One and welcome everybody to another smart money circle show.
I'm Adam Sarhan. With me today is Darren Dodson,
who's managing Partner at Alum Capital with around 250 million
in assets under management. Darren, thank you so much for
coming on the show. Oh.
It's great to be here, so I always like to begin.
Can you tell us your story and how you got to where you are
today, please? Sure, I grew up in Washington,
DC, started. Looking at and understand the
asset management business after graduating from Duke University
and focusing on antipredatory lending legislation, which I
worked with a group of attorneys to pass legislation in in 18
states to protect low income homeowners from predatory loans.
After that, I had the opportunity during that time to
look at. Research as a power for creating
change. And the research there showed
that loans were underwritten above risk to black and Latino
families in particular, which was, you know, created a lot of.
A lot of people stuck in loans for reasons that hurt them as
overall borrowers over time, which is bad for banks but also
hurt them in terms of. You know, no one should pay more
for a loan because of the race or color of their thick skin.
So using those insights ended up going to Stanford Business
School and then focusing on underwriting for companies that
create positive impact in the world.
And that's been my focus for the last 15 years of my career.
I did 8 years at the Calvert Funds where I focused on
investing in transformative, environmentally focused
companies as well as. Health tech companies before
starting my own firm, Alumin Capital, which I'm excited to
share more about today, perfect by the way, fantastic cause I
love that that there's something, there's a purpose
behind the mission there and that's really, really fantastic.
So next is a perfect segue to my next question.
Please tell us about your investment strategy.
At Alumin Capital, we're fund of funds.
We're private equity venture and growth fund of funds.
We focus on investing in. The leading impact funds in the
world and working with them to apply rigorous evidence based
strategies to address biases that prevent our managers from
seeing the all too often underestimated and overlooked
entrepreneurs talent within their hiring processes and then
also within their board construction and selection
processes. I love that.
So you're fund the funds, meaning you're looking at other
strategies. I guess it's a good segue again
to my next question. How do you handle risk and what
are some mistakes you see people make with respect to risk
management? Well, one of the things that we
do is that we look at investing in an area where there's latent
value in the in our investment strategy.
So when we look at. The asset management business,
about $82 trillion under management, 1.4% of it is
managed by women and people of color.
So one might naturally think that there would be an
opportunity and investing in, you know, 50% of the universe of
possible funds would be women led.
So we might look to women led firms as a potential for
outperformance. And women and people of color
led firms. In fact, our own research with
Stanford University where we systematically tested 180 asset
allocators and looked at their ability to select high
performing black managers versus high performing white managers
controlling for a number of variables and we found that
systematically asset allocators. Would leave money on the table
before investing in high performing black led funds which
means that there's a tremendous opportunity that it for those
that can see the opportunity which is the way we spend a lot
of time partnering with our downstream funds in order to
unlock the verticals that we invest into and their ability to
see these. We liken it to drive in a car
and if you're driving a car and you've ever had your.
Your parking break on you know something's going slower and
you're not sure what quite what for a while and taking the
blinders off and seeing opportunity within communities
that might be different that then fund managers meet through
their networks or you know through familiarity might in in
many cases given our thesis sort of yield economic opportunities
that might not have seen. I love it.
I love that. So I guess next question for you
from a before we well let me ask you about the risk again.
So you're saying that there's basically a layer of the market
of portfolio managers that are allocators are under invested 10
or under allocated towards and that's strictly based on their
race. So are there other indicators
that you use as far as finding these undervalued money managers
and allocating to them? Do you look at strategy?
Do you look at beta? Do you look at sharp ratio,
anything along those lines or is it just a race component and
gender? In the private markets, we also
have sector based, sector based strategy.
We have 4 sectors that we invest into transformative
environmental technologies we look at.
Health enabled technologies as well as educational technologies
and financial tech. So when we look at these
different areas, each of them have their own respective biases
within the strategies in the firms and the companies that the
respective funds we invest in to commit to and we're able to add,
you know our unique. Thinking about overcoming biases
to each of these different platforms, for example, within
Edtech we see that underwriting algorithms, machine learning,
etcetera can apply in the biases of a teacher so that education
isn't delivered in an equitable way.
So if we're interrupting those biases, it increases the
education for all students in the classroom.
And helps the firms deliver on important aspects that are
important to the education system.
Furthermore, we see in a period of high volatility like we're in
high inflation, high interest rates, etcetera, that biases
increase from our social psychologist friends.
In fact, we published a paper with some of the leading social
psychologists in the world. And in in what we learn is that
in these periods of time when people are often making Ras
decisions, slowing down and addressing biases becomes even
more important. So I think that one of the ways
that we mitigate risk that you know whether it's Daniel
Kahneman talking about his Nobel Prize winning research is under
these pressure oriented conditions where there's lots of
emotional energy in the markets. We're able to help our managers
slow down and address some of these biases that might occur.
Hey, so that makes perfect. So it clicked in my head as you
were speaking. Thank you for that.
So basically your alpha, your strategy, your edge is being
able to find cognitive biases that exists in all our minds and
then help I guess narrow it down over there to help this, I guess
discover or find these undervalued assets that most
people would miss because it's a blind spot for them.
Is that is that a good way of wording it?
That's it. I mean, the assumption I often
say, like cognitive biases as we know from Charlie Munger and
Daniel Kahneman, are a very broad number of hundreds of
different biases that might show up.
But we take, you know, kind of a broad view that if 1.4% of $82
trillion in assets are managed by women and people of color,
one of the biggest biases that the market might have,
especially after our research that shows the higher people
perform, the more bias they face if they're black.
And one of the biggest biases that we might see facing women
and people of color in the market is the inaccurate
assessment of their ability to outperform relative to the
analysis that's currently being done.
So while many cognitive biases may yield an opportunity in
markets, this one is so imbalanced relative to what we
had expect by random chance. That we think that there is a
massive value that underlies people's ability to properly
underwrite this group. Just like I saw, you know,
initially in the banking system where people were being
underwritten significantly above risk because they were black or
Latino. Yeah, no, I love that.
So I wrote a book about psychological investing as
Psychological analysis and it was #1 in Amazon for two months
every day and in it. I yeah, So you're speaking my
language, so to speak. I have a whole section on
cognitive biases, and I'm very, very big on the whole idea of
the book as a teacher, how to make rational, not emotional
decisions, especially with your money.
So what you're saying here is it's, it's spot on.
Like I've got my mind going in a gazillion different directions
here. I love that you were able to
take that realization you have and then create a whole entire
business around it. And being a fund to fund
manager, you can help, I guess find those blind spots that
other people would miss. So that to me is fascinating and
I and brilliant by the way. So hats off to you.
I mean really, really, really great job.
Thank you. So.
OK, well, let me also give the audience something.
There's something called the personal blind spot bias, one of
these cognitive biases. So if you ask 100 newlywed in
case the audience isn't following, here's how to explain
it. Ask 100 newlyweds the night of
their wedding. Raise your hand if you think you
can get divorced. Almost no hands are going to go
up. Yet statistically, we know half
of them are getting divorced. That's called the personal blind
spot bias, and that's a blind spot that people just don't see
if you're in it. But if you're out of it, you can
clearly see it. And that's what I guess what
you're doing over here in an investment standpoint.
So yeah, no, I love that. Okay, timeless lessons.
What are some timeless lessons you've learned along the way
that you'd like to share with the audience, please?
Well, one is the power of James Baldwin's contributions to our
work. And James Baldwin often talks
about people and the way that they think, the way that they
act, and the. The difference between and the
space between those two. And he says many people think
that they would like to do the right thing or underwrite with
these types of tools. But when they try to move into
action, there's there's a danger of, like you just mentioned in
your example, sort of understanding how their identity
might be challenged in the process of acting.
So in in some ways removing some of the motion from the
underwriting process sort of helps us to get there.
I think in studying something like both of us have been
working on and something that's unseen bias by definition, it's
going to be a little bit harder to explain to people something
that they don't naturally see. But I think that the consistent
frameworks for questions that we ask.
Those that were evaluating. Although it seems quite simple
as an analytical framework, we often see it change drastically
when women are presenting and you know large numbers of
downside questions that are asked.
Isn't the risk of this business greater than other businesses?
Are you afraid you'll run out of money or not hit your milestones
versus men who are often asked? You know, how hard can you hit
the ball over the fence or what's how big could this
opportunity be? These heuristics creep back into
the process of investing and the field that we're in.
Within venture capital, although we found similar findings within
public equities as well as fixed income, when we look at private
equity venture and growth, there is where we invest into.
There's often massive value creation and upside that could
be lost if we're missing some of these biases in a major way.
In other words, being second or third in a category isn't always
a desirable position. So really, choosing the number
one entrepreneur in a particular field, it can be very, very
valuable. So investing heavily in the
underwriting process to partner with our managers is something
that we focused on for that reason as well.
I love that. So let's talk about timeless
mistakes. What are some timeless mistakes
you've learned you've made, and or how do you avoid them that
you want to share? So I think one of the timeless
mistakes that I've seen made quite often is.
The creation of something new, let's call it the field of
impact investing or ESG without one of the critical
SuccessFactors in producing an alpha, which is namely the
inclusion of women and people of color.
And particularly because of this finding that shows that bias
increases when performance increases, which is sort of.
The hallmark of our our, our paper, so weeding out top
performing managers because of their race, timeless mistake
that I think a lot of portfolios could benefit from intentionally
looking for managers that they might inadvertently through bias
weed out. Also, I think it's an important
dimension of fiduciary duty, so. Turns out that this timeless
mistake is also important for that reason.
Because if we're trying to be great fiduciaries and we noticed
that a dimension about performance is missing from our
pipeline, i.e. Women and people of color led
funds that in some cases have are more often than not produced
at or above results. Then we should be looking you
know carefully through the portfolio for these
opportunities. I love that because that that's
really, really smart. So you actually you're able to
almost shed shed light if you will on that blind spot and then
extract alpha from there if I understand your process.
Yeah, that that's right. And it is sort of consistent
with modern portfolio theory. We want to start with a set of
the investable universe. And what we found is that in
evaluating pension funds, sovereign wealth funds,
university endowments, family office asset allocators.
That they are are are not looking for inadvertently sort
of some of these alpha producing managers, which in some cases
are women and people of color led funds.
I know the National Association of Investment Companies, for
example, has done research over the last 40 years showing at or
equal performance despite this, you know, kind of lack of.
Additional asset allocation to managers of color and women LED
funds. So when we combine the thinking
there, we asked, well, why aren't asset flows following
performance And one of the things that we think and
hypothesize on it, there seems to be some.
You know, important additional work to be done is that bias is
one of those things that can make the mind think differently
about allocating capital to outperforming funds, right.
Yeah, you're chasing returns and then yeah, that that makes
perfect sense. OK.
Next question, what's the best piece of advice you'd like to
share with the audience or your 20 year old self?
Let's see. I think that.
One of the exciting pieces of advice that someone gave me, and
this is a consistent, I found it to be somewhat consistent.
But my venture capital teacher at Stanford Business School was
Andy Rycliff, one of the founders of Benchmark.
And you know, he was one of the people that told me, you know,
big ideas come from two major conditions, and many listeners
may be familiar with this. One is that.
They're non consensus and the 2nd is that they're right.
So in other words, if we went around to a number of people and
we asked them if this idea was a good idea, a lot of the people
would say I don't know or be confused by the idea.
And the second condition is that you know there's economic value
associated with delivering on the other side of that idea.
Now I think the idea of bias. Facing women in color of in
asset management, when I go around and talk to leaders of
financial institutions, a lot of them seem puzzled at first.
But when they look around their offices in their industry and
they see 98% of 1 race and one gender in in the industry, they
then begin to kind of examine how bias might be showing up.
And then the second piece is the associated latent economic value
with fixing that problem or addressing these biases.
And you know that's the essence of a looming capitals message
and thesis. So trying to find follow Andy's
advice there and sort of find an area where there is untapped
value that many people may not understand or.
Have attention focused on for one reason or another and
deliver that value to, of course, our investors and create
a movement of others that see this value and can build
organizations to address it. That it's almost it reminds me
of the story with Henry Ford. If he was going to ask his
customers what they wanted, they would have said a faster horse
and buggy, but instead he invented.
So yeah, that makes perfect sense.
So, OK, beautiful. Well, Darren, this has been
absolutely fantastic. Thank you so much for coming on
the show. What is the best way for people
to get in touch with you? Is it a website or how would you
like people to reach out? Yeah, I think just go to our
website and you can learn more about our work at
www.alumincapital.com. Beautiful.
Well, Darren, thanks so much and hopefully we'll see you again
soon. All right.
Really appreciate it. Thanks a lot, Adam.