July 23, 2025 • 52 mins
In this episode of How I Invest, I spoke with Thomas Lee, Co-President and CIO of Parametric, a $600 billion asset manager within Morgan Stanley Investment Management. Tom walks us through how Parametric helps high-net-worth individuals access institutional-quality investment strategies, why customization is the future of asset management, and how their technology powers nearly a quarter million highly personalized accounts.
We talk about inflation myths, the credibility of the Fed, and whether the U.S. will eventually inflate its way out of debt. Tom also shares how Parametric brings tax-efficient investing and direct indexing to portfolios as small as $25,000, explains why "investments as a service" is not just a tagline, and offers valuable insights on long-term leadership, scale, and innovation.
Whether you're an institutional allocator, wealth manager, or an individual trying to understand the future of investing, this episode is packed with takeaways.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Tom, I've been excited to chat.
(00:01):
Welcome to the How Invest podcast.
Thank you.
Thank you for having me on, David.
So give me a sense for the scale at whereParametric is today.
Scale of Parametric, we are by the numbers thatasset managers are usually measured, we're a
(00:21):
little over $600,000,000,000 in AUM.
We have over a thousand employees based in sixoffices in The US and four outside The US.
We manage 220,000 accounts, so mostlyseparately managed accounts.
We also manage some ETFs and some traditional40 Act funds and some USITS funds in Europe.
(00:45):
So we have a, you know, we're a decent sizedasset manager that exists inside of Morgan
Stanley Investment Management.
So I mentioned we are about 600,000,000,000.
Morgan Stanley Investment Management is1,600,000,000,000.0, so we are roughly 37 of of
those assets.
(01:06):
When we last chatted, I was excited to hearthat you had worked out the Federal Reserve,
and my first question was what is inflation andwhere do you think inflation stands at today?
It's funny you asked that today because as youmay be aware, they released CPI this morning
and it came in at 2.7%, which is a uptick from,that's year over year CPI, came in at 2.7,
(01:31):
which I think is up over May.
May was 2.4, but it was the expected number.
Non core, so if you eliminate food and energy,was I believe 2.9.
The numbers in, if you look inside the numbers,you're seeing big jumps in things like audio
video equipment.
So thing, it looks, at least the earlyspeculation is that tariffs are starting to hit
and it's coming through in the numbers.
(01:52):
CPI is the traditional what you see on theevening news, read in the morning newspaper.
That's the inflation gauge that the governmentproduces that most people reference.
It's also the number that's baked into socialsecurity payments and other types of contracts.
That's where you see CPI.
The number, and it's calculated by using abasket of goods that's fixed for two years.
(02:18):
So it's not really robust or dynamic and itdoesn't include third party provided services.
So for example, if your employer paid for yourhealth insurance, wouldn't be factored into
CPI.
The number that the Fed focuses on, and they'vedone this for at least the last two decades is
PC, the personal consumption expenditure.
That number is calculated through surveys ofall goods and services consumed.
(02:44):
And it's chain linked, which means it's morerobust.
And why that's important, David, is because thenatural reaction for people if prices change
significantly is they change their consumptionpattern.
So if all of a sudden beef becomes veryexpensive, people consume less of it, maybe
consume more chicken or pork.
Or if gas becomes very expensive, people driveless.
(03:07):
The PC number for that reason tends to reflectmore, at least in the Fed's estimate, they
looked at this for a long time, what realconsumers are experiencing.
And so it's the number that they focus on andit runs generally consistently below CPI.
So those are the two kind of main gauges ofinflation in the economy.
I know all this is mired with politics andpublic policy, but fundamentally, when you go
(03:31):
outside, whether you're buying groceries or yourent or whatever, it feels like inflation is
higher.
Why does it feel like inflation is higher thanin the two percents?
It depends on who you are and what you consume.
I mean, everyone has everyone's own inflationexperience is based on their personal
(03:52):
consumption pattern.
So do you rent an apartment or do you own ahome with a fixed mortgage?
That will affect how you, housing is one of thebiggest contributors to inflation.
Do you drive a vehicle that has an electricengine in it?
Or do you drive one that has a combustionengine in it?
That could affect how you look at it.
What groceries do you purchase?
(04:13):
Do you eat out a lot?
Those are the things that are gonna affect howyou may view inflation.
Do you take trips?
Do you stay in hotels?
That may affect how you view inflation versussomebody who doesn't do some of those things.
So it's very personalized experience.
I think what the government does is a gauge,which kind of measures, tries to give everyone
a sense of where they are, but there's adistribution around that based on your personal
(04:36):
consumption.
Inflation is very idiosyncratic to how youconsume.
Just to play devil's advocate, there's eitherthis meme or this conspiracy theory depending,
I guess, how you frame it in the market thatthe true quote, unquote, true inflation is not
revealed to the public and that it's muchhigher.
A lot of people in the crypto crypto spacebelieve this, but also some very educated
(04:57):
people believe this.
Is there an incentive for the true inflationrate not to be disclosed to public?
Is there an incentive?
Well, clearly, I just mentioned that thatinflation is baked CPI is baked into things
like Social Security and other other financialinstruments, which the government pays.
(05:19):
So I guess you could argue that there's anincentive for the government to try to
misrepresent inflation.
The amount of coordination that would have tooccur for that to happen and the amount of
people who would have to be in on this, I mean,just to me doesn't seem realistic that the
government could somehow do that.
What I think is possibly, you know, a littlebit more realistic, and I think it's only at
(05:39):
the margins, I'm sure you've heard the storybefore, you used to buy, you know, maybe a pack
of frozen corn that had, that was 16 ounces,and now it's 16 ounces, but four ounces are are
vacant in it or something like that.
Same bag, less contents in the bag.
So there's always been an argument.
Are people really shrinking the product,providing you with less, fewer goods for the
(06:02):
same price?
That's something that would be very difficultto measure.
So I guess at the end of the day, I don'tbelieve that the that the government I think
that that it's easy to speculate about that,but it it's not something that that is likely
or occurring.
There's too many smart people in the market whowould would figure that out if there was
something fraudulent happening.
And the reason it's so hard to coordinate isbecause the the different Fed branches
(06:27):
individually calculated, economistsindividually calculated, as well as analysts
and macro investors individually calculated.
So it's not only different people in differentoffices, it's also different constituents.
Well, really, it's a Bureau of Labor whocalculates the CPI, and I think it's the Bureau
of Economic Analysis that calculates the PCE.
(06:49):
Then you have a bunch of economists, as youpoint out, locally at district banks studying
kind of what's going on pricing in theirmarket.
And then you have economists at universitiesand other places doing macro studies.
If those things were off or didn't align, yeah,you'd hear about it.
So tell me about the five year, five yearforward rate.
The five year, five year forward rate is whatthe Fed has identified as a long term.
(07:15):
It's the long term, it's the inflationexpectation five years from now.
So it's what the market is estimating.
They compare nominal bonds and tips and say, isthe market projecting for the five year
inflation rate five years from now?
Ultimately, rate, the way the interest ratemarkets clears is heavily dependent on people's
(07:37):
inflation expectations.
It's not one inflation we've experienced.
It's their expectation about future inflation.
The five year five year, as it's often called,is a good measure of long term inflation
expectations.
It's also a measure of Fed credibility.
If the Fed is not credible, that number couldbe potentially very volatile or higher.
(08:00):
And what we've seen, and if you look at a graphof this, it bounces in a very narrow range.
I think it right now is around 2.4%.
It's been as high as 2.6%.
And if I go back to, you know, early pandemicor before, it was below two.
But for the last couple of years, it's hungbetween two point three and two point six.
So it's really tight band.
(08:22):
And the Fed credibility, I'm guessing that'snot that they could do models correctly, that's
they stay an independent organization.
It it's that the Fed is willing to make thetough decision as there was a former Fed
chairman, William Martin Chesney, or I I thelast name was Martin, who said, you know, the
and he was the Fed chairman from in the fiftiesand sixties.
He said the Fed's job is to steal the punchbowl away right when the party gets started.
(08:45):
And what he meant is, hey, when the economyjust starts to overheat, starts producing at a
level that's not sustainable, it mightintroduce inflation.
They have to step on the they have to put onthe brakes.
They put on the brakes through primarilythrough the management of short term interest
rates.
Those are the markets belief that the Fed willdo that.
(09:07):
That's credibility that Paul Volcker, if you goback way to the early eighties and the first
Reagan administration, you know, afterinflation got very ugly in the in the late
seventies, Volcker established thatcredibility, and it's been sustained ever since
that the Fed will do whatever is necessary toprevent inflation from getting out of hand.
I've looked up the five year five year forwardrate since our last conversation.
(09:29):
I think today, it's 2.33%.
And I find that just shockingly difficult tobelieve given that, at least my interpretation
of DOGE failing, is that essentially one of thetools and the tools for the national debt to be
decreased has been largely ineffective, maybesome effectiveness, and now it's just a matter
(09:52):
of time before The US has to inflate away thedebt over several decades.
Why why is that not a consensus view, and whyam I wrong about with having that?
You're asking some good macro questions.
I mean, The US has a history.
(10:12):
And we do have, you know, if you look backover, and I think I wanna say the last time the
debt to GDP ratio was at this level, we'rehovering around 120%, was just after World War
II, like 'forty six, 'forty seven.
And if you look at The US in the early we ranan inflation rate around four to 5%.
(10:36):
That's one of the ways we got out of that hole.
But there were other reasons for running that.
Soldiers returning from overseas.
We had a GI bill.
We had people building houses and all sorts ofthings going on.
I you know, why doesn't the market think thatthat ultimately that we're gonna inflate our
way out of this debt problem?
(10:57):
I think it gets back to the belief that the Feddoesn't allow that.
The Fed is independent.
The Fed will not allow inflation.
The problem with in just you trying to useinflation to get out of the the this this debt
hole is if it has the potential to raiseinterest rates.
And we roll over a lot of debt, so it can makeit very expensive.
(11:18):
So we have to kind of manage that.
If we were to if politicians were to somehowthink miraculously that we could create
inflation and make it easier to pay off thedebt with cheaper dollars, they would have to
consider what it means for the amount of debtthat we have to roll over on a regular basis,
and how that could be impacted if the marketcame to that belief.
(11:39):
I appreciate the the macro lesson.
I do wanna talk about Parametric where you'reCIO.
You mentioned that you have roughly600,000,000,000 assets.
How much of that is high net worth and how muchof that is institutional?
I would roughly break that down.
Roughly institutional.
So 200,000,000,000 or so institutional and twothirds high net worth retail.
I mentioned, I don't think everyone in thatcategory qualified.
(12:02):
There's various different definitions of highnet worth.
But part of what we are doing is bringingdemocratizing what has historically been
institutional management capability to lowerand lower AUM.
So everyone in that category might not qualifyas high net worth.
So you say that you're bringing institutionaltools, institutional practices to the high net
(12:23):
worth.
What are some examples of that?
What are some kind of tools or funds thatyou've created in the last decade or so that
address some of the issues?
So David, if you think about it, institutionshave always had the or in my career, dating
back to the early nineties, have always had theability for large allocations to have their
(12:47):
assets managed in a custom manner.
The benefit was it can be very much customizedfor them.
Sometimes they can negotiate a better fee and,overall just a better experience for them.
That for many, for a long time was the of largeinstitutional institutions.
Increasingly as technology has evolved, asinnovation has occurred, I'm thinking of
(13:09):
innovation in the way we manage operations, inthe way we manage custodial operations,
fractional shares, things of that nature, we'vebeen able to provide separately managed account
experience to lower and lower AUM basis.
Within, for many of our clients, that minimum's$250,000 So we've actually evolved our
(13:32):
technology within Morgan Stanley Wealth, theircommon ownership, to the point where we can get
that down to $25,000 So what that means, one ofthe benefits that brings to clients, taxable
clients can have the accounts and manage fortax.
Clients can have the portfolio customized forfactors, for values, for completion.
And when I say the word completion, what I meanis I work at Morgan Stanley.
(13:56):
Part of my compensation is deferred MorganStanley stock.
I may not want Morgan Stanley in my portfolioholdings to avoid that concentration.
So maybe I want my holdings to avoid MorganStanley, maybe Goldman Sachs at the same time.
I don't want that.
So I can have that, the portfolio designed forthat completion around what I may hold
elsewhere in my portfolio.
(14:18):
All those capabilities now, we are bringing toa lower and lower AUM and they once were just
the privy of the largest institutions.
One of the things that I've learned recently isabout having a public position.
Let's say, you have a company you invested as aVC.
Now you have $5,000,000 in Coinbase shares isactually building a portfolio around a long
(14:41):
only position, whether it's tax loss harvestingor just, like, using that to offset losses.
Explain that on a simple level.
Why would a high net worth individual do this?
Let's let's use a very simple example of whatpeople often call direct indexing.
It's the ability to track an index whiledeferring gains and realizing losses or
(15:03):
throwing off losses, which those losses aninvestor may use elsewhere in their portfolio,
maybe to unwind a cryptocurrency position or aconcentrated low basis stock position.
That is the value of a kind of direct indexingis I can still get an index like experience.
I can also get some losses that I will maybeuse elsewhere in my portfolio, or I can just
(15:24):
roll forward, and I will defer gains.
More recently, that's been extended wherepeople are willing to or some people who have
maybe extreme positions, maybe they have a lowbasis in concentrated stock like Amazon or
Nvidia are willing to employ a short positionon top of that.
So you can generate even more losses.
The issue that people always have to keep inmind is we're not eliminating a tax liability.
(15:49):
Think of these portfolios as a sponge that'sjust absorbing it.
So if you at some point wanna liquidate thatportfolio, you will experience those taxes.
Many people say they don't wanna liquidate Theend game for that group is ultimately death and
step up.
Long short, that gets a little more complicatedbecause you can't step up a short position.
(16:11):
But what, you know, sometimes people getconfused.
They think we're eliminating taxes.
We're not doing that.
We're just deferring them.
And deferring them can be a benefit forinvestors, particularly if that deferral goes
to the end of their existence, at which pointthey get a step up for just a direct indexing
account.
Could you not unwind those short positionstowards the fund end?
(16:31):
Or what's the practical difference between thelack of step up in basis in the short position
versus the rest of the portfolio?
The way I would think of it, David, is, know,it's a, again, using my sponge analogy, you can
maybe shrink that long short down, but at somepoint, if the person wants to liquidate that
portfolio, they're just going to have thatconcentration of gains in there.
(16:54):
You can't completely eliminate it.
There's going to be some taxes to pay.
If there is, as we talked about, someone dies,then there is a step up basis on the long, but
the short never gets that benefit.
So tell me about the hyper customization offinance.
I think the best way to think about this is togo back in time and just look at this arc.
So we go back to, and by the way, there's agreat article in the, the CFA Institute has
(17:18):
produced, and it's called a monograph calledthe title Beyond Active and Passive, discussing
the hyper customization of finance.
If I remember the author's name, I'd say it,but if people wanna dig into this further.
Go back to the earliest pooled funds.
I think the first ones they find on record areright before the inception of The US, 1774.
And they were a reaction, this was in TheNetherlands, this was a reaction to a credit
(17:41):
crisis that occurred as a result of the BritishEast Indies Company.
So back then, if you wanted to invest, it wasjust one stock.
You thought it was diversified because they hadbusiness all over.
If that company failed or something happened,there was no way to get rid of it.
And most people's wealth wasn't concentrated inthat.
The first pool fund on record, or at least I'maware of, was 1774.
(18:04):
And the idea behind that pool fund wasstrength.
Strength through unity and access todiversification.
We pool our assets, we get unity anddiversification.
For the manager of that pool, you get scale.
So that's kind of the early onset.
These were closed end funds.
(18:26):
So you didn't have a lot of liquidity, you hadactive management risk.
Roll forward roughly one hundred and fiftyyears, 1924, you get Mass Financial, Boston
comes up with the first open ended fund.
So here you've got a daily NAV, so now you getliquidity.
You still have active risk.
(18:47):
And it took probably thirty years for thoseopen ended funds to overtake closed end funds,
but eventually they dominated.
So by the 50s, they were growing faster thanthem, and then they dominate them.
Then you get to, you know, I'd probably say1976, but if I want to be honest, Wells Fargo
was doing this in the late 60s, indexing.
And in 1976, August, again, our bicentennial,John Bogle rolls out the first Vanguard does
(19:14):
the first index fund.
It was like $11,000,000 they scraped togetherand created the first publicly available index
fund.
I mentioned Wells Fargo had one earlier, but itwasn't SEC registered, not available to the
general public.
So you have this evolution happening wherethings are getting generally better and better.
By the way, that Vanguard, I think is thelargest, maybe the largest mutual fund today.
(19:34):
It's 1,500,000,000,000.0 or something of thatnature, just enormous.
But then as you get into the 90s, you get ETFs,basic ETFs, then the ETF market explodes and
you get all these plethora of ETF offerings,which shows the demand for customization.
Technology continues to evolve.
And then you get into the, Parametric openedits first SMA in 1992, very difficult to
(19:58):
manage, but as technology got better and betterand better.
What we used to do, back when we'd havediscussions with advisors or their clients,
talking about the benefits of separatelymanaged accounts, it used to be missionary
work.
Now it's just become commonplace because peopleare seeing, hey, what used to be the benefit of
(20:19):
unity and diversification.
I can achieve that now through the evolutionsof technology and innovation in an SMA.
And the big benefit that I get throughcustomization is I can tailor everything to my
specific needs.
Again, mentioning those things I statedearlier, tax factor completeness, whatever the
case may be, it can all be tailored to myspecific needs.
(20:42):
And so in that hyper customized world, I ownmore securities, individual securities, less
funds.
Again, with fractional shares, I can do thatwith smaller and smaller bases.
I can do it within, I can do a multi assetportfolio of fixed income.
All that can be achieved because of building onall the innovation that had occurred
previously.
(21:03):
And so as I think about that natural evolutionfrom the very first funds to where we are
today, it seems to me the only way we're gonnamove forward is through continued
customization.
And it's what people have come to expect inother parts of their life, whether they're
ordering from Amazon or whatever theirstreaming service is.
My kids don't watch any TV anymore.
Everything's streamed.
(21:23):
It's very customized to their specific needs.
I think that's gonna be the expectation forindividuals investment.
And ultimately it's gonna be a scale businessand not everyone's gonna make the journey
because the technology involved in doing it isextremely complex.
It's nothing you buy off a shelf.
Most of it's built internally.
Parametric's been at this for thirty years.
(21:45):
As I mentioned earlier, we're managing roughly400,000,000,000 in SMAs.
I think that hyper customization, that demandfor hyper customization is the tailwind at our
back.
You know, I could be wrong, but that's mybelief.
So fascinating kind of evolution in that first,had economies of scale.
You had everybody pooling their money, andbecause of that, they could invest and make
(22:07):
efficient investments on a per investor basis.
And now diversification.
Yes.
They could get diversification as well versusinvesting into one asset like in the eighteenth
century.
And then today, you actually have technologythat basically divides it into almost infinite
slices.
In order to divide it like that, you need aheavy investment into research and development
(22:32):
and technology that's able to offer that kindof unbundling of the shares into everybody's
individual account.
Exactly, so you needed innovation.
And again, occurred in a lot of places alongthe chain operations, custodial product.
I mentioned fractional shares.
The ability to trade fixed income in small,small lots efficiently.
(22:54):
And then you need that technology to get to thepoint where, like I said, we can track and
manage almost a quarter of a million accountsand they're all customized to specific
guidelines, you know, created by the adviser ortheir client.
One thing that's counterintuitive about that isit seems like the technology, especially and
(23:15):
I'm sure there's been some regulatory change aswell that's allowed things like fractional
share.
But why is the technology so expensive tocreate in order to fractionalize shares and
create these small SMAs?
It doesn't seem like that should be thatcomplex.
I can manage a 100 accounts maybe with a, asimple little macro or something.
(23:40):
But when I start to get to 10,000 accounts,50,000 accounts, a 100,000 accounts, when I'm
tracking a million tax lots and I have to do itdata, that's the scale drives the complexity.
That's what really gets challenging.
(24:01):
Said another way, when you take away all humanin the loop, it gets infinitely complex.
I don't know if I'd say infinitely, but it'ssignificantly complex.
Not theoretically infinitely complex.
Yeah, where
Parametric's gravitating to is several yearsago it was portfolio managers looking at a
(24:26):
portfolio and punching keys to optimize it andmanage it.
Increasingly, we're managing portfolios byexception.
So the system knows those first steps that theportfolio manager is doing and saying, okay,
here's what I suggest as the optimization.
And the portfolio manager can then look atthings much more efficiently and process them
(24:47):
much more efficiently.
So it's management by exception.
Skeptical person may say that that's nice thatyou could have an ESG overlay or as you
mentioned, you have Morgan Stanley shares, youmight not want to have Morgan Stanley within
your portfolio.
These feel like etch cases outside of the taxpart of it.
Give me some very common use cases where peopleare using customization to drive returns either
(25:13):
pre or post tax returns?
Yeah, somebody can say, hey, I want aconcentrated AI portfolio.
And we'll create a simple basket of factorbased AI centric names.
They'll go through and say, yeah, we agree, andwe can manage that portfolio for them.
Or I wanna concentrate, whatever factors youmay want.
(25:35):
That would be a mainstream case.
I don't know if completion is necessarily anedgy case.
I think there's a lot of people think about itmore.
They understand.
They don't want to own more of where they maybework and get vested securities.
And you're right.
Tax loss harvesting for taxable investors isthe one that's most quantifiable.
(26:00):
That is not edgy.
We don't use the phrase ESG.
We use values based investing.
ESG has become kind of a political football.
But I do believe we're still in a world wherethere's still many people who want, and by the
way, values that they reflect might be the antiESG values.
Like whatever factor these screens are selling,I want to buy.
(26:23):
We can design that portfolio for them.
Do you believe in the efficient market or themostly efficient market hypothesis?
Yes.
I generally believe that markets particularlyin the short term are generally efficient and
they're always driving efficiency.
I do believe in the very long term because somuch capital is based on the short term There
(26:47):
can be inefficiencies, but it takes patienceand a long time to exploit that.
I'm a big believer in the mostly efficienthypothesis, which is basically saying, I'm
waffling a little bit, but a use case in thatis when my mom calls me and she said she says,
I read somewhere.
I saw a video that Palantir or Uber orMicrosoft is good or bad.
(27:07):
I'm like, great.
As long as you're investing in the publicmarket, if it is efficient, you can you can
essentially, you can't make alpha, but you alsocan pick randomly.
I can make a portfolio of of stocks that startwith the letter a, and I shouldn't do that much
worse, in theory, at least, than than the S andP 500.
So it kind of anything that could drive thisbehavior of people investing more in the
(27:30):
markets overall and in in most cases isactually very pro social behavior.
So I'm a big fan of these overlays because itallows people to align with their values and
invest in a way that I think probably mirrors,at least on a risk adjusted basis, the S and P
five.
Yeah.
Hopefully.
Listen, I agree.
I think we generally agree that in the nearterm markets are generally efficient.
(27:53):
I would encourage any investor who's looking atbuying say a single name.
I think this is a Warren Buffett quote, but youcan check me if I'm wrong.
It's in every market there's a fool.
Make sure you know who that fool is before youinvest in it.
Otherwise you're the fool.
So it's another way of saying what's your edge.
If you don't have an edge, you're just at thewhim of the market.
(28:16):
In your role as CIO, how do you define therole?
Are you making macro bets or making someprognostications in the market or in the
regulatory arena or tax scheme?
Or is it purely to be Switzerland and let otherpeople kind of make those guesses and provide
(28:39):
the pipes and rails to do that?
First of I'd say Parametric does not hold outthe ability to, consistent with our efficient
market hypothesis, the ability to provideforward guidance on the market.
So we don't represent that as a skillset thatwe have.
My job as CIO falls into kind of a couplecategories.
First, internally, it's the allocation ofresources.
(29:01):
So where do I allocate resources that I believebest match the needs of our client?
I don't do that.
I'm not some dictator.
I'm doing that by myself.
That's in collaboration with many other people.
But ultimately I have to own the allocation ofresources.
Where do we hire people?
Where do we allocate them?
Where do we give them an upgrade in technology?
Where do we have to stall things out?
Those types of things.
Second, I represent Parametric in publicforums.
(29:23):
So I have to oftentimes go see something, and Ido enjoy this part of it.
Go talk to some of our biggest clients, but Ialso like seeing as many, if I'm in a market
for a meeting, I try to see as many of ourclients as possible because it gives me
feedback on what things we're doing right anddoing wrong.
You'd be amazed at people's willingness to tellsomeone they see as a leader of the firm, hey,
(29:44):
by the way, this is where you guys are droppingthe ball.
They're more than happy to tell me.
I'm actually glad with that frankness.
And maybe third, as I mentioned, Parametric hasgrown to over a thousand employees.
And in addition to being CIO, I'm co presidentof Parametric.
My colleague Ranjit Kapila, he is the other copresident.
He runs our technology and operations portionof our business.
(30:07):
Critical to the value we deliver to employees.
But part of what I have to do and he has to dois we have to be able to tell a story.
Meaning, and I don't mean fabricate a story.
I mean, do you communicate with people and getthem aligned to the direction you need the firm
to head?
How do you do that in a way that is easilyunderstood and then reverberates throughout the
(30:31):
organization?
And that's part of my job is to be able to dothat effectively.
What are the biggest mistakes that you madeearly on in communicating with a thousand plus
employee base.
You've heard that old narrative about you know,you sit around the campfire and you whisper
something and you hear the person to your leftand then it goes around the campfire and it
(30:52):
comes back to you completely different.
And that's a little bit like if you don'tfigure out how to break something down into
very simple terms, it's gonna get mangled.
I think I've learned that the hard way.
What I thought was communicating clearly butprobably wasn't as clear as it should have been
because something didn't happen the way Iexpected it to happen and we got a negative
outcome.
You hopefully learn and get better as a resultof those mistakes.
(31:15):
And I assume it's something that every personwho's leading any kind of group of people goes
through.
Like I said, people, campfire with some peopleand you can't get it right.
How do you expect to get it right throughdifferent layers of of, leaders at a firm?
You gotta be really crisp, clear, and repeatit.
(31:37):
Alex Formosie, who I think is one of thegreatest communicators really of our generation
in terms of the business world, He he takes itto a whole another level.
Not only does he simplify things in very easy,digestible ways, but now he also tries to
either have it be alliteration or actuallyrhymes.
Because if it's rhymed,
that means
if it rhymes, it means that's true.
(31:59):
So he distills he distills even on that level.
So and I don't think you could over simplycommunicate something, especially when it comes
to the top.
I think people in many ways get overcommunicated to this.
They could sometimes even interpret a physicalposture or tone in a way that's not consistent
(32:21):
with what wants to be communicated.
So you have to be really careful.
I a 100% agree with you and that's why a fairamount of my time has meant not connecting with
people on video but trying to fly to differentlocations and meet people in person.
As I thought about your statement aboutrhyming, I don't know if you remember this from
your early days but schoolhouse rock.
I'm just a bill.
(32:42):
Like creating a song and how you can teachpeople things through the simple process.
But yes, creating a narrative for people tounderstand what you're trying to deal with or
address or the direction your firm is, if youwant the firm to head.
I agree that's important.
We'll get right back to interview.
But first, we're looking for the next greatguest.
(33:03):
If you or someone you know is a capitalallocator and would make for a great guest,
please reach out to me directly atdavid@WeisbergCapital.com.
I've done a deep dive on this.
I don't know if you're familiar with DavidDeutsch's memetic theories and something that a
lot of really influential communicators, Iwould throw Elon Musk in that group, is they've
actually found out that it's not even words orstatements that are most memeable or copyable.
(33:27):
It's literally memes.
So the word memes comes from, Richard Dawkinsin the, I believe, the seventies, which are
these ideas kind of like genes that spreadquicker than actually explanations or long
monologues.
It's it's the reason why people use narrativesor stories versus explanations because those
are more memeable.
So there's a whole there's a deep, there's arabbit hole to go to, which we we could save
(33:52):
for another conversation.
All right, Dave, I'm gonna hit you up for somerecommendations on books because no, I'm deeply
interested in this and how, if people are rightabout AI, this is gonna be one of the greatest
skills that people are gonna have to master,which is do you communicate, do you tell a
story to kind of lead people in a certaindirection.
You mentioned that when you travel and you talkto institutional investors, they oftentimes
(34:15):
give you the feedback.
Is that how you're growing Parametric in that?
Is your growth driven pulled from yourcustomer, or do you kind of go in and and try
to learn as much internally, develop models,react to where the market, where your
competitors is going?
What's that mix between push and pull products?
It's definitely a blend.
I don't know if I can put a percentage on oneversus the other.
(34:37):
We are clearly taking feedback from our clientsand trying to understand where they see the
market going.
We have, we're fortunate to be in this, youknow, inside of Morgan Stanley.
So we have leadership at Morgan Stanley thatsees broadly across different parts of the
marketplace.
Morgan Stanley runs a large wealth platform.
(34:59):
So they feedback from the advisors, many ofthem who are clients of ours.
So we can use that feedback.
And yes, we are also looking at what arecompetitors doing.
There are certain competitors we pay moreattention to than others.
We can't chase every new competitor down arabbit hole but we want to understand what
(35:21):
trends are evolving in the market.
I just finished, I'm probably late on this, theinnovator's dilemma and it concerns me you
don't want to follow your best customers over acliff.
So we always want to make sure we'reunderstanding what evolutions are out there and
if we're we're missing anything.
(35:43):
You obviously focus on public markets, but youalso live within an ecosystem of public and
private.
So you see this rise of alternatives.
What are your views on the rise of alternativesand how that affects Parametric and maybe how
Parametric and Morgan Stanley could play inalternatives as well?
Well, Morgan Stanley Investment Management hasa big book already in alternatives, real
(36:08):
estate, private credit, private equity.
They already have that skill set and aregrowing at some incredibly skillful people
working in that area.
Ultimately, and you hear this coming out ofplaces like BlackRock and others, they're
moving to a point where they're bringing altsdown further into the high net worth and
possibly someday retail channel.
(36:29):
My expectation where Parametric will play arole in that is Alt will be a part of a model
portfolio.
So in the hyper customization world of thefuture, it'll be what's provided as a model
portfolio.
Parametric will be the implementer of thatmodel portfolio.
We may have a sleeve in that model portfolio.
We may tax manage the entire portfolio.
(36:49):
Alts may be one part of it.
The issue I think that we're struggling withnow or the market's struggling with now is how
do you package those alts in a way that'sliquid enough to put in a high net worth model
portfolio?
Is it a simple interval fund or is it's gottabe something a little bit more liquid?
(37:09):
That's the part I'm less involved in but I knowthat's kind of a big question they're pursuing.
I think we've all, or at least there's beensome experience with a large real estate fund
that gated a while back when real estatestarted suffering.
And I think people are trying to figure outlike how do we avoid spat out or how do we
create liquidity?
It's a tough thing to solve.
(37:31):
So we'll see what they come up with.
These are multi factor problems.
You know, I've been thinking a lot about this.
The interval funds, first of all, obviously,lot of them are starting to have quarterly
liquidity over five years in this kind oftwenty twenty quarter gate.
But another one is purely naming conventions,calling something like a private equity twenty,
(37:51):
thirty five fund, similar to how they doretirement funds.
Yeah.
Doing, like, education or literally making itcalling it the private equity illiquid illiquid
fund, and there's a lot that could be donearound that.
But, certainly, what's surprising to me in infull transparency, I made investment in a
company called Alto, which is Alto IRA, whichbasically allowed people to invest their Roths
(38:14):
and traditional IRAs into private assets.
But you have these trillions of dollars in 25year olds' retirement accounts that are sitting
in liquid assets, and that, to me, is absurd,and that should be the low hanging fruit.
I think a lot of companies should focus onthat, and the regulatory should focus on those
opportunities versus kind of a little bit moreof a difficult situation and different
(38:37):
education situation with educating people aboutilliquidity in their taxable entities.
What you're hitting on is is most of thesestructures, I may have this wrong, are for
qualified investors.
Qualified investors, $5,000,000 liquid networth.
That's gonna eliminate a lot of people.
Definitely most people in their twenties.
(38:58):
So it's how do we how do we do this goingforward?
We'll see.
Sometimes these paradigms are so obvious inretrospect.
This idea of you have one account, you haveyour private assets and your public assets so
that a parametric would be able to come and seewhere you might have liquidity in your venture
capital or private equity and plan for thatthrough things like tax loss harvesting.
(39:19):
Such a such a good idea, but such a differentparadigm than existing paradigms where
everything's kind of its own fund.
Unless you have a billion dollars plus and youhave a full time CFO that's doing this kind of
analysis on a monthly basis, the regular theregular man, aka the non billionaire, does not
have access to these types of tools.
As I think about the advisor model, definitelythe platforms are trying to get advisors to buy
(39:44):
into the models, meaning they don't wantadvisors creating these separate accounts and
doing this themselves.
They want them to focus on a model.
And I don't know if you follow, how closely youfollow the RIA market but that's going through
enormous aggregation.
We're probably within three, four, five yearsfrom having the first trillion dollar RIA.
(40:06):
They're doing this, they're starting to looklike the platforms.
So what everyone wants to do because that's howyou scale these businesses.
So what everyone wants the advisor to betalking about with the client is a model.
Here's a model.
Look at this model.
And this gets to the hyper customization,right?
If I just have a plethora of models and I canoffer them then you can do a lot of things with
them including fit that alternative piece in.
(40:27):
And you can have a centralized manager likesomebody like Parametric kind of sitting over
the whole thing, managing a sleeve, taxoptimizing all the publics and coordinating
with the alternatives.
Again, I don't fully understand how that allworks yet because I don't know how the Alt
piece fits in but you can see it.
It doesn't feel like it's that far away.
(40:47):
There seems to be a lot of convergent factors.
I had the c CEO of iCapital, which is kind ofworking on making the pipes and rails to invest
into this.
I had the CEO of Atapar, which is kind ofworking on figuring out that all the data and
how to do streamline kind of all the privatesdata.
There's other k one platforms that arestreamlining k ones, which is and then there's,
(41:10):
of course, new regulation.
There's a credit investor test, all all thiskind of perfect storm is coming together.
In the best case, the best outcome, make thebest investments available to the longest tail
of people.
In a worst outcome, yeah, in worst worstoutcome, some people may be duped into some
funds by bad actors, but those are kind of thetwo that that's kind of the utopian and the
(41:35):
dystopian future, that we're gonna see play outin the next five, ten years.
Yeah.
And I think you forgot one other big factor,which is the largest money manager out there,
BlackRock, getting into the space and nowstarting to look at it like, we index in this
space?
Is there a way we can create benchmarks in thisspace?
That to me is gonna drive a lot of activity.
Obviously, you guys are more of a passiveinvestor than active investor, and that's been
(42:00):
a huge trend and specifically in the twentytens.
And now some people are going active becausesomebody has to make the market efficient.
And market by definition, theoretically cannotbe all passive because somebody's making it
active.
Just if you were to take a step back from yourrole, is there a is there room for active
investors to kind of balance the market, or isthat kind nomer?
(42:21):
I always think there's room for the activeinvestor.
I think I acknowledge to you that I thinksomebody long term, if they have a long enough
view, can make a, there's probablyinefficiencies in the marketplace.
I don't doubt that there may be somebody withskill out there.
I think it's hard to demonstrate.
You know if I filled Yankee Stadium with peopleand told them to all flip a coin, I eventually
(42:42):
would find 10 people who flipped heads 20 timesin a row or something.
So maybe you just get there by luck.
I think it's very hard for investors toidentify those people.
And so you have to kind of think about, can Iidentify that person and are they someone other
than that has skill and not just one of the 20flipping the heads?
(43:02):
To
add add to your side of the argument, even ifyou were able to identify skill after twenty
five years, a, that person may be in anotherseat or retired, but even if they're on their
own seat, their motivations have changed.
This is a common thing in venture capital andprivate equity.
People start to work less.
(43:22):
They take the incremental weekend off andvacation, which may be rational, not good for
their portfolio.
So even by the time you determine their skill,oftentimes, you're also not able to to
implement.
It's just purely kind of academic information.
You're not able to implement that intoinvestment strategy.
One of the smartest clients I dealt with, hehad this rule, manager moves to Florida,
(43:44):
manager buys a Lamborghini, he terminates them.
It's like these are two automatics.
Other, maybe the other thing you gottaremember, and Warren Buffett talks about this,
at a certain point if they're successful, theirsize overwhelms them.
Warren Buffett's like, I can't be more than themarket now.
I'm too big.
It's very hard for me to be anything other thanthe market.
And I think to his credit, he's honest.
And I think other people say, no, no, no.
(44:06):
I can take on more assets.
I can do more.
I can do more.
And it's very hard to do and continue to havethat edge.
If you could go back to 1989 and distillinvestment or management principle to yourself
that you could hold on through your entirecareer, what would you teach young Tom that
just graduated from college?
What would be the principle?
It's hard to say, David.
(44:28):
My experience at the Fed made me more of anefficient market person.
So I was always very respectful of the marketFrom a very early age I didn't ever believe
that I had an edge, a great edge in any way.
And I always understood that the market drivesfor more efficiency.
(44:49):
So I don't know that I would have any greatinsights to give 1989 Tom Lee.
It sounds like Herschel Walker referring toyourself in the third person.
And I don't know if I'd have any great adviceto give him about investing.
Maybe I could say career advice.
And this is something I often have discussionswith young people, which is careers like life
(45:12):
are nonlinear.
Everyone kind of thinks like, hey, if I do A,B, C, D, E, F I end up in G.
And maybe, you know, if you're at MorganStanley, g is like Ted Picks role or something.
And everything's nonlinear.
And I think people need to understand that,appreciate it, and think about resiliency
throughout their careers.
I personally started a firm with six employeesand we just, we weren't like brilliant people
(45:35):
thinking about customization back then.
It was the only thing we can do to winbusiness.
So, you know, necessity is the champion ofinnovation but I've been acquired three times
because we are in a consolidating, publicmarkets are consolidating.
And with each of those acquisitions camedifferent strategies, different cultures,
(45:56):
different focuses, different resources andbeing able to be resilient through that.
Because I think everyone's career is kind oflike that.
I don't think I'm unique in this.
I think that's the most important thing and Idon't think I fully understood.
I know I didn't fully understand that in 1989.
I don't want to age you, but obviously 1989 isthirty six years ago.
You've had a prolific career.
When you talk about resiliency, is it harderwhen there's like stagnation where you're just
(46:21):
like, it's been another year, we grew 2% inanother year, or is failure more difficult?
What's the most difficult thing to live throughand how do you know that you should push
through versus maybe pivoting?
Listen, that's a great question.
No growth, low growth is very challenging,right?
Because part of the benefit I get out ofworking here is seeing people around me
(46:45):
succeed, watching them build lives, watchingthem buy houses, have families do things.
I mean, obviously I want our clients.
It's important for me that our clients succeed,but I also want our CRM employees succeed and
that requires advancement and that requiresgrowth.
So I think to the second part of your questionis how do you know when, hey, we just got to
(47:07):
hold on and missionary work's going to becometrend.
I don't have a great answer for that.
I mean I think sometimes it's stubbornness.
Like you believe something, you believe this,you believe like evolution is behind you and
it's gonna happen and so you're willing to keepsomething alive.
(47:28):
I think you're always experimenting withdifferent things and seeing if things will take
off.
The problem is you don't, again you don't knowhow long, like how long should I continue to
experiment with this?
When do I cut it off?
That is the art of this business.
Like I don't have a good answer for you.
But the best answer that I've heard is haveyour priors changed?
(47:48):
Has your thesis on it changed?
In which case you may want to, you're gettingfeedback and you say, okay, take that feedback,
I'm gonna pivot.
Or is it just hard?
Some things are just hard.
Having a contrarian view is hard.
You know, believing in a passive strategy whenactive is hot or the vice versa is hard, and
(48:08):
that is just that's just sucking it up versusin the case that you were wrong about something
you thought, you know, there would be a big taxopportunity, but the tax scheme has gone
against you.
And now you're, like, self justifying in tryingyou're trying to update your thesis without
revisiting why you start taking the actionbefore you took action.
(48:30):
We're so good at diluting ourselves and, like,evolving the narrative in our own head, let
alone other people.
You definitely don't wanna get anchored.
You definitely wanna approach things fresh andthink about, hey, know, am I wrong here?
Or do we need to pivot as you state?
I read a book a long time ago by Bob Rubinwhere he talked about this.
(48:50):
It's keeping your options open as long as youwant to take in as much data to make the best
decision as you can.
But ultimately you're never gonna have all thedata.
So you're gonna have to take a risk.
And hopefully, as you point out, a key toadvancing making the right choices.
You make a few wrong choices and you end upsomewhere else.
(49:11):
I love the Jeff Bezos analogy to this.
Two sided doors, one-sided doors.
Two sided doors are decisions that are easilyreversible.
You wanna make them as soon as you have apretty good idea.
And then one-sided doors, like strategic orplatform decision.
Sometimes if it's a decision that'll bind youfor ten, twenty years, it's efficient to spend
seven, nine months, twelve months, as long asthey're getting incremental data.
(49:34):
It's another kind of, you know, lens to lookthrough at, especially difficult career
decisions.
I agree with you.
I'm familiar with the Bezos model that youmentioned.
And the issue that I'm kind of getting in andit's not surprising you, the higher you get up
in an organization, you usually end up withfewer two sided doors and more one-sided door
decisions.
People lower in the food chain will take careof the two sided door ones.
(49:58):
Essentially via organizational design, youstructure the tasks in such a way that you deal
with the difficult decisions.
I think everyone does.
Right?
Because one the one thing I have to optimize ismy time.
So I can't sit here and take every decision.
I gotta trust people.
I gotta hire good people, make sure I empowerthem to make those decisions.
I think that's why Musk calls CEO the worstposition at a company because you, by
(50:22):
definition, get all the unsolvable, most shittymistakes, and not most shitty decisions flow up
to the CEO.
And most people wanna be CEO until they realizethat it's literally you're constantly dealing
with the most difficult there is no easy daybecause if there was an easy day, it wouldn't
escalate to you in a larger
But, yeah, no.
Barack Obama, I think he made a comment aboutthis in his book when he was president.
(50:45):
It's like, decision reaches my desk if ithasn't been vetted by like 30 people.
So it's really the hard decisions that reachhis desk.
I agree.
That's why at least CEOs are often the highestpaid people.
Tom, this has been absolutely fantastic.
What would you like our listeners to know aboutyou, about Parametric, anything else you'd like
to share?
I would say about Parametric, we are about, asyou and I've talked about, are understanding of
(51:09):
efficient markets.
We're humble, we believe in customization andbuilding partnerships.
Partnerships with advisors, partnerships withclients, whether they be institutional or
sometimes high net worth is institutional likemoney or retail.
That's who Parametric is, that's our DNA.
And I understand that's become more popularrecently but we've been doing it for thirty
(51:31):
years And it's not something that you can justflip a coin and do one day.
It becomes, you think about investments adifferent way.
You think about investments as a service, morelike a service and less like a product.
And that's something that's very hard forpeople who've only sold product their whole
life to do.
You create all the infrastructure.
You hire people.
You hire a specific type of person withspecific competencies and cultural values.
(51:55):
You have this certain type of technology.
You have processes.
You have values, which is one type of thing ismore important versus another type culturally.
So it's so it goes back to an innovator'sdilemma.
There's a reason why organizations getdisrupted because they get so ingrained in
specific processes, whether positive ornegative, that it becomes their strength and
their weakness.
(52:16):
Well, they follow their best customers whodon't know the new trend, and they they can't
get away from it.
So no.
I agree.
Tom, I'm pledging to go to Minneapolis and sitdown with you or have you in New York City.
That'd be better, but I look forward tocontinuing conversation
I'm in New York quarterly, so happy to do itwhenever I whenever it works for you.
David, thanks for your time.
Thanks for listening to my conversation.
(52:37):
If you enjoyed this episode, please share witha friend.
This helps us grow.
Also provides the very best feedback when wereview the episode's analytics.
Thank you for your support.
Tom, I've been excited to chat.
(00:01):
Welcome to the How Invest podcast.
Thank you.
Thank you for having me on, David.
So give me a sense for the scale at whereParametric is today.
Scale of Parametric, we are by the numbers thatasset managers are usually measured, we're a
(00:21):
little over $600,000,000,000 in AUM.
We have over a thousand employees based in sixoffices in The US and four outside The US.
We manage 220,000 accounts, so mostlyseparately managed accounts.
We also manage some ETFs and some traditional40 Act funds and some USITS funds in Europe.
(00:45):
So we have a, you know, we're a decent sizedasset manager that exists inside of Morgan
Stanley Investment Management.
So I mentioned we are about 600,000,000,000.
Morgan Stanley Investment Management is1,600,000,000,000.0, so we are roughly 37 of of
those assets.
(01:06):
When we last chatted, I was excited to hearthat you had worked out the Federal Reserve,
and my first question was what is inflation andwhere do you think inflation stands at today?
It's funny you asked that today because as youmay be aware, they released CPI this morning
and it came in at 2.7%, which is a uptick from,that's year over year CPI, came in at 2.7,
(01:31):
which I think is up over May.
May was 2.4, but it was the expected number.
Non core, so if you eliminate food and energy,was I believe 2.9.
The numbers in, if you look inside the numbers,you're seeing big jumps in things like audio
video equipment.
So thing, it looks, at least the earlyspeculation is that tariffs are starting to hit
and it's coming through in the numbers.
(01:52):
CPI is the traditional what you see on theevening news, read in the morning newspaper.
That's the inflation gauge that the governmentproduces that most people reference.
It's also the number that's baked into socialsecurity payments and other types of contracts.
That's where you see CPI.
The number, and it's calculated by using abasket of goods that's fixed for two years.
(02:18):
So it's not really robust or dynamic and itdoesn't include third party provided services.
So for example, if your employer paid for yourhealth insurance, wouldn't be factored into
CPI.
The number that the Fed focuses on, and they'vedone this for at least the last two decades is
PC, the personal consumption expenditure.
That number is calculated through surveys ofall goods and services consumed.
(02:44):
And it's chain linked, which means it's morerobust.
And why that's important, David, is because thenatural reaction for people if prices change
significantly is they change their consumptionpattern.
So if all of a sudden beef becomes veryexpensive, people consume less of it, maybe
consume more chicken or pork.
Or if gas becomes very expensive, people driveless.
(03:07):
The PC number for that reason tends to reflectmore, at least in the Fed's estimate, they
looked at this for a long time, what realconsumers are experiencing.
And so it's the number that they focus on andit runs generally consistently below CPI.
So those are the two kind of main gauges ofinflation in the economy.
I know all this is mired with politics andpublic policy, but fundamentally, when you go
(03:31):
outside, whether you're buying groceries or yourent or whatever, it feels like inflation is
higher.
Why does it feel like inflation is higher thanin the two percents?
It depends on who you are and what you consume.
I mean, everyone has everyone's own inflationexperience is based on their personal
(03:52):
consumption pattern.
So do you rent an apartment or do you own ahome with a fixed mortgage?
That will affect how you, housing is one of thebiggest contributors to inflation.
Do you drive a vehicle that has an electricengine in it?
Or do you drive one that has a combustionengine in it?
That could affect how you look at it.
What groceries do you purchase?
(04:13):
Do you eat out a lot?
Those are the things that are gonna affect howyou may view inflation.
Do you take trips?
Do you stay in hotels?
That may affect how you view inflation versussomebody who doesn't do some of those things.
So it's very personalized experience.
I think what the government does is a gauge,which kind of measures, tries to give everyone
a sense of where they are, but there's adistribution around that based on your personal
(04:36):
consumption.
Inflation is very idiosyncratic to how youconsume.
Just to play devil's advocate, there's eitherthis meme or this conspiracy theory depending,
I guess, how you frame it in the market thatthe true quote, unquote, true inflation is not
revealed to the public and that it's muchhigher.
A lot of people in the crypto crypto spacebelieve this, but also some very educated
(04:57):
people believe this.
Is there an incentive for the true inflationrate not to be disclosed to public?
Is there an incentive?
Well, clearly, I just mentioned that thatinflation is baked CPI is baked into things
like Social Security and other other financialinstruments, which the government pays.
(05:19):
So I guess you could argue that there's anincentive for the government to try to
misrepresent inflation.
The amount of coordination that would have tooccur for that to happen and the amount of
people who would have to be in on this, I mean,just to me doesn't seem realistic that the
government could somehow do that.
What I think is possibly, you know, a littlebit more realistic, and I think it's only at
(05:39):
the margins, I'm sure you've heard the storybefore, you used to buy, you know, maybe a pack
of frozen corn that had, that was 16 ounces,and now it's 16 ounces, but four ounces are are
vacant in it or something like that.
Same bag, less contents in the bag.
So there's always been an argument.
Are people really shrinking the product,providing you with less, fewer goods for the
(06:02):
same price?
That's something that would be very difficultto measure.
So I guess at the end of the day, I don'tbelieve that the that the government I think
that that it's easy to speculate about that,but it it's not something that that is likely
or occurring.
There's too many smart people in the market whowould would figure that out if there was
something fraudulent happening.
And the reason it's so hard to coordinate isbecause the the different Fed branches
(06:27):
individually calculated, economistsindividually calculated, as well as analysts
and macro investors individually calculated.
So it's not only different people in differentoffices, it's also different constituents.
Well, really, it's a Bureau of Labor whocalculates the CPI, and I think it's the Bureau
of Economic Analysis that calculates the PCE.
(06:49):
Then you have a bunch of economists, as youpoint out, locally at district banks studying
kind of what's going on pricing in theirmarket.
And then you have economists at universitiesand other places doing macro studies.
If those things were off or didn't align, yeah,you'd hear about it.
So tell me about the five year, five yearforward rate.
The five year, five year forward rate is whatthe Fed has identified as a long term.
(07:15):
It's the long term, it's the inflationexpectation five years from now.
So it's what the market is estimating.
They compare nominal bonds and tips and say, isthe market projecting for the five year
inflation rate five years from now?
Ultimately, rate, the way the interest ratemarkets clears is heavily dependent on people's
(07:37):
inflation expectations.
It's not one inflation we've experienced.
It's their expectation about future inflation.
The five year five year, as it's often called,is a good measure of long term inflation
expectations.
It's also a measure of Fed credibility.
If the Fed is not credible, that number couldbe potentially very volatile or higher.
(08:00):
And what we've seen, and if you look at a graphof this, it bounces in a very narrow range.
I think it right now is around 2.4%.
It's been as high as 2.6%.
And if I go back to, you know, early pandemicor before, it was below two.
But for the last couple of years, it's hungbetween two point three and two point six.
So it's really tight band.
(08:22):
And the Fed credibility, I'm guessing that'snot that they could do models correctly, that's
they stay an independent organization.
It it's that the Fed is willing to make thetough decision as there was a former Fed
chairman, William Martin Chesney, or I I thelast name was Martin, who said, you know, the
and he was the Fed chairman from in the fiftiesand sixties.
He said the Fed's job is to steal the punchbowl away right when the party gets started.
(08:45):
And what he meant is, hey, when the economyjust starts to overheat, starts producing at a
level that's not sustainable, it mightintroduce inflation.
They have to step on the they have to put onthe brakes.
They put on the brakes through primarilythrough the management of short term interest
rates.
Those are the markets belief that the Fed willdo that.
(09:07):
That's credibility that Paul Volcker, if you goback way to the early eighties and the first
Reagan administration, you know, afterinflation got very ugly in the in the late
seventies, Volcker established thatcredibility, and it's been sustained ever since
that the Fed will do whatever is necessary toprevent inflation from getting out of hand.
I've looked up the five year five year forwardrate since our last conversation.
(09:29):
I think today, it's 2.33%.
And I find that just shockingly difficult tobelieve given that, at least my interpretation
of DOGE failing, is that essentially one of thetools and the tools for the national debt to be
decreased has been largely ineffective, maybesome effectiveness, and now it's just a matter
(09:52):
of time before The US has to inflate away thedebt over several decades.
Why why is that not a consensus view, and whyam I wrong about with having that?
You're asking some good macro questions.
I mean, The US has a history.
(10:12):
And we do have, you know, if you look backover, and I think I wanna say the last time the
debt to GDP ratio was at this level, we'rehovering around 120%, was just after World War
II, like 'forty six, 'forty seven.
And if you look at The US in the early we ranan inflation rate around four to 5%.
(10:36):
That's one of the ways we got out of that hole.
But there were other reasons for running that.
Soldiers returning from overseas.
We had a GI bill.
We had people building houses and all sorts ofthings going on.
I you know, why doesn't the market think thatthat ultimately that we're gonna inflate our
way out of this debt problem?
(10:57):
I think it gets back to the belief that the Feddoesn't allow that.
The Fed is independent.
The Fed will not allow inflation.
The problem with in just you trying to useinflation to get out of the the this this debt
hole is if it has the potential to raiseinterest rates.
And we roll over a lot of debt, so it can makeit very expensive.
(11:18):
So we have to kind of manage that.
If we were to if politicians were to somehowthink miraculously that we could create
inflation and make it easier to pay off thedebt with cheaper dollars, they would have to
consider what it means for the amount of debtthat we have to roll over on a regular basis,
and how that could be impacted if the marketcame to that belief.
(11:39):
I appreciate the the macro lesson.
I do wanna talk about Parametric where you'reCIO.
You mentioned that you have roughly600,000,000,000 assets.
How much of that is high net worth and how muchof that is institutional?
I would roughly break that down.
Roughly institutional.
So 200,000,000,000 or so institutional and twothirds high net worth retail.
I mentioned, I don't think everyone in thatcategory qualified.
(12:02):
There's various different definitions of highnet worth.
But part of what we are doing is bringingdemocratizing what has historically been
institutional management capability to lowerand lower AUM.
So everyone in that category might not qualifyas high net worth.
So you say that you're bringing institutionaltools, institutional practices to the high net
(12:23):
worth.
What are some examples of that?
What are some kind of tools or funds thatyou've created in the last decade or so that
address some of the issues?
So David, if you think about it, institutionshave always had the or in my career, dating
back to the early nineties, have always had theability for large allocations to have their
(12:47):
assets managed in a custom manner.
The benefit was it can be very much customizedfor them.
Sometimes they can negotiate a better fee and,overall just a better experience for them.
That for many, for a long time was the of largeinstitutional institutions.
Increasingly as technology has evolved, asinnovation has occurred, I'm thinking of
(13:09):
innovation in the way we manage operations, inthe way we manage custodial operations,
fractional shares, things of that nature, we'vebeen able to provide separately managed account
experience to lower and lower AUM basis.
Within, for many of our clients, that minimum's$250,000 So we've actually evolved our
(13:32):
technology within Morgan Stanley Wealth, theircommon ownership, to the point where we can get
that down to $25,000 So what that means, one ofthe benefits that brings to clients, taxable
clients can have the accounts and manage fortax.
Clients can have the portfolio customized forfactors, for values, for completion.
And when I say the word completion, what I meanis I work at Morgan Stanley.
(13:56):
Part of my compensation is deferred MorganStanley stock.
I may not want Morgan Stanley in my portfolioholdings to avoid that concentration.
So maybe I want my holdings to avoid MorganStanley, maybe Goldman Sachs at the same time.
I don't want that.
So I can have that, the portfolio designed forthat completion around what I may hold
elsewhere in my portfolio.
(14:18):
All those capabilities now, we are bringing toa lower and lower AUM and they once were just
the privy of the largest institutions.
One of the things that I've learned recently isabout having a public position.
Let's say, you have a company you invested as aVC.
Now you have $5,000,000 in Coinbase shares isactually building a portfolio around a long
(14:41):
only position, whether it's tax loss harvestingor just, like, using that to offset losses.
Explain that on a simple level.
Why would a high net worth individual do this?
Let's let's use a very simple example of whatpeople often call direct indexing.
It's the ability to track an index whiledeferring gains and realizing losses or
(15:03):
throwing off losses, which those losses aninvestor may use elsewhere in their portfolio,
maybe to unwind a cryptocurrency position or aconcentrated low basis stock position.
That is the value of a kind of direct indexingis I can still get an index like experience.
I can also get some losses that I will maybeuse elsewhere in my portfolio, or I can just
(15:24):
roll forward, and I will defer gains.
More recently, that's been extended wherepeople are willing to or some people who have
maybe extreme positions, maybe they have a lowbasis in concentrated stock like Amazon or
Nvidia are willing to employ a short positionon top of that.
So you can generate even more losses.
The issue that people always have to keep inmind is we're not eliminating a tax liability.
(15:49):
Think of these portfolios as a sponge that'sjust absorbing it.
So if you at some point wanna liquidate thatportfolio, you will experience those taxes.
Many people say they don't wanna liquidate Theend game for that group is ultimately death and
step up.
Long short, that gets a little more complicatedbecause you can't step up a short position.
(16:11):
But what, you know, sometimes people getconfused.
They think we're eliminating taxes.
We're not doing that.
We're just deferring them.
And deferring them can be a benefit forinvestors, particularly if that deferral goes
to the end of their existence, at which pointthey get a step up for just a direct indexing
account.
Could you not unwind those short positionstowards the fund end?
(16:31):
Or what's the practical difference between thelack of step up in basis in the short position
versus the rest of the portfolio?
The way I would think of it, David, is, know,it's a, again, using my sponge analogy, you can
maybe shrink that long short down, but at somepoint, if the person wants to liquidate that
portfolio, they're just going to have thatconcentration of gains in there.
(16:54):
You can't completely eliminate it.
There's going to be some taxes to pay.
If there is, as we talked about, someone dies,then there is a step up basis on the long, but
the short never gets that benefit.
So tell me about the hyper customization offinance.
I think the best way to think about this is togo back in time and just look at this arc.
So we go back to, and by the way, there's agreat article in the, the CFA Institute has
(17:18):
produced, and it's called a monograph calledthe title Beyond Active and Passive, discussing
the hyper customization of finance.
If I remember the author's name, I'd say it,but if people wanna dig into this further.
Go back to the earliest pooled funds.
I think the first ones they find on record areright before the inception of The US, 1774.
And they were a reaction, this was in TheNetherlands, this was a reaction to a credit
(17:41):
crisis that occurred as a result of the BritishEast Indies Company.
So back then, if you wanted to invest, it wasjust one stock.
You thought it was diversified because they hadbusiness all over.
If that company failed or something happened,there was no way to get rid of it.
And most people's wealth wasn't concentrated inthat.
The first pool fund on record, or at least I'maware of, was 1774.
(18:04):
And the idea behind that pool fund wasstrength.
Strength through unity and access todiversification.
We pool our assets, we get unity anddiversification.
For the manager of that pool, you get scale.
So that's kind of the early onset.
These were closed end funds.
(18:26):
So you didn't have a lot of liquidity, you hadactive management risk.
Roll forward roughly one hundred and fiftyyears, 1924, you get Mass Financial, Boston
comes up with the first open ended fund.
So here you've got a daily NAV, so now you getliquidity.
You still have active risk.
(18:47):
And it took probably thirty years for thoseopen ended funds to overtake closed end funds,
but eventually they dominated.
So by the 50s, they were growing faster thanthem, and then they dominate them.
Then you get to, you know, I'd probably say1976, but if I want to be honest, Wells Fargo
was doing this in the late 60s, indexing.
And in 1976, August, again, our bicentennial,John Bogle rolls out the first Vanguard does
(19:14):
the first index fund.
It was like $11,000,000 they scraped togetherand created the first publicly available index
fund.
I mentioned Wells Fargo had one earlier, but itwasn't SEC registered, not available to the
general public.
So you have this evolution happening wherethings are getting generally better and better.
By the way, that Vanguard, I think is thelargest, maybe the largest mutual fund today.
(19:34):
It's 1,500,000,000,000.0 or something of thatnature, just enormous.
But then as you get into the 90s, you get ETFs,basic ETFs, then the ETF market explodes and
you get all these plethora of ETF offerings,which shows the demand for customization.
Technology continues to evolve.
And then you get into the, Parametric openedits first SMA in 1992, very difficult to
(19:58):
manage, but as technology got better and betterand better.
What we used to do, back when we'd havediscussions with advisors or their clients,
talking about the benefits of separatelymanaged accounts, it used to be missionary
work.
Now it's just become commonplace because peopleare seeing, hey, what used to be the benefit of
(20:19):
unity and diversification.
I can achieve that now through the evolutionsof technology and innovation in an SMA.
And the big benefit that I get throughcustomization is I can tailor everything to my
specific needs.
Again, mentioning those things I statedearlier, tax factor completeness, whatever the
case may be, it can all be tailored to myspecific needs.
(20:42):
And so in that hyper customized world, I ownmore securities, individual securities, less
funds.
Again, with fractional shares, I can do thatwith smaller and smaller bases.
I can do it within, I can do a multi assetportfolio of fixed income.
All that can be achieved because of building onall the innovation that had occurred
previously.
(21:03):
And so as I think about that natural evolutionfrom the very first funds to where we are
today, it seems to me the only way we're gonnamove forward is through continued
customization.
And it's what people have come to expect inother parts of their life, whether they're
ordering from Amazon or whatever theirstreaming service is.
My kids don't watch any TV anymore.
Everything's streamed.
(21:23):
It's very customized to their specific needs.
I think that's gonna be the expectation forindividuals investment.
And ultimately it's gonna be a scale businessand not everyone's gonna make the journey
because the technology involved in doing it isextremely complex.
It's nothing you buy off a shelf.
Most of it's built internally.
Parametric's been at this for thirty years.
(21:45):
As I mentioned earlier, we're managing roughly400,000,000,000 in SMAs.
I think that hyper customization, that demandfor hyper customization is the tailwind at our
back.
You know, I could be wrong, but that's mybelief.
So fascinating kind of evolution in that first,had economies of scale.
You had everybody pooling their money, andbecause of that, they could invest and make
(22:07):
efficient investments on a per investor basis.
And now diversification.
Yes.
They could get diversification as well versusinvesting into one asset like in the eighteenth
century.
And then today, you actually have technologythat basically divides it into almost infinite
slices.
In order to divide it like that, you need aheavy investment into research and development
(22:32):
and technology that's able to offer that kindof unbundling of the shares into everybody's
individual account.
Exactly, so you needed innovation.
And again, occurred in a lot of places alongthe chain operations, custodial product.
I mentioned fractional shares.
The ability to trade fixed income in small,small lots efficiently.
(22:54):
And then you need that technology to get to thepoint where, like I said, we can track and
manage almost a quarter of a million accountsand they're all customized to specific
guidelines, you know, created by the adviser ortheir client.
One thing that's counterintuitive about that isit seems like the technology, especially and
(23:15):
I'm sure there's been some regulatory change aswell that's allowed things like fractional
share.
But why is the technology so expensive tocreate in order to fractionalize shares and
create these small SMAs?
It doesn't seem like that should be thatcomplex.
I can manage a 100 accounts maybe with a, asimple little macro or something.
(23:40):
But when I start to get to 10,000 accounts,50,000 accounts, a 100,000 accounts, when I'm
tracking a million tax lots and I have to do itdata, that's the scale drives the complexity.
That's what really gets challenging.
(24:01):
Said another way, when you take away all humanin the loop, it gets infinitely complex.
I don't know if I'd say infinitely, but it'ssignificantly complex.
Not theoretically infinitely complex.
Yeah, where
Parametric's gravitating to is several yearsago it was portfolio managers looking at a
(24:26):
portfolio and punching keys to optimize it andmanage it.
Increasingly, we're managing portfolios byexception.
So the system knows those first steps that theportfolio manager is doing and saying, okay,
here's what I suggest as the optimization.
And the portfolio manager can then look atthings much more efficiently and process them
(24:47):
much more efficiently.
So it's management by exception.
Skeptical person may say that that's nice thatyou could have an ESG overlay or as you
mentioned, you have Morgan Stanley shares, youmight not want to have Morgan Stanley within
your portfolio.
These feel like etch cases outside of the taxpart of it.
Give me some very common use cases where peopleare using customization to drive returns either
(25:13):
pre or post tax returns?
Yeah, somebody can say, hey, I want aconcentrated AI portfolio.
And we'll create a simple basket of factorbased AI centric names.
They'll go through and say, yeah, we agree, andwe can manage that portfolio for them.
Or I wanna concentrate, whatever factors youmay want.
(25:35):
That would be a mainstream case.
I don't know if completion is necessarily anedgy case.
I think there's a lot of people think about itmore.
They understand.
They don't want to own more of where they maybework and get vested securities.
And you're right.
Tax loss harvesting for taxable investors isthe one that's most quantifiable.
(26:00):
That is not edgy.
We don't use the phrase ESG.
We use values based investing.
ESG has become kind of a political football.
But I do believe we're still in a world wherethere's still many people who want, and by the
way, values that they reflect might be the antiESG values.
Like whatever factor these screens are selling,I want to buy.
(26:23):
We can design that portfolio for them.
Do you believe in the efficient market or themostly efficient market hypothesis?
Yes.
I generally believe that markets particularlyin the short term are generally efficient and
they're always driving efficiency.
I do believe in the very long term because somuch capital is based on the short term There
(26:47):
can be inefficiencies, but it takes patienceand a long time to exploit that.
I'm a big believer in the mostly efficienthypothesis, which is basically saying, I'm
waffling a little bit, but a use case in thatis when my mom calls me and she said she says,
I read somewhere.
I saw a video that Palantir or Uber orMicrosoft is good or bad.
(27:07):
I'm like, great.
As long as you're investing in the publicmarket, if it is efficient, you can you can
essentially, you can't make alpha, but you alsocan pick randomly.
I can make a portfolio of of stocks that startwith the letter a, and I shouldn't do that much
worse, in theory, at least, than than the S andP 500.
So it kind of anything that could drive thisbehavior of people investing more in the
(27:30):
markets overall and in in most cases isactually very pro social behavior.
So I'm a big fan of these overlays because itallows people to align with their values and
invest in a way that I think probably mirrors,at least on a risk adjusted basis, the S and P
five.
Yeah.
Hopefully.
Listen, I agree.
I think we generally agree that in the nearterm markets are generally efficient.
(27:53):
I would encourage any investor who's looking atbuying say a single name.
I think this is a Warren Buffett quote, but youcan check me if I'm wrong.
It's in every market there's a fool.
Make sure you know who that fool is before youinvest in it.
Otherwise you're the fool.
So it's another way of saying what's your edge.
If you don't have an edge, you're just at thewhim of the market.
(28:16):
In your role as CIO, how do you define therole?
Are you making macro bets or making someprognostications in the market or in the
regulatory arena or tax scheme?
Or is it purely to be Switzerland and let otherpeople kind of make those guesses and provide
(28:39):
the pipes and rails to do that?
First of I'd say Parametric does not hold outthe ability to, consistent with our efficient
market hypothesis, the ability to provideforward guidance on the market.
So we don't represent that as a skillset thatwe have.
My job as CIO falls into kind of a couplecategories.
First, internally, it's the allocation ofresources.
(29:01):
So where do I allocate resources that I believebest match the needs of our client?
I don't do that.
I'm not some dictator.
I'm doing that by myself.
That's in collaboration with many other people.
But ultimately I have to own the allocation ofresources.
Where do we hire people?
Where do we allocate them?
Where do we give them an upgrade in technology?
Where do we have to stall things out?
Those types of things.
Second, I represent Parametric in publicforums.
(29:23):
So I have to oftentimes go see something, and Ido enjoy this part of it.
Go talk to some of our biggest clients, but Ialso like seeing as many, if I'm in a market
for a meeting, I try to see as many of ourclients as possible because it gives me
feedback on what things we're doing right anddoing wrong.
You'd be amazed at people's willingness to tellsomeone they see as a leader of the firm, hey,
(29:44):
by the way, this is where you guys are droppingthe ball.
They're more than happy to tell me.
I'm actually glad with that frankness.
And maybe third, as I mentioned, Parametric hasgrown to over a thousand employees.
And in addition to being CIO, I'm co presidentof Parametric.
My colleague Ranjit Kapila, he is the other copresident.
He runs our technology and operations portionof our business.
(30:07):
Critical to the value we deliver to employees.
But part of what I have to do and he has to dois we have to be able to tell a story.
Meaning, and I don't mean fabricate a story.
I mean, do you communicate with people and getthem aligned to the direction you need the firm
to head?
How do you do that in a way that is easilyunderstood and then reverberates throughout the
(30:31):
organization?
And that's part of my job is to be able to dothat effectively.
What are the biggest mistakes that you madeearly on in communicating with a thousand plus
employee base.
You've heard that old narrative about you know,you sit around the campfire and you whisper
something and you hear the person to your leftand then it goes around the campfire and it
(30:52):
comes back to you completely different.
And that's a little bit like if you don'tfigure out how to break something down into
very simple terms, it's gonna get mangled.
I think I've learned that the hard way.
What I thought was communicating clearly butprobably wasn't as clear as it should have been
because something didn't happen the way Iexpected it to happen and we got a negative
outcome.
You hopefully learn and get better as a resultof those mistakes.
(31:15):
And I assume it's something that every personwho's leading any kind of group of people goes
through.
Like I said, people, campfire with some peopleand you can't get it right.
How do you expect to get it right throughdifferent layers of of, leaders at a firm?
You gotta be really crisp, clear, and repeatit.
(31:37):
Alex Formosie, who I think is one of thegreatest communicators really of our generation
in terms of the business world, He he takes itto a whole another level.
Not only does he simplify things in very easy,digestible ways, but now he also tries to
either have it be alliteration or actuallyrhymes.
Because if it's rhymed,
that means
if it rhymes, it means that's true.
(31:59):
So he distills he distills even on that level.
So and I don't think you could over simplycommunicate something, especially when it comes
to the top.
I think people in many ways get overcommunicated to this.
They could sometimes even interpret a physicalposture or tone in a way that's not consistent
(32:21):
with what wants to be communicated.
So you have to be really careful.
I a 100% agree with you and that's why a fairamount of my time has meant not connecting with
people on video but trying to fly to differentlocations and meet people in person.
As I thought about your statement aboutrhyming, I don't know if you remember this from
your early days but schoolhouse rock.
I'm just a bill.
(32:42):
Like creating a song and how you can teachpeople things through the simple process.
But yes, creating a narrative for people tounderstand what you're trying to deal with or
address or the direction your firm is, if youwant the firm to head.
I agree that's important.
We'll get right back to interview.
But first, we're looking for the next greatguest.
(33:03):
If you or someone you know is a capitalallocator and would make for a great guest,
please reach out to me directly atdavid@WeisbergCapital.com.
I've done a deep dive on this.
I don't know if you're familiar with DavidDeutsch's memetic theories and something that a
lot of really influential communicators, Iwould throw Elon Musk in that group, is they've
actually found out that it's not even words orstatements that are most memeable or copyable.
(33:27):
It's literally memes.
So the word memes comes from, Richard Dawkinsin the, I believe, the seventies, which are
these ideas kind of like genes that spreadquicker than actually explanations or long
monologues.
It's it's the reason why people use narrativesor stories versus explanations because those
are more memeable.
So there's a whole there's a deep, there's arabbit hole to go to, which we we could save
(33:52):
for another conversation.
All right, Dave, I'm gonna hit you up for somerecommendations on books because no, I'm deeply
interested in this and how, if people are rightabout AI, this is gonna be one of the greatest
skills that people are gonna have to master,which is do you communicate, do you tell a
story to kind of lead people in a certaindirection.
You mentioned that when you travel and you talkto institutional investors, they oftentimes
(34:15):
give you the feedback.
Is that how you're growing Parametric in that?
Is your growth driven pulled from yourcustomer, or do you kind of go in and and try
to learn as much internally, develop models,react to where the market, where your
competitors is going?
What's that mix between push and pull products?
It's definitely a blend.
I don't know if I can put a percentage on oneversus the other.
(34:37):
We are clearly taking feedback from our clientsand trying to understand where they see the
market going.
We have, we're fortunate to be in this, youknow, inside of Morgan Stanley.
So we have leadership at Morgan Stanley thatsees broadly across different parts of the
marketplace.
Morgan Stanley runs a large wealth platform.
(34:59):
So they feedback from the advisors, many ofthem who are clients of ours.
So we can use that feedback.
And yes, we are also looking at what arecompetitors doing.
There are certain competitors we pay moreattention to than others.
We can't chase every new competitor down arabbit hole but we want to understand what
(35:21):
trends are evolving in the market.
I just finished, I'm probably late on this, theinnovator's dilemma and it concerns me you
don't want to follow your best customers over acliff.
So we always want to make sure we'reunderstanding what evolutions are out there and
if we're we're missing anything.
(35:43):
You obviously focus on public markets, but youalso live within an ecosystem of public and
private.
So you see this rise of alternatives.
What are your views on the rise of alternativesand how that affects Parametric and maybe how
Parametric and Morgan Stanley could play inalternatives as well?
Well, Morgan Stanley Investment Management hasa big book already in alternatives, real
(36:08):
estate, private credit, private equity.
They already have that skill set and aregrowing at some incredibly skillful people
working in that area.
Ultimately, and you hear this coming out ofplaces like BlackRock and others, they're
moving to a point where they're bringing altsdown further into the high net worth and
possibly someday retail channel.
(36:29):
My expectation where Parametric will play arole in that is Alt will be a part of a model
portfolio.
So in the hyper customization world of thefuture, it'll be what's provided as a model
portfolio.
Parametric will be the implementer of thatmodel portfolio.
We may have a sleeve in that model portfolio.
We may tax manage the entire portfolio.
(36:49):
Alts may be one part of it.
The issue I think that we're struggling withnow or the market's struggling with now is how
do you package those alts in a way that'sliquid enough to put in a high net worth model
portfolio?
Is it a simple interval fund or is it's gottabe something a little bit more liquid?
(37:09):
That's the part I'm less involved in but I knowthat's kind of a big question they're pursuing.
I think we've all, or at least there's beensome experience with a large real estate fund
that gated a while back when real estatestarted suffering.
And I think people are trying to figure outlike how do we avoid spat out or how do we
create liquidity?
It's a tough thing to solve.
(37:31):
So we'll see what they come up with.
These are multi factor problems.
You know, I've been thinking a lot about this.
The interval funds, first of all, obviously,lot of them are starting to have quarterly
liquidity over five years in this kind oftwenty twenty quarter gate.
But another one is purely naming conventions,calling something like a private equity twenty,
(37:51):
thirty five fund, similar to how they doretirement funds.
Yeah.
Doing, like, education or literally making itcalling it the private equity illiquid illiquid
fund, and there's a lot that could be donearound that.
But, certainly, what's surprising to me in infull transparency, I made investment in a
company called Alto, which is Alto IRA, whichbasically allowed people to invest their Roths
(38:14):
and traditional IRAs into private assets.
But you have these trillions of dollars in 25year olds' retirement accounts that are sitting
in liquid assets, and that, to me, is absurd,and that should be the low hanging fruit.
I think a lot of companies should focus onthat, and the regulatory should focus on those
opportunities versus kind of a little bit moreof a difficult situation and different
(38:37):
education situation with educating people aboutilliquidity in their taxable entities.
What you're hitting on is is most of thesestructures, I may have this wrong, are for
qualified investors.
Qualified investors, $5,000,000 liquid networth.
That's gonna eliminate a lot of people.
Definitely most people in their twenties.
(38:58):
So it's how do we how do we do this goingforward?
We'll see.
Sometimes these paradigms are so obvious inretrospect.
This idea of you have one account, you haveyour private assets and your public assets so
that a parametric would be able to come and seewhere you might have liquidity in your venture
capital or private equity and plan for thatthrough things like tax loss harvesting.
(39:19):
Such a such a good idea, but such a differentparadigm than existing paradigms where
everything's kind of its own fund.
Unless you have a billion dollars plus and youhave a full time CFO that's doing this kind of
analysis on a monthly basis, the regular theregular man, aka the non billionaire, does not
have access to these types of tools.
As I think about the advisor model, definitelythe platforms are trying to get advisors to buy
(39:44):
into the models, meaning they don't wantadvisors creating these separate accounts and
doing this themselves.
They want them to focus on a model.
And I don't know if you follow, how closely youfollow the RIA market but that's going through
enormous aggregation.
We're probably within three, four, five yearsfrom having the first trillion dollar RIA.
(40:06):
They're doing this, they're starting to looklike the platforms.
So what everyone wants to do because that's howyou scale these businesses.
So what everyone wants the advisor to betalking about with the client is a model.
Here's a model.
Look at this model.
And this gets to the hyper customization,right?
If I just have a plethora of models and I canoffer them then you can do a lot of things with
them including fit that alternative piece in.
(40:27):
And you can have a centralized manager likesomebody like Parametric kind of sitting over
the whole thing, managing a sleeve, taxoptimizing all the publics and coordinating
with the alternatives.
Again, I don't fully understand how that allworks yet because I don't know how the Alt
piece fits in but you can see it.
It doesn't feel like it's that far away.
(40:47):
There seems to be a lot of convergent factors.
I had the c CEO of iCapital, which is kind ofworking on making the pipes and rails to invest
into this.
I had the CEO of Atapar, which is kind ofworking on figuring out that all the data and
how to do streamline kind of all the privatesdata.
There's other k one platforms that arestreamlining k ones, which is and then there's,
(41:10):
of course, new regulation.
There's a credit investor test, all all thiskind of perfect storm is coming together.
In the best case, the best outcome, make thebest investments available to the longest tail
of people.
In a worst outcome, yeah, in worst worstoutcome, some people may be duped into some
funds by bad actors, but those are kind of thetwo that that's kind of the utopian and the
(41:35):
dystopian future, that we're gonna see play outin the next five, ten years.
Yeah.
And I think you forgot one other big factor,which is the largest money manager out there,
BlackRock, getting into the space and nowstarting to look at it like, we index in this
space?
Is there a way we can create benchmarks in thisspace?
That to me is gonna drive a lot of activity.
Obviously, you guys are more of a passiveinvestor than active investor, and that's been
(42:00):
a huge trend and specifically in the twentytens.
And now some people are going active becausesomebody has to make the market efficient.
And market by definition, theoretically cannotbe all passive because somebody's making it
active.
Just if you were to take a step back from yourrole, is there a is there room for active
investors to kind of balance the market, or isthat kind nomer?
(42:21):
I always think there's room for the activeinvestor.
I think I acknowledge to you that I thinksomebody long term, if they have a long enough
view, can make a, there's probablyinefficiencies in the marketplace.
I don't doubt that there may be somebody withskill out there.
I think it's hard to demonstrate.
You know if I filled Yankee Stadium with peopleand told them to all flip a coin, I eventually
(42:42):
would find 10 people who flipped heads 20 timesin a row or something.
So maybe you just get there by luck.
I think it's very hard for investors toidentify those people.
And so you have to kind of think about, can Iidentify that person and are they someone other
than that has skill and not just one of the 20flipping the heads?
(43:02):
To
add add to your side of the argument, even ifyou were able to identify skill after twenty
five years, a, that person may be in anotherseat or retired, but even if they're on their
own seat, their motivations have changed.
This is a common thing in venture capital andprivate equity.
People start to work less.
(43:22):
They take the incremental weekend off andvacation, which may be rational, not good for
their portfolio.
So even by the time you determine their skill,oftentimes, you're also not able to to
implement.
It's just purely kind of academic information.
You're not able to implement that intoinvestment strategy.
One of the smartest clients I dealt with, hehad this rule, manager moves to Florida,
(43:44):
manager buys a Lamborghini, he terminates them.
It's like these are two automatics.
Other, maybe the other thing you gottaremember, and Warren Buffett talks about this,
at a certain point if they're successful, theirsize overwhelms them.
Warren Buffett's like, I can't be more than themarket now.
I'm too big.
It's very hard for me to be anything other thanthe market.
And I think to his credit, he's honest.
And I think other people say, no, no, no.
(44:06):
I can take on more assets.
I can do more.
I can do more.
And it's very hard to do and continue to havethat edge.
If you could go back to 1989 and distillinvestment or management principle to yourself
that you could hold on through your entirecareer, what would you teach young Tom that
just graduated from college?
What would be the principle?
It's hard to say, David.
(44:28):
My experience at the Fed made me more of anefficient market person.
So I was always very respectful of the marketFrom a very early age I didn't ever believe
that I had an edge, a great edge in any way.
And I always understood that the market drivesfor more efficiency.
(44:49):
So I don't know that I would have any greatinsights to give 1989 Tom Lee.
It sounds like Herschel Walker referring toyourself in the third person.
And I don't know if I'd have any great adviceto give him about investing.
Maybe I could say career advice.
And this is something I often have discussionswith young people, which is careers like life
(45:12):
are nonlinear.
Everyone kind of thinks like, hey, if I do A,B, C, D, E, F I end up in G.
And maybe, you know, if you're at MorganStanley, g is like Ted Picks role or something.
And everything's nonlinear.
And I think people need to understand that,appreciate it, and think about resiliency
throughout their careers.
I personally started a firm with six employeesand we just, we weren't like brilliant people
(45:35):
thinking about customization back then.
It was the only thing we can do to winbusiness.
So, you know, necessity is the champion ofinnovation but I've been acquired three times
because we are in a consolidating, publicmarkets are consolidating.
And with each of those acquisitions camedifferent strategies, different cultures,
(45:56):
different focuses, different resources andbeing able to be resilient through that.
Because I think everyone's career is kind oflike that.
I don't think I'm unique in this.
I think that's the most important thing and Idon't think I fully understood.
I know I didn't fully understand that in 1989.
I don't want to age you, but obviously 1989 isthirty six years ago.
You've had a prolific career.
When you talk about resiliency, is it harderwhen there's like stagnation where you're just
(46:21):
like, it's been another year, we grew 2% inanother year, or is failure more difficult?
What's the most difficult thing to live throughand how do you know that you should push
through versus maybe pivoting?
Listen, that's a great question.
No growth, low growth is very challenging,right?
Because part of the benefit I get out ofworking here is seeing people around me
(46:45):
succeed, watching them build lives, watchingthem buy houses, have families do things.
I mean, obviously I want our clients.
It's important for me that our clients succeed,but I also want our CRM employees succeed and
that requires advancement and that requiresgrowth.
So I think to the second part of your questionis how do you know when, hey, we just got to
(47:07):
hold on and missionary work's going to becometrend.
I don't have a great answer for that.
I mean I think sometimes it's stubbornness.
Like you believe something, you believe this,you believe like evolution is behind you and
it's gonna happen and so you're willing to keepsomething alive.
(47:28):
I think you're always experimenting withdifferent things and seeing if things will take
off.
The problem is you don't, again you don't knowhow long, like how long should I continue to
experiment with this?
When do I cut it off?
That is the art of this business.
Like I don't have a good answer for you.
But the best answer that I've heard is haveyour priors changed?
(47:48):
Has your thesis on it changed?
In which case you may want to, you're gettingfeedback and you say, okay, take that feedback,
I'm gonna pivot.
Or is it just hard?
Some things are just hard.
Having a contrarian view is hard.
You know, believing in a passive strategy whenactive is hot or the vice versa is hard, and
(48:08):
that is just that's just sucking it up versusin the case that you were wrong about something
you thought, you know, there would be a big taxopportunity, but the tax scheme has gone
against you.
And now you're, like, self justifying in tryingyou're trying to update your thesis without
revisiting why you start taking the actionbefore you took action.
(48:30):
We're so good at diluting ourselves and, like,evolving the narrative in our own head, let
alone other people.
You definitely don't wanna get anchored.
You definitely wanna approach things fresh andthink about, hey, know, am I wrong here?
Or do we need to pivot as you state?
I read a book a long time ago by Bob Rubinwhere he talked about this.
(48:50):
It's keeping your options open as long as youwant to take in as much data to make the best
decision as you can.
But ultimately you're never gonna have all thedata.
So you're gonna have to take a risk.
And hopefully, as you point out, a key toadvancing making the right choices.
You make a few wrong choices and you end upsomewhere else.
(49:11):
I love the Jeff Bezos analogy to this.
Two sided doors, one-sided doors.
Two sided doors are decisions that are easilyreversible.
You wanna make them as soon as you have apretty good idea.
And then one-sided doors, like strategic orplatform decision.
Sometimes if it's a decision that'll bind youfor ten, twenty years, it's efficient to spend
seven, nine months, twelve months, as long asthey're getting incremental data.
(49:34):
It's another kind of, you know, lens to lookthrough at, especially difficult career
decisions.
I agree with you.
I'm familiar with the Bezos model that youmentioned.
And the issue that I'm kind of getting in andit's not surprising you, the higher you get up
in an organization, you usually end up withfewer two sided doors and more one-sided door
decisions.
People lower in the food chain will take careof the two sided door ones.
(49:58):
Essentially via organizational design, youstructure the tasks in such a way that you deal
with the difficult decisions.
I think everyone does.
Right?
Because one the one thing I have to optimize ismy time.
So I can't sit here and take every decision.
I gotta trust people.
I gotta hire good people, make sure I empowerthem to make those decisions.
I think that's why Musk calls CEO the worstposition at a company because you, by
(50:22):
definition, get all the unsolvable, most shittymistakes, and not most shitty decisions flow up
to the CEO.
And most people wanna be CEO until they realizethat it's literally you're constantly dealing
with the most difficult there is no easy daybecause if there was an easy day, it wouldn't
escalate to you in a larger
But, yeah, no.
Barack Obama, I think he made a comment aboutthis in his book when he was president.
(50:45):
It's like, decision reaches my desk if ithasn't been vetted by like 30 people.
So it's really the hard decisions that reachhis desk.
I agree.
That's why at least CEOs are often the highestpaid people.
Tom, this has been absolutely fantastic.
What would you like our listeners to know aboutyou, about Parametric, anything else you'd like
to share?
I would say about Parametric, we are about, asyou and I've talked about, are understanding of
(51:09):
efficient markets.
We're humble, we believe in customization andbuilding partnerships.
Partnerships with advisors, partnerships withclients, whether they be institutional or
sometimes high net worth is institutional likemoney or retail.
That's who Parametric is, that's our DNA.
And I understand that's become more popularrecently but we've been doing it for thirty
(51:31):
years And it's not something that you can justflip a coin and do one day.
It becomes, you think about investments adifferent way.
You think about investments as a service, morelike a service and less like a product.
And that's something that's very hard forpeople who've only sold product their whole
life to do.
You create all the infrastructure.
You hire people.
You hire a specific type of person withspecific competencies and cultural values.
(51:55):
You have this certain type of technology.
You have processes.
You have values, which is one type of thing ismore important versus another type culturally.
So it's so it goes back to an innovator'sdilemma.
There's a reason why organizations getdisrupted because they get so ingrained in
specific processes, whether positive ornegative, that it becomes their strength and
their weakness.
(52:16):
Well, they follow their best customers whodon't know the new trend, and they they can't
get away from it.
So no.
I agree.
Tom, I'm pledging to go to Minneapolis and sitdown with you or have you in New York City.
That'd be better, but I look forward tocontinuing conversation
I'm in New York quarterly, so happy to do itwhenever I whenever it works for you.
David, thanks for your time.
Thanks for listening to my conversation.
(52:37):
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