March 4, 2025 • 44 mins
In this episode of How I Invest, I have a conversation with Scott Chan, Chief Investment Officer of CalSTRS, to explore how he oversees a staggering $350 billion in assets. Scott shares insights on CalSTRS’ collaborative investment model, their approach to private and public markets, and why they aim to be the "global partner of choice." We also discuss the importance of structural alpha, liquidity management, and identifying long-term supply-demand imbalances.
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Episode Transcript
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(00:00):
You manage 350,000,000,000 or over a third of atrillion dollars, kind of a crazy number.
In what way is your capital base an advantage?
In what way is it a disadvantage?
That's a great question.
It's two sides of the same coin here.
One thing that we've talked about is we justhave a very long term horizon.
You're labeling me as contrarian.
(00:21):
I think thinking long term gives you thecapability to be contrarian because most of
what you're seeing with short term is noise.
So that's number one.
Number two, the way you make money with a highdegree of probability is bottom up transaction
by transaction, deal by deal.
And so our science gives us the capability tobuild an expertise expert team across markets,
(00:44):
which is not typical for organization from ourside, is create a nimble and dynamic decision
making structure at the division level.
That's something that's unique.
The second thing is scale economics.
Some of the transactions we can negotiate froma cloud model perspective is the scale.
If we're gonna be a significant size, it justaids us being able to negotiate better win wins
(01:06):
with our partners.
Scott, I've been, excited to chat.
Welcome to the podcast.
Thank you.
No.
Thanks for having having me.
This is really exciting, and and, you you'vedone a great job with your podcast.
I'm so excited
to be here, David.
Thank you, Scott.
So how does one go about investing$350,000,000,000?
Let me just talk about the Caltranscollaborative model, which is our primary
(01:29):
primary wave of how we implement our investmentstrategy.
So if I were just to step back and define whatis the collaborative model for your audience,
for CalSTRS, that's an investment strategy tobring more of our assets in house to lower
costs, increase alpha, or control our riskbetter, or to leverage our partners in the
(01:49):
private markets to achieve similar benefits.
You think about public markets versus privatemarkets here at CalSTRS.
In the public markets, for example, in globalequities and fixed income, we have roughly 80
to 85% of our assets managed by our owninternal team from, you know, training to
portfolio management and anything in between.
And these areas have consistently beat themarkets.
(02:11):
We take a little bit of active risk, you know,sort of enhanced active is what we call it.
I mean, some fixed income, you know, call it 30basis points a year, we generate an alpha.
In global equity, that's become moresignificant.
It's around 50 basis points a year or so.
But in the private markets, we don't think wehave the capacity to build our own internal,
(02:31):
for example, Blackstone or Apollo or CarlyleFlemablanca.
And so what we try to do, is become the globalpartner of choice.
Why is it important for you to be the globalpartner of choice for the GPs that you work
with?
So that's a defining characteristic of ourcloud model is trying to become a global
partner of choice.
You might ask yourself, well, why is thatimportant?
(02:52):
Because we strive, David, to be one of the topthree calls, for any of our partners.
If we do, then we're gonna be successful inaccessing the best transactions globally.
So you think about it.
It'd be easy for us at 350,000,000,000 or so inassets on our management to be a one way street
where, all these asset managers, they come tous on the private market side or the
(03:13):
alternative side.
And, we say yes or no to invest in any of theirfunds as an LP.
But because we have 350,000,000,000 in capitalinvest, I wanna transform that traditional
dynamic.
And so it's important for us to do this becausenumber one, the best investors in the world,
they can also select their partners.
Right?
They have a certain amount of capacity.
(03:34):
And particularly when it comes to the thesubset of their best transactions, how can we
access that?
Number two, it's, by putting the best ofCalSTRS ideas with the best of our partners
ideas and leveraging that, we find that we cancreate a lot more value for our over 1,000,000,
teachers.
And so so that's that's kind of one one elementof it is becoming the global partner of choice.
(03:55):
I think that would be the second kind of mainpoint for the cloud model.
If you think about the essence, the core thingsthat we're trying to achieve is we're trying to
provide a value proposition for our partnerstoo.
So, you know, number one, I wanna be, known.
I want CalSTRS to be known as as having thetrusted relationships and expertise that all
our partners need.
(04:15):
So we can help you, and and together, we cansolve the complex financing needs of of the
world.
So my staff needs to be the forefront of theminds of our partners.
We need to sort of mirror them in our expertisetoo, and I think we've been able to show that
or demonstrate that.
Number two, we need to be nimble and dynamic inthe marketplace as well.
So we you know, if a decision needs to be made,and this doesn't happen often, but if it needs
(04:39):
to be made same day, we have to match thatcapability.
And we do that by delegating a lot of authorityto the divisions, and giving them the
opportunity to have their own investmentcommittees.
So we're nimble and dynamic.
And the third element is is is for us to beflexible.
So we don't have this one size fits all model,but we can structure anything depending on what
(05:00):
makes sense for the particular transaction orwhat makes sense for the partner and us
together.
So we could, you know, we could be in thelimited partnership.
We could have a separately managed accountthat's more bespoke.
We can, you know, co invest.
We can do a joint venture.
We can share revenues all the way to owning, aminority or majority interest in the asset
(05:20):
managers.
So those things, I think, are at the core ofhow we, execute the cloud model.
So you divide it into public and private partsof the market, and the implicit understanding
there is that the public side of the market,there's not much alpha there.
So you don't wanna be spending a lot onmanagement fees.
But on the private side, there is a lot ofalpha, so you wanna partner with managers
(05:41):
there.
In our, public markets, because we have so muchcapital, we end up being, you know, the market.
And, it's very difficult to deploy the amountof capital we have in a way that we can
generate health on a consistent basis.
And so if you looked at our global equityportfolio as an example, I would say, you know,
(06:02):
80% of that is passively managed and maybe 20%of that is actively managed.
And then if you looked at the fixed incomeside, again, we're sort of enhanced active.
So you're right in the sense that we've takenwhat we think is appropriate risks, but those
risks tend to be narrow.
And we've shifted, a lot more of our riskbudget, so to speak, as an organization into
(06:26):
the private markets where we think theprobability of generating alpha for greater
value add is is a lot higher.
And over the years, if you looked at the trendsover the last couple decades, we've shifted
roughly 44% of our asset allocation into theprivate markets and the alternative assets.
That's not only diversified the portfolio, butwhat you're alluding to, an alpha generator for
(06:47):
CalSTRS.
And you mentioned you wanna be the globalpartner of choice, and there's different ways
to do that, whether through JV, through anchorchecks.
What is CalSTRS ideal way to work with aprivate manager?
And talk to me about the life cycle ofpartnering with a private manager.
I don't think there is an ideal way that wecollaborate with our partners.
(07:08):
And and that's why I think the key word and ifArt is just summarized in one word, it's
collaboration.
Right?
We we wanna sit down with our partners and dowhat makes sense.
And that that differs.
Right?
It differs by the type of transaction, the typeof market, as well as the the, the capabilities
of our partners, because our partners are allorganized differently as well in terms of their
governance structure.
(07:29):
For us to do well, it's it's really by beingflexible.
Now I can give you an example, but, again, youknow, we can traverse from just an LP interest
all the way to ownership.
And, Fairfield Residential, for example, is anexample of a cloud remodel transaction, where
where CalSTRS has majority ownership.
And so if if you think about the current realestate cycle, I know that it's been depressed
(07:50):
for a few years.
But long term, if you think about residentialhousing in The US, which is essentially what
Fairfield Residential focuses on, We think thatthat's gonna be undersupplied for the
foreseeable future.
So if we looked out five or ten years, eveneven after the great boom and bust in in
08/00/2009, we just never saw the supply comeback the way it should have to meet the the
(08:14):
type of demand demographics that we have herein The US.
For us, it's very strategic to have ownershipin Fairfield, which is, you know, for us then
can act as an extension of staff.
Right?
We have 250 investment professionals, forexample, here at CalSTRS.
But Fairfield does call it 1,400.
Right?
They're they're in every, sub market.
(08:35):
They're in 30 plus sub markets in The UnitedStates.
They're in almost every one that matters.
Right?
They're a top 10 producer of residential realestate.
And so that really puts us on the ground floorto capitalize on opportunities and sourcing.
And as an example, we were then early withthem, on developing affordable housing.
And as prices continue to go up, the definitionof affordable housing in The United States
(08:57):
keeps keeps growing because we have majorityownership.
We also anchored, a number of those strategies,and we benefited from those investments, in
affordable housing.
But we also benefit from the growth ofFairfield as well because we own, the the
general partnership.
We own the the asset manager, so to speak.
New areas are are complex.
(09:18):
They may may not have, like, a, you know, fiveyear track record behind that.
But if we have the expertise and we can buildthe expertise with our staff to mirror that of
our partners, we can also, invest in thatcomplexity for the benefit of CalSTRS.
What does CalSTRS look for in a GP beforedeciding to do a joint venture?
One of the number one things that we look foror sort of one, two, and three is we we look
(09:42):
for, managers that have a competitiveadvantage.
Number two, we're looking for a desire tocreate more value together.
Right?
Things like what we do with cloud remodeledtransactions.
The third is is we want some, in the majorcategory shared principles around, a whole host
of of how we think about investing for the longterm, how are you building your teams, how are
(10:06):
you getting diverse ideas.
So those are, some of the characteristics thatwe are really looking for.
But, you know, if if I were to and and each oneof those probably could we could go into a
thirty minute conversation.
But if I were just to to stick on thecompetitive advantage piece of it, you know, in
Fairfield's case, we're one of the top 10producers of real estate in the country, and,
(10:26):
we felt that, they were gonna be able to growin a number of adjacencies.
They they felt that too.
What are the benefits to the manager ofpartnering with CalSTRS?
We look like an attractive partner because ifif you think about, another asset manager
acquiring, Fairfield Residential, for example,in this case, they would also have a lot of
(10:47):
those adjacencies already covered by otheracquisitions they did with other asset
managers.
Right?
And so what we provide is the capability ofgrowing together with them.
And that's a very powerful, incentive for anyasset manager who want to partner with us is
this idea that over the long term, we're verycommitted to, for example, building residential
(11:08):
housing in The United States.
If I look forward in a decade, I I think thisis gonna be continue to be a major part of what
CalSTRS does.
And so that long term investing and the abilityto help them, grow in into adjacencies, in this
case, I think was was very, very compelling forthem.
And if you looked at their alternative, beingacquired by another asset manager, well, the
(11:29):
other asset manager, chances are they they'vegot a number of these adjacencies already
covered through other parts of the business.
And so Fairfield would be stymied in in,potentially growing in certain trajectories.
And you're somebody that I would consider acontrarian thinker.
How do you go about incorporating thatcontrarianism as a CIO of CalSTRS?
(11:50):
It's hard to be contrarian, because you youhave to to wait a lot of times for your thesis
to to play out.
But as a long term investor, I think thatreally gives CalSTRS an advantage that, you
know, essentially, we're we're looking out longterm, and we can filter out, quarterly reports
that have a lot of a lot of noise to them.
(12:12):
And I would say as a long term investor though,there are only a few asset allocation shifts
every year where something on the horizon oflong term investing becomes more probable.
As it becomes more and more probable, it startsto compel you to act or, have you consider
emphasizing or deemphasizing assets.
(12:32):
If I were to look at 2025, here's as an examplewhat I would consider to be three of the most
compelling asset allocation shifts.
I think a number of that is, you know, sort ofcontrarian thinking, if you will.
So number one, I would say that the probabilitythat the stock market is gonna generate below
average returns over the next five to tenyears, it it's becoming more and more probable.
(12:55):
Right?
It's becoming higher.
For a large allocator like us, we might shift afew percentage points, you know, away from away
from global equities.
What specific assets are you shifting towardsif you're shifting away from global equities?
This is the first year, for example, that Iremember.
We entered the year and all the strategistswere thinking stock market's coming up.
If you roll back a year, the outlook was mixedand markets went up significantly.
(13:18):
Right?
The S and P was up over 20%.
If you think about the year before that, peopleand the year before that, I mean, for several
years, people thought we're gonna head intorecession.
Why?
Because interest rates moved up over 500 basispoints, and there has been a lot of historical
precedent around when rates have gone up so somuch.
Yet the market went up, you know, again, over20%, if you look at the S and P.
(13:39):
If you think about globally, The US also is isis likely considered probably the most
attractive, you know, in terms of economicgrowth in comparison to, for example, China or
for some of the other Europe, certainly.
And so a lot of my peers globally, they wannacontinue to invest in The US.
And so the setup, the expectations, I think,for The US market and global equities being US
(14:03):
market being a a very large part of that, youknow, called 60% or so at this point, is pretty
high, and the economy is robust.
But the problem now that you're bumping into isafter, you know, several years of really
robust, returns, you've got high evaluations.
Even if you consider some of these large captech names have higher profits and they're
(14:23):
growing faster, even even considering that now,valuations are on the higher end.
We've had a decade of outperformance strictlyin the S and P, and we're starting to see some
concentration of stock performance, of course,at the top that that's worrisome.
So you can really never time the tops andbottoms of of cycles, but I I do think that
it's becoming more likely that we're going tosee underperformance here.
(14:46):
Number two, I think there are many areas thatwith a higher probability, we're going to see
them outperform the equity markets.
And I don't think we've been able to say thatover the last two or three years.
Right?
And these areas are gonna most likely providelow risk and and diversify, the portfolio of
CalSTRS.
And so what are these areas?
(15:07):
Infrastructure and energy transition, equity onthe private side.
I think that's gonna be robust and remainrobust.
There's certain areas of private credit that Ithink are gonna generate, more returns at a
lower risk profile.
And structurally, I think these premiums aregoing to be higher because there's gonna
continue to exist a supply and demand gap, thefinancing of that.
(15:28):
So these are areas like asset backed,infrastructure debt, energy transition debt.
I I think those are our areas.
And if you think about the opposite of of the Sand P and the stock markets, real estate has
been down two years in a row, and it's beendown very, very significantly.
They were the first to react to this pricingadjustment of the rise in interest rates over
(15:53):
5%.
Every time you've seen a few significant yearsof decline, going forward, it's it's it's led
to outperformance in the real estate segment.
So it's likely too early for us to call thisinflection point, like, here's the bottom.
But I do think that, you can start picking yourshots.
We're seeing more opportunities.
And, this is likely is it one year from now?
(16:13):
Is it two years from now?
We'll start to see an inflection point, wherewe'll go from pockets of opportunities real
estate to the sector, making a comeback.
Those are some areas that that I think are veryinteresting.
The third thing that maybe also from acontrarian mindset is that at certain point,
and it could be as early as this year,liquidity.
(16:35):
Liquidity is gonna be more valuable than gold.
There's a lot of uncertainty and risk that'snot priced in securities.
The way that that tends to work is that doesn'tget priced in until there's an event.
Right?
Something actually happens, but we know thatthere are many triggers of potential events,
from, you know, the shocking hundred plusexecutive orders that we've seen, to, you know,
(16:56):
potential tariffs or solar immigration, ourfiscal deficit, geopolitics.
I mean, there there's so many differenttriggers out there.
And I think because of this uncertainty, bottomline is is I think, you know, at certain point,
maybe it's a share, most likely.
We'll see, you know, the stock market down.
What else are you focused on?
What we're doing is, number one, we're we'rebringing what we call our diversifying assets
(17:19):
back to Target.
That's primarily fixed income, but alsoincludes hedge funds and cash.
We have been underweight that, you know, as wewere riding the tailwinds of of a strong
market.
We're bringing that back to Target from anunderweight position.
And number two, we're really, ensuring that wehave the firepower and liquidity to invest in a
(17:39):
crisis or a market downturn where I thinkthat's where asset allocators really can
differentiate themselves, providing liquidityduring extreme market sell offs.
And so we've done a lot of work over the lastthree years in enhancing our liquidity tools to
be able to get into that position.
So you're building up your liquidity in casethere's a market drawdown.
(18:03):
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(18:47):
It's more on the supply of liquidity wherewe've identified, you know, if we went into a
crisis, what sources of liquidity would we bedrawing on?
Where we should invest in it, that changesfairly dynamically.
Because at the point in time, you know, is isit that the markets are down 40% and, you know,
(19:08):
it's time to, you know, to get back into the,you know, the global equity markets?
Are we seeing pockets of opportunity in theprivate markets?
Right now, I could tell you what we'reinterested in, and maybe that would remain the
same in a market sell, but may maybe it wouldbe different.
And so a lot of the preparation revolves justaround the liquidity tools we'll be using at
the time, and then we're gonna be, you know,meeting with the teams to to say, is is it
(19:34):
still these areas or are there different areasthat we should be emphasizing?
Because the market prices will be changing verydynamically along the way down.
You're shifting your assets into things thatcould become liquid if you need them to.
What are some of those assets?
Obviously, you don't wanna be in equities, somaybe that's it's not equities, but what are
some assets that have that option forliquidity?
(19:58):
Fixed income would have a lot of liquidity, forexample.
That includes our hedge fund book, which wecall risk mitigating strategies.
If the market downdraft comes, taking profitsfrom those two areas is gonna be a great, you
know, thing for us to do at that time.
Cash was also part of that that diversifyingside of asset base that we have, the
(20:20):
diversifying portfolio.
In other words, the other element is that wecan draw down on our balance sheet.
And so are there ways that we want to createleverage, you know, during that time to be able
to provide liquidity, which we would believewould be, you know, sort of short term in
nature over a cycle?
How would we want to draw upon those thosesources, particularly in times of, you know,
(20:44):
great discounts and dislocations in the market.
You've been the capital markets for more thantwo decades.
Is it always the case that when public marketssell off, the real opportunities are in the
illiquid alternative assets, and or is that isoversimplified way to look at it?
Every crisis and recession is different.
(21:05):
We had, a contest internally to Kelso.
We got all of our divisions together, and we'relike, we want everyone to present their best
ideas, and and we're gonna have some fun withthis.
And it's gonna be like a contest, and we'llrate it, and we'll get the best idea.
The best idea that won that year was reallyfrom our private equity division, head head of
our private equity division, Margo Worth, whothought that preparing for a recession is,
(21:30):
like, the best idea.
And that and that won because as we werethinking about how we handled the o eight, o
nine crisis, we thought we could improve onthis.
And so we spent, you know, a year, year and ahalf in front of before actually COVID hit.
You know, how are we going to plan for the nextcrisis?
And so we were ready to deploy significantamounts of capital over a pathway to the
(21:53):
private markets.
That didn't happen.
What happened was we saw a v shaped recovery.
The biggest, thing that we were able to do was,really invest back into the global equity
markets, which, you know, if we didn'trebalance portfolio, say, we we we might have
been 10% off of our target in in globalequities because it, you know, it kept
(22:14):
declining rapidly at that point in time.
So we rebalanced, and we're getting set to toreally target, you know, a lot of dislocation
in the private markets, but it rebounded in a vshaped way to the degree that no one got the
opportunity really to place significant amountsof capital on that.
And that was way different than o eight, o '9where there was this long path of being able to
(22:36):
deploy capital, and some of the bestopportunities were in the private markets.
What's interesting about market dislocations isthe cause and what tends to be an opportunity
at that time.
It changes dramatically from one crisis to thenext.
But it appears that the availability ofliquidity would have been helpful in both of
the crises.
So that's the lesson learned.
Yeah.
The lesson learned is is is keep enoughfirepower and liquidity to really invest when
(23:02):
they're dislocations.
In this case, we end up, putting on some very,very significant futures positions in the
global IP markets.
That's a form of leverage, for example.
And, we were very much rewarded in rebalancingthe portfolio in that way at at you know?
And that that that's hard to do.
You you gotta check your gut because themarkets are down.
You know?
They can be down 20%, third percent, even 40%,and here you are buying into it.
(23:25):
That is not easy to do even if you have a plan.
Right?
Because it just doesn't feel right.
You you feel that the next day and the next dayafter that, markets can continue to go down.
It's hard to have the discipline to do that inreality.
You need to really have a prepared mind.
You need to be ready for it, almost avisualization exercise to get the whole
organization behind the strategy ahead of time.
(23:47):
I think that really helps to have a preparedmind, to have a have a plan that's ready even
though you know that, everything's gonna bedifferent the next time we go through it.
You and I, we won't be able to guess, you know,what the cause of that crisis is, and you
realize certain things become more dislocatedand more interesting in terms of a pricing
perspective than others, you won't be able toguess that either, right, until it actually
(24:10):
happens.
Implicit to this is CalSTRS seems to have avery flexible governance structure that you're
able to move very quickly on opportunities.
Talk to me about your governance.
This is a really interesting point, David.
To me, if I looked globally at the at, all thedifferent asset allocators and certainly over
my lifetime, one of the biggest changes hasbeen global competition.
(24:32):
Right?
I mean, you you think about CalSTRS,350,000,000,000 in assets.
We're now, like and I don't know the exactnumber.
I stopped checking this, but at a certainpoint, we're, like, 25 on the list of global
allocators in terms of size.
Right?
The other big trend is every every assetlocator has become more and more like an asset
manager.
The staff has become more and more professionalto different degrees.
(24:55):
But I think what differentiates one of thethings that differentiates all the global
allocators and and one of the advantages wehave is great governance.
That starts with our our board.
And you need a board that's innovative, andthat that's able to delegate and and be
strategic with staff.
We have that, and they delegated the authorityof the investment decisions, how we have
(25:16):
flexibility to react to the markets.
We do that by policy.
They approve the policy.
We've got great governance, starting with theboard.
But then from staff's perspective, I think oneof the things that make has made us really
successful is, how we invest, how you makemoney, I believe, given my experiences in the
market, is bottom up.
(25:37):
It's transaction by transaction.
And that can only be done through buildingexpertise, across all these different segments
in in the market, which we've done to, youknow, to mirror our partners as as well.
I think those have been really keys.
And then we've delegated the authority, down tothat level, you know, people that have the
(25:59):
greatest insight into the assets.
And I would say 80% of our transactions workthis way.
They they go into the division.
Is is it is it private equity?
Is it real estate?
Is it, you know, fill in the blank?
And they decide.
They they have a a mature investment, Canadian,and and they decide.
And they can decide quickly, which has made usvery dynamic in the marketplace.
(26:20):
But we have a proven history of generatingalpha in pretty much every major asset class,
every major division here at CalSTRS.
CalSTRS is famous for utilizing structuralalpha.
What is structural alpha?
To me, it it's a couple things.
So so number one, I would define it as beingembedded in the structure of the deal or the
(26:42):
transaction.
And then number two, I would say it's nottaking any additional market risk.
But what we're doing is we're trying to takeoperational risks that we think we can
mitigate.
And how we would mitigate that is is through,resources through expert staff, who are capable
of, being able to structure these transactionsand mitigate the the operational risks of it.
(27:03):
It's best just to provide a simple example ofif I look back at some of the early days of of
investing in in private direct lending, we,decided to to structure a cloud model deal with
one of our managers where, you know, half ofour investment, we were in their LP.
You know, we were a limited partner.
And half investment, we were, co investing,with them.
(27:25):
So right there, we captured a 50% discount infees because we're a no fee, no carry on the co
investment side while paying, you know, fullfees on on the, on the LP side of it.
But we're also because we're anchoring, some oftheir funds going forward, and we have the
expertise with staff to be able to assess that,because some of these were newer endeavors,
(27:46):
with less of a track record than you might see.
We, were able to gain economics in those fundsas well.
In this case, we had a revenue sharingarrangement.
So if you think about every part of the returndistribution, you know, because it was direct
lending, we're penciling out what we're gettingon low teens on our investments.
And as that fund grew because we're sharing therevenue, as long as the returns were positive,
(28:11):
we're gonna generate, you know, three to 8%additional IRRs, given the the the economics
that we're sharing by anchoring the funds, withthem.
And so if you think about it from thatperspective, yeah, we had the operational risk
of how do we structure this, the the legalcosts of of making sure we had the right, you
know, vehicles and structures.
(28:32):
But at the end, we have the potential of addingthree to 8% IRRs on top of the, you know, the
IRRs that we expect.
And that could be a considerable amount ofvalue, for CalSTRS.
Speaking to people about David Swensen, thisthis really reminds me of his style where he
would both advocate for Yale.
He would advocate for other LPs, and he wouldalso advocate for the GPs.
(28:55):
You take a step back and you say, that's kindasounds nonsensical, but, really, it's non zero
sum.
If CalSTRS comes in and anchors a fund oranchors a new strategy, that's massive alpha
for the GP.
CalSTRS is able to come in and capture some ofthat alpha.
It's truly is a win win.
It's truly a non zero sum arrangement.
That is the case.
And and, again, it's one of the keys, andyou'll see this in our numbers, that we're not
(29:17):
taking additional market risk, you know, ingenerating, I think, uncorrelated alpha on top
of that.
Again, I I recognize that it it brings, youknow, some additional operational risks.
We've spent a lot of time, mitigating that withour expert staff and and increasing resources.
I mean, in the time we were accelerating thecloud model, think back, you know, in 02/2017,
(29:39):
we had a run rate of a hundred six cloud modeltransactions.
In 2023, we had a run rate of four and twentyfive cloud model transactions.
So we've we've really accelerated that.
And, you know, what has that done to return onrisk?
Well, if you think about the cost savings, weestimate greater than 2,000,000,000 in cost
savings over the last six years.
(29:59):
And and and I love that because I think everysuccessful corporation or business, they should
have that mentality of, like, how can Ideliver, a streamline more cost effective
business like like a Costco?
Delivering value to the clients.
We're delivering those costs right to theteachers, bottom line.
On the flip side, you don't wanna be penny wiseand pound foolish.
(30:21):
Every time we we are doing the Calabrio model,we have to think about it from the perspective
of, would we just be better off as an LP and afund for folks with a good advantage where we
have a sourcing advantage with them?
Can we add additional value to it?
And if you look back, we we've had one of thestrongest periods of of alpha generation.
If you look back, call it five or six years, wewe have over 10,000,000,000 in value added
(30:44):
returns over benchmarks.
You can say maybe 20% of that was was costsavings and maybe 80% of that is a structural
alpha that we're talking about, and also theexpertise of the team to be able to select
better risk reward for for the fund.
If you think about the alpha, 63 basis pointsover the last five years.
That's on top of if you looked at ten years, wewere 48 basis points.
(31:06):
And so you can continue to see this upwardtrajectory.
We estimate we're in the bottom quartile forcost in our peer group, so we're very cost
effective.
We're the bottom quartile of risk, but we're inthe upper part of the return spectrum.
You manage 350,000,000,000 or over a third of atrillion dollars, kind of a crazy number.
In what way is your capital base an advantage?
(31:28):
In what way is it a disadvantage?
That's a great question.
It's two sides of the same coin here.
One thing that we've we've talked about is wejust have a very long term horizon.
You're, you know, labeling me as as asconstraint.
I I think thinking long term gives you thecapability to be contrarian because, most of
(31:49):
what you're seeing in the short term is isnoise.
Right?
So that's number one.
Number two, I I think the way you make moneywith a high degree of probability is bottom up
transaction by transaction, deal by deal.
And so our science gives us the capability tobuild an expertise expert team across markets.
And I think what we've done, which is nottypical for an organization or a side, is is
(32:12):
create a nimble and dynamic decision makingstructure at the division level.
Right?
That's something that's, unique.
The second thing is scale economics.
Right?
Some of the transactions we can negotiate froma cloud model perspective is the scale.
Right?
So if if we're gonna be a significant size, itjust aids us in being able to negotiate, better
(32:33):
win win wins with our with our, our partners.
Given our size, our ecosystem continues togrow.
And so more and more in the future, as weconnect our own ecosystem together, we can
create even more advantages.
Simple example, recently that that I give youis is we, you know, we we became one of the top
life sciences real estate developers in thecountry.
(32:56):
We have big footprint in Cambridge Crossing,for example.
And we connected, you know, private equity tothat in the sense that within some of the real
estate embedded, we can offer some of the spaceto venture capitalists who so we can gain
equity interest in that.
But at the same time, we have we have thisrobust return just on the economics of the real
estate itself.
And that can be ecosystem.
(33:17):
How can we do that?
But then there's significant challenges.
Right?
I mean, the market has to be a certain size forus to even play it.
So we're gonna x out a lot of the world justbecause it's not scalable enough for us, and
and there's not much we can do about that.
Right?
Our check sizes are gonna be, you know, veryminimum, a hundred million, but most likely
more in the $500,000,000 range.
(33:39):
That otherwise, that's gonna be a prettysignificant market.
But I would say that probably the largestchallenge is us coordinating our approach
across divisions.
If you think about coordinating across so manydifferent divisions at scale dynamically, if
you underline dynamically, that's hard to do.
That's very, very hard to do.
And so there are a number of challenges thatwe've identified that I think are are
(34:01):
difficult.
We talk five years from now.
I'd say, David, those are some of ourcompetitive advantages now, but but I think
shifting allocation, the relative relativevalue amongst should we be, you know, give you
another example.
Our diversifying space, fixed income isgenerating a lot more returns than it had over
the last decade.
(34:21):
Right?
I remember a time during the zero interestrates, we were forecasting sub 2% returns in
fixed income.
It turned out, you know, 1.7% over kind of thelast five years.
But if you look forward, you know, that's 7%now with interest rates where they are, and
they're most likely to remain higher forlonger.
Right?
So we have to get better and better at how dowe shift capital from divisions based on, you
(34:46):
know, better risk reward.
And I think the other element is is reallycapitalizing, managing the risk and the
opportunities of, what I would call megathemes.
It's across all geographies.
It's across all asset classes, sectors, andcompanies has a huge TAM, and we're seeing that
convergence right now in AI and and power onthe infrastructure side.
(35:07):
You likely see in the headlines of, you know,80,000,000,000 from Microsoft and
75,000,000,000 from Google.
And so how can we best benefit from theconvergence of of AI and power, when I've got
data centers that are being built in realestate, they're being built and held in the
infrastructure division.
(35:27):
In power, we have an infrastructure division,but it's it's also on the higher end of the
risk curve in private equity.
It's somewhere in the middle in our sustainableinvesting group.
And so coordinating all of that across CalSTRSwould be really beneficial if we could connect
the divisions together.
But that takes time, and we need to react moredynamically.
(35:48):
So these are some of the challenges we'retaking them head on, and and I hope that, like
I said, we'll develop them eventually intobetter advantages going forward.
When we last chatted, you mentioned that youlook for supply demand imbalances in the
market.
How do you find markets with supply demandimbalances?
Thank you for listening.
To join our community and to make sure you donot miss any future episodes, please click the
(36:11):
follow button above to subscribe.
I think you're right.
We we have to look for sizable imbalances thatthat we think are gonna last a long period of
time so that that CalSTRS can benefit.
Let me just offer up three areas that over myexperience.
One, I would say, is crisises provide a lot of,supply demand gaps in financing for long
(36:31):
periods of time.
Number two, and and some of this we've alludedto, is new and emerging areas, I think, are at
times you can see a supply demand gap that fora very long time for these changes,
particularly around technology and innovation.
And the third is complexity.
Let let me just kinda go through each one justbriefly.
(36:51):
But, you know, if I think about the crisis is,like, today, we're interested in the asset
backed part of private credit.
I mentioned that to you.
Because banks and levered financialinstitutions have begun in earnest to move that
segment off their balance sheet.
Right?
They started with the direct lending, and nowthey're they're moving to the outside back
portion.
(37:12):
But this goes all the way back to the globalcredit crisis of o eight, o nine.
Right?
And even you saw this with Silicon Valley Bank.
You have this fundamental mismatch between theasset and liabilities of the bank.
Essentially, the deposits could be short term.
How short term?
Well, they could evaporate within days.
That's how short term it is in in seeingSilicon Valley Bank, and yet some of their
(37:34):
investments are going, long term.
So there's this fundamental mismatch.
And and that would be, difficult enough tomanage alone, but they're highly levered
institutions on top of that.
Right?
And so you're you're levering up thisfundamental mismatch.
If you think about that system, it it's it'sbound to go wrong.
(37:54):
There's there's it's bound, you know, to youknow, for something to go wrong.
And in fact, every crisis, you know, in The US,you see 500 to a thousand banks, you know, go
under.
We have this generational shift of assets thatmost likely never belonged on banks' balance
sheets, shifting to balance sheets where theydo both.
Right?
So if you think about a CalSTRS on the otherhand, we don't have a leverage or we have very,
(38:18):
very small amount of leverage.
Right?
For horizon, the super long term.
Right?
So we never have a run on the bank, and we canwe can match that that asset with the
appropriate long term horizon and duration.
So I think we'll we'll see this generationalshift of assets that are that are moving, and
there can be cycles, where there's more or lessof it providing better or worse pricing
(38:39):
opportunities.
But this is something that it's gonna takeyears.
It's a generational shift of assets that aregonna be moving to different hands.
Right?
Insurance companies and pension funds, forexample.
There's crises that could be born.
Number two, they're new areas.
Right?
So if you think about technology, what'sdifferent today?
A tech CEO might be spending half their time inpower and in data centers three years ago.
(39:05):
It probably was delegated to somebody where theCEO or president ever got involved.
Right?
This year, if you looked at some of the publiccompanies, it's, like, over 300,000,000,000 in
capital expenditure, that they want to start todeploy.
And so there there's such a big demand in a newarea.
And because they're they're trying to move itoff the balance sheet, a lot of it's gonna go
(39:26):
into the private markets, whether it be privatecredit or, you know, the development and
building of of the real estate.
So they're new areas.
And then then I think there's, there's also acomplexity premium.
Right?
So if something is is complex that takes, forexample, mature technology, but you're trying
to scale it in a new area.
What's the minimum amount of time frame thatthis supply demand imbalance needs to exist for
(39:50):
for it to be interesting for CalSTRS?
It's hard for us to think of of something not,you know, at least in a five year set, you
know, or or more to think about takingadvantage of a of a structural shift.
If you think about CalSTRS, we're if we'resuccessful with $350,000,000,000 today, you
know, ten, twelve, thirteen years from now, wewill have created a whole new CalSTRS.
(40:13):
We will have doubled our asset base.
Right?
So this this, idea of how we find, how weinvest with scale is a compounding idea because
as our returns compound, we become larger andlarger as an organization.
Your wife has been a teacher in California forover thirty years.
Does that impact how you go about investing thepensions of California teachers?
(40:38):
It % does.
One of the things as I've gotten older is veryimportant to me is is being well rested.
Sleep.
You know, I need to be mentally sharp.
But here's the catch.
If if the couch just doesn't do well, I mightbe sleeping on the couch because Heather is a
teacher, has been a teacher for over thirtyyears.
And so you talk about alignment of interest.
Not only is my wife a teacher, but a lot of herfriends are teachers.
(41:00):
And her sister, is a teacher as as well.
So I've I've got, tremendous alignment ofinterest around, the mission here at CalSTRS.
And you mentioned you focus on optimizingyourself, sleep.
Oh, how else do you become better as a CIO?
What do you read?
What do you listen to?
And how do you become better as a CIO?
I think it's a blessing and a curse that, so Ilive in the Bay Area, but I work in West
(41:24):
Sacramento.
And, the blessing is that I have a lot of timein the car, and so I I spend a lot of time
listening to to podcasts and just picking upthings, or I spend the time talking with folks.
It gives me time, you know, because I'm in thecar and driving, to really focus on on relevant
issues and and casting a wide net, being wellread.
(41:45):
And in my case now, I I'm listening to a lot ofa lot of that on podcasts, or I'm listening to
it on, books that, that I have throughaudiobooks.
The seat that I'm in gives me a wide purview ofmeeting with a lot of our partners.
And so I I would be, remiss if if I didn't, youknow, meet with them at least quarterly and
(42:05):
understand some of the brightest minds in theworld, you know, where is capital going?
I do that with my team as well.
I'm lucky I I wake up every day, and it's likeI I love the markets, and here it is.
I'm in the center of of of a lot of that withwith surrounded by great minds.
Those supply demand balances become moreobvious if you talk to enough people, you start
(42:26):
to connect the dots.
Right?
Absolutely.
I mean, doing it for a long period of time, Ithink you you recognize where there can be some
alignment, you know, misalignment, you know, interms of what you might be hearing or talking
to with partners.
But I think over time too, you develop realreal relationships, trusted partnerships, where
you're removing the incentive, you know, justto to hear what you want to hear, for example,
(42:49):
or, you know, something that might just come asa commercial advertisement from from one party
because they they just wanna sell their book.
Well, Scott, this has been a master class onhow to invest 350,000,000,000.
What would you like our listeners to know aboutyou, about CalSTRS, and anything else you'd
like to shine a light on?
I'd like to finally just highlight the team andculture of CalSTRS, which I think is the
(43:12):
ultimate competitive advantage.
And so much of what I do now as the CIO is,leading through people.
So the reason for my success with this successof CalSTRS really is the team.
I have an amazing senior leadership team.
Geraldine Jimenez, Mike DeRay, June Kim, KirstyJacobson, April Wilcox.
This is the strength of this greater CalSTRSteam, not only the senior leadership.
(43:35):
That's gonna be the reason for our successgoing forward as well.
To me, it's it's a team sport, and, thankfully,I have I have an amazing team.
Thank you, Scott.
I learned a lot, and thank you for taking thetime.
I will fly out to Sacramento, and I have acouple of people to see there, and I would love
to host you in New York as well.
We'd love to host you here in Sacramento.
And, yeah, I'll I'll, I'll hit you up when Ihead out to New York.
(43:59):
Great.
Thank you, Scott.
Thank you, Dave.
It's been an honor.
Thanks for listening to my conversation withScott Chan.
If you enjoy this episode, please share with afriend.
This helps us grow and also provides the bestfeedback when we review the episode's
analytics.
Thank you for your support.
You manage 350,000,000,000 or over a third of atrillion dollars, kind of a crazy number.
In what way is your capital base an advantage?
In what way is it a disadvantage?
That's a great question.
It's two sides of the same coin here.
One thing that we've talked about is we justhave a very long term horizon.
You're labeling me as contrarian.
(00:21):
I think thinking long term gives you thecapability to be contrarian because most of
what you're seeing with short term is noise.
So that's number one.
Number two, the way you make money with a highdegree of probability is bottom up transaction
by transaction, deal by deal.
And so our science gives us the capability tobuild an expertise expert team across markets,
(00:44):
which is not typical for organization from ourside, is create a nimble and dynamic decision
making structure at the division level.
That's something that's unique.
The second thing is scale economics.
Some of the transactions we can negotiate froma cloud model perspective is the scale.
If we're gonna be a significant size, it justaids us being able to negotiate better win wins
(01:06):
with our partners.
Scott, I've been, excited to chat.
Welcome to the podcast.
Thank you.
No.
Thanks for having having me.
This is really exciting, and and, you you'vedone a great job with your podcast.
I'm so excited
to be here, David.
Thank you, Scott.
So how does one go about investing$350,000,000,000?
Let me just talk about the Caltranscollaborative model, which is our primary
(01:29):
primary wave of how we implement our investmentstrategy.
So if I were just to step back and define whatis the collaborative model for your audience,
for CalSTRS, that's an investment strategy tobring more of our assets in house to lower
costs, increase alpha, or control our riskbetter, or to leverage our partners in the
(01:49):
private markets to achieve similar benefits.
You think about public markets versus privatemarkets here at CalSTRS.
In the public markets, for example, in globalequities and fixed income, we have roughly 80
to 85% of our assets managed by our owninternal team from, you know, training to
portfolio management and anything in between.
And these areas have consistently beat themarkets.
(02:11):
We take a little bit of active risk, you know,sort of enhanced active is what we call it.
I mean, some fixed income, you know, call it 30basis points a year, we generate an alpha.
In global equity, that's become moresignificant.
It's around 50 basis points a year or so.
But in the private markets, we don't think wehave the capacity to build our own internal,
(02:31):
for example, Blackstone or Apollo or CarlyleFlemablanca.
And so what we try to do, is become the globalpartner of choice.
Why is it important for you to be the globalpartner of choice for the GPs that you work
with?
So that's a defining characteristic of ourcloud model is trying to become a global
partner of choice.
You might ask yourself, well, why is thatimportant?
(02:52):
Because we strive, David, to be one of the topthree calls, for any of our partners.
If we do, then we're gonna be successful inaccessing the best transactions globally.
So you think about it.
It'd be easy for us at 350,000,000,000 or so inassets on our management to be a one way street
where, all these asset managers, they come tous on the private market side or the
(03:13):
alternative side.
And, we say yes or no to invest in any of theirfunds as an LP.
But because we have 350,000,000,000 in capitalinvest, I wanna transform that traditional
dynamic.
And so it's important for us to do this becausenumber one, the best investors in the world,
they can also select their partners.
Right?
They have a certain amount of capacity.
(03:34):
And particularly when it comes to the thesubset of their best transactions, how can we
access that?
Number two, it's, by putting the best ofCalSTRS ideas with the best of our partners
ideas and leveraging that, we find that we cancreate a lot more value for our over 1,000,000,
teachers.
And so so that's that's kind of one one elementof it is becoming the global partner of choice.
(03:55):
I think that would be the second kind of mainpoint for the cloud model.
If you think about the essence, the core thingsthat we're trying to achieve is we're trying to
provide a value proposition for our partnerstoo.
So, you know, number one, I wanna be, known.
I want CalSTRS to be known as as having thetrusted relationships and expertise that all
our partners need.
(04:15):
So we can help you, and and together, we cansolve the complex financing needs of of the
world.
So my staff needs to be the forefront of theminds of our partners.
We need to sort of mirror them in our expertisetoo, and I think we've been able to show that
or demonstrate that.
Number two, we need to be nimble and dynamic inthe marketplace as well.
So we you know, if a decision needs to be made,and this doesn't happen often, but if it needs
(04:39):
to be made same day, we have to match thatcapability.
And we do that by delegating a lot of authorityto the divisions, and giving them the
opportunity to have their own investmentcommittees.
So we're nimble and dynamic.
And the third element is is is for us to beflexible.
So we don't have this one size fits all model,but we can structure anything depending on what
(05:00):
makes sense for the particular transaction orwhat makes sense for the partner and us
together.
So we could, you know, we could be in thelimited partnership.
We could have a separately managed accountthat's more bespoke.
We can, you know, co invest.
We can do a joint venture.
We can share revenues all the way to owning, aminority or majority interest in the asset
(05:20):
managers.
So those things, I think, are at the core ofhow we, execute the cloud model.
So you divide it into public and private partsof the market, and the implicit understanding
there is that the public side of the market,there's not much alpha there.
So you don't wanna be spending a lot onmanagement fees.
But on the private side, there is a lot ofalpha, so you wanna partner with managers
(05:41):
there.
In our, public markets, because we have so muchcapital, we end up being, you know, the market.
And, it's very difficult to deploy the amountof capital we have in a way that we can
generate health on a consistent basis.
And so if you looked at our global equityportfolio as an example, I would say, you know,
(06:02):
80% of that is passively managed and maybe 20%of that is actively managed.
And then if you looked at the fixed incomeside, again, we're sort of enhanced active.
So you're right in the sense that we've takenwhat we think is appropriate risks, but those
risks tend to be narrow.
And we've shifted, a lot more of our riskbudget, so to speak, as an organization into
(06:26):
the private markets where we think theprobability of generating alpha for greater
value add is is a lot higher.
And over the years, if you looked at the trendsover the last couple decades, we've shifted
roughly 44% of our asset allocation into theprivate markets and the alternative assets.
That's not only diversified the portfolio, butwhat you're alluding to, an alpha generator for
(06:47):
CalSTRS.
And you mentioned you wanna be the globalpartner of choice, and there's different ways
to do that, whether through JV, through anchorchecks.
What is CalSTRS ideal way to work with aprivate manager?
And talk to me about the life cycle ofpartnering with a private manager.
I don't think there is an ideal way that wecollaborate with our partners.
(07:08):
And and that's why I think the key word and ifArt is just summarized in one word, it's
collaboration.
Right?
We we wanna sit down with our partners and dowhat makes sense.
And that that differs.
Right?
It differs by the type of transaction, the typeof market, as well as the the, the capabilities
of our partners, because our partners are allorganized differently as well in terms of their
governance structure.
(07:29):
For us to do well, it's it's really by beingflexible.
Now I can give you an example, but, again, youknow, we can traverse from just an LP interest
all the way to ownership.
And, Fairfield Residential, for example, is anexample of a cloud remodel transaction, where
where CalSTRS has majority ownership.
And so if if you think about the current realestate cycle, I know that it's been depressed
(07:50):
for a few years.
But long term, if you think about residentialhousing in The US, which is essentially what
Fairfield Residential focuses on, We think thatthat's gonna be undersupplied for the
foreseeable future.
So if we looked out five or ten years, eveneven after the great boom and bust in in
08/00/2009, we just never saw the supply comeback the way it should have to meet the the
(08:14):
type of demand demographics that we have herein The US.
For us, it's very strategic to have ownershipin Fairfield, which is, you know, for us then
can act as an extension of staff.
Right?
We have 250 investment professionals, forexample, here at CalSTRS.
But Fairfield does call it 1,400.
Right?
They're they're in every, sub market.
(08:35):
They're in 30 plus sub markets in The UnitedStates.
They're in almost every one that matters.
Right?
They're a top 10 producer of residential realestate.
And so that really puts us on the ground floorto capitalize on opportunities and sourcing.
And as an example, we were then early withthem, on developing affordable housing.
And as prices continue to go up, the definitionof affordable housing in The United States
(08:57):
keeps keeps growing because we have majorityownership.
We also anchored, a number of those strategies,and we benefited from those investments, in
affordable housing.
But we also benefit from the growth ofFairfield as well because we own, the the
general partnership.
We own the the asset manager, so to speak.
New areas are are complex.
(09:18):
They may may not have, like, a, you know, fiveyear track record behind that.
But if we have the expertise and we can buildthe expertise with our staff to mirror that of
our partners, we can also, invest in thatcomplexity for the benefit of CalSTRS.
What does CalSTRS look for in a GP beforedeciding to do a joint venture?
One of the number one things that we look foror sort of one, two, and three is we we look
(09:42):
for, managers that have a competitiveadvantage.
Number two, we're looking for a desire tocreate more value together.
Right?
Things like what we do with cloud remodeledtransactions.
The third is is we want some, in the majorcategory shared principles around, a whole host
of of how we think about investing for the longterm, how are you building your teams, how are
(10:06):
you getting diverse ideas.
So those are, some of the characteristics thatwe are really looking for.
But, you know, if if I were to and and each oneof those probably could we could go into a
thirty minute conversation.
But if I were just to to stick on thecompetitive advantage piece of it, you know, in
Fairfield's case, we're one of the top 10producers of real estate in the country, and,
(10:26):
we felt that, they were gonna be able to growin a number of adjacencies.
They they felt that too.
What are the benefits to the manager ofpartnering with CalSTRS?
We look like an attractive partner because ifif you think about, another asset manager
acquiring, Fairfield Residential, for example,in this case, they would also have a lot of
(10:47):
those adjacencies already covered by otheracquisitions they did with other asset
managers.
Right?
And so what we provide is the capability ofgrowing together with them.
And that's a very powerful, incentive for anyasset manager who want to partner with us is
this idea that over the long term, we're verycommitted to, for example, building residential
(11:08):
housing in The United States.
If I look forward in a decade, I I think thisis gonna be continue to be a major part of what
CalSTRS does.
And so that long term investing and the abilityto help them, grow in into adjacencies, in this
case, I think was was very, very compelling forthem.
And if you looked at their alternative, beingacquired by another asset manager, well, the
(11:29):
other asset manager, chances are they they'vegot a number of these adjacencies already
covered through other parts of the business.
And so Fairfield would be stymied in in,potentially growing in certain trajectories.
And you're somebody that I would consider acontrarian thinker.
How do you go about incorporating thatcontrarianism as a CIO of CalSTRS?
(11:50):
It's hard to be contrarian, because you youhave to to wait a lot of times for your thesis
to to play out.
But as a long term investor, I think thatreally gives CalSTRS an advantage that, you
know, essentially, we're we're looking out longterm, and we can filter out, quarterly reports
that have a lot of a lot of noise to them.
(12:12):
And I would say as a long term investor though,there are only a few asset allocation shifts
every year where something on the horizon oflong term investing becomes more probable.
As it becomes more and more probable, it startsto compel you to act or, have you consider
emphasizing or deemphasizing assets.
(12:32):
If I were to look at 2025, here's as an examplewhat I would consider to be three of the most
compelling asset allocation shifts.
I think a number of that is, you know, sort ofcontrarian thinking, if you will.
So number one, I would say that the probabilitythat the stock market is gonna generate below
average returns over the next five to tenyears, it it's becoming more and more probable.
(12:55):
Right?
It's becoming higher.
For a large allocator like us, we might shift afew percentage points, you know, away from away
from global equities.
What specific assets are you shifting towardsif you're shifting away from global equities?
This is the first year, for example, that Iremember.
We entered the year and all the strategistswere thinking stock market's coming up.
If you roll back a year, the outlook was mixedand markets went up significantly.
(13:18):
Right?
The S and P was up over 20%.
If you think about the year before that, peopleand the year before that, I mean, for several
years, people thought we're gonna head intorecession.
Why?
Because interest rates moved up over 500 basispoints, and there has been a lot of historical
precedent around when rates have gone up so somuch.
Yet the market went up, you know, again, over20%, if you look at the S and P.
(13:39):
If you think about globally, The US also is isis likely considered probably the most
attractive, you know, in terms of economicgrowth in comparison to, for example, China or
for some of the other Europe, certainly.
And so a lot of my peers globally, they wannacontinue to invest in The US.
And so the setup, the expectations, I think,for The US market and global equities being US
(14:03):
market being a a very large part of that, youknow, called 60% or so at this point, is pretty
high, and the economy is robust.
But the problem now that you're bumping into isafter, you know, several years of really
robust, returns, you've got high evaluations.
Even if you consider some of these large captech names have higher profits and they're
(14:23):
growing faster, even even considering that now,valuations are on the higher end.
We've had a decade of outperformance strictlyin the S and P, and we're starting to see some
concentration of stock performance, of course,at the top that that's worrisome.
So you can really never time the tops andbottoms of of cycles, but I I do think that
it's becoming more likely that we're going tosee underperformance here.
(14:46):
Number two, I think there are many areas thatwith a higher probability, we're going to see
them outperform the equity markets.
And I don't think we've been able to say thatover the last two or three years.
Right?
And these areas are gonna most likely providelow risk and and diversify, the portfolio of
CalSTRS.
And so what are these areas?
(15:07):
Infrastructure and energy transition, equity onthe private side.
I think that's gonna be robust and remainrobust.
There's certain areas of private credit that Ithink are gonna generate, more returns at a
lower risk profile.
And structurally, I think these premiums aregoing to be higher because there's gonna
continue to exist a supply and demand gap, thefinancing of that.
(15:28):
So these are areas like asset backed,infrastructure debt, energy transition debt.
I I think those are our areas.
And if you think about the opposite of of the Sand P and the stock markets, real estate has
been down two years in a row, and it's beendown very, very significantly.
They were the first to react to this pricingadjustment of the rise in interest rates over
(15:53):
5%.
Every time you've seen a few significant yearsof decline, going forward, it's it's it's led
to outperformance in the real estate segment.
So it's likely too early for us to call thisinflection point, like, here's the bottom.
But I do think that, you can start picking yourshots.
We're seeing more opportunities.
And, this is likely is it one year from now?
(16:13):
Is it two years from now?
We'll start to see an inflection point, wherewe'll go from pockets of opportunities real
estate to the sector, making a comeback.
Those are some areas that that I think are veryinteresting.
The third thing that maybe also from acontrarian mindset is that at certain point,
and it could be as early as this year,liquidity.
(16:35):
Liquidity is gonna be more valuable than gold.
There's a lot of uncertainty and risk that'snot priced in securities.
The way that that tends to work is that doesn'tget priced in until there's an event.
Right?
Something actually happens, but we know thatthere are many triggers of potential events,
from, you know, the shocking hundred plusexecutive orders that we've seen, to, you know,
(16:56):
potential tariffs or solar immigration, ourfiscal deficit, geopolitics.
I mean, there there's so many differenttriggers out there.
And I think because of this uncertainty, bottomline is is I think, you know, at certain point,
maybe it's a share, most likely.
We'll see, you know, the stock market down.
What else are you focused on?
What we're doing is, number one, we're we'rebringing what we call our diversifying assets
(17:19):
back to Target.
That's primarily fixed income, but alsoincludes hedge funds and cash.
We have been underweight that, you know, as wewere riding the tailwinds of of a strong
market.
We're bringing that back to Target from anunderweight position.
And number two, we're really, ensuring that wehave the firepower and liquidity to invest in a
(17:39):
crisis or a market downturn where I thinkthat's where asset allocators really can
differentiate themselves, providing liquidityduring extreme market sell offs.
And so we've done a lot of work over the lastthree years in enhancing our liquidity tools to
be able to get into that position.
So you're building up your liquidity in casethere's a market drawdown.
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(18:47):
It's more on the supply of liquidity wherewe've identified, you know, if we went into a
crisis, what sources of liquidity would we bedrawing on?
Where we should invest in it, that changesfairly dynamically.
Because at the point in time, you know, is isit that the markets are down 40% and, you know,
(19:08):
it's time to, you know, to get back into the,you know, the global equity markets?
Are we seeing pockets of opportunity in theprivate markets?
Right now, I could tell you what we'reinterested in, and maybe that would remain the
same in a market sell, but may maybe it wouldbe different.
And so a lot of the preparation revolves justaround the liquidity tools we'll be using at
the time, and then we're gonna be, you know,meeting with the teams to to say, is is it
(19:34):
still these areas or are there different areasthat we should be emphasizing?
Because the market prices will be changing verydynamically along the way down.
You're shifting your assets into things thatcould become liquid if you need them to.
What are some of those assets?
Obviously, you don't wanna be in equities, somaybe that's it's not equities, but what are
some assets that have that option forliquidity?
(19:58):
Fixed income would have a lot of liquidity, forexample.
That includes our hedge fund book, which wecall risk mitigating strategies.
If the market downdraft comes, taking profitsfrom those two areas is gonna be a great, you
know, thing for us to do at that time.
Cash was also part of that that diversifyingside of asset base that we have, the
(20:20):
diversifying portfolio.
In other words, the other element is that wecan draw down on our balance sheet.
And so are there ways that we want to createleverage, you know, during that time to be able
to provide liquidity, which we would believewould be, you know, sort of short term in
nature over a cycle?
How would we want to draw upon those thosesources, particularly in times of, you know,
(20:44):
great discounts and dislocations in the market.
You've been the capital markets for more thantwo decades.
Is it always the case that when public marketssell off, the real opportunities are in the
illiquid alternative assets, and or is that isoversimplified way to look at it?
Every crisis and recession is different.
(21:05):
We had, a contest internally to Kelso.
We got all of our divisions together, and we'relike, we want everyone to present their best
ideas, and and we're gonna have some fun withthis.
And it's gonna be like a contest, and we'llrate it, and we'll get the best idea.
The best idea that won that year was reallyfrom our private equity division, head head of
our private equity division, Margo Worth, whothought that preparing for a recession is,
(21:30):
like, the best idea.
And that and that won because as we werethinking about how we handled the o eight, o
nine crisis, we thought we could improve onthis.
And so we spent, you know, a year, year and ahalf in front of before actually COVID hit.
You know, how are we going to plan for the nextcrisis?
And so we were ready to deploy significantamounts of capital over a pathway to the
(21:53):
private markets.
That didn't happen.
What happened was we saw a v shaped recovery.
The biggest, thing that we were able to do was,really invest back into the global equity
markets, which, you know, if we didn'trebalance portfolio, say, we we we might have
been 10% off of our target in in globalequities because it, you know, it kept
(22:14):
declining rapidly at that point in time.
So we rebalanced, and we're getting set to toreally target, you know, a lot of dislocation
in the private markets, but it rebounded in a vshaped way to the degree that no one got the
opportunity really to place significant amountsof capital on that.
And that was way different than o eight, o '9where there was this long path of being able to
(22:36):
deploy capital, and some of the bestopportunities were in the private markets.
What's interesting about market dislocations isthe cause and what tends to be an opportunity
at that time.
It changes dramatically from one crisis to thenext.
But it appears that the availability ofliquidity would have been helpful in both of
the crises.
So that's the lesson learned.
Yeah.
The lesson learned is is is keep enoughfirepower and liquidity to really invest when
(23:02):
they're dislocations.
In this case, we end up, putting on some very,very significant futures positions in the
global IP markets.
That's a form of leverage, for example.
And, we were very much rewarded in rebalancingthe portfolio in that way at at you know?
And that that that's hard to do.
You you gotta check your gut because themarkets are down.
You know?
They can be down 20%, third percent, even 40%,and here you are buying into it.
(23:25):
That is not easy to do even if you have a plan.
Right?
Because it just doesn't feel right.
You you feel that the next day and the next dayafter that, markets can continue to go down.
It's hard to have the discipline to do that inreality.
You need to really have a prepared mind.
You need to be ready for it, almost avisualization exercise to get the whole
organization behind the strategy ahead of time.
(23:47):
I think that really helps to have a preparedmind, to have a have a plan that's ready even
though you know that, everything's gonna bedifferent the next time we go through it.
You and I, we won't be able to guess, you know,what the cause of that crisis is, and you
realize certain things become more dislocatedand more interesting in terms of a pricing
perspective than others, you won't be able toguess that either, right, until it actually
(24:10):
happens.
Implicit to this is CalSTRS seems to have avery flexible governance structure that you're
able to move very quickly on opportunities.
Talk to me about your governance.
This is a really interesting point, David.
To me, if I looked globally at the at, all thedifferent asset allocators and certainly over
my lifetime, one of the biggest changes hasbeen global competition.
(24:32):
Right?
I mean, you you think about CalSTRS,350,000,000,000 in assets.
We're now, like and I don't know the exactnumber.
I stopped checking this, but at a certainpoint, we're, like, 25 on the list of global
allocators in terms of size.
Right?
The other big trend is every every assetlocator has become more and more like an asset
manager.
The staff has become more and more professionalto different degrees.
(24:55):
But I think what differentiates one of thethings that differentiates all the global
allocators and and one of the advantages wehave is great governance.
That starts with our our board.
And you need a board that's innovative, andthat that's able to delegate and and be
strategic with staff.
We have that, and they delegated the authorityof the investment decisions, how we have
(25:16):
flexibility to react to the markets.
We do that by policy.
They approve the policy.
We've got great governance, starting with theboard.
But then from staff's perspective, I think oneof the things that make has made us really
successful is, how we invest, how you makemoney, I believe, given my experiences in the
market, is bottom up.
(25:37):
It's transaction by transaction.
And that can only be done through buildingexpertise, across all these different segments
in in the market, which we've done to, youknow, to mirror our partners as as well.
I think those have been really keys.
And then we've delegated the authority, down tothat level, you know, people that have the
(25:59):
greatest insight into the assets.
And I would say 80% of our transactions workthis way.
They they go into the division.
Is is it is it private equity?
Is it real estate?
Is it, you know, fill in the blank?
And they decide.
They they have a a mature investment, Canadian,and and they decide.
And they can decide quickly, which has made usvery dynamic in the marketplace.
(26:20):
But we have a proven history of generatingalpha in pretty much every major asset class,
every major division here at CalSTRS.
CalSTRS is famous for utilizing structuralalpha.
What is structural alpha?
To me, it it's a couple things.
So so number one, I would define it as beingembedded in the structure of the deal or the
(26:42):
transaction.
And then number two, I would say it's nottaking any additional market risk.
But what we're doing is we're trying to takeoperational risks that we think we can
mitigate.
And how we would mitigate that is is through,resources through expert staff, who are capable
of, being able to structure these transactionsand mitigate the the operational risks of it.
(27:03):
It's best just to provide a simple example ofif I look back at some of the early days of of
investing in in private direct lending, we,decided to to structure a cloud model deal with
one of our managers where, you know, half ofour investment, we were in their LP.
You know, we were a limited partner.
And half investment, we were, co investing,with them.
(27:25):
So right there, we captured a 50% discount infees because we're a no fee, no carry on the co
investment side while paying, you know, fullfees on on the, on the LP side of it.
But we're also because we're anchoring, some oftheir funds going forward, and we have the
expertise with staff to be able to assess that,because some of these were newer endeavors,
(27:46):
with less of a track record than you might see.
We, were able to gain economics in those fundsas well.
In this case, we had a revenue sharingarrangement.
So if you think about every part of the returndistribution, you know, because it was direct
lending, we're penciling out what we're gettingon low teens on our investments.
And as that fund grew because we're sharing therevenue, as long as the returns were positive,
(28:11):
we're gonna generate, you know, three to 8%additional IRRs, given the the the economics
that we're sharing by anchoring the funds, withthem.
And so if you think about it from thatperspective, yeah, we had the operational risk
of how do we structure this, the the legalcosts of of making sure we had the right, you
know, vehicles and structures.
(28:32):
But at the end, we have the potential of addingthree to 8% IRRs on top of the, you know, the
IRRs that we expect.
And that could be a considerable amount ofvalue, for CalSTRS.
Speaking to people about David Swensen, thisthis really reminds me of his style where he
would both advocate for Yale.
He would advocate for other LPs, and he wouldalso advocate for the GPs.
(28:55):
You take a step back and you say, that's kindasounds nonsensical, but, really, it's non zero
sum.
If CalSTRS comes in and anchors a fund oranchors a new strategy, that's massive alpha
for the GP.
CalSTRS is able to come in and capture some ofthat alpha.
It's truly is a win win.
It's truly a non zero sum arrangement.
That is the case.
And and, again, it's one of the keys, andyou'll see this in our numbers, that we're not
(29:17):
taking additional market risk, you know, ingenerating, I think, uncorrelated alpha on top
of that.
Again, I I recognize that it it brings, youknow, some additional operational risks.
We've spent a lot of time, mitigating that withour expert staff and and increasing resources.
I mean, in the time we were accelerating thecloud model, think back, you know, in 02/2017,
(29:39):
we had a run rate of a hundred six cloud modeltransactions.
In 2023, we had a run rate of four and twentyfive cloud model transactions.
So we've we've really accelerated that.
And, you know, what has that done to return onrisk?
Well, if you think about the cost savings, weestimate greater than 2,000,000,000 in cost
savings over the last six years.
(29:59):
And and and I love that because I think everysuccessful corporation or business, they should
have that mentality of, like, how can Ideliver, a streamline more cost effective
business like like a Costco?
Delivering value to the clients.
We're delivering those costs right to theteachers, bottom line.
On the flip side, you don't wanna be penny wiseand pound foolish.
(30:21):
Every time we we are doing the Calabrio model,we have to think about it from the perspective
of, would we just be better off as an LP and afund for folks with a good advantage where we
have a sourcing advantage with them?
Can we add additional value to it?
And if you look back, we we've had one of thestrongest periods of of alpha generation.
If you look back, call it five or six years, wewe have over 10,000,000,000 in value added
(30:44):
returns over benchmarks.
You can say maybe 20% of that was was costsavings and maybe 80% of that is a structural
alpha that we're talking about, and also theexpertise of the team to be able to select
better risk reward for for the fund.
If you think about the alpha, 63 basis pointsover the last five years.
That's on top of if you looked at ten years, wewere 48 basis points.
(31:06):
And so you can continue to see this upwardtrajectory.
We estimate we're in the bottom quartile forcost in our peer group, so we're very cost
effective.
We're the bottom quartile of risk, but we're inthe upper part of the return spectrum.
You manage 350,000,000,000 or over a third of atrillion dollars, kind of a crazy number.
In what way is your capital base an advantage?
(31:28):
In what way is it a disadvantage?
That's a great question.
It's two sides of the same coin here.
One thing that we've we've talked about is wejust have a very long term horizon.
You're, you know, labeling me as as asconstraint.
I I think thinking long term gives you thecapability to be contrarian because, most of
(31:49):
what you're seeing in the short term is isnoise.
Right?
So that's number one.
Number two, I I think the way you make moneywith a high degree of probability is bottom up
transaction by transaction, deal by deal.
And so our science gives us the capability tobuild an expertise expert team across markets.
And I think what we've done, which is nottypical for an organization or a side, is is
(32:12):
create a nimble and dynamic decision makingstructure at the division level.
Right?
That's something that's, unique.
The second thing is scale economics.
Right?
Some of the transactions we can negotiate froma cloud model perspective is the scale.
Right?
So if if we're gonna be a significant size, itjust aids us in being able to negotiate, better
(32:33):
win win wins with our with our, our partners.
Given our size, our ecosystem continues togrow.
And so more and more in the future, as weconnect our own ecosystem together, we can
create even more advantages.
Simple example, recently that that I give youis is we, you know, we we became one of the top
life sciences real estate developers in thecountry.
(32:56):
We have big footprint in Cambridge Crossing,for example.
And we connected, you know, private equity tothat in the sense that within some of the real
estate embedded, we can offer some of the spaceto venture capitalists who so we can gain
equity interest in that.
But at the same time, we have we have thisrobust return just on the economics of the real
estate itself.
And that can be ecosystem.
(33:17):
How can we do that?
But then there's significant challenges.
Right?
I mean, the market has to be a certain size forus to even play it.
So we're gonna x out a lot of the world justbecause it's not scalable enough for us, and
and there's not much we can do about that.
Right?
Our check sizes are gonna be, you know, veryminimum, a hundred million, but most likely
more in the $500,000,000 range.
(33:39):
That otherwise, that's gonna be a prettysignificant market.
But I would say that probably the largestchallenge is us coordinating our approach
across divisions.
If you think about coordinating across so manydifferent divisions at scale dynamically, if
you underline dynamically, that's hard to do.
That's very, very hard to do.
And so there are a number of challenges thatwe've identified that I think are are
(34:01):
difficult.
We talk five years from now.
I'd say, David, those are some of ourcompetitive advantages now, but but I think
shifting allocation, the relative relativevalue amongst should we be, you know, give you
another example.
Our diversifying space, fixed income isgenerating a lot more returns than it had over
the last decade.
(34:21):
Right?
I remember a time during the zero interestrates, we were forecasting sub 2% returns in
fixed income.
It turned out, you know, 1.7% over kind of thelast five years.
But if you look forward, you know, that's 7%now with interest rates where they are, and
they're most likely to remain higher forlonger.
Right?
So we have to get better and better at how dowe shift capital from divisions based on, you
(34:46):
know, better risk reward.
And I think the other element is is reallycapitalizing, managing the risk and the
opportunities of, what I would call megathemes.
It's across all geographies.
It's across all asset classes, sectors, andcompanies has a huge TAM, and we're seeing that
convergence right now in AI and and power onthe infrastructure side.
(35:07):
You likely see in the headlines of, you know,80,000,000,000 from Microsoft and
75,000,000,000 from Google.
And so how can we best benefit from theconvergence of of AI and power, when I've got
data centers that are being built in realestate, they're being built and held in the
infrastructure division.
(35:27):
In power, we have an infrastructure division,but it's it's also on the higher end of the
risk curve in private equity.
It's somewhere in the middle in our sustainableinvesting group.
And so coordinating all of that across CalSTRSwould be really beneficial if we could connect
the divisions together.
But that takes time, and we need to react moredynamically.
(35:48):
So these are some of the challenges we'retaking them head on, and and I hope that, like
I said, we'll develop them eventually intobetter advantages going forward.
When we last chatted, you mentioned that youlook for supply demand imbalances in the
market.
How do you find markets with supply demandimbalances?
Thank you for listening.
To join our community and to make sure you donot miss any future episodes, please click the
(36:11):
follow button above to subscribe.
I think you're right.
We we have to look for sizable imbalances thatthat we think are gonna last a long period of
time so that that CalSTRS can benefit.
Let me just offer up three areas that over myexperience.
One, I would say, is crisises provide a lot of,supply demand gaps in financing for long
(36:31):
periods of time.
Number two, and and some of this we've alludedto, is new and emerging areas, I think, are at
times you can see a supply demand gap that fora very long time for these changes,
particularly around technology and innovation.
And the third is complexity.
Let let me just kinda go through each one justbriefly.
(36:51):
But, you know, if I think about the crisis is,like, today, we're interested in the asset
backed part of private credit.
I mentioned that to you.
Because banks and levered financialinstitutions have begun in earnest to move that
segment off their balance sheet.
Right?
They started with the direct lending, and nowthey're they're moving to the outside back
portion.
(37:12):
But this goes all the way back to the globalcredit crisis of o eight, o nine.
Right?
And even you saw this with Silicon Valley Bank.
You have this fundamental mismatch between theasset and liabilities of the bank.
Essentially, the deposits could be short term.
How short term?
Well, they could evaporate within days.
That's how short term it is in in seeingSilicon Valley Bank, and yet some of their
(37:34):
investments are going, long term.
So there's this fundamental mismatch.
And and that would be, difficult enough tomanage alone, but they're highly levered
institutions on top of that.
Right?
And so you're you're levering up thisfundamental mismatch.
If you think about that system, it it's it'sbound to go wrong.
(37:54):
There's there's it's bound, you know, to youknow, for something to go wrong.
And in fact, every crisis, you know, in The US,you see 500 to a thousand banks, you know, go
under.
We have this generational shift of assets thatmost likely never belonged on banks' balance
sheets, shifting to balance sheets where theydo both.
Right?
So if you think about a CalSTRS on the otherhand, we don't have a leverage or we have very,
(38:18):
very small amount of leverage.
Right?
For horizon, the super long term.
Right?
So we never have a run on the bank, and we canwe can match that that asset with the
appropriate long term horizon and duration.
So I think we'll we'll see this generationalshift of assets that are that are moving, and
there can be cycles, where there's more or lessof it providing better or worse pricing
(38:39):
opportunities.
But this is something that it's gonna takeyears.
It's a generational shift of assets that aregonna be moving to different hands.
Right?
Insurance companies and pension funds, forexample.
There's crises that could be born.
Number two, they're new areas.
Right?
So if you think about technology, what'sdifferent today?
A tech CEO might be spending half their time inpower and in data centers three years ago.
(39:05):
It probably was delegated to somebody where theCEO or president ever got involved.
Right?
This year, if you looked at some of the publiccompanies, it's, like, over 300,000,000,000 in
capital expenditure, that they want to start todeploy.
And so there there's such a big demand in a newarea.
And because they're they're trying to move itoff the balance sheet, a lot of it's gonna go
(39:26):
into the private markets, whether it be privatecredit or, you know, the development and
building of of the real estate.
So they're new areas.
And then then I think there's, there's also acomplexity premium.
Right?
So if something is is complex that takes, forexample, mature technology, but you're trying
to scale it in a new area.
What's the minimum amount of time frame thatthis supply demand imbalance needs to exist for
(39:50):
for it to be interesting for CalSTRS?
It's hard for us to think of of something not,you know, at least in a five year set, you
know, or or more to think about takingadvantage of a of a structural shift.
If you think about CalSTRS, we're if we'resuccessful with $350,000,000,000 today, you
know, ten, twelve, thirteen years from now, wewill have created a whole new CalSTRS.
(40:13):
We will have doubled our asset base.
Right?
So this this, idea of how we find, how weinvest with scale is a compounding idea because
as our returns compound, we become larger andlarger as an organization.
Your wife has been a teacher in California forover thirty years.
Does that impact how you go about investing thepensions of California teachers?
(40:38):
It % does.
One of the things as I've gotten older is veryimportant to me is is being well rested.
Sleep.
You know, I need to be mentally sharp.
But here's the catch.
If if the couch just doesn't do well, I mightbe sleeping on the couch because Heather is a
teacher, has been a teacher for over thirtyyears.
And so you talk about alignment of interest.
Not only is my wife a teacher, but a lot of herfriends are teachers.
(41:00):
And her sister, is a teacher as as well.
So I've I've got, tremendous alignment ofinterest around, the mission here at CalSTRS.
And you mentioned you focus on optimizingyourself, sleep.
Oh, how else do you become better as a CIO?
What do you read?
What do you listen to?
And how do you become better as a CIO?
I think it's a blessing and a curse that, so Ilive in the Bay Area, but I work in West
(41:24):
Sacramento.
And, the blessing is that I have a lot of timein the car, and so I I spend a lot of time
listening to to podcasts and just picking upthings, or I spend the time talking with folks.
It gives me time, you know, because I'm in thecar and driving, to really focus on on relevant
issues and and casting a wide net, being wellread.
(41:45):
And in my case now, I I'm listening to a lot ofa lot of that on podcasts, or I'm listening to
it on, books that, that I have throughaudiobooks.
The seat that I'm in gives me a wide purview ofmeeting with a lot of our partners.
And so I I would be, remiss if if I didn't, youknow, meet with them at least quarterly and
(42:05):
understand some of the brightest minds in theworld, you know, where is capital going?
I do that with my team as well.
I'm lucky I I wake up every day, and it's likeI I love the markets, and here it is.
I'm in the center of of of a lot of that withwith surrounded by great minds.
Those supply demand balances become moreobvious if you talk to enough people, you start
(42:26):
to connect the dots.
Right?
Absolutely.
I mean, doing it for a long period of time, Ithink you you recognize where there can be some
alignment, you know, misalignment, you know, interms of what you might be hearing or talking
to with partners.
But I think over time too, you develop realreal relationships, trusted partnerships, where
you're removing the incentive, you know, justto to hear what you want to hear, for example,
(42:49):
or, you know, something that might just come asa commercial advertisement from from one party
because they they just wanna sell their book.
Well, Scott, this has been a master class onhow to invest 350,000,000,000.
What would you like our listeners to know aboutyou, about CalSTRS, and anything else you'd
like to shine a light on?
I'd like to finally just highlight the team andculture of CalSTRS, which I think is the
(43:12):
ultimate competitive advantage.
And so much of what I do now as the CIO is,leading through people.
So the reason for my success with this successof CalSTRS really is the team.
I have an amazing senior leadership team.
Geraldine Jimenez, Mike DeRay, June Kim, KirstyJacobson, April Wilcox.
This is the strength of this greater CalSTRSteam, not only the senior leadership.
(43:35):
That's gonna be the reason for our successgoing forward as well.
To me, it's it's a team sport, and, thankfully,I have I have an amazing team.
Thank you, Scott.
I learned a lot, and thank you for taking thetime.
I will fly out to Sacramento, and I have acouple of people to see there, and I would love
to host you in New York as well.
We'd love to host you here in Sacramento.
And, yeah, I'll I'll, I'll hit you up when Ihead out to New York.
(43:59):
Great.
Thank you, Scott.
Thank you, Dave.
It's been an honor.
Thanks for listening to my conversation withScott Chan.
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