Free Money Podcast S02E05 Transcript

A conversation with CalPERS' Marci Frost

This AI-generated transcript has been lightly edited and condensed for formatting, but is no substitute for the actual recording. Click here to listen to the whole thing.

Sloane Ortel (00:10):

Welcome to the free money podcast. It's where you get the Brooklyn Bay area consensus about institutional investing that you desperately crave. And I could use a consensus right now. Things are pretty crazy.

Ashby Monk (00:20):

It is crazy. Imagine if money really could talk, what it would be saying about this week?

Sloane Ortel (00:28):

Stop probably, I mean, like what are you doing to me guys? This is too much.

Ashby Monk (00:34):

It feels like whiplash out there.

Sloane Ortel (00:36):

I feel like, you know, a lot of journalists that I know have talked about how insane it is to try and come up with a consistent characterization for the markets. You know, cause like on the one hand you have like a 6% off day. And then on the other hand you have the former CEO of Enron setting up like an energy trading platform.

Ashby Monk (00:54):

Yeah. There's some, there's some wackiness going on out there. It's hard. I don't think anybody's doing a good job of explaining what's going on except for the people who say that these public equities markets, first of all, went so high, because there were no other good alternatives as in you either put your money in the public markets or you just, you know, you're basically wasting any opportunity to make any money anywhere else. But beyond that argument, I don't see a lot of good arguments for why we've seen the big ramp and now are experiencing some more downside volatility.

Sloane Ortel (01:31):

Yeah. I mean like one of the crazy bubble indicators out there and like I, you know, I use the term bubble with like seven asterix. I'm not calling a bubble, I'm just saying one of the indicators of froth. But Social Capital has a SPAC out there like a special purpose acquisition company. So they floated this thing and the purpose is to like buy some company to be defined in the future trades as IPOB and it's trading at a 10% premium to its cash. So the idea is that whatever these guys are able to buy is going to instantly be worth 10% more than the cash that they pay for it.

Ashby Monk (02:11):

Geez. Yeah. Well that was like Hertz. The big Hertz ramp up. It's in bankruptcy and they were going to raise an extra billion dollars in equity. These are like the little signs that things aren't, aren't looking so hot and Oh, by the way, we're kind of entering another tick up for a lot of States on the COVID. So it seems like the markets are reacting to COVID to be honest, like when the news is reasonable, it goes up like crazy when the news is bad, it goes down like crazy. That does feel like probably a good explanation for what we see.

Sloane Ortel (02:46):

Yeah. Well, we've got these, this you know, whatever it takes kind of situation coming out of the fed now. I have a friend whose partner makes YouTube videos of like technical analysis and that partner is up like 400% in the last three months. And is like the ultimate short term investor, like, but you know, I mean, you can't do that if you're like a big long-term investor, right? Like how the heck are these people like dealing with a situation where like everyone's nephew is like smoking the indices...

Ashby Monk (03:20):

Wouldn't it be amazing. If we came up with some baloney technical analysis that we put into a YouTube, that was like the, you know, the alchemy that most technical analysis is we came up with the free money elixir related to picking stocks and we would probably be just as good as anybody doing like true technical analysis, no offense to the technical analysis people, I guess I'm offense, but it's pretty yeah, it's a little bit like magic. Right. It seems legit, but there's something behind it.

Sloane Ortel (03:52):

I got into it before fundamentals, TBH. But that's just because it's like reading rune stones or tea leaves or something,

Ashby Monk (04:04):

You are literally reading tea leaves. And you're like, okay, today's the day.

Sloane Ortel (04:08):

Yeah. It was a part of my witchy phase. But like, let's say you're an actual long-term investor. Yeah.

Ashby Monk (04:16):

Then you don't do technical analysis, right?

Sloane Ortel (04:18):

Yeah. Like maybe like you have your niece read, read the tea leaves for you on the side or something like that. Mmm. But yeah. What do you do?

Ashby Monk (04:27):

It's an amazing time to be a long-term investor. If you look at the way these funds are designed, they're designed to take advantage of moments like this through something we call re-balancing, disciplined re-balancing, where we set these target allocations to different asset classes. And as those asset classes breach different thresholds, like my public equities allocation goes too high, I'm supposed to kind of re-balance and you don't have to re-balance to the, you know, the average allocation you can re-balance to the kind of edges or you know, the limits. But the point is, you know, as you're breaching these thresholds, you're selling high and you're buying the other asset class that is under priced. And you're kind of getting back to these central long-term strategic asset allocation targets. And just doing that in a disciplined way makes you counter-cyclical and makes you often a better performer.

Ashby Monk (05:26):

But the reality is that implies that you have a couple of really good things going for you. First, you have a board who can kind of hold the line and not lose their S H I T in the midst of a crisis. And you have a staff that can kind of see through and maintain the strategy. The staff part, you have to have kind of really sophisticated portfolio tools. Like you have to know where your portfolio is today. Like what we would call GPS portfolio GPS, what do we hold? What are the prices of those things? What are the risks inherent in those products? Can I get liquid? You know, if we can get the GPS of our portfolio and we can start to think about things like, what are my unfunded commitments? What are my cash needs? We can re-balance in ways that are really smart. So that's the first thing on the staff side. The second thing in terms of good governance, you need a board that like understands that their job is long-term strategy. And like the worst thing they can do for the fund is to jump in here and say, Oh gosh, we should be getting into cash. You know?

Sloane Ortel (06:31):

Yeah. Like market timing advice.

Ashby Monk (06:34):

Exactly. In a prior episode, we talked about how hard it is to time the markets. It's almost impossible. So when you see boards being like, Hey, we got to get cash. This is catastrophic, you know it's a recipe for disaster. And so part of the reason you see it happening, it goes back to the staff, like, did they understand the liquidity needs of the fund? Had they run the scenarios and kind of talked to the board about what certain scenarios would mean in terms of draw downs? You know, if you have all these unfunded commitments, and those commitments that are coming due, these crisis can kind of reveal all these things that have not been managed properly.

Sloane Ortel (07:16):

Everyone's a long-term investor until that happens.

Ashby Monk (07:19):

Yes, exactly. That's exactly right. Like we're all crazy long-term until we need to get cash to meet some capital call and then we're like desperate for liquidity.

Ashby Monk (07:28):

And then the final thing is leadership. Like some of my colleagues at Oxford have written entire papers on like how leadership is the single most important thing for governance because the CEO of the pension plan is managing the stakeholders. They're setting, you know, the kind of, they're not technically setting the agenda for the board, I guess that would be the chairperson, but they're managing up. They're making sure the board isn't, you know, doing silly things and they're keeping them educated and apprised of all the things going on. And at the same time, the CEO is lobbying the board to make sure the staff is resourced and can kind of manage through crises with that portfolio GPS I was talking about. And so leadership is, is really the critical piece here. And I imagine strong leaders are probably feeling like they're they're gonna crush it through this crisis and leaders that haven't been empowered or kind of are being second guessed by the board. Aren't feeling too great right now.

Sloane Ortel (08:24):

Yeah. But like, I mean, that's the kind of thing that like, people don't usually talk about, you know, I mean, like who's going to get, who's going to get on a podcast and be like, ah, I dunno.

Ashby Monk (08:35):

I mean, I feel like we should figure out if we could talk to a giant pension fund CEO and just ask what's it like, like how are you managing, you know, have those kind of long-term strategies in the midst of the short term reactions?

Sloane Ortel (08:54):

Let's get the most giant.

Ashby Monk (08:54):

The most giant would be CalPERS. Should we see if we can call CalPERS?

Sloane Ortel (08:59):

Yeah. Let's call Marcie.

Ashby Monk (09:01):

Let's call Marcie. See if she'll pick up. Let's see if she'll pick up. Don't ignore us. Hello. Hi.

Marcie Frost (09:15):

I agree to be recorded. I gave you my personal number because this phone has some problems. I took off the case though, so we should be okay. Just in case.

Ashby Monk (09:26):

Sweet. Well, we hear you great Marcie. And as we like to tell people they're quasi-live, which means we could go back and edit things. If you say something too crazy, that would be on the front page of the New York times. But we we don't normally we don't normally edit. So the reality here is we've just been chatting a little bit about how volatile the markets have been over the last three months and how pension funds in theory are designed to be these long-term entities that can re-balance around crises and kind of really do a good job. But this period over the last quarter has felt especially kind of difficult. We've got this, you know, global pandemic. We have a national crisis on race going. Somebody told us about a murder Hornet craze. At some point, how, how would you as CEO of CalPERS talk about managing the long-term in the midst of so much short term volatility?

Marcie Frost (10:27):

Yeah. One of the things I think that we've gotten far better at and frankly, I think it was many lessons learned from the 08-09 financial crisis is that you have to plan, you'd have to run that plan through various scenarios so that at the time a crisis hits and in this case it was a health crisis, that you're not reacting out of emotion, you're reacting and following a plan generally, right? No plan is going to take into consideration every possible thing that could happen in the markets or every possible thing that could happen in society, but one of the things we feel really good as we look back over the last 12 months or so we have been leading the board through these draw down risk mitigation scenarios and really telling them about the tabletop planning that we had been doing. Doing. We have a new newer CIO.

Marcie Frost (11:16):

He's been here almost two years now. These are strategies that Ben has been bringing into the investment office. So we are longterm investors. We can have our capital play out over decades as long as we're being rewarded appropriately, appropriately for that illiquidity. So we think about long term, we pay out $24 billion out of this $400 billion portfolio. Every year we do have to consider the have term real short term matters, right? Are always on our minds. In this case, because we had planned better. 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. You also find those opportunities short term, but we have short term risk in the system. A well-funded, you know, we're roughly 70% funded. And when I say we're not well funded, I would love that number be above 90%. And if we were about 90%, we could actually take on a little more risk, but we have to carefully manage the risks.

Marcie Frost (12:42):

Draw down risk is really important for us to consider. We don't want this fund getting close to that 50% markers, very difficult for a fund with our scale and size to recover from that number. So we have short term risks that we have to address and always have, as we think about long-term strategies.

Sloane Ortel (13:00):

That's awesome that you were so well prepared with so many of those plans, like just in a drawer to dust off are there short term lessons as well as short term risks? Like what, what sort of aspects of how you run CalPERS might change as a result of the last three months?

Marcie Frost (13:14):

Yes. So we were able to get basically almost 2,500 employees working remotely within about two weeks of the pandemic, and the investment office had even better performance around that. So we have been watching, you know, like many others watching what was happening in China as the, you know, the health crisis was hitting there, what was going on with the markets, what was going on with the companies there. We had started to work within the organization, whether that's our information technology department or procurement department. But essentially day one of this crisis, the investment office was working remotely with 100% productivity and performance. So they were able to do all the trades. They were able, you know, they were meeting every morning as the management committee to figure it out were there short term opportunities in the market that they wanted to exploit or take advantage of. And, you know, that's something I think that the investment office and the leadership of that office has been proud of, that there's been no disruption in the work of that particular department.

Marcie Frost (14:20):

And so, you know, one of the things that we've thought about, which I know there are other companies who have thought about this and have actually implemented a non brick and mortar, if you will, but remote strategies of having their workforce primarily work in remote locations, whether that's from their home or an alternate location, the management attitudes about whether we thought people could be productive there, whether we thought people could actually get the necessary work done if they were working from home and didn't have that management oversight, if you will. This pandemic has shown us that our productivity numbers are actually higher. And we have mechanisms where we can track how well our teams are doing from a productivity standpoint, whether that's our customer service division, whether that's our actuarial office, our legal office, our health plan office. So that's something we will factor in as we think about workforce planning into the future post COVID-19. 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. Yeah. We're excited about that. Our team,

Ashby Monk (15:44):

You didn't even put a date on that Marcie. You just said, we're good.

Sloane Ortel (15:48):

Forever. Yeah. That's awesome.

Sloane Ortel (15:51):

That is a change. Yeah.

Marcie Frost (15:57):

It's a significant change! Management has to think about how do you have oversight over performance and productivity without walking by someone's workstation to make sure that they're working. So, you know, for the people who will have this full time remote work you know, we'll have the ability to measure it. We have to be able to measure the production of it. Know we're a trust fund, every dollar that comes out of that trust fund to pay us, we have to show the value to that expenditure. So yeah, our team is excited, our management probably has to go through some additional training on how to manage a remote workforce, but we're not the only ones doing this. Many companies have done it for years. Certainly contact centers have done it for years, but it would be, you know, one of the first places that we would look to do this. We're running it today. The way that we offer member service is also likely to change pretty dramatically. We had to shut down all of our regional locations throughout the state of California and what we have replaced those in person appointments with is either teleconference or through a web app. And you can have, yeah, a face to face exchange through these virtual meetings, and I believe the resulting exchange is of equal value to what it would be were have person to person. And we think that that's going to change the way that we do service delivery to our 2 million members here in the state of California.

Ashby Monk (17:17):

That's amazing. If you get, I think you just inspired me. Sloane, I'm going to make the announcement from now on the free money podcast is going to be remote.

Sloane Ortel (17:23):

Yup. This is market-moving news, you heard it here first.

Ashby Monk (17:24):

If you want to reach out to us to talk about that, if that's the news you want to cover, just let us know. In all seriousness it's incredible that you can do that. But what it tells me is you're getting very good at measurement metrics. And how you integrate that into a, you know, an operational context. Because if people are at home, you're not walking by to say, you know, are you sitting at your desk? You need to build metrics and you need to integrate that into compensation incentives. And one of the things we're hearing all over the place right now is it's this notion of ESG and sustainable portfolios. And we've seen in the first quarter that, that approach, that investment approach is more resilient in these times of crisis. They're outperforming. And I guess one of the questions I wanted to ask you, but I'd love to like let you free form it, given that you're doing this, this work from home stuff is how do you get this data that is normally qualitative and based on processes and get it kind of last mile integrated into decision making. It's moving from a process to a data-driven form of oversight and governance. And I'm just curious if you guys have an internal policy around that or you've developed any thinking,

Marcie Frost (18:47):

Right. So our entire attitude about the way that we make investment decisions or the way that we make decisions about workforce planning generally is around data. So one of the items, that when I first came into CalPERS, one of my commitments to the board when they hired me is that I would create this enterprise performance management system, which would track all of the core processes within CalPERS, right? More like a balanced score card that could be reported out to the board on a quarterly basis for all the important core work of the organization. So we do that. We're very public about it and very transparent about it. It's on our website. But when we factor that into our thoughts with ESG, we've been, a real leader, I believe, a best practice leader, if you will, on environmental and social and governance issues. And in particular on the E and the G we're still working through some of the framework around the S, but on the environmental side you know, we have really restructured our investment office into what we call our policy advocacy and then integration.

Marcie Frost (19:50):

So the policy and advocacy work really gets ahead of the investment work and the quantitative analysis that goes along with making an investment decision and data is always going to be, you know, our friend and understanding one, the risks that we're taking. And we believe that CalPERS, and we're not alone in this, but every institutional investor, we have to find better ways manage and mitigate the risks. So we cannot do that if we don't have the data. So I know we want to talk a little bit about, you know, data and transparency as well, but, on ESG, we've had some criticism about the way that we've handled ESG. We're getting ready to issue our TCFD report on Monday, June 15th. And that's, Hey, you know, the carbon, basically the carbon prints of the entire CalPERS portfolio, as it relates to maintaining some of the agreements that we made to the Paris accord.

Ashby Monk (20:42):

Wow. Good for you.

Marcie Frost (20:42):

Yeah. So we see three key risks, the CalPERS, and the first one I know Ashby, you, and I've spoken quite a bit about, but the first risk the system is getting a 7% return over decades.

Sloane Ortel (20:54):

Oh, what is that hard?

Ashby Monk (20:56):

That's hard? Just joking. We know it's hard.

Marcie Frost (21:00):

Yeah. Ben would be really happy to talk with you about that as well, because you know, getting, getting a 7% return while you had $24 billion of your assets going out of the portfolio every year to pay benefits, 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. So the please we have seen that some of the lower carbon indices are performing well, as you indicate recently, but we also need to look at the long-term macro trends. We're much more concerned about long-term macro than we are short term shocks in the markets and to the system, but on the policy and advocacy side we, we believe our voice really does matter.

Marcie Frost (21:52):

And we have to engage on these matters, whether we're sitting on the SEC investor advisory group around disclosures, whether that's, you know, I'm directly involved with United nations, on their sustainable development goals, I'm also a member of the net zero asset owner Alliance, and helping to create this cart, climate action, 100, which really came from data, right. Came from looking at a portfolio and understanding that about a hundred companies in the portfolio were the largest emitters of carbon. And so, creating along with some of the other institutional investors around the world, creating this engagement platform for climate action 100, I think, has really been helpful. It's a private engagement. We're not trying to publicly embarrass these companies we're trying to really understand, are they mitigating these risks? Are they really working towards that's net zero by 2050? And we think that there's been great success there. You can look at some of the oil companies and some of the independent directors that have been appointed onto those companies. We feel really good. That engagement is actually working, but you'll see it. I think this is an opportunity with, with the pandemic to hopefully expedite, and quicken the pace on some of these disclosures around human capital, around carbon pricing, around lobbying activities, frankly, you know, we, we need to know you know, what companies are doing in those areas so that we understand the risks. We know how we're deploying our capital and does it make sense for the long-term as well as short term.

Sloane Ortel (23:25):

That's really interesting. I mean, like you mentioned so much stuff that's happened in the last 18-24 months. I'm wondering like if a framework like that, the sustainable development goals, the SDGs, okay. Those were born in 2012. Do those, do those still capture adequately the scope of need that you see? Is that a defining framework for you?

Marcie Frost (23:50):

Yeah, I think we see it as a pension fund. We believe that they're inclusive. As long as they also have a framework around sustainable financial markets, volatility is really troubling for a system and troubling for CalPERS in that we're not completely funded. And so the volatility can be quite difficult. It sends a shock to the members of the system or the retirees of the system when they see the fund has lost $40 billion and they start getting concerned about their benefits them, you survive this correct market, but we do believe that they're inclusive, but we, we also want to make sure that there's a lot more focused on sustainable financial markets and getting, you know, this is not something CalPERS can necessarily solve on its own. We need all asset owners. We need asset managers. We need governments to get involved and this cannot be realized without government asset owners cannot solve all of the issues related to the SDGs.

Marcie Frost (24:53):

Yeah. Number 13 in particular addresses one of the key risks that we have. So, you know, 7% return, it's the employer, our 3000 participating employers in the system, their ability to continue to pay the contribution rates, whether that's the normal cost of the plan, or that that's the unfunded actuarial liability. And then the third key risks is related to climate and right. Number 13 directly spot on with us. And that's the one that we've decided to have more resources allocated to it. My direct involvement, but certainly have a team that's helping me there as well. But yeah, I think they're inclusive. No one entity can solve the problems within that framework or know the goals that are associated accomplished without a lot of work together between asset owners, asset managers, governments. And there has to be some money. Money has to flow into this. You can't solve this without funding and for CalPERS finding the right funding, the right investment opportunity that meets our expectations around returns has been a real challenge for us, frankly.

Ashby Monk (26:03):

Yeah. I think in hearing you talk about it, it's like palpable to me that you have to straddle this, this line, which is you have a fiduciary duty to meet the 7% return target and you have this incredible outflow that's happening every year you have to pay pensions. And there are sort of broader longer-term issues, which we could define as risks that threaten the portfolio, but then there's a whole other series of issues that could end up feeling politicized. And, and for those that aren't as familiar with pension fund governance and how pension funds operate, for a long time, we've designed the boards of directors and the governance to avoid politics influencing decision making in a way that reduces return or doesn't address risk. So we can all make the case about climate change being integrated because of the ability to manage a long-term, risk, a hazard to the assets you're buying.

Ashby Monk (27:02):

And, and oftentimes pension funds will get a huge amount of pressure from politicians to do things that they need to have the courage to say no to in order to maintain that fiduciary duty. Now you can tell there's a long lead up here at Marcy. I know in the last quarter or so you guys have been getting a huge amount of pressure from a certain political party in Washington DC about China. And in fact, there's been pressure placed directly on you. And what I would describe as unfair and unfounded statements made about your wonderful American citizen, chief investment officer about divesting from China and, and moving out of China entirely. And frankly, to me, it feels like that's a politicized request. And so I guess one, I just wonder what your views are on all that. And two, should we take it now that the politicians that are basically pushing you to divest from China, think it's okay now to include politics in decision making?

Marcie Frost (28:13):

Yeah, that's a great question. First of all, CalPERS legally invest all assets of the portfolio, including the investments. And we have a very small exposure to China, but you know, most of that is done through an index provider and it's the China A-Shares that have really come under scrutiny. And in particular for not only CalPERS, but also for the thrift savings plan, the federal defined contribution plan. And what they were trying to do is add an investment option to their investment lineup that would allow participants to invest in emerging markets, which would include China. And so, you know, the personal attack I'll touch on that real quickly on our CIO, who is a us citizen, was really troubling and had quite an impact on him, he is a great investor. He is a kind human being on top of it. And that attack was really pretty difficult for him.

Marcie Frost (29:12):

And, you know, we rallied around him as much as we could and rallying around meaning we needed to get data out there about the way CalPERS invests. We invest again through these index providers in this case MSCI was really the one who was coming under more scrutiny at the time. I haven't spoken about this, but it doesn't feel any different frankly than any other demands to divest assets from the portfolio. We've been before congressional hearings where we've taken criticism that we've made certain divestments and then - not CalPERS - but there's a belief plans have been asking for federal bailouts. We've never asked for a federal bailout, so we would never ask for a federal bailout. But, you know, I've had to address directly with the media or, you know, on a television interview, about California needs to, you know, to wake up that these developments are hurting your ability to get that 7% return, hurting retirement security. And this request to me, it was really just a request to divest.

Marcie Frost (30:14):

I didn't see it any differently, but it wasn't any different than any other requests that we get from any other entity. It's just happened to be a member of Congress. It happened to be in, on, on a television channel and it was done in a really horrific way. When you have someone who's really trying, he was hired because is an investor. He was hired because I needed him to help me get this system into a better place. And we had a 10 year plan, we have a 10 year plan to move the system from this roughly 70% funded to get us into that 90th percentile, but even more importantly, to improve the chances that we can hit our 7% return. Everything that he's done since he's been here has been about those two priorities, as well retooling our investment office to ensure that our investment team also has those opportunities has the work necessary and the talent we need to execute on the strategy.

Marcie Frost (31:13):

So, any divestments that the system has gone through, we really have not done divestments in the most recent history over the last three years. I'm not a fan of divestment. I'll be honest about that. Okay. That if we find an asset that no longer fits our strategy, that's an investment decision, it's not a divestment decision, right? Any divestment that has happened historically for CalPERS, has to hit or meet the fiduciary duty of the 13 trustees of the CalPERS board. So every divestment that tobacco, or coal as two examples, they have to be revisited every five years and they have to go through a diligence to make sure that their fiduciary duty is still met by not investing in that asset. Yeah. Yeah, you're right. If there's a problem with a particular Chinese company or there's a problem with investing in China generally, whether that's the a-shares or otherwise, the federal government has the mechanism to address it.

Marcie Frost (32:11):

Through the Office of Foreign Asset Control and we as, as well as every other pension system is in compliance with OFAC. And I had an opportunity to go and talk to some people at the time that all of this was breaking. It felt so personal to the CIO, but also, you know, why is CalPERS who is so willing to divest here, why aren't they willing to get out of China here? Going and explaining this to, you know, a number of the policy makers, i think we made some headway there. I think they understood where we're at, that if you want to solve this problem, it's within Congress or the federal government or the administration's ability to solve it, but like them and like us it's hard to say you're going to divest from a single company. We use data. We don't have access to the data, certainly, that the federal government has access to, we really do believe and take advice and guidance from the Foreign Asset Control. So the way we've addressed it, politics can be really difficult. It is a tough part of my job to keep politics out of the portfolio and to insulate the team, insulate the investment office and away from politics, driving investment decisions. But that doesn't say, we shouldn't be questioned, it doesn't mean that we should not be transparent about the way we're in debt and allow people to be critical of the way we're doing it. If we don't have an answer to why we're investing, then you know, maybe we should be looking at whether that's the appropriate asset for CalPERS long-term.

Sloane Ortel (33:43):

That's fascinating. I mean, I think like as we talk about data you mentioned your work with the sec and like, I, you know, we hear from time to time about quote unquote enhancements and modernization of the sort of disclosure requirements that surround all of the companies that you invest in directly or indirectly, which in effect you know, sort of reduce them, right. Shorten disclosure requirements you know, take information away from investors. Okay. Okay. I've heard or been told, but by folks, if that's what investors want and I have a hard time imagining an instance in which that's the case, are you able to?

Marcie Frost (34:22):

Yeah. I mean, disclosure is how we determine the risks that we're taking on. And we have an obligation and a responsibility to do that. We want more, not less, whether that's related to human capital, I sit on a group called the Embankment Project for Inclusive Capitalism, which has a framework for human capital disclosures. And there are many CEOs of public companies who have joined Epic and they're starting to disclose those human capital metrics. And that's very helpful to an organization like CalPERS to understand the risks. And again, long-term decades, long investor. We want to know how these companies are thinking about the business plan, how they're thinking about how do you incentivize your employees. We don't want short term incentives. It's really important to have long-term incentives that really look to the success of that company. Long-Term, not just quarter by quarter. We also want to, you know, we've been very active in our proxy voting. We are very active around CEO compensation.

Marcie Frost (35:25):

That if you cannot correlate that compensation to the performance of the company, which is what we want high performance for that company. Because that's how we get our return. But if you can't correlate it, you know, we're going to be pretty vocal that we're not going to vote against it. If you have an independent director policy, We have an independent director policy and if you have a director that's beyond that time frame, we're going to vote against that independent director. It's extremely important as well. And then, you know, and that's on the governance side and then we've got the climate related financial disclosures and we're going to sit at about 3.5° versus the 2° that is ideal. And we're going to have to answer we're going to need to answer the questions about well, how do you plan to get back to 2°. What's the plan that's in place to satisfy the commitment that was made. We call it accountability because it's just accountability. We're very supportive, we try to do private discussions with the company. I think there was a period of time at CalPERS where we didn't care as much about embarrassing a public company. And that was really unfortunate. That should not have been done, because it doesn't help our discussions actually lead to the outcomes that we want. And I think we've had some good success with that. But, yes. We're going to have demands for data. Data is, you know, how the markets run. They're very reactive to information. We have our own issues around that when we talk about investment strategy. It's one of the areas that we actually can't be that public about, because that information is given to other investors who can implement it at a faster pace. So we're really careful about our own IP, our own investment strategy. We can make it more public and we will, once we've executed the strategy, then we'll make that strategy more public. But it's really important that we have the data, and really it's completely around risk mitigation, not to tell the company how to do the business, but we want to understand how they're conducting their business. We don't have the expertise to run these public companies. We do have a need to know how they're looking at it, how they're managing their workforce, how they're managing their business. And are they managing the risks that they have inherent within the line of business they're operating?

Sloane Ortel (37:42):

Thank you so much for that. I, you know, I just, well, I wonder if before we let you go, we could just ask, I mean, I have a friend who has come to see you as sort of an icon for having a non traditional educational background. And I think I would be in a fight with them if I didn't ask you what advice you had for other folks with that same sort ofa history.

Marcie Frost (38:06):

Yeah. Thank you. I do appreciate that question. I, my best device, and I think i've spoken a little bit about this internally within the organization, as well as outside, but you have to, I call it minding your attitude. You have to be positive. But positive doesn't mean that you're not a critical thinker and you're really challenging, right? The norms and the business norms, and really pushing the boundaries in a way that people can hear you. You have to be optimistic and positive about the future, but you also have to use critical thinking skills to make sure you're understanding where the trouble spots are. But you do need to mind your attitude, people won't listen to you if you begin with, this attitude of, you know, this can't happen or that can't happen without being able to back that up about why you believe that people are much more willing to listen to, you know, individuals who put a problem on the table, and then here's what I believe the solution is. I was always that kind of person. And then the second would be, yeah, be a problem solver, find the problem don't want to deal with and solve that problem. Simply the symptoms of that problem, but fine, the analysis and the data and have the patients to really find the root cause of that problem and solve people need to have solved and nobody knows how to do it. So I think that would be number two. And then the third one, I call it, follow the leader. I, you know, throughout my 35 years of public service. Now, if you can believe it, it's gone by really quickly, frankly, because I've enjoyed it. But you need to find leaders who know that it's their job to help make you successful. Whether that is leadership or that's resources, whether that's tools or coaching for that matter. You know, when I first started out, I was pretty, passionate about things, and you know, I made mistakes, I got a little emotionally wrapped up and maybe my way of doing things and just working for people to coach you through those make or break moments.

Marcie Frost (40:02):

Yeah. So I've been doing this now for 35 years. Mmm. My education did come through many ways and for many people, I owe a lot of my success to the people who I worked with and for over over the years. And I've really always been someone who every day professionally or, you know, something, I feel like if I don't know something that's really uncomfortable for me, I'm going to go out on my own and broaden that skillset. Probably the best example of that when I first became a member of the Washington state investment board, and about a year into that became the chair. There were certain things that were being presented to us that I didn't fully understand. But I took responsibility for my own development, took responsibility for my learning and reached out to people who I knew had the skillset and this knowledge, and one of them. And I've mentioned this individual's name before but Ashby I know, you know him, David Nierenberg, who's one of the investment experts on the Washington state investment board. And I Oh. And the fact that you don't know everything. You may feel a little vulnerable. But you can't solve something if you don't acknowledge that you need some help, I go to this individual and say, you know, I really need to deepen my investment knowledge. And we did that with a series of books that he recommended to me. And then, he would, the evening before the board meeting, we would sit down and talk and it was just really nice. Having people help you and be responsible for your development is, I think, something I've always had access to and have been very appreciative of.

Marcie Frost (41:38):

And it has been a bit nontraditional, you know, 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. I think it's important to focus on what people have. Don't try to, you know, check these boxes. Seek to understand what people's backgrounds are, what the relevant skill sets are. They don't have the traditional, you know, boxes to check and dig a little deeper, try to understand what people really can bring to that job. What you're looking for is individuals who have complimentary skills. You do not want, that same hire in all of your teams. You want people who have different backgrounds, different skills different abilities. And that's what makes us stronger teams. That complimentary skill set that will help you to avoid big mistakes. That tends to be what I focus on. As I became a leader of teams a few years into my career, It was something that I always kept with me. My job is to develop the team. My job is to make sure they're successful if they're successful I am successful automatically.

Ashby Monk (43:19):

Marcie. That was awesome. I mean, first of all, I said, just an incredible, inspiring story, but in addition I think just hearing, you know, your, your trajectory through to now has just been, has just been fantastic. And I feel like the first time you and I met, it was actually an educational event where you were, that you were the chair of the Washington state investment board and I was one of the people showing up to try to teach you guys something. But in the end, we probably learned more from you guys than you learn from us because you're the ones actually doing it. And, and, you know, the tip of the spear on good governance. And so look, your, your candor here has just been awesome. And we just really appreciate it. And, you know, we always try to like make the world of pension funds approachable and fun to people who don't know it. Our dream is that people who listen to this will want to go work for pension funds. And, and I feel like you've just kinda nailed it. You know, like, first of all, I didn't know you were a typist, that's a job that doesn't exist anymore. Ubut how far you've come and, and we're just delighted for it. So,uI feel in like we're in good hands here in the state of California and,uwish you a great future and thank you for the time.

Sloane Ortel (44:31):

Yeah. Thank you so much.

Marcie Frost (44:33):

Yeah. I do remember that time when we first met and it was in Sacramento, I've been to Sacramento, it was an ITPM event and it was you and Jagdeep, who were doing an education session for trustees.

Ashby Monk (44:46):

That's right.

Marcie Frost (44:47):

I remember it. Well, yup.

Ashby Monk (44:49):

There may or may not have been karaoke later, but that's another story.

Sloane Ortel (44:53):

You heard it here. First guys,

Ashby Monk (44:55):

There's the news for the day, Karaoke occurred. Thank you. Thank you, Marcy. Marcy's one of my favorite people, and obviously we knew we were going to call Marcie that was little gag upfront. But, but she's just, you know, in terms of like the ability to manage staff and the board, like you can tell she's just so sharp.

Sloane Ortel (45:16):


Speaker 5 (45:17):


Sloane Ortel (45:18):

And so it was just really fun to hear her talk.

Sloane Ortel (45:22):

And she would have to be too. There's so many times during that conversation where you and I were just kind of like making like excited faces at each other in the video.

Ashby Monk (45:30):


Sloane Ortel (45:33):

And like, just imagining the job that she has, where she's like, you know, in a way the ultimate punching bag. For folks who would care to make, you know, some sort of incendiary comment about pensions.

Ashby Monk (45:44):

That's her job. Her job is to take the punch and keep going and protect the staff, protect Ben protect the other deputy CIOs to get on with the job of making 7% a year. And she does it with grace and, and, you know, she's got thick skin, obviously she's been doing it for 35 years and she came out of politics and she's also been the chair of a board. Washington State Investment Board is an incredible organization. So I think coming from that chair slot into the CEO role also gives her a level of insight into the challenges boards face. So maybe she can come with a bit more empathy than like the typical CEO that used to be a CIO. So yeah, that was fun. I really enjoyed that.

Sloane Ortel (46:30):

Yeah, me too. But you know, it's all the enjoyment in the world. It is time for deer, the deer Ashby segment.That horn, isn't just a great jam. It signifies at the beginning of this segment where we take listener questions. If you are listening to this and you would like us to answer your question in this segment, please send an email to free money and one more taking care of business announcement before we get into this. The free money podcast has partnered with Columbia university's Earth Institute and Beyond Alpha research to do a quick survey of institutional investors about how they're viewing the sustainable investment goals. So if participating in that is of interest to you, it'll be totally confidential. You know, the work is conducted by a friend of the show Mirtha Kastrapeli, formerly a Managing Director at State Street. Very sharp person. There'll be a form in on the podcast's website, Um if you're interested in having that chat, is that enough announcements? So you're ready for a question.

Ashby Monk (47:39):

Well, I love it. Let me just say, like, help us help you, you know, that's, that's the help me to help you, help me to help you kind of like we're here to, we do research and we do research to help people. And so this survey will help do research about, you know, sustainability and investing come get involved.

Sloane Ortel (47:56):

Yeah, exactly. I mean like these conversations need to be had speaking of sustainability and investing this first question is fabulous. So apparently this week, a British petroleum you know, known for being beyond petroleum had some, some of their branding documents and they made headlines for like, apparently their goal is to be more like Greta Thunberg. So how can BP be more like Greta Thunberg?

Ashby Monk (48:35):

That's a stumper. I mean, I'm guessing that question was asked with not a lot written after, but if it, if it comes to like, I mean, I've been thinking about this a little bit because I don't understand what they were going for there if it's like wanting to be a climate influencer, which is, I think the definition of what Greta really is, they are a climate influencer. They're just influencing it the wrong way. So, you know, they're, they're making that whole climate change thing happen faster.

Sloane Ortel (49:06):


Ashby Monk (49:08):

But I honestly, I don't know what the hell they're talking about beyond meat than Greta Thunberg.

Sloane Ortel (49:19):

I would love to be in the room when whatever marketing consultant like brought that in. It's like, so what we want to be, I mean, every branding slideshow is like, you know, you could be like Apple, you could be like, yeah, yeah.

Ashby Monk (49:32):

I know. It's like some, some marketing consultant was just trying to get, have a moment, you know, in the boardroom we think we could be like Greta.

Sloane Ortel (49:40):

Yeah, exactly. It's like, all right, all we have to do is stop everything that we're doing. And you know, even, even including our business travel. All right, next question. Private equity funds are often proud to mention that their investors include police pension funds after, you know, kind of the protests and demonstrations in the last couple of weeks and the violence should we expect that change in the future?

Ashby Monk (50:10):

That question is a really interesting one for me, because the subtext, if you will, is that the police are the bad guys and the private equity are just people who have used the bad guys in order to market the private equity, private equity guys are the bad guys. You know, whenever I, whenever I walk into a private equity fund and you'd be surprised how often this happens. They have like photos of firemen and teachers and police officers on the wall. Like, I literally can't help myself from thinking those are the people you're robbing. Right. Like, and so the answer to your question, your question, I do know that one of my favorite academics Ludovic Phalippou, Ooh, he just put out a paper - I think it is today - about how undeserved the billionaire factory that is private equity has become. And if you look at the performance since 2006 and the compensation that has been captured by this small community of people on Wall Street at the expense of firemen, teachers, policemen it's ridiculous. You know, it's the fee structure and the big private equity funds is the greatest kind of free option for general partners in the history of time. And so I understand the person asking the question is like, cops are bad, private equity, you know, are they going to have cops in their lobbies anymore? And my answer to that is I don't care because I already think private equity is the fact you think cops are bad. Boy, wait till you hear about private equity. You're missing the point here with the cops. There's a lot of good cops. There's no good private equity.

Sloane Ortel (52:05):

We're going to have a backlash against the free money podcast.

Ashby Monk (52:08):

I don't think the private equity people made it this far into the podcast.

Sloane Ortel (52:12):

We're already banned from the Hamptons altogether. All right. So our last question for this week is what adjective describes your preferred form of capitalism?

Sloane Ortel (52:23):

What's yours, what's yours. What is your adjective? So depends on like, like when I'm explaining what I do for a living, which is like notoriously hard to do. Mmm. I say I'm involved in, in Subaru capitalism, which is like when I mean, it's sort of like, we all go to the co op and like yeah. About the environment, but basic capitalist mechanisms remain in place. You know, so I find that useful. Um I think at the spiritual level Camus capitalism is probably where I'm at. Like life is meaningless and we might as well have as much fun as possible to, you know,

Ashby Monk (53:10):

I often use this term sustainable. I know it's not flashy, but it kind of imparts this notion that like the growth that you're generating today shouldn't destroy the future. So that's the first thing. So feel free to make capitalism free market just don't destroy my future. And the other thing about that word sustainable is it's like, it can be defended, like that's one of the definitions upheld or defended, like sustained in a courtroom, you know counselor, you know, I want, I want to like walk around and be like, look, capitalism isn't that bad because in my mind, capitalism is a great engine of freedom and, you know, the rising of boats and all these things. It's just the form of capitalism that I feel like we're pursuing today. That is, you know, crony, capitalism,

Sloane Ortel (54:03):

Crap capitalism.

Ashby Monk (54:05):

Yeah. Like, you know, for all the reasons we've heard on the last few episodes, it's, it's a fairly crappy form of capitalism. And it's partly why we want to empower these longterm investors to help usher in an era of sustainable capitalism. So yeah, that's my word.

Sloane Ortel (54:22):

I love that defensible capitalism basically. Right?

Ashby Monk (54:26):

Like don't tear everything down to get rich today. That's the first kind of version of the second one is that we can like held our heads high and defend it. When people come to us and say, we should be communists. Like I'm annoyed that we even have to have that conversation like communism, you know, you're going to lose your rights to do whatever the hell you want to do. Yeah. If we, if we hadn't been like, if certain [inaudible] firms hadn't been making stuff. Yeah.

Sloane Ortel (54:54):

Private equity guys, billionaire factories. Oh man. Well that about does it for us this week, guys. Do we love them? I think lot of them, if they made it this far, we love them big time long one. That's true. But if you're listening and you love us back, please leave us a, a review on your favorite podcast, factory or application or a website. Mmm. That would be a really nice thing. Yeah. But yeah. Bye