Simon Brewer  

In this mini-series, we're interviewing a group of the largest institutional allocators, also known as the super allocators, to understand how these immense pools of capital think about the assets they invest in, shifting asset allocations, passively active, publicly private and steering through turbulent waters. Are they akin to supertankers who must accept that size brings inevitable slowness to respond or in fact can they be much more adept than imagined? To help us form a clearer picture and to understand similarities and dissimilarities, we're going to talk to CalSTRS in California, the Australia Future Fund, APG in the Netherlands and Ontario Teachers’. And in discussions with their CEOs and CIOs, I hope we'll end up better informed and understand the approaches in managing such pools of capital with very real and dependent beneficiaries. So we go to Sacramento, with Christopher Ailman, the Chief Investment Officer of the $300 billion, California State Teachers' Retirement System. I believe I'm right in saying the largest educator-only pension fund in the world and the second largest pension fund in the US. So, Christopher, welcome to the Money Maze Podcast.

Christopher Ailman

Thank you. It's a delight to be here. I appreciate the opportunity.

Simon Brewer  

Well, it's been said that you've helped transform the California State Teachers' Retirement System from a somewhat sleepy pension fund into a $300 billion institutional investing juggernaut. Before we talk about CalSTRS, let's talk about Christopher Ailman. You were educated and grew up I think in California. I'm sitting in a cold, wet, grim London where it's January and it's still dark when you arrive at work. Did you ever think you had been born in the wrong place?

Christopher Ailman

No, I enjoy California. God, I love it. I have had the opportunity to move out of state. I worked up in the state of Washington, ran their pension plans for a period of time, which is just absolutely beautiful. Northwest of America is gorgeous. I sort of love Canada, but I have to say while I have visited London a bunch of times, I like it in May and June but not so much in January or February, or actually sadly the rest of the year.

Simon Brewer

One of the questions we like to ask sometimes is how did you earn your first dollar?

Christopher Ailman

Gosh, how far back do I go? It's interesting. Out of school, you have to realise I went to college before PCs. I was very interested in investment and management. Computers were just coming out. I thought I wanted to be in corporate management. My university had a great accounting series so I focused in more on being an accountant. Back then, there was a Big Eight. Now, obviously, the Big Four. I headed up to interview with them and realised that auditing and some of the jobs are pretty mundane. I had been exposed at that point to Wall Street. I started on the small institutional side, doctors, hospitals, nonprofits, but then got the opportunity to move to government and I really only thought I would stay in government for a brief period. It really surprised me and I found that it suited my lifestyle. My first dollar earned really had to be from being exposed to the equity market. I had been in this business before the title of Chief Investment Officer existed, so all the way back in 1985. And I have been through numerous booms and busts in areas like real estate, the birth of private equity, diversification of portfolios. Back then, we called it US and non-US equities, just a lot of interesting transitions. I was one of those people that was fortunate to start young and then grow with the industry. I've been blessed by the chance to be at a small fund, then moved to the State of Washington, which at the time, was about the 30th largest fund and run that portfolio, famous for private equity. I really got exposed to some of the early investments in the early '90s to private equity, and then came to CalSTRS, California Teachers', in the year 2000. Surprisingly, to me and them, I've stayed. I had told the board when I interviewed, I'd be their longest-serving CIO and I've stayed longer than even I expected, but I love it. Part of it is, and you hit on it, we're an educator-only fund, so we have a very unique membership of just over a million, believe it or not, public school teachers in the State of California. My sister is a retired teacher, my sister-in-law is now a retired teacher, and my daughter is a teacher. I can very much relate to our mission and who we're serving.

Simon Brewer

I think I'm right in saying that this fund started in 1913. That's a lot of history. What was the genesis and what was the thinking? And I suppose also, why has it managed to remain one unitary vehicle?

Christopher Ailman

I'm old, but thankfully, I'm not that old that I was there when they started the fund. I studied pension plans and teacher plans were among the first started. And so for the listeners, they've got to realise that's before Social Security was created in the USA. 1913 is really early. But it was the realisation that teachers, mostly women, worked their entire career in the field of teaching and that they deserved some kind of a retirement pension. Think about the lifespan in 1913. It was literally pay-as-you-go because the liabilities were not that great. But it really was started and designed primarily for women. And one of the things that's changed is longevity. Once a California teacher reaches the age of 60, so they got to get to 60, but once they get there, a teacher in California lives longer than any other worker in America. It is amazing.

Simon Brewer

Wow, that is interesting. Well, there's a great book called 'The 100-Year Life' that was written by some London Business School professors that talks about it, but I think it sounds like it was written for your beneficiaries.

Christopher Ailman

As we're talking today, you will be stunned to know that we have over 425 teachers, beneficiaries on the retirement payroll that are over 100 years old. It is stunning. Back to your first question of why California. They live in California, which means they tend to eat healthier. I know Britain is known for its gardens, but out here, we have a lot of fresh vegetables, farm to fork, and they're non-smokers and they're college educated so they just live healthier lifestyles, and I think that's a big attribution of why they live so long. It's amazing. Longevity is a real challenge for me.

Simon Brewer

Britain may be known for its gardens, but it's not known for its healthy eating. So you may be looking at some select groups of people when you visited London.

Christopher Ailman  

Bangers and mash isn't healthy?

Simon Brewer

CalSTRS, on arriving there in 2000, how did you prioritise your vision?

Christopher Ailman

Whenever you take over, and you made the analogy at the beginning of a tanker ship, I like to think of us as a cruise boat, a big part Carnival Cruise Line or something, a lot more fun than a tanker. The first thing you have to do is to get to know the ship. You have to know the portfolio. You have to understand the nooks and crannies in the portfolio. Why is it built the way it's built at that time? I really believe unless you understand the past, it's hard to move forward. There was already an existing team, so I had to understand their history and culture, what they had been through. And then what I did is really sit down and I set a goal. We were sleepy, as you described. We were hidden. Literally, the name of the fund wasn't even on the building so people didn't even know we were in a state capital. But my goal was to really make us a world-class money manager, and that had a lot of analogies, a lot of definitions. But it meant that we were managing some of the money, we had a global reputation, and we were, at the time, the third largest fund in the USA, but I really wanted to take us out of the shadows and establish us as a presence. It's a personal thing, but it has always bothered me that around the world, when you say the teacher’s fund, 9 out of 10, they're going to mention, as you described, Ontario Teachers'. We're two times their size. No one mentions California Teachers'. Really, it was a personal goal. I have to say, prior to my coming, and I knew CalSTRS because I had worked in this town before running the county retirement system so I knew the staff and I knew the fund well. Historically, it had been a third and unfortunately, mostly fourth-quartile fund in the '80s, in the '90s. And I knew what the major cause of that was, which was big asset allocation bets into bonds away from stocks. Anybody who looks at the '80s and '90s knows it was a big bull market time. I knew just stabilising the asset allocation was the first key and then building out the rest of the team. I think when anybody takes something over as just general management advice, you really have to do your homework and your due diligence on why is it in the position it's in whether a team as a leader or struggling, and then you've got to figure out what are your resources, what tools do you have, what budget do you have, and find your niche. What I think about, and I'm not an expert on British Premier League, but some of those smaller teams know how hard it is for them to build up talent, and they can't go out and buy an all-star very easily. But how do they compete consistently above the qualifying line? I set a long-term plan and the big thing is the staff had just been through a CIO turnover and a real sharp division was unify them and pledge, as I said earlier, to the board and to them, I was going to be around for a fairly long time. I had said to the board, I would be there for at least 15 years and stuck by my word. And I think that was important for the team at the time. Think about management turnover. In an orchestra, Premier League, anything when you have management turnover, it tends to lead to chaos and the team does not perform at its best.

Simon Brewer  

You've touched on asset allocation and that's really where I'd like to pick up the thread because there is liability sitting in your business, unlike some, and there are two components we've often talked about in this world, which is a strategic asset allocation and a tactical allocation. So maybe you could just explain how you balance those two competing forces.

Christopher Ailman

I don't look at them as competing forces. I look at them as long-term guides and then short-term shifts. Look at ourselves personally in our lives. We all have long-term goals, but then we have to make day-to-day and year-to-year, month-to-month shifts along the way. But we stay true to those long-term goals. So to me, the strategic asset allocation is set by the board. They look at that liability strain. They know what the contributions are because a retirement system is pretty simple. There's contributions and there's investment income. Those two together have to pay the benefit. Sometimes your benefits are flexible, which is great, but in ours, they are carved in stone. They really only have two levers, and in fact, in ours, the contribution lever, to use an example and analogy, are really set in soft cement. So they're very hard to move. So it really becomes the investment goal. A long-winded answer, but you have to understand where that strategic asset allocation comes from. It comes from that long-term perspective. And you said we're unique and challenged. Think of us as a 35-year-old career schoolteacher, so somebody who says I'm going teach my whole life but they're about 35 so they've earned some money but they have a long way to go. And our fund, as I said, they could live to 100. So they're going to live for that money for a long time. I'm blessed with a chance to have a long horizon invest that money in a number of ways. And as I said earlier, the fund had taken some pretty significant asset allocation bets, sadly, mostly wrong, not all, but mostly wrong in the' 80s and '90s. So my goal was to actually stick close to home, not take asset allocation bets. Personally, I'm not a big believer in market timing. I've done it and it's been wrong. It is nearly impossible to pick even close to the tops and bottoms of markets. When the board adopted an asset allocation after I got there, I actually tightened down the ranges on the strategic asset allocation. So to give you an example, there are some funds in USA that say their target for global equity is 50%. They may have a range as wide as low as 20 and as high as 70. Big asset allocation bet. The traditional book, if you open a CFA book or a traditional university book, it will tell you the range should be plus or minus 5. I narrowed it to plus or minus 3% so that we could shift the boat a little, but we really had to stay true to course and aim for that horizon. To me, again, I don't look at them as strategic and tactical as being opposites. I look at them as the strategic is your long-term horizon. I'll go back to your big ship analogy. The board has picked a point on the horizon and I have to aim for it. The challenge is I never go to port, so I can't hide in a storm. I can only batten down the hatches and tie down everything in a storm. I've got a ride through it. But instead of taking big tax on that boat and trying to make changes, and in your analogy, you take tax and a big ship, you waste time, gas, you get nowhere, I've got to just stick close to that. Historically, we have not made big wagers on the asset allocation. We've done these tilts is what I would describe them, plus you have to manage cash flow. Now, in my analogy of a 35-year-old teacher, they're not going to draw on the money until they're 55, 62 in France, maybe 65 in France, if it gets away with it. They're not going to draw on the money for a long time. In our case, we are a mature plan so we do have a negative cash flow. So I have to plan for that. Instead of average cost buying in, I have to average cost selling out. So that becomes an important decision. Again, it's nuanced and I'm getting technical on the portfolio, but it really becomes an important decision between strategic and tactical. You've got to find a way to always be raising that cash flow.

Simon Brewer  

So I've actually dissected your 5 and 10-year numbers that you published. And so I'd like to actually look at some of these assets. Let's just start with fixed income, because we're going to talk when we get to equity about passive versus active, but you've had some outperformance in the world of fixed income as I look at the long-term series. Just tell me a little bit how you've achieved that.

Christopher Ailman  

When you think about active and passive, a lot has to do with the benchmark you're trying to outperform. I work with MSCI and I've worked with FTSE Russell in the past as well. The equity benchmarks measure the entire universe, are very accurate, have no cost and are very challenging. This isn't to disrespect the fixed income team who does an awesome job, but the fixed income benchmark, by its definition, is a measurement of everyone that issues debt. Well, that's not the optimal measurement. You don't want to have the most money with people who need to borrow the most. The old adage you want to loan money to people who don't really need it. When you look at the indices, there are some that are just already made that I think smart people can beat it fairly consistently. Now that said, we have an awesome team and they have absolutely beaten the benchmark absolutely consistently. In fixed income, the old adage is you have credit, you don't mess with duration because it's really hard to figure out the direction of interest rates. It's better than 9 out of 10. It's 95 out of 100 years that team has been able to deliver consistent solid alpha all the time.

Simon Brewer

Well, you're not being too technical because we have Greg Peters of PGIM back in the autumn and he really talked about that benchmark issue and why it's not always representative. So that's helpful. I want to just talk about equities. Again, you might correct me but from what I can understand, 70% of the fund's stock allocation is passive. A lot of that has happened on your watch. When I looked at the outperformance, not surprisingly, there wasn't much in equity, direct equity. This is I think particularly now such an interesting time to talk about alpha versus beta. Now, I was reading a UK firm called Phoenix Asset Management, I happen to have been invested with them for a long time, very successful long-term fund, multi-decade alpha. I read that Gary Channon, the PM, he says there are two edges a value-based approach has the index tracking, which should mean all value managers can outperform the index after fees if they'd number one, avoid bubbles and overvaluation, and number two, take advantage of troughs of undervaluation because both go against human instinct. And then, as you will know, companies like GMO have recently come out with the deep value segment in the US offering potentially 30% alpha. Now, I just want to start by understanding how you weigh up that tension between active and passive.

Christopher Ailman

I want to present a balanced point of view here simply because my point of view leans very heavy on passive and I get attacked by active managers. Part of it is you've got to understand as an investor, where are you coming from. What can you get access to? And we're all about net return here. So what's the net cost way to grab the return? I'm sure there are active managers that perform very well, but they also tend to pick their clients, they also tend to be very expensive. And can they outperform consistently? We've seen active managers outperform for four years, and then near five and six, lose all that alpha. I think it's really a challenge. And oftentimes when I run into high net worth like yourself or other people who have investments with active managers and say they're getting alpha, they're fairly small funds so they don't fit my size. Keep in mind, I'm over $150 billion in global equity so I need absolute size. I'm also a governmental entity in my entire career. So I've been a public fund CIO for over 35 years. All of the funds I worked at were public entities, so they had government contracts, which it doesn't take a rocket scientist to figure out that's not the best contract for asset management. And the way we had to hire them was basically putting a billboard out on the highway to try and attract them. So from my perspective, whether it was my smaller fund where I started the state of Washington or CalSTRS, it's been very hard to hire and keep active management. I can get the beta of the market at zero cost and now I can run it internal with my own team who then can do a lot of other things for us. And obviously, when you add in securities lending, you've got a return so I can run billions and billions of dollars against an index, and oh, by the way, will probably outperform by 10 to 12 basis points, nothing to an active manager. But on $50 billion, 10 basis points is a huge sum of money net, again, not without fees. I look at what I have, my structure, one, I'm required by law to follow certain things and I realise active management is too expensive, too inconsistent and I can't get access to these small private niche managers that people tell me about. They won't do business with us on our terms. You have to do business on their terms, which are unacceptable to us. I'm a big fan of passive simply because you look at the overall pension plan, the global equity segment is my largest asset class, and I need to get the beta of that market. We assume over a very long period of time that the equity market will return somewhere between 8 and 9 because historically it has. I need that return and I'm not willing to take a lot of risks. So if I can get that return at no cost to me, I'm going to lock that in and then take my alpha risk in other areas where I think I got a better chance of having it generated, in private markets, in fixed income and other areas. And I'm all about return. That's what I need to focus on. That is my sole job. So I'm going to go passive, I'm going to lock it in. And to me, I think that is by far the most efficient. Just good grief, look in 2020. At the end of '21, everyone was out celebrating the ARK fund and Cathie Wood as this absolute genius. And at the end of 22, it's 100% the opposite. You went from one extreme to the other without even stopping in the middle. And unfortunately, that's what I've seen is the life of active management. One more technical point, the historical study, you know the work by Fama-French that value is the best place to invest. Yet in 2001 and 2002, we said value was dead. We said Warren Buffett was an idiot, we being the industry. And then here we are in '22 and '21, and again, value is dead. Yet we know historically, that's actually the best place to be. It's really hard to pick between value and growth, value and growth, to know if it's different this time. And I think that's why retail investors have a real challenge when they go to active management. Let me put it this way. I have said that active management is going to lose its license to operate simply because they charge too high a fee for the service they provide. If you look at active managers, we know the story. Two-thirds of them don't outperform the market net fees. If you take that fee away or could reduce that fee, you dramatically improve their ability to outperform the market. Before fees, most active managers on average, more than half, do outperform the market. But when you add in their fee cost and their fee load, it's stacked against you.

Simon Brewer

I think you have defended your corner eloquently and it's difficult to disagree. Of course, the irony is the US being probably the deepest and the most efficient capital market, the room for alpha is less than when you travel to smaller markets. Now, just before we leave listed equity, you're obviously not 100% passive so you are selecting within that universe other managers. Just tell me a little bit about what the mandate is to those in your team who are doing it because I'm imagining you're giving them more rain because of this huge weight in passive.

Christopher Ailman

I have a foot on each side of the argument, I'll admit that. We haven't thrown in the towel completely, but you hit on the head. The ability to produce alpha has to do with the efficiency of the market. If a market is highly efficient, if there are eight analysts covering a large-cap stock, there's no information arbitrage, there's no ability to know what's going to happen. Everything is instantly priced in the price of that stock because it's known. When you drop down into smaller caps in the USA, you get a lot less coverage, a lot less information flow. And then when you step outside the US and certainly go below the developed markets and go into the emerging markets, there is an information advantage. So you will see if you scale down the efficiency, if you could create a scale of the efficiency of the public markets around the world, you would see our active-passive shift change in lockstep with that drop in efficiency. Now, that said, we do have some mid-cap and small-cap active managers in the US. When you go all the way to the extreme of the emerging markets, we're almost 100% active, almost. And it's because those markets are inefficient, information is valuable, and they can make better decisions. Now, they have to make a lot more decisions. When you have 28 countries and industries within those countries and 28 currencies by the way, you've got a lot of decisions you have to actually get right to be able to outperform the market. That's an area that we find an interesting challenge. And then I want to overlay that. E, S and G, so environmental, social and governance, what the companies do and how they behave is actually really important to us. Particularly when you drop into the non-US and the emerging markets, we want people paying attention to that. So another reason we would rather go active than just be passive.

Simon Brewer  

I've read your sustainability report so I'm going to come back a little bit later to ESG. But let's talk about the piece of the asset allocation where I can see that your team has achieved quite a lot of offer, and that's obviously in the private markets or the alternatives, which of course, cover a multitude of sins. Can we just start by hedge funds and infrastructure? How do you think about them before we then get to PE and VC?

Christopher Ailman

Hedge funds and infrastructure, you picked two kinds of extremes. First, let me describe the hedge funds. I have a very strong view that hedge funds are not an asset class. They are just simply trading vehicles. It's a legal contract. The word hedge fund has really become just a legal contract of 2 and 20 and gates. Let's keep in mind there are over 25 flavours of hedge funds depending on where you are in the world. Let's think of ice cream. There are more than 25 flavours of ice cream. They do very different things. So I think when you look at that, you have to first recognise it's an inefficient contract structure that's efficient for the GP and inefficient for the LP. But also recognise that it is not a uniform asset class. It's a bunch of different strategies. They generally tend to be trading, they tend to be short-term quick moves. Some do, clearly. There are a handful, the biggest, that have produced ridiculous return numbers over the years, very expensive, if impossible to get into and opaque. You have no idea what they're doing, which to a lot of people might be fine. I'm a steward of a million teachers' money. I want to be able to tell them what we're invested in. I want to know what we own and what we don't own. When I look at the myriad of hedge funds, there are some strategies within that that we think actually complement what we do. And believe it or not, we view them as risk mitigating, they are not correlated with the global equity market. They're not negatively correlated. So it's not a perfect hedge, but they're less correlated. So you won't find a hedge fund category in my asset allocation because I believe it's an asset class, you will find what people might describe as those strategies in three of my asset classes because they complement what we do.

Simon Brewer

I wanted to just talk about the infrastructure of hedge funds because the PE and VC conversation flows together as one. So just tell me about infrastructure because it's featuring in your allocation.

Christopher Ailman

We believe very strongly. I really feel that infrastructure really suits us well because if you step back and look at us, as you mentioned, we're terribly old, over 100 years old, a very long horizon, very patient. We have $300 billion, we have a 35-year horizon, I need cash flow because I have a negative cash flow. So I really am long-term and patient capital. Big, physical boring assets that kickoff cash are actually beautiful to me. A parking lot, a toll road, a port, an airport. Nowadays, infrastructure has even become cell towers, power lines. We own some of the biggest, boring, buried, you don't even see it, but we make money from it. When you think about that island of Manhattan, picture that, a huge amount people that live on the island of Manhattan. You can only see one or two at best electrical generating plants. It sounds silly, but the best analogy is think about their enormous extension cords going under those rivers from New York and New Jersey up into Manhattan to power it. They're buried 20 feet down in the mud of those rivers. We own a couple of those. And as long as they're there, buried under the mud, somebody pays us to be able to push electricity through them. We don't only electricity, we just on that big ugly cable. I love that. Just recently in San Francisco, I went over a freeway on ramp to the Golden Gate Bridge. Everybody knows the Golden Gate Bridge. Nobody knows the freeway on ramps. They're actually very beautiful, well-designed, efficient, built on time. We own those. There's no toll. But as long as they sit there, the State of California pays us a fee for being able to have them. So I just can't describe enough how I think that's really valuable. And as I said, long term, patient, boring, but you get this steady cash flow and return on your money. The big difference between us doing it and say the public sector building that stuff, we maintain it. Taxpayers around the world know that when the government builds something, that's great, but they often cut back on maintenance and don't retain it or don't keep it up, and then after 50 years, it starts falling apart. We maintain it so that it's like new when we hand it back. Long story short, it sounds silly, but I really do like infrastructure. As an institutional investment, it doesn't fit for most retail investors. They can't even find a way to buy it. There isn't a good structure for them. But for us, we can team up with other funds. Keep in mind, infrastructure, big chunks of capital. These things are expensive, sunk capital for a long period of time. I have a huge pool of money so to be able to invest in something, pick on private equity, great long-term investment. But let's realise, I get my money back every seven, eight years out of private equity. I have to redeploy it. Infrastructure? I can put the money there for 15, 20 years and just get cashflow.

Simon Brewer

So we segway then into PE and VC

Christopher Ailman

You owe me $3 for helping you pay for the segway.

Simon Brewer  

Thank you. So here we are in a potential change of investment climate, which we'll come on to in a minute and a lot of excitement obviously in private equity and declining market cap in a lot of parts of the world as companies have either gone private or chosen to stay private for longer, and a lot of euphoria courtesy of the largesse of central banks that is now passing. How have you thought about given that you can afford what Swensen would refer to as the illiquidity premium. How have you thought about those two asset classes?

Christopher Ailman  

I think they're particularly valuable for long-term investors and institutional investors. It's an area that we're not too dissimilar from, again, a 35-year-old teacher saving for retirement. But sadly, she only has access to stocks and bonds through mutual funds. We have the ability to be that long-term patient capital and invest in long-term investments. David Swensen was brilliant, he wrote the book. He literally did write the book on endowment investing and institutional investing and really saw the value of being long-term, being in a private area where you don't need mark to market and you can wait for the return of your capital. And we know that the compounding is powerful. For me, I think that private equity has been a big alpha driver in the funds that I have worked for. As I mentioned, at the State of Washington, they really are one of the early pioneers into private equity and now they have almost a third of their portfolio, I think over 30% of their portfolio in private equity, and it has really generated returns historically for them. And it's because simply not everything in that industry is perfect or well done. Think of it this way. When you're a public company, every 91 days, everybody wants to look in on how you're doing. Think of that as a report card. That's terribly short-term, a lot of pressure every 90 days. You may know what you have to do over the next year or three years, but it would hurt that 91-day earning. Most CEOs find it really difficult to make those long-term decisions. But if you're a private company where you don't have to report over that cycle, then you can make those long-term decisions and make those changes and actually improve the health of the company. And I think that transition you're hitting on of seeing public companies go private, a big part of that is that arbitrage of thinking short term versus being able to think long term. There's a cost arbitrage, but I think that especially it's a long-term, short-term trade-off for them. And the ability to invest in a company and redeploy earnings back into it really becomes a powerful generator of return over time.

Simon Brewer  

Given your very clear liabilities, the world of venture capital is less certain axiomatically, but just tell me a little bit how you think and deploy money there.

Christopher Ailman  

Venture capital is actually a real interesting challenge for us. You would think here we are in California, 140 kilometres from Silicon Valley, we'd have access to all the great ones. The challenge is actually we don't. Number one, they want small investments, not big ones, and I'm big. They want to diversify their LPs and they prefer private LPs who are very secretive and quiet, just like they are. Well, I'm public. Everything I do is in the press. And the State of California has decided to approve a bunch of laws that require me to disclose even more to the point that many of the big venture capital firms said we don't want you as a client. They found a really nice way to say that, but they would rather have other people's money who don't ask questions, and we ask a lot of questions. It's actually a really small segment in my portfolio, unfortunately. But also, as we've learned, venture capital, while you hear about the spectacular unicorns, 9 out of 10 deals are losers or breakevens. It really is trying to pull a needle out of a haystack. That said, some of the firms that have actually proven very skillful in every fund finding one or two needles in a haystack but making 10 times their money on those. We have seen examples even here most recently. I'll pick on FTX, where they put money in but it disappeared. So VC is a real high stakes but also very challenging game. I love it because it's entrepreneurial. Many of the products we take for granted today were started in venture capital. It is critical, I think, just to humankind as a way to finance innovation and new ideas. That said, it's a real challenging area to be. I would love to have a larger allocation, but we just don't fit their world well and vice versa.

Simon Brewer  

Thank you. That's very understandable. So we've looked at the map of these assets that you deploy. One of the early things I touched on was the question of agility when you have such a large pool of capital, but we know that there are intersections in the market be it March ‘20, be it the shift in central bank's view of having been too lax with inflation, where risk and opportunities suddenly can be looked at through a clearer lens. How agile would you say you can be?

Christopher Ailman  

I'm going to go back to an analogy you started which is the big ship in the ocean. Again, I like to say we're a big cruise line ship. I can't spin on a dime. $300 billion and being a public fund, it's very difficult to be agile. If I was a $3 billion endowment, my good friend Collette runs the Williams Endowment. It's a real challenge. But for her, she can shift on a dime. She can invest $100 million and it's meaningful to her balance sheet. To me, $100 million is not going to move the needle. So we'll make subtle shifts, like I said. We'll batten down the hatches, we'll tilt the portfolio a bit, but I'm going to ride through the storms. I would like to be counter-cyclical. Like you said, March of ‘20, I can tell you because I remember that vividly as the COVID outbreak was starting to suddenly spread and the markets got extremely volatile that we wouldn't limit in the first six minutes of the trading day. I have a smaller tactical team. So picture that cruise ship, I call up the key people, the engine room, navigation, communications. We all huddle up in the captain's quarters or the front of the ship and talk about what we should do. Keep in mind, the stock market opens at 6:30 in the West Coast. In March of '20, we were talking at 5:00 am, we were talking again at 7:00, we’d talk at 10:00, and we’d talk at 1:00. Most of that was by phone. At that point, several people were in the office. And then we’d talk again at about 3:00 in the afternoon about what we would do the next day. So we have the ability to try to tilt the portfolio. First initially being defensive, we went into that thankfully being slightly underweight, but then starting to be aggressive of coming back in and buy. The challenge is we just did not understand. We knew people were going to shut down the global economy. And normally, if I told you I know for a fact that in the next two weeks, we’re literally going to stop the global economy, you'd probably think that's pretty bad. The flip side of that is then the Fed turned and dropped the rate on money to zero, flooded the market with liquidity, and suddenly, you have to change your perspective of wow, now we're back to zero interest rates. I remember the very first time after '08 where the Fed came out and said they were going to keep interest rates near zero for a prolonged period of time. I called my whole team together at that point. We'd never seen anything like that in our entire careers. We had to rethink what does this mean when borrowing money is almost free, risk-free money has zero return, and capital was scarce. We had a view that any of our capital had an extreme value to it that was liquid. And whether it was private equity, real estate, fixed income, equity, they all had to compete for it and they all had to get a very high rate of return. You go from basically operating day to day and normal in those environments to suddenly triage moment and tighten down and meet more frequently and communicate more frequently. We can't spin that ship on a dime. I laugh because retirees will point out to me that cruise ships have side thrusters now. I had to study that but I realised they can only use those in port when they're not going fast. We're out in the open ocean, full speed, so I can't use the side thrusters and spin on a dime. I'm going to make those subtle shifts and subtle defensive or offensive moves.

Simon Brewer  

Let's go back to ESG. I read your sustainability report. It's very credible and I absolutely get the objectives. I was also intrigued, probably reflecting my own biases, pleased to see and I’ll quote you, divestment is a last resort action that can have a lasting negative impact on the health of the teachers' retirement fund. We interviewed Nicolai Tangen of the Norwegian sovereign wealth fund and he had done an interview explicitly with the CEO of BP talking about why that's a company they're working with as BP like Shell and others are on their journey. When you've got a large allocation to passive, do you worry your voice can't be heard?

Christopher Ailman  

No, I worry we’ll be ignored. What it gives me the advantage to do is to sit down with a CEO. And I've had the chance to do this several times, look at them in the face, explain to them that as long as there are public school teachers in the State of California, we're going to own their stock, which means we're going to own their stock a lot longer than they're going to be CEO, and the next CEO and the next CEO. So we're not going away. You need to listen to us. We are your long-term capital to this corporation. We own it more than you do, even though you run it day to day. And you and the board of directors who we elect need to listen to us because we're a consistent voice. We're not just going to quit and go away, which is what they often say, if you don't like my company, then sell the stock and go away. And my answer to them is no, we're not. It's true, we may own less during some times and more during other times, but generally, we're not going away. That's had a profound impact. Most CEOs don't think that there's really long-term capital unless there's a family owner or a large, profound founder. In our case, it's a whole new area and it really has caught their attention. I remember one CEO stopped and said, 'Wait a minute. You're telling me you're not going to sell my stock? You're still going to be here after I'm gone?' Yeah. And the same issues we have with you, we're going to have with the next CEO. Sure enough, we heard from investor relations the next day that they wanted to establish a better relationship because up to that point, it had not been good. So I think we're getting a better voice. Institutional investors are singing together so we're a louder chorus and I think that's powerful. Because individual solos are nice, but CEOs can divide and conquer. But when they hear a loud chorus of voices, they have to pay attention because retail is waking up and starting to vote alongside us. We put out our votes and let everybody know. So I think we're trying to be very good corporate stewards because I want these companies to survive. If I'm going to own them for 30 or 40 years, I want them to succeed. And I'm long-term, so I don't care about 91 days. I want them to succeed 3 years, 5 years, 10 years. There's amazing stories of 120, 200-year-old companies that suddenly get destroyed and disappear. That's really sad. That shouldn't happen. Companies need to adapt and survive and we want that long-term. It's good for society. It's good for us. We're very loud, vocal, but I think a solid business partner with corporations, with other institutional investors. Many of the people you mentioned that you've got in this lineup, we're good friends with and we talk to regularly. They're experts in their local markets and sometimes they'll take the lead and we team up with them. Sometimes we will take the lead and they team up with us. But how a company behaves and makes its money, I want them to make money, but how they make their money, I want it to be very long term. I don't want them to cut corners just for short-term profit. That doesn't do me any good. I need to make money next year and the year after that. We tell CEOs all the time that cutting corners to make a return, if you're thinking and 91-day segments, knock it off. You need to think beyond your career horizon, and that's hard. CEOs’ careers are typically four to six years, and we're going to own it longer. People get pretty worked up nowadays about the initials E, S, and G. But if you think of it as sustainability, long-term corporate profit, I often say forget the initials. We're getting lost in acronyms. Long-term business risk, that's what I care about. Long-term business risks, and if you asked CEOs in their language, their eyes are absolutely focused. They hire consultants to help them understand those long-term business risks. Boards measure it and look at it. And my answer is yes, I can translate almost all of those into E, S, or G issues. They just, again, get lost in the acronyms.

Simon Brewer  

Well, I think you have provided some really terrific insights into not just how you operate, but how one thinks about very long-term stewardship of capital. So I'm just going to ask a few closing questions, if I may. What advice would you give to a 20-year-old Chris Ailman?

Christopher Ailman  

Eat better, don't gain weight, exercise more. And I would say my God, take care of those knees. Don't ever ski again. That's a challenge because I'm not 20 so it's hard to have that perspective. I do mentor a lot of the younger staff. We have summer interns that I teach on a regular basis. I'm still a big fan of institutional investing. I think that's an exciting career. It suits me because it's long-term. I often tell young people, the first thing you actually have to do is really figure out who you are. Come up with three or four things that in your life define who you are, which is awfully hard for a young person to picture long term. What do I want to be known for? What's going to be the most important thing to me personally? But list those four things, don't forget them, keep looking back at them because you have different pressures in life, and oftentimes, you end up sacrificing what might have been your main goal. You just want to keep your eyes on that long-term. I think sustainability and long-term investing are absolutely wonderful careers. Certainly, there's no question to a 20-year-old, the biggest megatrend that is going to impact their life right now is going to be climate change. The second is demographics but the first is going to be climate change. And they absolutely have to learn it and understand it because we're going to have stronger weather storms, droughts, rain, hurricanes, winds, temperature. Everything's going to get more extreme every year, unfortunately, without slowing and probably accelerating. The second thing is demographics. If you're 20 right now, you're at the end of an enormous population boom. You need to understand that demographics is destiny and study that. And I think the other thing that they would want to learn or understand better is geopolitics. Not enough people travel the world and see the world. Many of the people, particularly in the United States, are way too insulated. But I think I would say travel the world, understand history better, and that may help you understand China and the US because the relationship of China and the US in the next 30 years is going to be absolutely profound.

Simon Brewer  

As I said, before we started the interview, we were lucky enough to have General David Petraeus is out today, which will be a few weeks hence when your episode is released. But in terms of talking about the geopolitical map and that very specific question of how competing political philosophies with China and the US coexist, I think he does a great job of explaining those tensions and solutions as well. And my final question to you is that this business, although you've done a very good job overseeing CalSTRS, can at times be very disheartening when the performance is into your face and things aren't going well. How have you dealt with those periods?

Christopher Ailman  

I get on my knees. I would tell people and I do tell the young people that losing other people's money is actually by far the toughest thing to do. It just hollows you out. It hurts in the heart. I remember '08 vividly as a black hole of my life. And I remember talking to the staff about we're going to get back on top, we're going to dig out of this hole. Asking people to commit, that's one thing is to look on that. Another is to understand that it's going to happen. This is a business. If you look back in history, all the way back, US stock prices all the way back to the 1860s, global stocks in some markets longer but most, less so. You know there are going to be air pockets, potholes, where suddenly, the floor drops out. But you also know on the other side of those, oftentimes, you're going to recover. It's going to take some time, but you will recover so you can dig yourself out. Those potholes, you know the analogy that the stock market drops down an elevator shaft but it climbs stairs, they're fast, they're furious, they're unbelievable, but you have to keep your wits about you. As Warren says, when everybody is greedy, be frightened. When everyone's frightened, be greedy. It's incredibly hard to do. It sounds silly, but it is so hard to do. And I think of that. Even right now there's geopolitical risks around the world, central banks around the world are raising interest rates, we’re fighting inflation, everyone's predicting a recession in '23. So are we going to have one of those pothole events? My team is already trying to build up cash to think of the buying down, buying low, the opportunities, which is great. It is the biggest challenge. It's so hard. Again, I can't say it enough, it takes the breath out of your lungs but you have to think long term, you have to get back to the basics of what you're trying to do and achieve. But again, I'm making those subtle course corrections, batten down the hatches, and then start actually coming in and buying when you realise there's maybe a little stability, a little light on the horizon. But then when everything is sunny and wonderful, you'd actually find that's many times when I'm the most nervous. When everybody's having Mai Tai on the deck, I'm looking around for the clouds on the horizon.

Simon Brewer  

Never as good as it seems or as bad as people fear. But anyway, that was a great place to stop there, Christopher. Thank you. Two pieces of your advice I'm going to summarise as we always do. If you're young and thinking about careers, get your arms around those megatrends of climate change and demographics. And number two is the most important thing when people get overly absorbed in the whole ESG debate is if that you're providing long-term capital, it's the sustainability of that business that is absolutely key. And I think that is often overlooked as well. With that, Christopher, I'm going to say thank you very much again. It's been great talking to you. I know you've actually got some bad weather in California so maybe we're more like London today, but this has been terrific.