“Though David has only been with ERS for a few months, he has already distinguished himself as a talented leader and a gifted investor. He joined us after more than two years at Dow, where he excelled at asset allocation and manager selection, and since joining ERS, he has shown great promise as a stock picker. His genial manner has also contributed significantly to the team and the division at large, and we know he has a bright future at ERS.”
—David Veal, CIO, Employees Retirement System of Texas
The CIO Editorial Team shared a dozen questions with all our NextGen nominees and asked them each to pick six to answer. Their answers informed our decision to include them as a NextGen. Below are the answers from Dave Lazarz.
CIO: What is the best way to bring more diversity to the financial industry?
Lazarz: From my understanding, lack of diversity has been a stain on the financial industry for as long as it’s existed. However, I do think we’re starting to see a shift, and there are several things that we as an industry can do to drive this change. The most important focus in my opinion needs to be education and recruiting for underrepresented groups. I believe the No. 1 reason that the financial industry continues to lack diversity is because of the lack of education around what types of opportunities our industry offers. To start, this could be done through informational webinars/in-person events from financial institutions and/or middle/high school class offerings dedicated to finance. From a recruiting perspective, I think the industry is making progress, and I think this will only get better with time as industry leaders continue to see the need for diversity in their organizations. Another way to bring more diversity to our industry is to allocate capital to managers from underrepresented groups. I think most institutional investors understand this, as we’ve seen emerging manager programs continue to grow. I believe this will continue to compound going forward and will help promote diversity industry-wide.
CIO: What asset classes offer the best options for avoiding or mitigating drawdown risk in an institutional portfolio?
Lazarz: If you just looked at stock-bond correlations over the first 20 years of this century, I think this would be an easy question to answer. Your answer would be long-duration U.S. Treasury bonds. During this time period, stocks and U.S. Treasury bonds were negatively correlated, meaning when stocks were in a drawdown, bonds would rally, as they are generally seen as a “risk-off” asset. However, contrary to popular belief (and my own assumptions), this negative correlation has actually been an exception, not the rule, over history. I read a piece from AQR Capital Management published in March of this year showing that stock-bond correlations have tended to change over time and have only been consistently negative since the year 2000. With that being said, I think allocators need to be more creative when thinking about how they can mitigate drawdown risk. I think there are many interesting ways to do this. If I had to choose, I would use a mix of U.S. Treasurys, uncorrelated absolute return strategies (systematic/trend following hedge funds), tail-risk hedging (far OTM put options on equity indices) and core private infrastructure assets.
CIO: What roles do AI and large language models have in the future of institutional investing?
Lazarz: I believe AI and LLMs will be the biggest theme to pay attention to in the world of institutional investing over the next 10 years. These technologies will not only have massive implications for what assets/asset classes allocators need to invest in, but also how allocators will research and invest going forward. From an investment perspective, today’s clear winners have been semiconductor companies like Nvidia and cloud hyperscalers and early AI-adopters like Microsoft. However, it may still be too early to know exactly which companies are going to be long-term winners in the AI space. It’s possible that there will be brand new startups that end up the biggest winners. This is why it’s crucial for allocators to stay invested in both public and private markets to ensure they catch the AI boom across asset classes. From a “how” perspective, AI and LLMs have been changing, and will continue to change, the way allocators make investment decisions. AI will give investors the ability to analyze data, recognize trends, create models and make investment recommendations faster than ever. This will, without a doubt, change the institutional investing landscape as we know it forever.
CIO: What traditional and/or alternative asset classes do you think are most important for institutional investors, and why?
Lazarz: For institutional investors with a long-term investment outlook, I think alternative asset classes are far and away the most important. I think of alternatives in four buckets: private equity/credit, private real estate, private infrastructure and hedge funds. Each of these asset classes play important roles within an institutional investor’s portfolio. Private equity/credit, real estate and infrastructure offer higher expected returns, lower correlations and often smaller drawdowns than their public counterparts. These assets are often held in illiquid drawdown funds that span several years, which I think helps mitigate risks of “panic selling” at the wrong time during a market downturn. Hedge funds offer a more liquid profile, while usually maintaining low to negative correlations to public markets. These funds are also supposed to be well-managed from a risk perspective, so investors should also expect smaller drawdowns compared to public markets. Institutional investors can use a combination of these alternative asset classes, paired with traditional public assets, to make a robust long-term portfolio. I believe the alternatives piece of these portfolios is what gives institutions their edge and will continue to drive above-market returns.
CIO: What should be an investment trend, but isn’t (yet)?
Lazarz: One investment trend that I’ve been starting to follow that I feel hasn’t hit the mainstream in a big way is collectibles. Collectibles can be anything: classic/exotic cars, sports memorabilia, watches, etc. This has been a space that I’ve loosely followed throughout my life, as I used to collect sports and Pokémon cards and have always been a fan of exotic cars. I started following it a bit closer recently when I saw certain Pokémon cards were selling for hundreds of thousands and sometimes millions of dollars, and classic/exotic cars for even larger amounts. These niche markets have always interested me because of their inefficient nature and opportunity for outsized returns. I was recently listening to the podcast The Compound and Friends, in which guest Darren Rovell shared some of his favorite collectibles with the hosts. One of them that caught my interest was “the largest Warren Buffett signature ever,” which is supposedly worth millions of dollars. Rovell also shared that he’s been offered to manage funds that specifically buy and sell these collectible items. It seems to me that with the right fund manager, there could be value in this asset class for institutions.
CIO: What new skills do you think allocators need to be leaders in the field in the coming decade?
Lazarz: I think the most important new skill for leading allocators going forward will be figuring out how to leverage AI to their team and portfolio’s benefit. AI will most likely change the world in ways we can’t imagine, and I assume the financial industry will not be an exception. Therefore, it is crucial for allocators to learn and understand how the technology can be useful. I think one of the biggest benefits for institutional investors will be team productivity boosts. An analyst that spends days digging through 10-Ks and building DCF models will be able to do so at an exponentially faster pace with the help of AI. Portfolio managers will be able to have AI co-pilots that help them make optimal asset allocation decisions. CIOs can elevate their teams by encouraging the use of AI to drive excess returns and better manage risk across asset classes. I believe the best allocators need to be able to leverage the best technology that’s available to them. AI is the next frontier in tech and something that every leading allocator should use and benefit from.
