“Eddie Shultz is one of our strongest team members and is always raising the bar for rest of our asset classes. His ability to combine the skills of being a forward thinker with his incredible attention to implementation detail has served TMRS well for many years. He is also a committed team player and willing to give 110% on any pressing need that TMRS has, even when it falls clearly outside his normal areas of responsibility.”
—TJ Carlson, CIO, Texas Municipal Retirement System
There are many reasons to take note of Eddie Schultz, CFA, Esq., but perhaps the biggest is his outspokenness on issues for allocators. He has been known for his sometime inflammatory comments on the power dynamic between asset managers and allocators. That has helped him stick around in the minds of investors who are hungry for some change in the industry.
“I’m probably one of the biggest critics of the industry that exists,” Schultz said. “I’m not too shy about saying it. I’m pretty quick to criticize when I think people are being complacent or greedy or taking advantage of the situation. I think there are some folks who appreciate that.”
It was a winding road to the Texas Municipal Retirement System (TMRS) for the allocator. After several stints in Las Vegas and New York City, where Schultz landed just before the fall of Lehman Brothers in 2008, the investor moved to Texas, his wife’s home state. When he interviewed at the state pension fund, the firm was just starting to diversify from an all fixed-income portfolio, an exciting time for Schultz to land at the allocator.
“I thought, ‘Where else am I ever going to stumble across an opportunity to work for a small team putting billions of fresh capital to work over the next few years?’” Schultz said. “That’s how I got started.”
Now, he’s the director of real estate and real return at the $34.5 billion state pension fund, where he has taken a macro view of his investments. Schultz believes more investors should get aggressive on portfolio management, rather than manager selection, as the market changes more and more.
About five years ago, Schultz restructured his real estate portfolio to take on more appropriate leverage levels, a move that resulted in a real estate portfolio in the public sector that has performed at the top tier for years, according to the allocator. “We took far less risk than most anybody else and still managed to outperform because we just made better macro decisions,” Schultz said.
Other criticisms that he’s levied against the industry? Poor governance structures in private partnerships that are highly lopsided toward asset managers. “I do think that’s something that can change,” Schultz said.
Relationships have improved as TMRS has called for better disclosures from asset managers, advocating for disclosing more of the institutional partners that are in the same private partnerships. That’s helped him join forces with other allocators.
“We’ve seen some headway there as we work more closely with other institutional investors, so that our voice has more meaning as we sit together,” Schultz said.
CIO: What is the best way to bring more diversity to the financial industry?
Schultz: The short answer is effort. But you can’t give a short answer to a systemic issue. Our team over the years has found a lot of value in having a diversity of life experience and ideas in the debate room. So, when we hire, we make sure our applicant pool starts with as much breadth as possible. The critical component is tapping your network, posting the job with organizations that promote diversity, sending personal emails to your contacts that you know work mentoring or forming career groups, etc. But this is all late-stage granular work. To really help increase diversity, industry organizations need to be reaching out to students prior to business school graduation, possibly prior to their senior year internship. Too many finance majors are switching paths after getting that unwelcome feeling as a freshman in college. That is detrimental to our industry. The best talent can come from anywhere. By driving talented people away, we not only lose the best people, but we lose the diverse perspective they add to the mix.
CIO: What are your favorite alts, and why?
Schultz: I don’t believe in broad-based bucketed asset classes. I like two specific characteristics in alternatives: a highly skilled, specialized team with perspective on where they sit within their respective capital market, and strategies working in capital-starved, inefficient sectors. Finding a firm that satisfies both is difficult but is the ultimate goal within alternatives if you believe alpha still exists.
CIO: How will the pandemic have changed the economic/financial world?
Schultz: Just like the predictions surrounding major economic events in the past, the extreme conjecture about the lasting impact of the pandemic will likely be proved wrong by a series of subtle changes. However, subtle changes on a large scale can have lasting impact. The biggest change will be how consumers view their own consumption. I believe we will see higher savings rates and a change in priorities when people do spend money. Certainly, there will be regulatory and policy fallout, but those won’t have as big an impact as consumers making mildly different decisions. Businesses will be forced to adapt, supply chains will have to be reconfigured, supply and demand curves in countless industries will be disrupted. But the real underlying question is: Will businesses and financial underwriting revert to pre-globalization standards to protect themselves in the future? Not if the government safety net becomes a permanent fixture.
CIO: What place does blockchain have in tomorrow’s financial scene?
Schultz: Blockchain will undeniably have a place in the financial sector moving forward. It has the potential to do to finance what the internet did to commerce, but I doubt it will make finance look terribly different in the near term. Finance was meant to be the grease that keeps the economy moving, but over time it has become more of an impediment by taking a bigger and bigger piece of that output. Blockchain could disrupt the growing proportion of the economy that finance takes. Current systems can be incredibly inefficient with high costs. Blockchain offers a tool to potentially streamline the billions of transactions that happen every day with unlimited ability to enhance how data is transmitted and contracts are executed. Unfortunately, early indications show the blockchain ecosystem is likely to reshape the middleman rather than eliminate it. Ideally, the disruptive competition will create a better outcome for the economic creators, not the financial toll takers.
CIO: How will ESG change investing going forward?
Schultz: [Environmental, social, and governance investing] will change the conversations that are had publicly and privately, shining light into areas that were previously ignored or hidden. You see it now with environmental concerns; everyone is trying to get ahead of the narrative and show their investments are a benefit to their respective communities. It’s a dog and pony show today, but the substance isn’t far behind. The social and governance elements are still a work in progress. We’ll see some heavy-handed approaches or even regulations, but, ultimately, regulation doesn’t change how people think—money does. Once investors start openly asking questions surrounding toxic culture and poor governance, the industry will adapt quickly.
CIO: Where do you see the most exciting areas to specialize further over the coming years?
Schultz: Industrial modernization. Plenty of people are chasing the venture technologies that will change the future, and plenty more are chasing the energy transition, but this barbell has left out the massive industrial arena that needs advancement today. It’s ripe with low-hanging fruit, but requires more work than other areas of capital deployment.
CIO: What investing decision have you made that you’re most proud of?
Schultz: I’m most proud of the decisions we made to NOT invest in certain areas. You must have the ability to walk away from a high-conviction idea when you can’t get access in an equitable way. I lost most of my hair developing this ability, so I now use it liberally.
CIO: Who is the manager you don’t currently work with whose brain you’d most like to pick for an hour?
Schultz: Cathie Wood from ARK. Not to find out the next great tech idea or even to understand her team’s process. Investing used to attract personalities that thrived on accountability, people that had courage in their conviction. That is mostly gone today. She is investing in a volatile space, very publicly, and has no problem stepping up for the good and bad that comes with it. While her detractors and supporters are passionately debating, she remains even-keeled. I would love to learn where that strength comes from. I think she can teach us something about standing behind your work.
