Michael Larson: Background & bio

‘The arrangement is simple: Mr. Larson makes money, and Mr. Gates gives it away.’ — Wall Street Journal

Michael Larson is Bill Gates’ private money manager and runs Gates’ personal investment company Cascade Investment LLC, funded solely by Gates. Michael Larson also manages the funds for the Bill Gates Foundation.

Michael Larson, the son of an industrial engineer, grew up in North Dakota and then in Albuquerque. When he graduated from high school, he wanted to join the Coast Guard but couldn’t because he was only 16.

He attended Claremont College, finishing in three years with a degree in economics, and then went directly to the University of Chicago, where he picked up an MBA at the age of 21. From there Larson went to work for Arco doing mergers and acquisitions. Then he shifted gears and joined Putnam Investments in Boston, managing bond funds. After two years, he struck out on his own. He was trying to buy a money-management firm in Chicago when the call from Bill Gates’ headhunter came.

Bill Gates has said about Michael Larson — “Since Microsoft is my primary focus, I wanted someone who could operate on their own…I also wanted someone with a conservative philosophy about investing. I needed to have complete faith in the person I picked since I didn’t ever want to have to look over their shoulder.”

Gates’ money manager had to be smart, trustworthy and as clean as a whistle. From Fortune:

“He told me I would be working for a wealthy guy in the Pacific Northwest,…I actually thought it was Craig McCaw.” No…it’s Bill Gates, and could he [headhunter named Bert Early] please have the names of 13 references. “I thought it was the old FBI trick,” chuckles Larson, “you know, ask for 13 and randomly pick three. But Bert called all 13 and kept each of ’em on the phone for an hour.” Apparently Larson didn’t have as much as an unpaid parking ticket in his file (has he considered running for office?), because Early gave him the thumbs-up.

“Actually, when I heard it was Bill, I wasn’t sure I wanted the job,” says Larson. “I think he had just fired some people, and I thought he would be difficult to work for. But I had to meet him.” So he came out, and the two men hit it off. They talked about Albuquerque–Microsoft’s hometown in the early days–about risk management, and about investing, of course. “The interview was what really sold me on Michael,” says Gates. “He’s bright and very inquiring, and has a strong performance record.”

Bill Gates decided to hire Michael Larson after the Journal reported in 1993 that the entrepreneur’s money manager at the time had previously been convicted of bank fraud. Gates already knew about the conviction, but began looking for someone new after the uproar.

Married with three children, Michael Larson prefers Levi’s jeans and dark pink shirts. Some current and former employees say he can be brusque and controlling, even deciding the seating chart for the investment firm’s annual holiday party.

Michael Larson: Investment philosophy

Since 1995, Michael Larson has delivered a compound annual return of 11% for the Gates Foundation and two predecessors, outperforming the S&P 500 stock index by more than one percentage point.

However, not much is known about the money manager’s secretive style, or even the investments that Cascade Investment LLC holds. According to the Wall Street Journal, Michael Larson has all sorts of tricks for keeping Cascade’s and Bill Gates’ name from appearing on other investments.

Employees are made to sign confidentiality agreements, which cover them even after they leave. $10 billion is farmed out to around 25 other money managers, helping to hide the trail and generate other ideas. Additionally, Michael Larson has been known to create limited liability corporations especially for real estate purchases, keeping Cascade’s name off the documents. Most of the time, even Bill Gates doesn’t know what investments Cascade owns.

Michael Larson doesn’t restrict himself to stocks; he looks at bonds, currencies, commodities, land, and direct investments in companies. He’s a long-term, buy-and-hold investor. “My most important job is asset allocation,” he says. “That’s where the real money is made.”

According to this Fortune article, published during March 1999, Michael Larson runs the three portfolios he managed at the time in very different ways — Larson managed money for The William H. Gates Foundation, the Gates Learning Foundation and Bill Gates’ personal portfolio at the time. The two foundations merged to form the Bill & Melinda Gates Foundation during 2000.

So what’s in the portfolios? The Learning Foundation is the simplest. Because Patty Stonesifer and her crew have a fairly constant need for cash, Larson keeps this portfolio mostly in short-maturity U.S. government and corporate fixed-income securities. The William H. Gates Foundation is a little more complicated. Though it may have a smattering of stocks at any given time, it too is almost entirely in bonds–about 75% short-term U.S. governments and corporates. “The portfolio is pretty conservatively positioned right now for a couple of reasons,” says Larson. “First, it reflects my view of the markets. And second, we just had an inflow of a couple of billion dollars.” Another reason bonds are attractive to Larson is that as new money streams in, scaling up in the fixed-income markets is much easier than in stocks.

As for the other 25% of this foundation’s assets, Larson has made investments running the whole gamut of the bond market. He holds some inflation-protected Treasury bonds called TIPs, and plain-vanilla corporate bonds like Ford, Du Pont, and Time Warner (parent of Time Inc., FORTUNE’s publisher). He also has a position in junk bonds and foreign government bonds–Danish, German, Canadian–as well as foreign corporates, gobs of mortgage-backed securities, and all sorts of hedging investments. Larson farms out some 15% of the overall portfolio to bond managers at Morgan Grenfell, PIMCO, Miller Anderson & Sherrerd, and Western Asset Management. “These guys have discretion over the money we give them, but if I don’t agree with their take on interest rates or the yen, I’ll override them by hedging,” Larson says.

Gates’ $5 billion personal portfolio is another matter. First, there is the question of how much Microsoft stock Gates should own. “The money I have outside Microsoft is less than 10% of the total,” says Gates. “Since we are obviously heavily weighted with Microsoft, we will sell stock periodically in order to get more diversity. It’s basically the same strategy most individual investors engage in.”

As for the actual content of Gates’ $5 billion portfolio (drum roll, please), it turns out to be not that exciting. And for good reason. “If you think about it, 90%-plus of Bill’s wealth is in a single technology stock. He really doesn’t need much, if any, equity exposure at all,” says Larson. “Right now his portfolio actually looks somewhat like a big old bond fund.” In fact, a recent snapshot of Gates’ personal portfolio looks like this: Larson has 70%, or $3.5 billion, invested in short-term governments and corporates, with a small weighting in foreign bonds. He also owns some emerging-market debt and high-yield issues. “Basically we are short on the yield curve right now,” Larson says, again reflecting his wary view of the markets.

What about the other 30%, or $1.5 billion? About half of it–$750 million–is in what Larson calls private equity; that’s buyout funds and direct investments, such as Gates’ stake in Teledesic, McCaw’s satellite company (Larson is on its board). That figure also includes funds run by outsiders. About 5% of Gates’ portfolio is farmed out to managers like McNamee’s Integral Capital Partners and Blue Ridge Capital, a New York hedge fund run by John Griffin, former right-hand man of Julian Robertson at Tiger Management. Larson also has a significant amount of money in short positions–actually more than usual right now–which reflects his view that many stocks are fully, if not overly, valued. He also has a small amount of money with Bill Fleckenstein, who runs a short-selling fund.

Of the nonbond portion of Gates’ portfolio, another $250 million is in what Larson calls “real stuff.” He means real assets, like commodities (he’s been in and out of crude oil futures) and real estate, such as investments in the Reserve, a real estate and golf course development near Palm Springs, and in the Cliveden hotels in England.

The remaining $500 million is in stocks. Given Gates’ huge position in Microsoft, why does Larson own equities at all? “Because I think some stocks have behavior patterns that run counter to Microsoft,” says Larson. “For instance, if and when the air comes out of tech stocks, food and oil stocks could hold up real well. The other reason we do equities is because we have some expertise in certain areas, and we make money at it.” It so happens that one of Larson’s interests is media stocks. He favors cable stocks such as TCI and Liberty Media, as well as Cox Communications and Barry Diller’s USA Networks. Larson also holds Berkshire Hathaway–he owned 300 shares last year and recently bought a bunch more–which he thinks became particularly attractive after its Gen Re acquisition. “Gen Re was in the S&P 500. Berkshire isn’t. So after the deal, index managers had to sell Berkshire, depressing the price.”

Bets on the bond market have been reduced recently in favor of private equity and other types of adventurous, so-called alternative assets.

Despite Michael Larson’s experience, in the past Gates has made his own investment decisions in biotech. According to Fortune, he’s always been interested in science and likes to read up on the topic as well as investing in cutting-edge biotech companies. He started digital-image company Corbis Corp. in 1989. Smaller investments include stakes in nuclear-reactor developer TerraPower LLC and meat-substitute maker Beyond Meat.

Michael Larson runs a tight ship with his employees as well. Cascade has around 100 employees, who, when traveling on business, must stay at a low-cost hotel, not the Four Seasons, despite the fact that Cascade owns a large chunk of the hotel chain.

Some of Michael Larson’s investments over the years:

  • A significant stake in the Four Seasons luxury-hotel chain.
  • Ritz-Carlton hotel in San Francisco
  • 10.5% stake in Canadian National Railway
  • 4% stake in Liberty Global
  • 13.7% stake in AutoNation
  • 9.3% stake in Ecolab
  • 29% stake in Republic Services
  • 8.4% stake in Deere & Co
  • Part owner of Whistler Four Seasons ski resort in Canada
  • At least 100,000 acres of farmland across the United States
  • A 490-acre ranch in Wyoming once owned by Buffalo Bill
  • Schering Plough
  • McDonald’s
  • Coca-Cola

Michael Larson: Articles