Stewart: Welcome to another edition of the InsuranceAUM.com Podcast. My name's Stewart Foley. I'll be your host. Welcome back. This podcast is an executive spotlight and it's brought to you by PGIM Fixed Income. Thanks for joining us, and today's guest is a good friend from a long time ago, Randy Brown, who is the Chief Investment Officer for Sun Life and the Head of Insurance Asset Management at SLC Management. Randy, thanks for being on. It's great to see you and thanks for taking the time.
Randy: Great to be back, Stew. Great to see you as well.
Stewart: I'm trying to think of the last time we talked. Saw each other when InsuranceAUM was way fledgling. I think we had sushi in the Back Bay in Boston, right? It was fabulous, but it's been a minute and it was great. We just got done, full disclosure to our audience, we just got done catching up.
So the first thing we want to start off with is the way we start them all, which is what is your hometown? What was your first job? Not the fancy one. And what makes insurance asset management so cool?
Randy: Okay. So my hometown is actually more difficult to answer than most people know because I travel quite a bit, but I'm going to call it officially Boston today, except that I'm officially a resident of Florida, for those of you on the Internal Revenue Service.
Stewart: Right. Where did you grow up?
Randy: I grew up in Baltimore.
Stewart: Oh, in Baltimore.
Randy: So I grew up in Baltimore, went to college in upstate New York and graduate schools, and then worked in New York for most of my career. A brief stint in London before moving to Boston.
Stewart: Very cool. What was your first job?
Randy: Well, if you really want to go to first first job, I worked at a summer camp in sixth grade summer. I worked every summer since the summer of sixth grade, and that was really the first job. Very humbling to change trash cans and clean out bathrooms, but that's what you could get as a sixth grader. But professionally, my first real job was coming out of business school, engineering, and business school, was as a mortgage-backed securities trader at Solomon Brothers in 1986.
Stewart: There you go. And what makes insurance asset management so cool?
Randy: I think it's the best, really. I love it.
Stewart: I do too.
Randy: What makes it so cool is that it's a multidimensional Rubik's Cube. There's so many complexities that you have to solve for. I used to be a total return person as well. In there you say, oh, I really like this sector. This is rich, this is cheap. I'm going to sell that, buy that. That was the decision-making ending and then the implementation began.
So we have to do the same thing. I really like this sector versus that sector. I get to have a longer time horizon, which I think is fantastic because it plays to what I think is my strength as an investor instead of just a trader. But then that's where really the fun begins. So what's the impact on my capital and my accounting and my liquidity? And where am I relative to internal and regulatory guidelines and state guidelines? And so it makes it a much more interesting problem to solve, I think, than 'I've just got to go beat a benchmark.'
Stewart: I had someone say this to me and I thought it was pretty succinct and pretty accurate, and the person said “What makes insurance asset management so different is the number of externalities.” And I thought that was such a great term because it covers all the things that you talked about. We put together a chart that shows sort of the CIO and the investment team and then all the things that connect to that and all the considerations you have in navigating what is already a very challenging capital market and you're up against smart people, but I've always said I think insurance asset management is the smartest money in the world because of all of the externalities in addition to trying to beat a benchmark in the capital markets.
Randy: Yep. I think that's really well put.
Stewart: And so you have a unique background versus a lot of CIOs. Can you describe it and talk a little bit about how it helps you with your mandate? Which is, we were just talking about how crazy busy you've been. Give us a little bit of background on you.
Randy: So as I said, I began my career as a trader on Wall Street for close to 14 years. So I had a daily P&L. You really could trade actively. I tended to gravitate to the new products where there really may not have been a market established and I had to create a market, so educate people about the merits of these particular cash flows and get them to buy into the value creation. But I had a daily P&L, and so you learn to really get a feel for the pulse of the market.
Then I became a portfolio manager for insurance companies. So there, it was a matter of bringing all together some of the complexities that we talked about. And now step three of the career here is as asset owner primarily, where now I get to be purely the decision maker as opposed to implementing someone else's agenda.
So for me, I think it really helps because I think about the markets in a balance of short-term, long-term, and as a trader you look at technicals and fundamentals, supply, demand, but psychology. How is the market feeling and how's it going to react? But I get to have the perspective of having a long-term horizon, balanced against that short-term what's going to happen today. So we tend not to be traders. With these portfolios, we're turning battleships. I takes a long time, or aircraft carriers are even bigger. It takes a long time to reposition an insurance portfolio. I don't care what accounting regime you're in, it takes a long time so you have to balance.
Stewart: And then also what's affectionately known to investment people as the operation. The operation of insurance company is complex and changing and your cash inflow is complex and changing, and then there's a lot of regulatory environment. Right now, I did a webcast the other day and we talked about that it was reported that there was something on the order of $700 billion worth of unrealized loss in the Schedule D assets of, and obviously with private assets, that number's got to be a trillion. And it's simple math. It's just the run-up in rates that we saw over the last 18 months. So you've got long-dated liabilities. You've got a bunch of them. You've got a very, very sophisticated portfolio. How are you navigating this particular investment environment?
Randy: This one to me feels a bit unique. Again, I've seen a lot of cycles, probably more than most, and this one feels a little bit different. So part of it was anticipating, again, looking at the long-term read of supply demand and technicals versus fundamentals. I would say as an organization, we did a really good job anticipating some of the moves, and this is where my background was sort of engineering and finance, so this is where one of my trainings is in engineering. You always look at the boundary condition. Where does it break? Well, to me it broke when you had $19 trillion of developed world debt at a negative nominal yield. That's not sustainable. I call that a disequilibrium state. It cannot persist in perpetuity. So it had to reset and when it reset, the view was it was going to be faster and further than anybody in the market was anticipating. That was part one.
Part two was we felt inflation... Everyone who was worried about deflation, said inflationary pressures are building up, and I think inflation is going to be a very significant factor on the market. So if you put the two of those together, we had a view that rates were going to go up very quickly and we thought inflation would be more persistent than the market is predicting. And both of those, we've been fortunate and both of those calls were right. So we repositioned the portfolio and again, it took five years of work to reposition it to get us to where we are today. And where we're today, I think is in a very strong position relative to a lot of our competition. The tide has gone out for sure. You have to make sure you're still afloat at the end of the tide going out, which we will be.
So that's how we've kind of navigated it. I think we have a fair amount of dry powder, because we are anticipating some very attractive buying opportunities that are developing and will continue to develop.
Stewart: Yeah, you were right on the money both times. What form did that take? The fixed income geek in me says you made a significant duration call, which takes a lot of what's affectionately known as internal fortitude, because if you're wrong, it's career-limiting potentially. I'm not trying to be funny, but that's a big thing. But are you saying that you guys were actually, you made a directional call on rates?
Randy: Yeah, so in my old seats, that's what I would've done. In this seat, we run a very closely matched ALM book, so not only duration but key rate durations across multiple points in the curve. So I don't have the latitude to make a duration call, but let me give you an example of where that decision-making process manifested itself.
So if you thought rates were going to go up quickly and inflation was going to be higher... We have a large real estate book, both debt and equity, probably on the equity side larger than a lot of our competition because we think it's a really good asset class. So what did that mean? That meant that cap rates relative to an abnormally low level of risk-free rates looked fine, actually looked relatively wide at the lows compared to history. So if you just looked at the spread, you would say, oh, cap rates are fine. I looked at it and said, those are unsustainable and need to reset. So the simple math is if you have a cap rate of 4, and the cap rate resets 1%, that's a 25% drop in the value roughly of your property. That's serious.
Stewart: You bet.
Randy: Serious movement, particularly as those are more market to market. So if you had that view, what would you do? Well, you would sell office, and we had sold retail because we said, well, with this much inflation, in the end of the subsidy of the COVID era, consumers are going to be under pressure. So we sold in a big way. We cut our office exposure in half, well in advance of what we're seeing now in office, and you reposition that into sectors like multifamily and industrial where you had pricing power. Multifamily reprices once a year. People move. You get new people in at market rents. Market rents were going to be higher because of inflation. In industrial, we saw a systematic shortage of industrial and logistics in particular that got manifested or exacerbated by the pandemic. So we had a dramatic repositioning of the real estate portfolio and it has served us very well. It is the number one question I get these days by analysts, by investors, by everybody, is about the real estate portfolio. That would be one simple example.
Stewart: That's a great example. That's another great call. So one of the things that may not be terribly apparent is that you led two of the biggest asset management firms for insurance companies prior to joining Sun Life. I have said, and others, the industry has changed more in the last 24 to 36 months than it has in the last 24 to 36 years. How have you seen, and we're both, I mean this isn't videoed, but we both have our fair share of gray hair. You'd said you'd saw more cycles than most. I think that's true and I think that that's helpful when you get into a situation like this where we're in uncharted waters, but to your engineering example, you know what simply doesn't make sense. How have you seen this industry change and really where do you think it's going to go?
Randy: I totally agree with you in terms of the magnitude of the changes we've seen. If I were to go back, I've been at Sun Life close to 8 years. So I left the active asset management piece of the business 8 years ago, but at that point, what had I seen in terms of changes until then?
When I started, it was really BlackRock and Deutsche Asset Management where the two were kind of neck-and-neck, and probably number three at that point was 30% or 40% of the assets. So it was really a pretty tight oligopoly if somebody particularly had a fixed income mandate, and that's really where the focus was at that point. Pretty much you were going to see it. And a track record I'm really proud of. When I was at Deutsche, if we saw a piece of business, we won 65% of the time over the 3 years. It was extraordinary growth and we really pulled a global team together.
But then what happened? All of a sudden everyone woke up to the fact, wow, these insurance assets are big and sticky and maybe I want to get into them too. And so you saw others going into the business, which then if you fast-forward... So it got more competitive. Then if you fast-forward, which was really one of the things that drove me to want to go from an asset manager to an asset owner, was this view that you had pensions run using LDI as a term, and if we call that on a spectrum of 1 to 10, if they were at a 0, and you had insurance, which we use the term ALM, and that was a 10, I said because of changes, one change was unfunded pension obligations going on balance sheet, the pension funds were moving from 0 higher. And insurance companies because of the persistently low rates and the need for more income in soft markets and liabilities were moving, because they needed more, were moving down to the left and they were going to meet. But my view was they weren't going to meet at 5. They were going to meet at 7, meaning that the pension world was going to take a part of the playbook of insurance companies, but insurance companies were going to take part of the playbook of pensions.
So that led to this explosion of the focus on, let's call it ‘non-investment grade fixed income’. We all did investment grade, corporate structured finance and government books. Basically, that's what the industry was. Now private credit and lots of different alternatives have really become mainstream to the point that you've seen this major influx of PE companies starting insurance companies and then taking it one step further where they're actually focusing on asset management to grow their business to the point where they're really consolidating around. You've heard all the verbiage from Henry Kravis to Apollo to now the latest move by Blackstone, where really you're coalescing around this insurance mandate. So it's been a massive change in focus from just core to alternatives and a tremendous influx of other players, so it's a significantly different market than it was 10 years ago.
Stewart: I see a fair amount of regulatory movement too. I think the regulator is trying to figure out how to get better transparency on all the private assets that have been added so that they understand the risks and so forth. We've done a couple of podcasts on regulatory changes and it's challenging just to be kept abreast of all those changes as well. So when you look at the current markets right now, capital markets, what do you see? Is there something mispriced that offers value in your mind and is there something that's mispriced that is overdone?
Randy: I think we're at a very interesting point in the market and we really haven't been here before. So there's still some very large issues facing us and which way it comes out is anybody's guess. So I kind of say lots of talking heads are going to tell you what's going to happen, and I'll tell you I have no idea, because the confidence interval here is extremely wide. I can make a very convincing case for a deep recession and I can make a very convincing case for no landing and everything in between. So what are some of those things? We're very high employment still. Despite recent slight weakness, employment is still very high. Inflation to me feels persistent, and you've got the UAW strike. I read one research piece today, which essentially their demand, if you factor in the higher wages, the shorter work week, et cetera, et cetera, et cetera, is something like 150% increase in wages. That's the demand.
So I think you've got a structural imbalance in the availability of housing and in particular structural shortage of affordable housing. You've got this massive demographic of aging boomers and a shift in the workforce composition. You've got geopolitics that start right here at home. The latest discussion about the government shutdown is troubling to say the least, but the dysfunction on the US political front, I'm not a historian, political historian, but it feels unprecedented some of the bid and the ask there. You've got a government that has to fund a massive deficit. At the same time, you have foreign buyers that are buying fewer treasuries and you've got a rising rate environment, so that's going to consume a bigger part of the budget.
And that bigger part, one of two things has to happen, or three things, it's got to crowd out other spending. You have to raise taxes or you need a significant increase in GDP, which will raise the whole tax base. Something's got to give. So if you take all that as a background, it says that there are lots of different ways this could develop. So that's the long answer. The short answer is you've seen a disintermediation of banks, which I think creates lending opportunities, particularly in the private markets. Commercial mortgage lending, 65% of it was from regional banks. They've got issues right now to deal with in terms of ALM mismatches and liquidity and disintermediation of their deposit base into money markets.
So we see an opportunity. We've got a team that originates mortgage loans both for the balance sheet and for third-party clients. I see opportunity there. Private credit across the rating spectrum. We've got a 70-person team that originates both again for the balance sheet and for third-parties in investment grade, private credit, typical life go stuff. But then below investment grade, there are opportunities that I'm seeing and funding in some of those where people just need liquidity, and you're able to sell your credits with good covenants, with good collateral. If you can provide liquidity and write a check and make decisions, there's some really good opportunities.
So those are here now, Stew, and I think they're going to develop further as this comes along. I think equities, in my view, but I was always a bond guy, equities are expensive, but I'll put a big asterisk on that is I've always been anti-equity so don't listen to what I say because I've never gotten that one right. Certainly as I look at it, when think the S&P 500 is so not diversified. I think something along the lines of a third of it roughly is in two handfuls of companies. That's not a representation of the broader environment, so how you invest in equities is also going to be impacted here. So sorry, long answer, but there are a lot of pockets.
Stewart: Great answer. I was listening to Howard Mark's podcast this weekend and he said, believe me, the last thing I want to do is misquote this guy because I have so much respect for him, but it was something on the order of, "7 stocks drove the S&P return and the other 493 are flat." And that was a real eye-opener for me, which I think is really interesting.
So let me take a couple of pieces of things that you've talked about and ask the last question. It's the second to the last question. I've got a really pithy, interesting, fun thing that I've come up off the top of my head that I'll throw at you in a minute. We're friends. You know that it's going to be goofy, whatever.
But you talked about real estate and moving out of office in favor of other sectors. That's obviously a result of the pandemic and folks who are working either hybrid or from home and not 5 days a week back in the office. Right when we came on, we were talking about your advice to newer employees. What advice would you give someone who was newer to your organization? And by the way, I sincerely believe that you are one of the finest managers and mentors of people. You are universally respected in this business without a doubt. So if you could give some advice to people who are newer in the industry, what would it be?
Randy: First of all, I really appreciate that and the payment, that check by the way, as I told you, is in the mail so thank you.
Stewart: Great, thank you. I appreciate it.
Randy: Yeah, no, thank you for that. That's very kind.
Stewart: It's true. You've been all over this business and you've been at it a long time, and we have some mutual friends who are also OGs in this business, but you know. You're very good at this and it's helpful. I think people benefit, Randy, when they hear from... Not everybody's going to get a chance to have lunch with you, unfortunately, but if you had a group of people and you were having lunch with them, looking back over everything you've got, what would you tell?
Randy: Yeah, so thank you. I think it's really important to mentor newer employees. And I was on the board of my business school for like 20 years, so I would do a lot of mentoring of the students there as they look to... Typically, in business school you see a lot of people who are trying to transition careers. So at one point or another I did something that I'm really terrible at, which is I actually wrote down my thoughts and I came up with a little list that I call my Randyisms, for lack of anything smarter.
So if I were to give advice to my kids, as an example, number one, focus on your job. A lot of these are going to sound so basic, but there are a lot of people who spend so much time worrying about all the stuff going on around them. Don't worry about it. Focus on your job. Let other people worry about the perceived politics and the perceived... People like to expend a lot of negative energy. Don't. Focus on your job. You need both performance and service. And I'd say good service can overcome poor performance for a while. We all have styles. Maybe one shop is delivering an overweight to structured finance and another one likes credit, another one likes illiquidity, and those are going to come in and out of favor, so good service can overcome poor performance for a period of time so it's critical.
This is a full-contact sport, 24/7. A lot of people are like, I want to punch in at 9:00 and punch out at 5:00 and that's fine, but I think it's going to be difficult to excel and differentiate yourself. This is a full-contact sport. When you give specific examples as I'm doing now, you can say something but if you give an example, it makes it stick better. We always talked about how we don't sell products, we offer solutions. So let me understand your problem, let me empathize with your position and then let me offer some suggestions about potential solutions you may want to consider.
That is a very different approach, something that I've been doing my whole career and I think the market has finally caught on to stop talking product. When somebody comes in and says, hey, how are you? I've got these four funds in the market. Which one do you want? That conversation doesn't last very long. Underpromise and overdeliver. A lot of people do the other. It tends to backfire. Communicate especially bad news early. Don't just give a problem, give the solution. So that's a big one.
A lot of people like to say, gosh, our technology is really bad. Okay, great. So thank you for telling me. Let me go solve the problem for you. No technology's bad. Here's specifically something I think would give us an advantage. Here's why. I'd like to go run with that if that's okay. That is a vastly different conversation and that will separate you from the herd immediately. Give the solution. Connect the dots. It's a big global world out there. So when you look at something here, think about what are the implications, the proverbial flapping of the wings of the butterfly. Relationships matter a lot. You and I just talked about that. Culture is critical, so you got to be part of the culture. We'll come back to that with office. Collaborate. I say people want to matter, so thank-yous go a long way. Think long-term.
Be aware of the game of telephone. So what you say... This is what I've learned. It's extraordinary. What I say versus what people hear, it's vastly different. And sometimes I'll go, how in the world did you hear that? These are the specific words I used. And it's because some people come into a conversation with a bias of what they want to hear and they interpret what you say to fit their worldview as opposed to what you say. So you got to be really aware of that. This is also another one that'll really differentiate you. Answer the question before somebody asks you.
So I'll give you an example, again, going back to my example. ABC Corp is on the cover of the Wall Street Journal. You're a client service person. You know your CIO is going to get a call at 8:00 from their CEO. Hey Susie, do we own any ABC Corp? So there's two answers. I don't know, I'll get back to you. Or yes we do. We own this much. It's at this unrealized gain loss. And the view is, from our manager or from my team is we think it's a hold because of the following reasons. Which one do you think is better? So answer the question. Don't make them call you. Send them before.
Be a team player. Don't use the word I. Use the word we. It's not your money. It's our money. And then embrace change. People hate change, even if it's good. I always use the example. If I'm like, Hey Stew, I've got a million dollars in gold I want to give you. People will go, oh my God, how am I going to carry it? Where am I going to store it? Oh, woe is me. Are you kidding me? So people hate change, even if it's a great change.
Stewart: I love those, by the way, every one of them. I learned the ‘we’ thing when I was at NEAM and one of the things I've learned in running this business is that ‘I’ can't accomplish too much. I need ‘we’.
Randy: And everybody does it.
Stewart: True.
Randy: I did this. I bought that. No, no, we bought that. Are you going to write me a check to cover the costs? We bought that.
Stewart: Exactly.
Randy: So let's go back to where you started, which is we were talking about return to office. So culture is critical and I think it's really hard to have cultures over Zoom unless you've already got a deep relationship. So, Stewart and I were commenting, we haven't seen each other in a while, but we kicked up within five seconds. It was as if I saw him yesterday because we have a good relationship that's been established over time, and that doesn't happen over Zoom. So there are a lot of people who don't want to return to the office because guess what? It's really convenient to put on a t-shirt and sit at home and get the extra time. Absolutely. But being in the office, particularly for newer employees, and establishing relationships is in my view, critical to your career success and frankly critical to the success of the organization.
And if you have a bunch of people who don't come into the office, it's very hard to create loyalty to the company. So you're going to see more turnover in staff, in my view. And so interestingly, I'm doing this podcast from my office at work. It's typically the newer people who don't want to come in. The less new, the older people who are the ones here because we understand the value of the informal communication. When I'm walking to the elevator for lunch and I see an analyst, I'll say, come on, walk with me. Let's go grab lunch. And you talk and you find out and it gives them exposure. And I'm like, you know, that's interesting. I didn't know that. Oh, you're interested in that? Let me see if I can help you. Never going to happen unless you're here. So that's the value of it.
Stewart: I love it. All right, so you ready for the out-the-door questions?
Randy: I am.
Stewart: I want to introduce some optionality to the podcast. So you ready? You can do either or both. The first one is, what's the best piece of advice you've ever gotten? And the second one is, who would you most like to have lunch with, alive or dead?
Randy: Okay, best piece of advice. It was given to me by a client of mine when I was a trader, who said, "Focus on your job."
Stewart: Focus on your job.
Randy: All this stuff was going on in Solomon Brothers at the time. Focus on your job. So I thought that was great advice because as I said, people spend a tremendous amount of negative energy on stuff going on around them. Oh, I saw Susie talking to Steve over in the corner. I wonder what they were talking about. I heard a rumor. It's just distracting.
Stewart: Yeah. Burns up a lot of time and energy for sure.
Randy: Yeah. So that would be one. I guess to your second one, boy, it is hard, but I'd love to sit down with Warren Buffett to figure out... He was way ahead of all of us.
Stewart: Oh, way ahead. Yeah.
Randy: Insurance is really a way to aggregate long-term cash flows. And then he above anyone else, got the hall pass to invest in a completely different style. He was big into equities when we were all like, what do you mean you want to buy a triple B bond? Right?
Stewart: Exactly.
Randy: Very different. So that would be one.
Stewart: Absolutely. It's so great to have you on, man. I enjoyed this tremendously. Great advice. I love the Randyisms. I love your perspective on the market. I really appreciate it. Thanks so much for taking the time.
Randy: Well, it's always great to see you and thank you for inviting me to speak on the podcast, and it's been a lot of fun.
Stewart: We're thrilled to have you on. We've been joined today by Randy Brown, who's the CIO for Sun Life and the Head of Insurance Asset Management at SLC Management. I want to thank our sponsor today, which is PGIM Fixed Income. Thank you so much for making this executive spotlight possible. Thanks for listening. If you have ideas for podcasts, please shoot me a note at podcast@insuranceaum.com. Please rate us, like us, and review us on Apple Podcasts, Spotify, or wherever you listen to your favorite shows. My name's Stewart Foley and this is the InsuranceAUM.com Podcast.
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