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The Many Analogies Behind The Walt Disney Company’s $19B Portfolio

by trusted insight posted 4years ago 3321 views

Lawrence Goldsmith is the vice president of pension and investments at The Walt Disney Company, which has $19 billion in assets under management across its defined benefit and defined contribution plans. In this interview, Goldsmith discusses his four pillars to risk management, why respect (R-E-S-P-E-C-T) is the key to industry success, his holistic approach to selecting top-quality investments (despite asset classes) and why the industry shouldn't rely too heavily on technology. 

Prior to his position at Disney, Goldsmith was the chairman and founder of the Recording Arts Foundation, partner and portfolio manager at Perella Weinberg Partners and managing director at the University of Texas Investment Management Company. He was recently named on Trusted Insight’s 2017 Top 30 Corporate Chief Investment Officers. He graciously spoke with Trusted Insight on Sept. 1, 2017. The following interview has been edited and condensed.

Trusted Insight: You've seen the industry from just about every angle conceivable: treasury, asset management, consultant, university endowment managing director and corporate pension fund CIO. How have those previous experiences shaped your investment philosophy and your approach at The Walt Disney Company?

Lawrence Goldsmith: I think it comes down to respect. I'm thinking of Aretha Franklin, R-E-S-P-E-C-T.

When I look at all of the different places I've been fortunate enough to work at, the number one thing is, respect your client. Who are you managing the assets for? Every client has a different perspective, a different set of priorities. You really need to attune yourself to that to be successful.

My role is to do a fundamentally superior job in terms of risk control, investment selection and allocation, mandate execution, and communication and reporting; all of this in the spirit of generating a long-term expected return on assets that exceeds our benchmarks and peers, while motivating the best talent in this industry to move upward and forward. That then allows management to continue to do what they do best, which is grow the company's greater assets.

When I enter a place to work, my thought process is always to shape the investment to fit the client. Today, I want to make sure that everything that we do here at Disney--while hopefully being superior in construct and performance--is also easily explainable to employees who may not have deep investment experience. I’m not looking for the esoteric or avant-garde. I want things that are fundamentally responsible and able to generate superior results.

That's what has shaped my thoughts here. It goes back to respect. I have been entrusted with someone’s wallet. This is not my wallet. This is our participants’ wallet, and they've saved a lifetime for this. They're going to need these funds, and it's my job to respect that wallet while it's under my purview.

Trusted Insight: What did the portfolio that you assumed look like when you arrived. How has it evolved in the five years since?

Lawrence Goldsmith: When I arrived, the first order of business was to focus on a robust risk management process. The pillars that we use here are people, philosophy, process and performance. We wanted to make sure that we had rigorous processes around those evaluations, and make sure that we were regularly touching base with the managers both here and at their locations of business. It’s about making sure that we understand in depth how the portfolio should perform, not just how it is performing.

When it comes to my team, I try to imbue them with the precept that I don't want you to be a manager of portfolios. I want you to be a portfolio manager. We look at things like daily trades. What are the managers buying? What are they selling? We may actually call them up and have a dialog with them like, "Why did you buy this today?"

"If it's quality merchandise and it should be in the store, we're going to find shelf space for it."

I think being more inquisitive, more thoughtful, more robust in our risk practices are things that I've tried to instill in what we do on a regular basis. I'm blessed to have a team here that is thoughtful and they treat this as their own business. The respect that we bring to the portfolio is pervasive among the entire team.

Trusted Insight: What are some of the biggest risks that you face currently? How are you going about addressing those?

Lawrence Goldsmith: The number one rule is always to preserve capital. I'm very big into capital preservation. What people oftentimes don't understand is that if I give you a dollar today, and then the market is up 10 percent tomorrow and down 10 percent the next day, you're not back at a dollar. You're at 99 cents. So capital preservation is key.

As we look at the market environment, we remain cognizant of the fact that there are four quadrants of investing between stocks and bonds: Stocks go up. Yields go up. Stocks go down. Yields go down.

The biggest risk you need to be prepared for is if stocks were to go down and rates were to go down at the same time. Do you have sufficient protective provisions in place, both with managers and otherwise, to make sure you can navigate that space thoughtfully? Then, hopefully, when things turn around, you’re able to engage risk more commensurately with a prudent risk-on attitude.

When rates go down, the present value of our liability goes up. Unlike an endowment, where they may not want rates to go up, if rates do go up and stocks do go down, we typically defuse a lot more of our liability, more than offsetting any losses in return as equities decline.

Trusted Insight: Being a chief investment officer at a corporation is much different than at other institution types. What makes your position unique to some of the other institution types that you've worked at?

Lawrence Goldsmith: When I was at another place (I'll keep it nameless), if I wanted to put an investment into the portfolio, oftentimes it would be a fight over, "Well, that belongs in equities. No, that belongs in hedge funds." We don't have that here. We certainly have our different asset classes, but if it's a great investment and it's going to be beneficial and the Investment Committee approves it and our Treasurer and everybody is happy with it, we'll find a spot for it.

There are no fiefdoms here that have to be overcome in order to do it best. That is one of the truly liberating things I enjoy about being here. It really does feel like an all-for-one and one-for-all environment. I would also tell you that I never consider myself to be a CIO. I'm not exactly sure what that means. All I know is that I have been entrusted with leasing a wallet. As long as that's under my stewardship, I'm going to make sure that I do the best job I possibly can to make sure that it's done respectfully, to protect principal and to make sure that we get prudent results.

Trusted Insight: Does that mean you look at the portfolio more holistically and less in terms of filling up an equity bucket or a fixed income bucket?

Lawrence Goldsmith: We do have asset allocation segments such as equities, fixed income and alternatives, and within that certain sub areas. If we have an equity manager that we're looking to hire, let's say he/she has a beta of 0.5. If the equity group manager here doesn't want it, we'll find a space for it in alternatives.

In other words, we will find a space for it if it's a good investment. Again, I've been at places in the past where it's like, "Well, that belongs here versus there. You shouldn't be buying that for your part of the store." My attitude is we don't care where on the shelf the eggs are: as long as the eggs are well-refrigerated and tended to and nobody is cracking them inside the carton, we're good. If it's quality merchandise and it should be in the store, we're going to find shelf space for it.

Trusted Insight: To what degree have advancements in technology impacted how you invest and approach the markets?

Lawrence Goldsmith: Advancements in technology have been hugely beneficial for those of us who've been in the industry as long as I have, and I’ve been in this space since 1989 in terms of institutional investing. That said, I always remember this is a people industry and a people business, and in the end, we're selecting investments that are going to benefit other people.

And while I respect technology, I will always prefer a talented pianist over a player piano any day. We may be able to create a cello sound that sounds exactly like Yo-Yo Ma. I would prefer to listen to Yo-Yo Ma. To the extent that we don't lose the deep due diligence and thoughtfulness behind what makes a good purchase and a good sale, I think it's great.

"You can build a house with just a saw. I prefer to use a saw, hammer, nails, etc., and other tools that might make it an easier, more beautiful home to build and live in."

You’ve got to avoid relying too much on technology in terms of having it do the job for you. I've seen many instances elsewhere where people build models and they work great... until they don’t. Then panic sets in. The manager starts tweaking things and moving things around. The next thing you know the chessboard is turned upside down and the pieces and their location don’t reflect a legacy of anything near thoughtful in terms of a starting point or eventual destination.

In terms of risk management solutions, we've seen huge benefits from technology. There are concepts and constructs that we're able to evaluate from a portfolio perspective both in terms of return analysis and security analysis that would've taken weeks and months, and now it can be done in hours and days. We really appreciate that. Interpreting that and using that thoughtfully still rests on the shoulders of good people to do so in concert with their goals and their risks.

Trusted Insight: The number and sophistication of Institutional investment offices is growing. Is that a factor at all in terms of how you approach the markets?

Lawrence Goldsmith: We are long-term investors, and we try to think in that context. Of course, the long term is a long series of shorter terms pieced together. I don't have a problem with the growth in institutional investment. I'm more concerned about the herd mentality of people in certain places that could cause a huge disruption if the market does have a correction. For example, an overuse of exchange traded funds, particularly leveraged ones; too much use of leverage; a lack of understanding of how securities may react in the time of a crisis; too much reliance on past historical precedent of performance that may or may not come to fruition the next time a crisis hits.

I'm always trying to evaluate if we are in a space that's overcrowded. Do we have people stewarding our assets who are alert and are following these markets closely? As long as we have that, I feel comfortable. I do feel like there is too much of a general reliance on things continuing as they have been. While that's great and works well in a trending market like we've had so far that's gone up, I'm not sure how that will work in a disruptive environment.

Trusted Insight: In what ways have you seen your investment strategy and philosophy evolve over time? How has that played into your construction of the Disney portfolio?

Lawrence Goldsmith: As I mentioned, the four pillars that I've inherited over time that I've tried to build upon are people, philosophy, process and performance--with performance being the outcome when the prior three are fundamentally aligned and robust. Given that, as time goes on, I become more and more convinced that people are truly the fundamental difference between good, great and outstanding performance.

It's their ability to be aligned with you as the fiduciary, thoughtful in their perspectives about how to invest, and flexible to consider other opportunities. They're not wedded to something for 20 or 30 years, nor are they unwilling to change their ways to develop.

Some of the most fundamentally advanced managers are fixed income managers, because they've been using options and currency for years and years and years as a portfolio management tool. A lot of equity managers still eschew those instruments as not being part of their portfolios. You can build a house with just a saw. I prefer to use a saw, hammer, nails, etc., and other tools that might make it an easier, more beautiful home to build and live in.

We do a lot of work on performance-based fees that are not the industry standard performance-based fees. My theory here is if I'm going to go to an Eric Clapton concert, I really want to go initially because he has a great reputation. I would prefer to pay Mr. Clapton after the concert is over and he's had a robust performance, played “Layla” on the electric guitar instead of acoustic and really given me the performance of a lifetime. I'm willing to pay more for that than I would a standard ticket, but if he gets up there and he's got a cold and he plays for 20 minutes and he's off the stage, probably not top ticket performance from my vantage point.

Trusted Insight: Do you see the broader industry shifting to performance-based fees or is the two-and-20 model too ingrained?

Lawrence Goldsmith: You're seeing more and more performance-based fees. The question I have to ask you is: if I hire a small-cap manager to manage assets for us and they make 1 percent over their benchmark, how much of a fee should they be getting for that 1 percent? My argument would be very little. It's not peer-leading performance to outperform 1 percent per annum in that space, as a rule, and the client is taking the risk. The manager should get less at that point in time.

Now, if they're doing 5 percent over a multi-year period consistently, up at those levels they deserve a greater share of the profit than they would be getting at a lower state. Things like two-and-20 that you still see in a lot of the alternative space are just far too expensive. I can't justify some of those expenses, and that's why a lot of the mandates that we're engaging in are drawdown type structures.

"The only thing I will say is to my brothers and sisters in this industry is: Don't try to be Warren Buffett. Don't try to be David Swensen. Be who you are, as the best investor you can be."

It's like the just-in-time inventory concept that Toyota made famous. This is when a manager knows their mandate, we get approval from the Committee to engage them, we have capital to deploy and when the opportunity strikes that's when they draw the capital. No fees are charged until that point in time.

Typically, their fees are very, very low or modest once they engage the capital. Then the goal is, once the opportunity evaporates, for them to return the capital to us and then collect their fee based on their results. That's worked out great for us so far. I would tell you that we have a lot of dry powder waiting in the wings for the next opportunity to arise.

Trusted Insight: Does that spell the doom of two-and-20 eventually?

Lawrence Goldsmith: I'm not saying that some managers aren't worth two-and-20, but paying a blanket two-and-20 as a standard protocol of engaging in a liquid (or even illiquid) investment to me is imprudent.

There can be constructs that are set up that are mutually beneficial that allow the plan sponsor to pay less for lower results and the manager can get better compensation given outstanding results, especially over the long term. We align ourselves in that way and we seem to be able to find reasonable managers that are already going in that direction. I think that's fine. I think until people break hold of that rigid pronouncement in general, it's still going to be around for a bit.

Trusted Insight: What's the most important lesson you've learned in your career?

Lawrence Goldsmith: This is a small industry. I've been on both the buy side and the sell side. You have to respect everybody. I get a lot of emails a day. I try to respond to every thoughtful inquiry coming to us to proposition an investment, even knowing that many times we cannot accommodate.

I want to give the people the respect of knowing that, "Hey, you know what? You have a job to do. I respect that. I read what your proposal is. It is or is not something that we would like to pursue at this point in time." I would say that if you respect the people in this industry and they respect the product that is basically a great combination for success.

Again, I keep coming back to the people, because when I think about the greatest asset I've had over time it's the people I've worked with and worked for, providing me the insights necessary to make a credible difference between a good investment and a great investment. I give them a great deal of the credit for allowing me to be here today and talk to you about this.

Trusted Insight: What questions did I fail to ask that I should know about you, about Disney's investment office or about institutional investing in general?

Lawrence Goldsmith: The only thing I will say is to my brothers and sisters in this industry is: Don't try to be Warren Buffett. Don't try to be David Swensen. Be who you are, as the best investor you can be.

I see a lot of plan sponsors who are trying to emulate other people, and I just think everybody needs to carve their own path for success. You can be equally or even more substantially successful or relevant within the context of the people that you're responsible for.

Hopefully, at least in my role, I've attuned myself to our client, and I'm giving them what they need. That's my goal. I'm not out to prove who I am. I'm out to make this the most robust example of institutional investment management from a corporate pension plan perspective that there can be for The Walt Disney Company.

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