Notes from UTIMCO Board of Directors 20th Anniversary Event. Created in March 1996, UTIMCO is the first external investment corporation formed by a public university system and oversees investments for The University of Texas and Texas A&M Systems. You can find the UTIMCO meeting audio stream here.
UTIMCO 20th Anniversary Meeting Notes – Ray Dalio
- People are drawn together by common values. Meaningful work and meaningful relationships through radical truth and transparency. Bring uncomfortable things to the surface. Meritocracy – find the best answer. Thoughtful disagreement. It takes deviating from the crowd. “We’re misunderstood because it’s a distinctive culture.”
- A beautiful deleveraging – if growth is higher than interest rates, we pay off debt with the least amount of dislocation. Productivity determines how we live, how fast it grows is most important. Short-term debt cycle is the business cycle, 5-8 years. Long-term cycle – lowering of interest rates: causes asset prices to rise, makes items cheaper to buy on credit, and reduces debt service payments. That ends at zero interest rates – monetary policy 2: CB makes bond purchases and buys another financial assets, going up in price, lowers future expected returns - wealth effect. Becomes decreasingly effective. Greater currency vol. This all happened in the 30s.
- Japan hit zero interest rates 20yr ago, shooting for 2% inflation and can’t. In Europe, zero interest rates and economies are depressed. US is less-far along. Economic restructuring and a balance of payments challenge. Requires a debt restructuring. It’s a heart transplant. Pushing on a string – not as easy to stimulate. Tools? Range between coordination between monetary and fiscal policy – run a deficit – to helicopter money – CBs put money directly into hands of spenders. In 1930s it was veterans. Depends on political environment. Emotional people choosing emotional leaders is natural – happening elsewhere too. China is the least risky politically.
- Everyone is long, everyone is leveraged. You need balance in asset classes. “All-weather” / risk parity, etc. Tell me what econ environment we’ll be in, I’ll tell you what assets to be in. Balance – knowing what we don’t know, is a good thing. Alpha is a zero sum game. A lot of people think they can do it, but a game very few people can play. The ones that can play are probably closed to new investment.
- We can hold illiquidity risk in an endowment model. Advantages? Look at premiums. Avg return of private equity manager = to public manager but top quartile much better. Risk premiums have moved around a lot, pay attention to where they’re moving. We’re not in PE / illiquid assets because the ability to change our mind has been more valuable than those risk premiums. They’re often not as good as thought to be.
- Inflation / Deflation: put $$ under your pillow, so start looking for alternatives. Other currencies aren’t popular, gold isn’t popular. With negative interest rates I think you get Japan type situation – stagnancy. Won’t see inflation near term. This isn’t 2008; it’s containable.
- Extended period of an experiment. Unprecedented environment, no one was around 70 years ago. We are 6-7 years into in expansion. Uncomfortable situation – if things get weak, what are the tools? Not an easy adjustment process. Business cycle point to late cycle – credit markets, M&A, flows into liquid large cap. Yet housing performing well; difficult for investors to read. Macro driven markets – tough time for fundamental stock pickers. Long-term viewpoint, stable capital, ability to go long and short is essential.
- On coming to activism late-cycle: one should be willing to own a biz all through the cycle.
- My top mistakes – not making tough decisions quickly. Allowing mediocrity to exist in a high-performance organization, selling / not selling. You learn the benefits as you reflect. Force yourself to do things you’re naturally uncomfortable with. Build a portfolio that suits your temperament.
- People in our seats think they get to be an asshole, but the cost of that is high – employee turnover, not being a team, self-focused, all high. Need respect, a healthy debate. Comp system based on a piece of the pie. Critical for us to get through tough times together.
- Growth of ETFs, quants, etc. that is less micro in nature. You need people willing to understand where perception is, willing to have a unique perspective about that. No longer good enough to have a quality business and a great stock and just think it’s worth more. Biggest skill-sets: desire to win above a desire to be right. Dangerous investors are those who want to be right more.
- People are missing that the world isn’t ending, particularly in the US. Companies in general are termed out, even leveraged one. You have record high margins, people are concerned because of cyclicality. In free-fall, there’s no elasticity to demand – can’t raise revenues by raising prices. We’re looking for industries w/ consolidation where there is elasticity. Most of expected return is in the risk-premium now. With lower rates, duration has extended - % move in a stock for a change in assumption is much higher now. 20% isn’t that much of a move in context of long-duration asset. Some of 20-30yr bonds are down 50% with credit quality not changing much. We have to get used to that; tweak strategies to capture vol rather than being impacted by it.
- After the stocks you have invested in your fund, the next most important thing is who is invested in your fund. We’re funding our investments with our assets. We insisted on lockups. Can’t take advantage of opportunities without it.
- Collegial atmosphere. Performance in interviewing, not just stock picking. Dinner at the end of the interview – group setting, get to know them. Ask questions that don’t come out in the normal interview.
- Hardest things to find in people – look past the quarter, see around the corner. Takes up to a year to break some of the habits from people being told to dump a position because of a bad Q. If someone gets a stock right for the wrong reasons, not a good thing; can’t count on that luck continuing. Develop deep industry knowledge and see where things will end up. If you’re right and got in too soon, build a bigger position rather than getting out.
- We look for riskier things – harder for smart people to become comfortable with. In commodity industries, we look when there’s blood on the streets and look for the survivors – those who won’t come to the capital markets. We look to rule out certain possibilities. The other guys go out of business first, the industry consolidates and the survivors are stronger.
- Trend of more activism good or bad? It was needed. In 2000, great age of passivity. 2 proxy contests a year from 1996-2001; everyone was asleep. Enron & Sarbanes-Oxley helped. Now with any new innovation “everyone’s doing it” but it’s cyclical. Companies have become their own activists; GE for example. Dangerous for late-comers; the easy stuff isn’t there. So they go to weak companies and then in a downturn they blow