The transcript from this week’s, MiB: Julian Salisbury, CIO, Goldman Sachs, is below.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, MASTERS IN BUSINESS HOST: This week on the podcast, I have an extra special guest. What can I say about Julian Salisbury? He is the Chief Investment Officer of Asset and Wealth Management at Goldman Sachs. He’s a member of the management committee. He co-chairs a number of the asset management investment committees. He covers PE, infrastructure, growth, equity, credit, real estate, on and on. Really a fascinating person who has seen the world from a unique perspective in multiple cities as an investor. He’s been with Goldman for 25 years and helps oversee over $2.5 trillion in assets under supervision.
I thought this was an absolutely fascinating way to see the world of investment management. And I found this conversation to be fascinating. And I think you will also.
With no further ado, my discussion with Goldman Sachs’ Julian Salisbury.
Welcome to Bloomberg.
JULIAN SALISBURY, CHIEF INVESTMENT OFFICER OF ASSET AND WEALTH MANAGEMENT, GOLDMAN SACHS: Thanks, Barry. It’s great to be here.
RITHOLTZ: I’ve been looking forward to this conversation for a long time. Let’s start out with a little bit of your background. You begin in audit practice at KPMG. What was the original career plan?
SALISBURY: Honestly, I didn’t really have a long-term plan. I grew up in a family where my mother was a mathematician, my father was a chemist. I didn’t really know much about the world of finance. Investment banks were not really a known concept in the area where I grew up. I graduated college, realized I needed to get a job. And my dad had always said, as many young kids get this advice, doctor, lawyer, accountant, engineer.
SALISBURY: And accountant seemed like a reasonable option. And I kind of stumbled my way into accounting. And what I found was it was just a phenomenal training ground for somebody who wants to then go on to invest, especially doing more micro-level analysis. That background of being an accountant was just great bedrock training.
RITHOLTZ: Very precise, very specific. So how do you then go from tax and audit practice to finance and investing? Very different fields.
SALISBURY: Yes, I’d love to tell you there was some great master plan. But in the UK, when you qualify as a chartered accountant, first of all, you have to complete your three years training. So people these days want to change job after a year, 18 months. You have to finish the three years. I finished the three years. I qualified the following week. I lined up a bunch of job interviews with a variety of banks. And again, I ended up in the financial services audit practice at KPMG. So I got to know banks a little bit. And frankly, I heard they paid more.
So I interviewed with a bunch of banks, got a number of job offers by the end of the week, and joined Goldman Sachs in October 1998.
RITHOLTZ: So let me throw one of your own quotes back at you because I feel like it’s so revealing. Quote, “The world of finance isn’t as complicated as newcomers expect. It’s simply shrouded in techno jargon.” Explain what you mean there.
SALISBURY: I continue to find this true to this day. But when I first joined the firm, I was doing P&L and risk reporting for a credit trading desk. And people start talking about DVO on this and duration that, jump to default this, futures versus cash. I didn’t know what any of these terms meant. So I took it upon myself to go off and took a course in bond math, took another course in derivatives and realized the underlying fundamental concepts were barely, I mean, it wasn’t even high school math in most cases. And it was really more about learning, not a different language, but a different dialect.
And it’s interesting because you’ll find people who’ll be fluent in one dialect and then they become fluent in credit dialect. And then you talk to somebody who works in an equities business and they start throwing Greeks at you and you’ve never come across these terms. Again, it sounds highly complicated. Most people, you could sit them down in half an hour and explain the majority of the concepts.
RITHOLTZ: That’s been kind of true in a lot of professions over history —
RITHOLTZ: Is that almost by design, their language keeps outsiders at arm’s distance.
RITHOLTZ: And hey, if you want to learn our secrets, you have to pay us.
RITHOLTZ: Are you suggesting that all of this techno jargon is just to create a little mystique around the wizards of finance?
SALISBURY: I wouldn’t say that’s entirely it. But what you find, and this becomes more and more true, I think, is people become very specialized. In order to compete and win in so many things today in finance, you have to be super specialized. So you find people who are super deep in one area, one narrow area. And it might be investment grade credit or distressed credit. It might be equity derivatives. It might be growth equity. And they all develop their own little system of useful terms, but then they end up becoming almost like a barrier that makes it hard for an outsider who hasn’t grown up in the world of finance, who doesn’t have a father who ran a hedge fund or an uncle who ran a private equity firm. It’s hard for them to break in without some way of developing that jargon.
RITHOLTZ: So that shorthand works for the practitioners, and there’s no malicious intent there. It’s just, hey, that’s how these people talk in their chosen specialty.
SALISBURY: Sure, yes, it’s quite natural.
RITHOLTZ: Really interesting. So you mentioned you joined Goldman Sachs in 1998, coming up on your 25th anniversary. Congratulations.
SALISBURY: Yes. Thank you.
RITHOLTZ: That’s pretty good. Heady Times in ‘98, what’s kept you at Goldman for 25 years?
SALISBURY: Look, I think, first of all, it’s the people, just super high-quality people across the business, no matter what part of the firm they operate in. Just the average intensity level, integrity level, capabilities. It’s just really hard to match when you go to other organizations. So people is a huge part of it. Another part of it is I’ve been lucky, although I’ve been in one firm for 25 years, I’ve just done so many radically different things.
RITHOLTZ: You’ve been in a lot of different divisions. You’ve had a lot of different job descriptions.
SALISBURY: Yes, I’ve been in, I think, all but one division at this point, and I’ve worked in three different offices, two continents. I would say it’s been a little more evolutionary after the first five or six years, but that ability to constantly be learning and at times, be quite entrepreneurial in terms of starting new businesses. So what I tend to find is after three or four years, it depends how big and complicated the task is. But after, in some cases, it might be two years. In other cases, it may take a little longer, three, four years. You know, you start to think what’s next. You develop reps. A lot of things are hard to start with. And then it’s like, I love sports analogies. It’s like lifting weights. At some point, you have to start changing the exercise or increasing the weights.
SALISBURY: Otherwise, you stop developing and learning. And sometimes it’s a change and then you can go back to what you were doing before and you come back and you’ve benefited from that cross training. But it’s the ability to constantly learn and keep adapting.
RITHOLTZ: So you mentioned a couple of continents. You’ve worked in London and Moscow and now New York. How have your roles changed in each of those locations? And what do you learn working in very different parts of the world?
SALISBURY: Yes, so I joined, as I said, in ‘98 and I was doing P&L and risk reporting for the investment grade trading desk and then the high yield desk. I ended up being hired onto the high yield desk as a research analyst and did that for a number of years, a couple of years. And then I was the beneficiary of the TMT bubble bursting in 2001. So the whole sector that I was covering went bankrupt. So I went from being a publishing high yield research analyst to a distressed debt analyst and investor.
RITHOLTZ: Same companies, just —
SALISBURY: Same companies, yes.
RITHOLTZ: They just became distressed.
SALISBURY: The high yield bonds quickly went to zero and then you’re buying the bank loans at discounted prices. And that was fairly evolutionary. And then in about 2003, we set up a group called the European Special Situations Group, which was a multi-asset class proprietary investing business. It was centered around credit, but really invested in both credit, real estate, growth equity. I led the corporate research team there for a few years. And then in a fit of madness, I guess, at the end of 2006, the credit markets were pretty uninteresting. There wasn’t a lot to do. It was bad companies issuing low quality bonds. And I thought about what’s next. I actually went out to visit the team in Asia and thought about moving out there. And my wife happens to be Russian or Belarusian. So I had an interest in the Russian market.
And around that time, Russia was starting to open up a little bit. It was a very different place that we find ourselves today. They were starting to want to attract international capital. And I did a couple of trips out there. And the next thing I know, my boss is buying me a one-way ticket to Moscow.
So I spent the next couple of years there. The role there was quite different. It was really building a growth equity business. And we had some great successes, not backing oil and gas companies or formerly state-owned assets. It was really finding growth equity companies, young entrepreneurs that were building businesses.
I did that for a couple of years. And then I moved back to London at the end of 2008, which was a really interesting pivot.
RITHOLTZ: Good timing, yes.
SALISBURY: Yes, I was asked to come back to lead the European business, which took about buying at the bottom. At the end of 2008, we owned a lot of illiquid assets. And whilst on a relative basis, those assets outperformed what was going on in a lot of other private firms, you know, it was certainly, I think we had 169 positions on the book at the time. And there was a problem with 168 of them at the end of 2008.
And that was kind of like, you know, almost like a distressed buy at the bottom assignment. But what was interesting about that was the quick need to both separate the portfolio between the old stuff and the new stuff, because there were a lot of new investment opportunities. And if people were too burdened down by dealing with legacy situations, they couldn’t really focus on the new opportunities.
And frankly, it had to do with the same with the people.
RITHOLTZ: I think that was a proposal from one of the central bankers. We need a bad bank and a good bank.
RITHOLTZ: You inherit a whole bunch of positions that have come through the financial crisis.
SALISBURY: Yes. Yes.
RITHOLTZ: You really want to look at this as, hey, here’s the legacy stuff that comes with a little hair on it.
RITHOLTZ: And here’s our opportunistic, hey, look at all this stuff that we —
RITHOLTZ: — have no exposure. What was the financial crisis like when you were in London?
In the US, it was sheer mayhem. What was it like over there?
SALISBURY: Absolutely. I mean, it was an existential event. I mean, people were wondering, am I going to have a job? It was the year I made partner, actually, in 2008. And I thought, great, I just made partner. Is this group, is this business going to exist by the end of the year? So it was certainly stressful. But in some ways, those events, and we saw it again in March of 2020, we saw it again around where you see these big moments where it draws people together.
So actually, everybody gets any kind of nonsense and couch time all dissipates, because everyone’s so focused on dealing with a task at hand. So in that way, it was quite a good defining moment. The other thing I would say is, in some ways, I remember a few years earlier, there was one investment that I was working on that ended up being spectacularly successful. But there was a period of time where I was quite worried that it was going to lose a lot of money.
And the reason I was worried is it was my position, it was me, and the rest of the world was looking good. The thing in ‘08, everything was broken and bad.
SALISBURY: So that actually helped in a way that everybody was dealing with the same broad-based crisis as opposed to when it’s just you or just your firm or just your fund, where in some ways it can feel more stressful.
RITHOLTZ: So what brought you back to New York and what year was that?
SALISBURY: So I led the European Special Situations Group from 2008 to 2013. And then at that time, I was asked to run the global business. And it seemed pretty natural to move to the US at that time. There were a couple of reasons for that. One, the London market is where it’s been most of my career. I knew the market, but I also knew the people there. I was very well-calibrated. I had a very strong and trusted team, the vast majority of which are still with the business today. So I felt like that was the last place I needed to be. So then it was a question of Asia or the US.
If I’d moved to Hong Kong, I think it would have looked like a fairly self-serving tax trade. If I had done that, it would have been because I thought that was one of the more interesting markets at the time, where there was real alpha-generating capabilities.
RITHOLTZ: So you said, let’s find the most expensive, taxable city in the world.
SALISBURY: Yes. No, what I decided is do what’s right for the business.
SALISBURY: And what was best for the business at the time was to be in New York, where it’s a New York headquartered firm. It’s a US-centric firm. I think that’s fairly well understood.
And at the time, we were going through a lot of regulatory change. Capital rules were changing. Risk appetite was changing. And being at headquarters, where you could stay close to the people, whether it’s head of compliance, head of legal, head of risk, whoever was running the business needed to be close to those decision makers in order to shepherd the business through that post-financial crisis period, where there was a lot of the Volcker rule brought into focus. Could we do these businesses? Could you run private equity business? Could you run distressed credit businesses? So we really had to work through that over a number of years. And that’s what really brought me to the US. And I wasn’t a huge fan of New York before I moved here. But now we’ve been here almost 10 years. We love it. And I can’t imagine leaving.
RITHOLTZ: Tell us a little bit about what the Goldman Sachs asset and wealth management business is like. What do they focus on?
SALISBURY: At the simplest level we manage money for our clients. About 2.7 trillion dollars of assets today. Three main client segments. Institutional clients, our own private wealth clients, and then third-party wealth clients where we manage money on behalf of other wealth managers distribution partners. Those are the three main segments within institutional. We manage money on behalf of pensions, endowments, insurance companies, sovereign wealth funds. So that’s essentially what we do from a client segmentation perspective and we do that globally — US, Europe, and Asia.
In terms of the investing side of the business, we really are somewhat unique in that we cover the full range of products.
RITHOLTZ: Meaning both public and alternatives.
SALISBURY: Yes, and really even within that, the full range. So everything from money market funds, core fixed income, high yield, fundamental equity, quant equity, and then the full range of alternatives both direct and indirect. We have a business where we invest in other people’s private equity funds, private credit funds, and then we have a series of direct investment strategies. Private equity, growth equity, credit, real estate, infrastructure, sustainability, life sciences.
So what we find, and then of course we have a multi-asset solutions business where we talk to clients about the entirety of their portfolio, their strategic asset allocation models. So what we find is with our clients increasingly they don’t want to just be pitched on a product or pitched on a single idea. It’s like what do I do, how do I address my needs, what are my liability structures, how do I make long-term investment decisions, and then how do I execute upon that overall advice through these individual investment opportunities.
RITHOLTZ: So that sounds like a substantial menu of options that can be fairly customized for each individual client regardless family office, high net worth individual —
RITHOLTZ: — or one of the institutions.
RITHOLTZ: Take us through a little bit of what that process is like because I have to assume it’s not cookie cutter. If you’re dealing with a sovereign wealth fund, that’s a very different conversation —
RITHOLTZ: — than a family office.
SALISBURY: Look, every client is different. They have a different liability structure, different investment goals, different investment risk tolerances, and we have different teams. We have an institutional client team, we have private wealth advisors that cover our own clients directly, and then we have a series of people that cover the distribution partners. So it’s pretty bespoke and tailored to their individual needs.
And yes, some demand and expect a higher level of customization and a higher level of service. If somebody’s giving us billions of dollars, then they expect a very high level of customization. At the simpler end, it can be a relatively plain vanilla product. But I would say even our private wealth, smaller private wealth clients are increasingly looking for broader set of advice and customization in terms of how we design their portfolio, which could be implementing values that they have or tilts that they have a desire to include or exclude certain products or CUSIPs within their equity portfolio or fixed income portfolio.
RITHOLTZ: Really intriguing. So you’re Chief Investment officer of Asset and Wealth Management. That sounds like there’s a pretty big list of responsibilities under that. So not only are you describing the broader asset allocation decisions with various clients —
SALISBURY: Yes. Yes.
RITHOLTZ: You’re also selecting the specific assets that go within each of those allocations. Is that more or less right?
SALISBURY: Yes, so we have different teams that do this. So we have our MAS team, our Multi-Asset Solutions team, who are really providing more of the overall portfolio advice. And that’s a discrete skill set for doing that. And then we have investment teams in each of these areas. So we have specialists in sectors that I set out for you.
I’m responsible for each of these individual investment teams, making sure we have the right players on the field, the right processes in place. And then as it relates to the private side activities, I co-chair all of those investment committees. So the individual deals that are coming through in our private equity business and our growth equity business and our real estate business.
So we have, you know, I’m one person, my primary responsibility at the end of the day is to make sure that we have the right people on the field fulfilling each of these roles and functions.
RITHOLTZ: You’re the coach and you’re sending different players in to do different jobs.
RITHOLTZ: So your background, you’ve worked at merchant banking, you’ve worked in special situations.
RITHOLTZ: How does all of that come into play as chief investment officer?
SALISBURY: It’s interesting because some of it’s helpful and useful and then sometimes it can burden you. When I ran the special situations group, it was a pure investing business. We didn’t really have clients. We didn’t really have to worry about marketing or advertising, didn’t spend time on podcasts or TV.
SALISBURY: We kept everything as quiet as possible. And 100% of the focus was just finding interesting investments that we generated the highest return on equity possible for the firm.
There wouldn’t be a dollar of risk that we would deploy that I wouldn’t personally review. We’d have a couple of hundred deals a year coming through the investment committee.
And that was interesting and it was a great model while it lasted. But I would say that the industry changed, the regulatory environment changed. And also, I used to sit back and think, this is great. We just get to focus on assets and asset risk management. I don’t have to worry about flying around the world collecting capital from LPs. We have one LP and it’s the firm, it’s Goldman Sachs and they’re in the same building. The problem is, you know, there are multiple problems with that, but one is you miss out on a huge information piece, which is understanding what these huge asset allocators and investors want. And understanding what their liability structures are and what their needs are from an investment perspective really informs your view on the forward path of asset prices.
And then I would also say we were seeing increasing need from our clients to increase allocations to alternatives. And we were doing a lot of this for ourselves, but we didn’t have enough investment product to be able to offer to our clients and scale and grow the business.
So it was a very natural evolution to take a series of businesses which have been prosecuted either wholly on balance sheet or to a large extent on balance sheet and start to evolve that business model where we continue to commit our own capital and our partner’s capital, but to bring in client money alongside us.
RITHOLTZ: So you touch on so many fascinating areas I have to follow up, at least with three of them. One is you mentioned clients’ wants.
RITHOLTZ: How do you separate when clients want something from when clients need something? And then lastly, from when, hey, all these clients are all clamoring for the same asset class, maybe this has had a little bit of a good run and it’s time to think about leaning the other way. How do you juggle all of those?
SALISBURY: Our job as an advisor to our clients is to know them intimately, to understand them, to understand their funding structure or their liability structure, to understand their risk tolerance, to understand their investment philosophy and approach, and then really to bring to them a variety of solutions. We have a team that really looks at their portfolio holistically across all asset classes, and then we have individual teams that can help bring implementation in each of the individual asset classes to make up that overall portfolio. But it’s really a solutions-oriented approach and a very client-centric approach.
RITHOLTZ: You mentioned liability. I want to discuss that because I think the layperson who hears this may not understand.
RITHOLTZ: When we’re talking about financial liabilities —
RITHOLTZ: what we’re really talking about is, hey, we have a bunch of people retiring in 10 years and we expect to have to pay out X dollars.
RITHOLTZ: Go into a little bit of what those liabilities are, not the usual use of the word.
SALISBURY: Yes. Sorry, when I say that, I mean, by the way —
RITHOLTZ: A little jargon, a little techno jargon.
SALISBURY: Yes, exactly. People should be — if people had forgotten about asset liability mismatches, they got the starkest reminder of it possible with the collapse of SVB a couple weeks ago.
RITHOLTZ: For sure.
SALISBURY: Generally, it’s asset liability mismatches that causes bank failures, but it also causes, in some cases, hedge fund failures and other financial institutions to fail. So what I mean by that is, what is your source of funding? If you’re an individual investor, for example, you don’t have to give that money back. It’s your money, so you may be able to afford to tie it up as long as you’ve kept enough money aside to meet your near-term liquidity needs, you know, your cost of living, essentially.
If you have a private equity fund where you’ve raised money from institutional clients, they have given you that money for 10 years, often. In some cases, it could be longer. So you have time to invest that money, generate a return on that money, and give the money back.
If you have hedge fund money, you may have to give that money at a month or three months’ notice, so you have to be very careful about how long you lock up your investments for. And if your source of funding is overnight deposits that can be called — that are on demand, then you have very, very short liabilities.
So what I mean by that is, first, understand the duration of your funding source. That’s what I mean by liabilities. Insurance companies have very long-dated capital. Pension funds have quite long-dated capital. It tends to be quite sticky.
So first, understand the duration of that funding source. And then the second is, understand the return requirement of that funding source. So for example, a lot of pensions and endowments would tell you, in order to meet my obligations to pay pensioners for the next few years, I need to generate, on average, a 7% return on that portfolio. Okay? And if I do more, that’s good. But in extremis, I should want to achieve a 7% return and take as little risk as possible.
So then they have to look at, what’s my mix? And how does each investment that I make help me achieve that goal? So it’s really understanding funding source duration, funding source return requirement, and then for certain types of financial institutions, understanding the capital rules.
So for example, if we raise, if we invest money for an insurance company, how we structure that can make a difference to the amount of capital they have to hold against it. So it’s our job to better understand these. Of course, the best funding source is to just have lots and lots and lots of your own money —
SALISBURY: — with no particular time horizon on which you give it back, no particular capital rules that you have to comply with, no clients to actually have to answer to. But most people don’t have the luxury of having that much money.
RITHOLTZ: Infinite perpetual capital is the ideal circumstance —
RITHOLTZ: And if only you could do that.
So earlier we were talking about assets, and then you referenced risk management.
RITHOLTZ: Tell us a little bit about the difference between managing risk and merely owning assets.
SALISBURY: Well look, I would say whenever you are making investment recommendations to your clients, you have to think about a range of potential outcomes. Of course, there’s a base case outcome for most investments that you might make. If you invest in a bond, the base case would typically be that it pays a coupon until maturity and then redeems at par. It might not be a straight path between when you buy it and when you get redeemed. That’s a general expectation. There’s a general expectation in the markets that if you hold equities long enough, they’ll generally go up in price. Again, it may not be a straight line.
Similarly, when you buy private assets, there’s a general expectation that these things will accrete in value.
But what you have to really do for each client is help them understand what’s the risk or the deviation that could occur around that base case. And sometimes people become relatively blasé or they kind of fall into this mode of thinking there’s only ever going to be a tight range of outcomes, and they don’t think about the extreme events. What could happen in a more extreme — could I survive an extreme set of circumstances?
A great example, you know, some of these things you can plan for and some you can’t. Like, so for example, it was probably unreasonable in March of 2020 that companies would have a war chest — a hotel company would have a war chest that would see them manage through 12 months of zero revenues based on a global pandemic.
SALISBURY: There are some things that you can’t, but there are a lot of things that you can prepare for.
RITHOLTZ: On the flip side, the airlines had a couple of weeks’ runway. Turns out not to be enough.
SALISBURY: Yes, exactly. But there are certainly things you could prepare for. So can I withstand an equity drawdown? Do I have the liquidity available to meet my ongoing cash flow obligations even in the event of a drawdown? And then you see some surprise events. So it was kind of interesting. We’ve seen a couple of these events now.
One, when people have asked me to compare and contrast today versus 2007, 2008, what you hear from a lot of people is, yes, there’s some fairly heady valuations. There were some fairly aggressive kind of investment strategies being pursued. But I would say generally, there’s less leverage in the system. The banks, the large banks at least, are better capitalized. You have fewer hedge funds making long day-to-day liquid investments with three-month capital. There’s just generally more duration in the liability structure so that people can withstand a storm.
And then you see the events of September of last year where the UK pensions, many of the UK pension plans had a very short-term liquidity crisis because they basically had a mismatch between their assets and their liabilities.
RITHOLTZ: Comparable to Silicon Valley Bank.
SALISBURY: It was a little different in this case in that they had very long dated obligations or pension liabilities. They couldn’t match those liabilities in the investment market. So they bought duration in the swap or the derivative market.
And then when you saw a sharp move in UK interest rates based on inflation concerns that came to arise back in September, all of a sudden, these pension funds were subject to margin calls, which they had to rapidly liquidate assets. Now, most of them had, pretty much all of them had enough liquid assets to meet those margin calls. But I don’t think they’d really kind of prepared for themselves that kind of two or three standard deviation event.
Similarly, you look at what happened a few weeks ago with the SVB situation. You had a lot of people who had hundreds of millions of dollars unguaranteed deposited with one bank.
SALISBURY: They should probably never have been doing that. They should probably have always had it either in multiple banks or more likely in a money market fund where you have a truly diversified set of risk. So I think it’s really not thinking, it’s thinking through for each client, what’s my base case return for their portfolio? What’s the base case return for an individual asset within that portfolio? And based on like large deviations from norms, as you saw last year, for example, with both bonds and equities going down, can I live to fight another day? Can I live to fight another day?
Whenever I think about crises, number one, two and three is liquidity. Can I get to the other side? Because if I have enough time, I can dig my way out of a hole.
RITHOLTZ: There was a book, I don’t remember if it was the 30s or 50s, “The Battle for Investment Survival.” Maybe that was Gerald Loeb. But it’s all about what do I need to do to make sure I could get through this and still be standing after the storm recedes. Dead on.
RITHOLTZ: So let’s take a look at a day in the life of a CIO responsible for that much capital. Tell us what a typical day is for Julian Salisbury.
SALISBURY: It’s hard to say a typical day, but I can tell you over the course of the week —
RITHOLTZ: Generally how I spend my time. First of all, one of the most fun parts of it is sitting on the investment committees for our private side activities. We have our private equity committee on a Tuesday, our growth committee on a Monday. We also do infrastructure on a Tuesday. We do real estate on a Wednesday and credit on a Thursday. So that’s kind of like a central core part of how I spend my time, really seeing what the teams are bringing through in terms of deals that we’re looking at in the early inception of the transaction as well as taking these deals all the way through to final approval. That’s on the private side and then on the public side, really getting market updates from our various portfolio managers and CIOs across the public side business in terms of what’s been happening in those businesses.
So that’s the kind of more investment side of things.
Then there’s business reviews, going through each of these individual investment units and really looking at their structure, their resource allocation, their talent, their performance is something I spend a lot of time on, really dissecting not only what is their performance but why have they performed the way they’ve performed both on an absolute and relative basis, both versus benchmark and versus clients. I spend a lot of time either individually one-on-one with people or talking to our different investment teams around talent and cultivating talent and building culture within the businesses. And then there’s clients. I spend a great deal of time with clients either on the road, a lot of time on the road probably, you know, like 20 to 30 percent of the time on the road with clients. And I always find those just incredibly, you know, informative meetings, really deeply understanding the wants and needs of our clients. And that certainly helps inform investment judgment and decisions that we’re making on the asset side.
And then I would say the final thing is just kind of from a strategy perspective, what are the new investment products or investment solutions, whether it’s new strategies or different wrappers around existing strategies in order to be able to deliver our investment solutions to a broader range of people.
RITHOLTZ: So, so many questions to ask. Let’s stay with strategies first. So what trends and practice areas have you most excited looking forward 2023 and beyond?
SALISBURY: Well, when I think about our need for talent in the organization, I think of it as three buckets. There’s our client business where we’re providing solutions and advice to our clients. There’s our investment teams. And then there’s the operating platform. And we’ll come back to that last one in a second because that’s a critical area of focus for us.
I would say from a client perspective, we really see growth across all of our client channels. So we’re, as we grow the business, as we expand the number of clients and we expand the number of offerings and solutions that we’re bringing to those clients, we naturally need more client advisors to help support the growth of that business and maintain the level of service and advice that our clients expect.
So whether it’s our institutional business across pensions and endowments and insurance, whether it’s our private wealth advisors where we’re adding advisors or our third-party wealth channel, you know, as we scale and grow the business, there’s a general need to have more talent to continue to provide the level of advice and service that we would want.
From an investment perspective, you know, we’re continually looking at our teams and continually looking at performance and looking to refine our teams. But, you know, we really find that those investing businesses are quite scalable. So it’s really, as we expand the size of the platform, we do need to add talent in order to help manage an expanding pool of assets. And then on the infrastructure side, I would say there’s a, you know, continual demand and need to invest in technology and operations in order to deliver a better client experience and to continue to improve and enhance our already strong risk management capabilities. But, you know, that’s an area that we’ve added quite a bit of talent in the last few years.
RITHOLTZ: I’ve had a number of people sitting in that exact seat all say the same thing. I’m going to throw their questions at you.
Finding talent is not only the most important part of their job, it’s also the hardest part.
RITHOLTZ: Is that overstating it or is that a fair?
SALISBURY: No, it’s absolutely critical and it’s amazing the difference one person can make.
So we have a pretty well tried and tested campus recruitment approach. So we’re going out to schools across the nation as well as around the world to find, you know, the best and brightest talent.
I would say we’ve opened up the funnel materially over the last, you know, decade or two to try to expand the size of the searchable universe essentially to attract not just the obvious kid who did the finance degree at the obvious finance focused school, but to attract a broader range of talent.
I really find that diversity, and I use that term broadly defined, people who come from a variety of different backgrounds, experiences, different college degrees can be very useful to bring that range of people into an investment business.
So we have a tried and tested kind of campus recruitment approach. You know, in addition to that, you know, lateral hiring, you know, while we certainly endeavor to bring people in at the campus level and grow them and help advance them over time to take on more senior positions so that often when somebody leaves, there’s, you know, somebody behind them ready to take on that job, and in some cases, more than one person willing to take their job.
You know, we do attract a lot of lateral talent as well, especially around specific new areas that we’re growing in.
So it’s really broad based. And look, it’s a constant hiring approach. I mean, I think I heard some stats the other day that a little over 50% of the people at the firm have joined in the last three or four years. And that’s quite natural and understandable. That’s a combination of natural attrition that you have in any business, growth of the business, some acquisitions that we’ve made. So integrating all of that talent and integrating, ensuring that there’s like a cultural assimilation is really important.
But, you know, the other thing that’s key is, whilst you naturally have people joining and some attrition, is making sure you have a strong core of people who are consistent and have been there for a very, very long time, especially in the asset management business, because when people give us money to manage, they’re giving us money to manage for a very long time.
It’s not about a transaction or a trade. So if you look at our core business, you know, we have many, you know, hundreds of investment professionals that have been doing this for decades.
RITHOLTZ: You mentioned lateral hires on new business areas. What sort of sectors and trends are you excited about looking out over the next couple of years?
Well, when I think about our need for talent in the organization, I think of it as three buckets. There’s our client business where we’re providing solutions and advice to our clients. There’s our investment teams. And then there’s the operating platform.
And we’ll come back to that last one in a second because that’s a critical area of focus for us. I would say from a client perspective, we really see growth across all of our client channels. So as we grow the business, as we expand the number of clients, and we expand the number of offerings and solutions that we’re bringing to those clients, we naturally need more client advisors to help support the growth of that business and maintain the level of service and advice that our clients expect.
So whether it’s our institutional business across pensions and endowments and insurance, whether it’s our private wealth advisors, where we’re adding advisors, or our third-party wealth channel, you know, as we scale and grow the business, there’s a general need to have more talent to continue to provide the level of advice and service that we would want.
From an investment perspective, you know, we’re continually looking at our teams and continually looking at performance and looking to refine our teams. But, you know, we really find that those investing businesses are quite scalable. So it’s really, as we expand the size of the platform, we do need to add talent in order to help manage an expanding pool of assets.
And then on the infrastructure side, I would say there’s a, you know, continual demand and need to invest in technology and operations in order to deliver a better client experience and to continue to improve and enhance our already strong risk management capabilities. But, you know, that’s an area that we’ve added quite a bit of talent in the last few years.
RITHOLTZ: Really quite interesting. So this has been kind of a funky year. Inflation seems to be coming down. We don’t know when the Fed’s going to be done their rate hiking cycle. How do you look at 2023 from an investment perspective? Do you think, hey, we have to make some wholesale changes? Or are you building portfolios where, hey, that’s what happens. The market cycle rates go up and down. You have to have robustness in order to encounter these.
SALISBURY: I think you have to have some consistency to your process, but also have the humility to realize that you need to make adjustments. And every time there’s an event in the market, it should cause you to rethink how you do things, whether it’s SVB or the events that we saw in the UK pension system last year. These are opportunities to learn and enhance your process. But I don’t think this is a wholesale shift, we’re in a higher rate environment, obviously, for now. And while rates will likely start rolling over into next year, I think we’re in an environment where the hurdle rate for making more illiquid investments is higher. So you’ve got to be really mindful that you’re getting paid enough on a nominal return basis versus the risk-free rate.
But I don’t think this is a major shift. I mean, the way we’re looking at the market today is the equity markets are fairly fully valued on most metrics that you look at. And therefore, we view rates as most attractive, generally. Credit is somewhere in the middle. And equities is looking like the most stretched. But I wouldn’t make a – you know, that causes you to tilt or lean in terms of how you adjust your portfolio. But it’s not a radical shift in approach.
You know, we look at it from a long-term investment perspective. What are the long-term goals of the client? And do they have an asset allocation that’s going to help them meet those long-term goals? So we start with a strategic asset allocation. But then there could be tilts around that based on the environment.
RITHOLTZ: So you mentioned earlier 2022 was so unusual. It was one of the few years that we’ve seen where both stocks and bonds were down double digits. I recall a lot of people declaring asset allocation is dead —
RITHOLTZ: 60-40 is dead.
RITHOLTZ: Everybody has to start over. I’m going to assume you don’t buy into the world of allocation is over.
SALISBURY: No. I mean, it was a bad year for 60-40. That’s clear. But you also have to recognize that the speed and nature of that rate hiking was pretty unprecedented. By the way, it really demonstrated why diversification in a portfolio is important because there were other asset classes you could have owned that would have seen better performance. Commodities, for example, had a particularly good year. One could argue that it was simply the difference between mark-to-market and non-mark-to-market. But if you’d had a heavier weight towards privates in your portfolio, that would have created a ballast and some consistency to your returns. But I certainly don’t think it’s dead.
But I do think people should think about within the 60-40, for example, is it all public bonds and public credit or are there other alternative products, private products that can help form that kind of bedrock of the income portion of my portfolio, and similarly, on the 60 side, it’s not just about public equities and being in index. It’s the private equity alternatives that can give me some diversification, exposure to types of assets or industries that I couldn’t otherwise get exposure to that accrete on a more consistent and persistent basis over time and don’t have quite the day-to-day volatility that we see in public markets.
RITHOLTZ: So you mentioned the rate of Fed hikes we’ve seen has been very rapid, arguably unprecedented.
RITHOLTZ: How do you look at Fed actions and this rate volatility? How does this affect your outlook going out beyond just the next month or quarter?
SALISBURY: Again, you have to break it down asset class by asset class. Within our macro businesses, within our public markets businesses, plus minus 25 basis points in terms of peak and the exact month it starts rolling over, it makes a huge difference and it’s something we focus on. We have a research-based approach. We have an outlook and a set of expectations and if the reality deviates from those expectations, we’ll refine the approach. We have other asset classes that on the face of it should be less sensitive to the day-to-day machinations of the rate market but when they move as rapidly as they just did, it can have a dramatic effect.
So what do I mean by that? I sometimes think as when you’re a micro investor doing private deals, it’s like playing a game of chess. If you get the macro wrong, it turns out you were playing chess on the Titanic. You could have bought the best piece of real estate, you could have bought the best class B office 12 months ago and not anticipated the pace of rate hiking that we just saw and it just repriced the whole asset class.
So I think the approach, the focus on the rate cycle really varies from somewhere like our money markets business where differences in duration in how we run that portfolio being plus or minus 10 days can make a huge difference in our returns and performance relative to other money market managers. We have other businesses that might appear less rate sensitive or less obviously rate sensitive but then when you have that magnitude of move, they really roll over.
Another great example of this, I thought it’s kind of funny that in the growth equity space that people didn’t seem to appreciate the full — how much duration risk they were running. Guess what? When you own a bunch of public assets where all the profitability is 10 years out, that’s a long duration asset. So when you have a rate move like that, it really causes a complete de-rating.
RITHOLTZ: Interesting stuff. You’ve had a pretty busy quarter. You announced three funds, Horizon, Environment and Climate Solutions, a private credit fund and a growth equity fund that all closed their rounds raising more than $22 billion.
Tell us about those funds and what they do and how does each slot into a client solution?
SALISBURY: Well, so taking each of these, our growth equity fund really focuses on a couple of different segments, enterprise software, fintech, healthcare and consumer.
Those are kind of like the power rallies in terms of industries that they focus on. They’re typically making significant but minority investments in fast growing companies. You know, these are companies often with an enterprise value in the area of $200 million to $1 billion, sometimes skews higher, but I would say the sweet spot is that area. And the reason for that, these are kind of companies that are growing, at least, you know, were growing 50% to 100% rates of revenue growth where the potential for takeout isn’t exclusively an IPO, they could be sold to a strategic and we’re trying to help grow these companies over a three to four- year period, prepare them for a public exit or a strategic exit and we build a portfolio of these businesses and we do that globally. That’s our growth equity business and it’s a first time fund but we’ve been doing it for 30 years just using our own money.
Our mezz fund, this was actually the eighth in a series of mezzanine funds we’ve been doing —
RITHOLTZ: Private credit.
SALISBURY: Private mezzanine credit. We’ve been doing this for decades and this is really a strong power rally for us in as much that, you know, we’re tied to the, you know, a preeminent investment bank. We have very close relationships with sponsor clients. This means we’re, you know, we’re at the leading edge every time an asset is going to trade or refinance, we know about it because our investment banking business and we can position ourselves as the preferred provider of the mezzanine capital to facilitate that transaction.
And I would say right now, given what’s going on in the world, the rates of return available to us in the private credit markets generally are just unusually attractive.
So, that’s our mezzanine credit fund and then our Horizon Climate Fund is a, this is really more of a private equity style control investments where we’re looking to invest in companies that will have a positive impact on the environment. It’s an Article 9 fund and it’s investing in things like climate, water treatment, recycling and these are fast growing companies but also, you know, so there’s absolutely, these are pools of money that are managed with a profit motive but they’re also investing in companies that are having a positive impact on the environment.
RITHOLTZ: So let me throw a curveball at you.
RITHOLTZ: At one point in time, you were a aspiring sports scientist and competitive kayaker.
RITHOLTZ: What’s that about?
SALISBURY: I picked up kayaking when I was, you know, 11 or 12. I started competing when I was 14 or 15. I got quite into it. I took it very seriously. I developed a passion for it and next thing I know, I’m in the top division in the country and competing at the highest level.
RITHOLTZ: So when you say kayaker, we’re not talking about the long skulls that we see on the Charles River. We’re talking about one or two person kayaks?
SALISBURY: It’s a one-person kayak. You sit down, you have a double-bladed paddle and you go down the whitewater rapids and you get navigating poles in the river. You have gates that you go downstream through and gates that you go upstream through. Most people only know about it because it’s in the Olympics every four years and they forget about it but it’s a pretty interesting competitive sport.
RITHOLTZ: Were you ever good enough to think about the Olympics?
SALISBURY: I competed at a pretty high level up until the age of 19, up until the age of like around 20 actually, 2021. I was, you know, a British university champion for a few years and competed in the top division but at some point I realized there wasn’t a lot of money in that sport and I didn’t like the idea of sleeping in the back of a van, chasing, you know, chasing glory around the world for the next five years.
RITHOLTZ: Not a lot of money in kayaking, whoever would have guessed.
RITZHOLTZ: I know I only have you for a limited amount of time. Let me jump to my favorite questions that I ask all of my guests, starting with what have you been watching, streaming, listening to lately? What’s been keeping you entertained?
SALISBURY: My two favorite shows at the moment are “Ted Lasso” and “Succession” very different shows. One speaks to my interest in sport and the other one is, it’s almost a comedy. It’s such a dysfunctional family.
RITHOLTZ: So tell us about your mentors who helped shape your career.
SALISBURY: You know, there’s a few people along the way. I mean, first of all, I mentioned this earlier but, you know, Goldman Sachs, you’re surrounded by great people that you can learn from developing, you know, and that could be technical skills, it could be leadership skills, and the other thing I would say is over the years, whenever I get asked this question, I think not just about who I’ve worked for but the many things that I’ve learned from the people who work for me and sometimes my level of interaction with them is so great.
You can learn a lot from an analyst and you can certainly learn a lot from your peers, partners that work for you, managing directors that work for you. So whenever I get asked this question, I sometimes feel like I’ve almost learned more from the people who work for me than the people I work for. But look, there have been some particular strong people along the way. I remember a guy that I used to work for at KPMG and one year I said to him, “Gee, at the end of the year — ” and this guy was unreplaceable and he seemed to be in the middle of every piece of business that we did and you couldn’t imagine how the place would function without him and I said, you know, “At the end of the year you must be able to ask for whatever you want” and he just looked at me and said “They manage” and it was really like the humility there and the realization that everybody’s, you know, replaceable. Some are harder to replace than others but he just kept that grounding and sometimes people lose sight of that and believe their own story a little bit too much. That was a great lesson.
I had a, when I, after a couple years at Goldman Sachs I was working for a guy in the distressed credit business and his analytical rigor and his relentless questioning and skepticism almost to an unhealthy level was actually a great learning experience because he, it was, you know, in a world where a lot of people like to believe the brochure or the prospectus, he never, it was, everything had to be founded in analytical rigor and facts, not what management told you or what story you heard. Take nothing for granted.
RITHOLTZ: Take nothing for granted.
SALISBURY: It’s like can you prove it in the numbers? I mean it’s back to the comment I made earlier around accounting. We get, we get a lot of kids who come through the business who have fancy MBAs but they don’t truly understand the interactions between a P&L, a balance sheet, and a cash flow statement and if you don’t have all three, and I mean a complete one, not a partial balance sheet with just the liability structure but everything, you don’t really understand the business.
RITHOLTZ: Really very intriguing. Let’s talk about books. What are some of your favorites? What are you reading right now?
SALISBURY: Whenever I get asked this question my first response is about 25 investment memos every single week. Add to that the various other business updates that I get and the prep for management committee on a Monday detailing all of the client flows in the business.
It doesn’t actually leave a lot of time or eyesight left to pick up other books and with the advent of the iPhone, like this constant stream of information from Bloomberg and other news sources means that I’m reading a lot but not enough time for pleasurable books. But there are a couple. There’s “The Avoidable War.
” I think the geopolitical situation with China is something that everybody should be very mindful of right now and that’s going to impact asset prices and flow of money and I think that’s something everybody needs to be paying attention to.
I’ve been picked up a book recently looking at it’s called “The Shallows” which is really looking at how the mind is being rewired by the internet. The way we think and the way we operate is fundamentally changing. I mean you know everybody’s developing kind of attention deficit disorder because of the constant flow of information and actually the ability to sit down and absorb a long-form book is becoming harder for a lot of people because they’re so used to the instant gratification of the Twitter feed or the or the short-term news story.
RITHOLTZ: Yes, deep work is becoming more and more rare.
RITHOLTZ: Our final two questions. What sort of advice would you give a recent college grad interested in a career in either investment or finance?
SALISBURY: I’d say three things. One, don’t be put off as we talked about earlier by some of the strange language and nomenclature. Become a student of it. Study it and break through those barriers and don’t be intimidated by it.
Two, I would say develop an area of expertise early on and what I mean by that is in order to start really adding value you need to prove yourself to be really expert or knowledgeable in a particular area, the go-to person on that on that issue and it could be relatively narrow so I’ll give you an example. I used to be a high yield research analyst. You know you learn how to model one cable TV company and then you do a second and a third and then you — because of the process that you go through you start to develop an ability to assess relative value between those things and then you do a fifth and a sixth and then you become the go-to person. So become a deep expert in that one area the go-to person but then you want to start if you if you unless you want to do that for the rest of your career you need to start adding some breadth. But it’s getting the balance right because you know you can’t if you’re skipping from one area to another and you never get deep an expert in any one thing then you become too much of a generalist.
So it’s getting that balance right between specialist skills and but not getting so sucked in that you become siloed and that’s the only thing you ever do.
RITHOLTZ: Really interesting. And our final question. What do you know about the world of investing today you wish you knew 30 or so years ago when you were first getting started?
SALISBURY: Yes well I started out in life really doing as a micro analyst like covering distressed credit situations and it was always about finding that complicated weird interesting deal where you couldn’t really lose money and there was interesting convexity to the upside and it was all about the art of maximizing risk adjusted return on that one trade and almost having like a bit of a dismissive view to people who just put money into like mutual funds and regular equity funds and little you know fixed income funds and, you know, in sometimes you can get lost in the in the wood you know looking you can’t spot the wood for the trees and just the power of compounding a diversified portfolio over decades has proven to be a highly successful path to wealth maximization.
So it’s really taken a step back from the not just about maximizing the profit on the individual deal but how do I maximize return on my overall portfolio over a long period of time.
RITHOLTZ: Micro and macro.
RITHOLTZ: Really quite fascinating.
Julian, thank you for being so generous with your time. We have been speaking with Julian Salisbury he is the Chief Investment Officer of Asset and Wealth Management at Goldman Sachs where he helps to oversee over $2.5 trillion in assets under supervision.
If you enjoy this conversation, well check out any of the previous 499 we’ve done over the past eight years. You can find those at iTunes, YouTube, Spotify wherever you find your favorite podcasts. Sign up for my daily reading list at ritholtz.com. Follow me on Twitter @Ritholtz, check out the fine family of Bloomberg podcasts on Twitter @podcasts.
If you’d like to learn more about Julian Salisbury and the work he does at Goldman Sachs, go to LinkedIn and look up Julian Salisbury.
I would be remised if I did not thank the crack team that helps with these conversations each week. Samantha Danziger is my audio engineer, Atika Valbrun is my project manager Sean Russo is my researcher, Paris Wald is our producer. I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.