A lot of this is doing the work to move capital in ways that's optimal as I've worked with Dr. Jennifer Eberhart, and as well as Dr. Ashby monk to hit to work on this paper, uh, with a few other authors, really to prove and show the bias managers of color face as they increase performance, particularly black managers. So after we proved that in a paper and published it, then the question becomes, what do we do about it?

A lot of people are making statements all over the country around how they value communities of color and black communities. But when you look at their balance sheets, I've been kind of thinking about things like, not public statements, but balance statements and financial statements, and whether those mirror the statements that people are making publicly. So that's something we believe in as a firm at Illumen Capital. It's something that is evidenced in the paper that we published. It's something that we share with our investors, who currently manage over a trillion dollars in capital so that they can begin to apply these ideas to their broader portfolio.

Sloane Ortel (13:15):

Let me just hone in on a sub point of that. I think throughout history, whether through red lining or another process, you might want to name, the financial community has been a big player in perpetuating inequality, perpetuating in effect segregation. Is it still...

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Good things are happening even as we endure a global crisis.

A Mumbai-based startup has successfully reversed the aging process in rats, a previously unthinkable breakthrough.

A new era in American spaceflight begins tomorrow, when two astronauts travel to the International Space Station onboard a SpaceX Falcon 9 Rocket. It will be the first crewed launch from the US since the shuttle program ended in 2011 and the first time a new type of spacefaring vehicle has carried humans from Cape Canaveral to the heavens since 1981.

And Blackrock — the world’s most humongous asset manager — reported that the recent downturn in financial markets had only strengthened their conviction in sustainable investing strategies. At this and other firms, Environmental, Social, and Governance (ESG) driven investment strategies are increasingly understood as a source of comparative resilience in portfolios, not just ethically admirable allocations that are “nice to have.”

This is clearly rad.

But it also pushes one to wonder about the harbingers of resilience. We wanted to do better than hoping we’d know it when we saw it. So we called Jean Rogers, Chief Resilience officer at the Long-Term Stock Exchange (LTSE) and a founding mother of the global sustainable investing movement.

As founder and CEO of the Sustainable Accounting Standards Board (SASB), she created industry-specific materiality frameworks that opened the investment profession’s eyes to the promise of ESG investing. And she’s hard at work to compound that contribution.

In our conversation, she pushed us to see the set of things that matter to a company’s performance as more than just a static list. Conditions change. And circumstances can arise where something “wasn't material for a company one day and now stakeholders are up in arms about it. Now it's a material condition for the company.”

She recently outlined a framework for this process of transformation in a paper co-authored with Harvard Business School’s George Serafeim which urged investors to understand materiality as a “process of becoming” rather than a “state of being.”

In our conversation, she outlined five factors analysts can use to assess a company’s capacity for resilience to acute events or exogenous shocks. The first, is "bigness of vision," or:

On inventiveness:

Unless we recognize “Something has died, and something new is coming after it,” it could take until 2040 before humanity emerges from the aftermath of this pandemic.

That comes from Tom Baruch, a prolific “clean tech” venture capitalist who has led investments resulting in 18 IPOs and 8 M&A transactions and now operates from his family office, Baruch Future Ventures.

He was our token optimist on this episode of Free Money, which was recorded on May 15th. But his outlook didn’t take the shape that one might expect. As an introduction, he offered “I believe this is going to last awhile. I don’t see us bouncing back until 2023 or 2024…. I don’t believe that the world [we used to live in] is going to come back.”

Our mouths hung agape as he talked.

But then he started describing a future that doesn’t sound so bad. His belief that, thanks to technology, “we’re entering a period of free clean water, free energy, and free protein” is beyond provocative. It brings to mind the world of Star Trek, where scarcity has altogether ceased to exist.

Tom thinks we can get there soon.

“People used to think that to really effect the kind of change we’re talking about it’ll take 20 years, you have all these scaling issues. And it’s all true. But now we have tools that we’ve never had before.” That means “It’s not gonna be a 20 year deal. we can do it in 10 years.”

That sounds pretty good. But of course Tom isn’t saying it’s a guaranteed outcome. What scares him is that “the government - especially our current government - is gonna try and prop up broken old Industries. So we’re not going to add to GNP. That’s the problem. The way to add to GNP is free energy, free food, free water. That way we’ll build a very prosperous society.”

Tom describes some of what’s needed to accomplish his vision in a recent paper on Medium, but the best way to access his imagination is by listening to this conversation and looking through his portfolio. He blends optimism and pessimism together in a way that can’t help but open your mind.

We also answered three questions from listeners at the end of the show. This week we discussed:

• Why exactly is it bad that PE funds don't get marked down during a selloff?
• CalPERS caught some flak recently for unwinding a tail hedge program literally right before the market fell off a cliff. Was that bad luck or a bad decision?
• There is a fairly significant movement to cancel rent, which sounds pretty good. Would that create long-term consequences that are actually...bad? 

And as a bonus, here’s Sloane’s wipeout compilation from the 2020 ski season, which she mentioned in the introduction.

There is “a time bomb waiting to go off” in some American states.

That’s according to Ben Oppenheim, PhD, a computational epidemiologist at Metabiota and our guest on this episode of Free Money. We spoke on the first of May, one day after the United States endured its highest death toll so far in this pandemic. And the outlook isn’t great. The places with growing case counts “have older populations, a lot of preexisting conditions, worse health systems, and more structural barriers to people getting the kind of care they need.”

He stressed that “my worry is not wave one [of infections], but wave two.” That’s because “we can be successful in the first round, but until we’ve got a vaccine, really good therapeutics, or herd immunity, this thing could come back in a hurry. We’ve seen that in some countries that were initially successful.”

These events — often thought of as the public health equivalent of a ‘hundred year flood’ — are vastly more likely to occur than people generally think. In fact, this is the third coronavirus outbreak this century. SARS struck in 2003, followed by MERS in 2012.

So it’s not like this wasn’t on our radar. The chart below comes from a textbook chapter Ben contributed to entitled Pandemics: Risks, Impacts, and Mitigation. It shows estimates of the annual probability that the death toll from an influenza pandemic will exceed a given quantity.

Note that the x-axis is denominated in millions, which means Metabiota simulations show a roughly 1% annual chance of more than one million dead.

At one point in our interview, Ben muses about our collective priorities before the pandemic and wonders aloud: “What the hell were we doing?”

And that’s where we want you to concentrate. This is likely to be the crisis that makes ESG-aware investment processes not just commercially viable, but highly relevant. The Wall Street Journal reported over the weekend that ESG funds protected investors from some losses during the recent selloff, likely because they held fewer investments in energy companies.

Long term investors, take notice. This is the second historically aberrant natural disaster we’ve endured recently. When we recorded our last episode shortly before New Year’s Eve, much of the west coast had lost power due to widespread wildfires. Integrating ESG processes won’t predict these events, but they will prepare portfolios with an awareness of future risks and promote better corporate citizenship.

Ben reminds us that “Pandemics are not a health system event…when they hit, they engulf the whole of society.” So the question for you is: can you find your part in creating a better whole?

We also discussed all of these questions in this week’s Dear Ashby segment:

• If states do wind up declaring bankruptcy due to the coronavirus, what would happen to state pensions?
• What have you started doing during lockdown that you plan to continue when life returns to normal? 
• Because of the pandemic, lots of Americans are making more in unemployment benefits than they typically make in income. How should we be thinking about that?

It’s the end of the year. What have we spent all of this time talking about?

Mostly what it means that pension funds, sovereign funds, endowments, and other asset owner institutions collectively manage roughly a third of all the money on earth.

They tend to be globally diversified and invest with long time horizons, which aligns them with the public interest because they cannot succeed unless human enterprise flourishes around the world. They also provide most of the world’s risk capital, which makes them the base of modern capitalism.

Our mission at Free Money is to help them find the freedom to properly fulfill their potential, orient their operations toward projects that build collective value, and serve as truly effective stewards of society’s accumulated capital. 

It’s more profitable to try and extract value from them, so we have plenty of competition. But our greatest enemy is ignorance, not malevolence. So we spent the last episode of the year talking about at least five forces which work together to leave the world’s financial plumbing in thrall to the tyranny of low expectations. 

We’ll enumerate and examine each in essay form after this quick word from our sponsor.

The Influence of Unexamined Norms

Substantially every form of diversity imaginable is present among institutional investors. They exist in China, California, Canada, Texas, Taiwan, and Tuvalu. Some invest to support educational institutions while others provide insurance or fund members of a certain family. At least one is meant to stabilize the country of Iran.

With so much inherent difference, we wonder: why do they act so similarly?

One reason is that they have constraints which vary in their specifics but create similar operating conditions. For instance, they often hold monopolies over the assets they manage, which creates incentives for staff to optimize for not getting fired, rather than what’s best for the organization.

On top of that, conformity tends to be written into the law in the form of the prudent person rule, which states:

On the surface, this makes a lot of sense. Skill, prudence, and diligence clearly belong inside of an investment decision-making process.

But imagine trying to apply investment skill while required to mimic a person acting “in a like capacity” at “an enterprise of like character and aims.” What if you are...

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Many institutional allocators are troubled by the self-evident lack of diversity in investment management. 

It’s easy to suggest that one fix that: cultivate more diverse talent! Build a more welcoming environment for new funds! But how exactly would one accomplish that? 

Many pensions made worthy attempts with emerging manager programs, which were meant to support asset managers that did things a little differently. Unfortunately, those different managers were very much the same as others when it comes to delivering lackluster performance. 

So now they’re canceled. Not everywhere, but at enough pensions that it makes a trend. On this episode of free money, Ashby and I talk about what this means for diversity, inclusion, and innovation in the industry. 

And as always, we answer the questions on every institutional allocator’s mind. Specifically:

• Why are “long-run short sellers” worried about GPIF’s move to restrict stock lending? 
• It’s legal to do anything you want to an opossum in North Carolina from December 29th - January 2nd. What would you do with those five days?

Apparently allocators will still consider backing investors who've had trouble with sexual harassment. WTF? But like actually.