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EPISODE 263

Goldman Sachs’ Katie Koch Champions the Tech and Sustainability Revolutions

50 minutes · October 13, 2021

Katie Koch, Goldman Sachs’ Co-Head of Fundamental Equity, has launched two ETFs with her team to help identify the winners in the climate transition and the newest tech companies that are reshaping our world: the Goldman Sachs Future Planet Equity ETF (NYSE ARCA: GSFP) and the Goldman Sachs Future Tech Leaders Equity ETF (NYSE ARCA: GTEK). Katie shares how her background prepared her for a life in finance and how diversity — in all its forms — can lead to differentiated returns for investors.

Speaker 1 (00:03):

From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision, and global business. The dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism. Right here, right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now welcome inside the ICE House. Here's your host, Josh King of Intercontinental Exchange

Josh King (00:46):

Back in 1903, a year before our current headquarters of the New York Stock Exchange was opened here in Lower Manhattan, President Theodore Roosevelt went on a camping trip in California. His destination was what we now know as you Yosemite National Park, specifically Glacier Point. And his companion was John Muir, the Scottish American conservationist who founded the Sierra Club 11 years earlier in 1892. On that odd, inspiring trip, Muir lobbied the president to create a unified national park that incorporated Yosemite Valley and Mariposa Grove. I took my family there a few years ago. And when you see it, it becomes easy to understand why Muir wrote that, and I'm going to quote him here, "No temple made with hands can compare with Yosemite. Every rock in its wall seems to glow with life." The park serves as a humbling reminder of what the world once looked like and how much can change.

Josh King (01:43):

In the century that followed, we've seen the advent of inventions that have changed the course of human history and altered the landscape of our planet, but the park remains essentially the same, still framed up like a black and white portrait by Ansel Adams. Technology and progress have made it possible for us to wander through Yosemite from thousands of miles away but they've also contributed to forest fires that enforced majestic sequoias to be wrapped up in aluminum blankets to keep them safe. That decision to safeguard the park highlights a basic instinct in human nature to preserve and protect.

Josh King (02:18):

Our guest today has focused her attention on analyzing and understanding that intersection between the environment and financial markets. She's betting that the sustainability revolution and preserving our planet will be just as disruptive as the industrial and technological revolutions. The opportunities for investors to capture those changes and be on the right side of those disruptions is where the wheat is separated from the chaff. Katie Koch is Co-Head of the Fundamental Equity Business within Goldman Sachs Asset Management. She and her team manage equity portfolios on behalf of institutional and individual clients around the world and she's here to talk about two products that are focused on how the world is changing around us and how investors can take advantage of them and finance those changes. Our conversation with Katie Koch is coming up right after this.

Speaker 1 (03:10):

Whether it's markets, exchanges, or networks, connection makes everything possible. The connection between data and technology, innovation and expertise, and most of all, between people and opportunity. For over 20 years, ICE has transformed markets, products, and processes to make things work better, faster, smarter. From modernizing energy and commodity trading to revolutionizing the bond markets. Whether it's the world's largest stock exchange or the dream of home ownership, we do more than see the big picture. We create it. You may not know our name, but we bet you know our network. ICE, make the connection.

Josh King (04:09):

Our guest today, Katie Koch is a Partner and Co-Head of Fundamental Equity at Goldman Sachs. Katie served most recently as the Head of the Global Portfolio Solutions Group, managing multi-asset class portfolios and she also led several businesses in the firm's London office for 10 years. Katie joined the firm in 2002 right out of Notre Dame becoming a Managing Director in 2011 and Partner in 2016. She serves on the Board of Directors for TIFF Investment Management and is a member of Notre Dame's Wall Street Leadership Committee. Welcome Katie inside the ICE House.

Katie Koch (04:44):

It's so great to be here, Josh, thank you for having me.

Josh King (04:46):

Sorry about that loss to Cincinnati and South Bend, that's got to sting.

Katie Koch (04:49):

It was a great weekend. Tough game though, I'd agree. Good things ahead for the Irish though.

Josh King (04:55):

I got to Notre Dame a few years ago. Still remember the pep rally with the band Chicago on the South Quad right in front of Knute Rockne Memorial. Do you get back into the campus a lot?

Katie Koch (05:04):

I just love Notre Dame, truly. And I'm so grateful for the experience I had to go to college there for two main reasons. The first is that as you're obviously aware having visited it, it's a very faith-based university. Like any religious faith-based organization, Jewish, Islamic, Hindi, there's a big focus on doing the right thing. So not the easy thing, not the expedient thing, not the popular thing, just a general effort to try and do the right thing. And I think that's helped me a lot as a leader through difficult times in our business and it's also been very helpful as an investor because it actually turns out that companies that try and do the right thing, that care about their environmental footprint, that try and push the equity down to all the employees of the company, that care about board diversity, these are great management teams usually running great companies that tend to actually outperform over time.

Katie Koch (06:03):

That has a really fancy title now called ESG but I'd actually more or less put it under the category of doing the right thing. And the other second reason I loved being at Notre Dame was that I was a literature major there and they have a great English department. I guess perhaps unexpectedly, I think that's really helped me in investing.

Josh King (06:20):

So, English major.

Katie Koch (06:21):

Yeah.

Josh King (06:21):

The study of authors, thesis, arguments, how does that influence how you think about markets and investing?

Katie Koch (06:28):

Two main reasons I'd give you. The first is that you do develop good pattern recognition. You start to see things in other pieces. So for example, if you're reading Yates, you'd say, "Oh, maybe I see some William Blake in this," and you learn how to build on that over time and how things show up in different places. And the second is that as an English major, you have to take all of these various sources and pull them together into a cogent thesis and then you really lean into that. And there are so many parallels between that and investing.

Katie Koch (06:56):

In terms of how I transitioned that to finance, I'm going along, I'm very immersed in Victorian literature, I love Japanese fiction, I read all of the Lost Generation of US writers. I just loved all of this stuff. But at some point during my junior year, I kind of realized that I needed a job when I graduated, so I went to one of my professors and I said, "Can I keep studying this stuff and not live in my parents' basement?" And she said, "You know how to think and how to write and how to tell a good story, surely you'll be able to convince someone to hire you." And that thinking and ability to write have been very helpful in my career and clearly I did convince Goldman Sachs to hire me and I was there for a summer analyst and then I've been there since.

Josh King (07:39):

Yeah, let's talk about that hiring process because the Goldman Sachs Analyst Program has mentored some leaders in the firm who went well beyond the old headquarters at 85 Broad Street, including Bob Rubin and Hank Paulson, Treasury Secretaries under Presidents Clinton and Bush. Everyone carves their own path into the program. What attracted you into it? And talk about the first couple years of being in the firm.

Katie Koch (08:03):

After I joined Goldman Sachs, one of the most important things I got to do was actually the chance to work abroad. I joined out of school. I worked very hard to make my bosses look good and get some followership from them and some buy-in from them. Actually my original boss from Goldman Sachs who ran the largest private wealth team in Chicago is still there. He's terrific. He's actually a client of ours now in this business. He still doesn't hesitate to call me and tell me exactly what he thinks and what he wants me to do, 19 years later, which is actually kind of fun. He also gave me great advice, which is that I worked in the equity markets when I was on that team and it was mostly US equity markets and I really wanted to get international experience. And so he gave me the advice, "Well, if you want to do that, you should move abroad." I had this incredible opportunity to move to London, which I did for, I was supposed to go for a year, my third year at Goldman Sachs.

Josh King (08:56):

Had you traveled much abroad before?

Katie Koch (08:59):

Not a lot. I did a semester abroad in college, but that was it. I certainly didn't think I was going to stay that long and I ended up staying for a decade. And so like what an incredible professional experience to get exposure to global markets, to learn how to manage diverse and global teams, to build international businesses. And then obviously personally it's been incredibly enriching too, so that was a really important moment for me in my early career.

Josh King (09:22):

You were over there in the middle of the financial crisis, what's that like?

Katie Koch (09:25):

That was pretty formative and obviously difficult. I was working in the equity business then. I think really we were served well by having a very good risk management framework on how we manage the portfolios and took it very seriously because in the asset management business we are in the business of helping people achieve financial security and the financial crisis was a really big threat to that. And I'd say I was able to work with great leadership that helped us stay focused on managing the client portfolios, trying to get to the other side of that crisis. And as an active manager, actually those dislocations as you know can create tremendous opportunity too. When I said it's formative, I think that's important because the one thing we know for sure is there'll be more crises. In fact, as you know, we just went through a big dislocation a couple of years ago and those experiences build on each other and then you learn how to stay calm, stay focused, serve your clients, take advantage of the dislocation to build long-term wealth.

Josh King (10:28):

So you and your co-head took over Goldman's Equity Business at a pretty tumultuous time. Active management was very tough. So, fast forward to today, you've raised about 17 billion in new assets and approximately 80% of the strategies are outperforming their benchmarks for the three-year period. So let's put our best Brian Kelly hat on and go back to that 41, 13 win over Wisconsin instead of the Cincinnati game. What was your game plan? How did you execute to turn the business around?

Katie Koch (10:54):

Yeah, so I love active management obviously, but you're right, it can be a really difficult business. So when I had the opportunity to come in and to help lead this business, I'm kind of looking around and active managers were losing a half a trillion dollars a year of outflows from that category. The reverse of that is that we now have $15 trillion, which we'll come back to, of capital allocated to market cap weighted indexes. And so, I did what everybody does, I think, when they start something new, which is really takes some time to figure out what business I'm in and it looked pretty challenging from that perspective. And then in addition, I had this very large, actually two very large competitors that took pricing to effectively close to zero in the equity space. And so as you can imagine, that's just generally a tough business model.

Katie Koch (11:42):

But then, you take a step back and public equities is a $90 trillion addressable market and I had a great team of people around me who feel I get to more about them and we looked at it and we said, "If we can build something that's a true value proposition for clients, we can build a great business here. But whatever we do, it needs to be really, really different from that market capitalization weighted indexation that's now being offered for close to free." And so we came up with a strategy of how to be different and that strategy included things like leaning into less efficient asset classes, emerging markets. I'm a big lover of emerging markets and small cap, lots of alpha there, one. Two, if we were going to be in more efficient markets, Japan, Europe, US, we are going to run very concentrated strategies where we could be really different from the benchmark.

Katie Koch (12:36):

The third thing that we believe in is the democratization of alternatives. So giving more retail investors access to public private hybrid products, for example. And then fourth, which hopefully we'll get to talk about today is identifying the themes that are going to change the world over the next 10 years and getting our clients invested in those themes and in the right side of innovation and disruption. And by having the right people in the right seats doing the right things and kind of executing against the strategy, we have been able to do what you said, which is our highest goal, deliver great performance for our clients. And on the back of that, we've been able to have great commercial success. So that's really a win for everybody.

Josh King (13:14):

So investors across the world have been flocking to thematic investing. Current estimates put the assets under management for thematic funds at 668 billion according to Ignites. They're looking for mega trends like urbanization or technology and then specific ideas like genomics or electric cars. What role do these types of investments play in a portfolio and what trends should investors be honing in on today?

Katie Koch (13:39):

When I think about the role of anything that we're going to build or manage at Goldman Sachs Asset Management, the central function of it has to be to help our clients achieve financial security, okay? And this is actually becoming really difficult. I think it's a super, super important issue for every saver in the world. Remember, our clients are everybody from my mom who's a retired teacher to the world's largest sovereign wealth funds. And while they may be very different in profile, they're actually unified in the challenge, which is that a lot of them are investing in some version of a 60, 40 portfolio. 60% stocks, 40% bonds. And that portfolio is very broken going forward. And what I mean by that is if you look at the last 10 years, that portfolio delivered 9% compound analyzed return, great. Just owning the S&P 500 17% compound annual return for 10 years, sign me up. That's amazing. We can all do well off of that.

Katie Koch (14:42):

But the future often looks different from the past and the next 10 years are going to look different. And in our estimates that 60, 40 portfolio is going to deliver for our clients two to three percent real return. You got high valuation inflation coming back, et cetera. So we're going to have to do things differently. And today we're talking about equity markets, so I'll say in the equity part of the portfolio, we don't think clients are going to be served by just doing this backward looking market capitalization weighted indexation and that brings us to thematic investing, which enables these vehicles should enable clients to get on the right side of innovation and disruption. And on the back of that, actually be able to achieve better returns.

Josh King (15:24):

Would you say that the benchmarks are broken now?

Katie Koch (15:26):

I think the benchmarks are very broken, yeah. And that excites me as an active manager because my job is to outperform it and it's easier to outperform something that's broken. But when you look at equity benchmarks, they are by definition allocating capital to the companies that have performed the best over time to the past winners. We're obviously trying to identify the future winners and thematic investing gives you a great way to do that. So we estimate, just looking at the S&P 500, that half the S&P 500 is at risk for disruption and this is very meaningful because the dispersion of returns between the disrupters and the disrupted is enormous. Take the retail space, Amazon, 1997, IPOs. It is at the 175000%, roughly, through yesterday. Macy's, same category, right? More or less. Up 98% cumulative over the same period with many other companies bankrupt and delisted. So this is very important to get on the right side of, and we think that a smarter way of allocating capital is to have strategic allocations to these key secular growth trends, which should help drive better returns for clients.

Josh King (16:43):

If you're looking at game films of the market, but you're looking at Macy's instead of Tom Brady last week, how do you go about identifying these trends?

Katie Koch (16:51):

So we have this dedicated thematic business, and we started it six years ago, we've generated some great returns for clients. And on the back of that, we've been really fortunate to build a business and we now manage 20 billion in capital. But where did it start? It started as things that we noticed that we were just overweight in our broad equity portfolios, where we felt a lot of conviction that we wanted to commit capital to those ideas, because it was a way of outperforming those broad market benchmarks. So on our Goldman Sachs Future Planet, GSFP, as an example, we had been underway traditional hydrocarbons for a long period of time because we believed that we were going to be in this continuous shift to a net zero world.

Katie Koch (17:31):

And we found on the other side of the ledger, we were overweight a lot of the solutions providers and we think the transition to a net zero world is one of the greatest wealth creation opportunities over the next 10 years. And we said wouldn't it be great if we could have a vehicle that would give clients dedicated exposure to that thesis. And so that's really the origin story of how we launched a lot of these thematic capabilities.

Josh King (17:53):

So let's talk about that vehicle for a second. Earlier this summer, you launched the Goldman Sachs Future Planet Equity ETF, that's NYSE [inaudible 00:18:02] symbol, GSFP, as you just mentioned, the fund designed to help investors position their portfolios on the right side of the climate transition by providing focused exposure to long term secular growth areas across market caps and geographies. So, I went on the website this morning, checked out some of the big names on it, Ecolab, Daikin, Enel, Ball Corp, Donnaha, among others, how do all of these compliment each other in the fund? What's the strategy?

Katie Koch (18:27):

Let's start with kind of why does someone want to even care about investing in environmental sustainability now? And I will tell you, some of the people that are invested in this fund are very focused on environmental sustainability and it's a real passion of theirs. We actually also have people who are climate skeptics that are invested in this fund because they see that this is the direction of travel. And so kind of very big picture, why do we focus on this now? The first is that you've got governments, the corporates, and the consumer all pulling in the same direction for this transition. Second, as investors, and this is probably the most critical, we love seeing a cost curve bend because that's really Tinder for innovation at scale, if you will. And in this space, we're seeing a lot of cost curve bends, so wind and solar power generation are already the cheapest sources of power for more than two thirds of the world. And if you look at the electric vehicle space, they're now at cost parody with the combustible engine despite only comprising 4% of global car sales. So think about how much cheaper EVs are going to be common when adoption rises and it becomes a virtuous circle.

Katie Koch (19:37):

So we've got these governments, corporates, consumers pulling in the same direction. We have these incredible bending cost curves. And then the scale of the problem has defined the problem as the, what the Paris agreement wants to do, which is to cut GHG emissions by 50% by 2030. This is so huge in scale that the approach needs to be holistic. So you mentioned some company names there. You'll notice that they're not all renewables companies, so renewables, yes, this is definitely part of this. We're invested in NextDay, a finished company that's the leader in making renewable diesel, but we're also invested in maybe less obvious companies that are going to help us in this transition.

Katie Koch (20:15):

So, quick example on that, we're big believers in sustainable consumption. The consumer is much more aware of their environmental footprint and is looking for product and sometimes willing to pay a premium to be thoughtful about that. So we own Renewcell, which is in the fashion space, fashion, as you probably know, is a huge polluter. This is a solutions provider to that. They recycle clothing in the same way as others recycled paper, so extract the cellulose from clothes, mostly jeans, make new fibers out of it, make new clothes out of it. They're new but they already have made lines for H&M and Levi, which are doing really well.

Katie Koch (20:50):

And I want to give you one other example that may not be obvious to people, but in the circular economy, which is a phrase that gets thrown around all the time, like what does that really mean? It means it's basically anything that's the opposite of use something once and throw it away. And someone who's been a real change leader in this space that you've probably used many times herself is DocuSign. So why is DocuSign in the Goldman Sachs Future Planet ETF? They're an electronic signature service, which everyone listening to this is probably aware of. They eliminate the need to print and store paper. And since 2003, they've replaced more than 20 billion sheets of paper with a digital solution, which has saved two and a half million trees, 2 million gallons of water, 105 million pounds of waste, and 1.6 million pounds of additional CO2 emissions.

Katie Koch (21:36):

So, there's lots of ways of attacking this. And to answer the question, we take a step back, say the world needs to be in a more sustainable environment, many different sectors, many different companies can help us get there. Let's build a portfolio that helps our clients get on the right side of that.

Josh King (21:51):

So you and I were chatting a little bit before we made the microphones hot. You mentioned you listened to some of our old episodes, you listen to the Cathie Wood episode. Cathy laid out for us very clearly how she goes about doing her research in a very transparent way. You've rattled off so many of the names that you've found all around the world and these different geographies, much smaller caps than some of the bigger names that we've all focused on. How do you go about finding them? What's the research process?

Katie Koch (22:16):

First of all, let me just say Cathie Wood's amazing. Anyone that goes out on their own, particularly a woman, starts her own business, puts up the records that they have put up her and her team and catalyzes 70 billion plus dollars into active space, amazing. So awesome and so much to learn from them, just a big admirer of what they've achieved there. In our team, we have a fundamentally driven process. One thing that's very consistent with what other people that are doing highly innovative and disruptive investing do including Cathie is that we believe the sector siloed model approach to active management, which has existed for a long time, is very broken because some of the best ideas are actually going to be found between geographies and also between sectors.

Katie Koch (23:04):

So I think that's really important to keep in mind because it's pretty tough to understand the trajectory of the consumer without having a very, very in-depth technological knowledge and thinking about the intersection of tech and consumer, and I'd argue the same thing for healthcare. There are certain companies, like you'd take Tesla. Is Tesla a car company, or is it a software company, or is it really a function of the electric battery that you need to understand? These are important considerations and I think that the great alpha opportunities are lying in the recesses between sectors.

Josh King (23:38):

The Future Planet Equity ETF was the firm's first transparent, actively managed Equity ETF. Why did you choose this rapper for the strategy as opposed to a mutual fund or a separately managed account?

Katie Koch (23:49):

We're obviously trying to innovate and disrupt, as you can tell, in this business and bring new ideas and new themes to the market, which is the future planet. And if you're going to do that, you probably want to do it in a wrapper, that's also innovative. And so that's why we chose the fully transparent daily active ETF. Our clients are going to get transparency, they're going to get the liquidity of the ETF, and they're going to get the tax efficiency of the ETF. So it's really just the best rapper for the end market.

Josh King (24:15):

After the break, we're going to talk more with Katie Koch about the Future Tech Leaders Equity ETF, the investment environment, and the importance of diversity and inclusion. And that's all coming up right after this.

Speaker 1 (24:28):

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Josh King (25:39):

Welcome back. Before the break, Katie Koch, Partner and Co-Head of Fundamental Equity at Goldman Sachs, and I were discussing her background, the investment landscape, and the Goldman Sachs Future Planet Equity ETF. In mid September, Katie, you announced the launch of a new ETF called the Goldman Sachs Future Tech Leaders Equity ETF, that's NYSE [inaudible 00:25:59] symbol, GTEK, that seeks to invest in technology companies with market caps of less than a hundred billion across developed and emerging markets, a very different group of names here like Marvell Technology, King, the software group, and Mercado Libre. Why focus on this part of the tech market and what opportunity do you see here for investors?

Katie Koch (26:22):

So our major thesis here is that we think the dominant tech franchises in 10 years are going to look really different from the ones we all know today. And we're trying to anticipate these future tech leaders and get our client's capital on the right side of them. So while the FANGs have served clients really well over the last decade, we now have a major concentration problem because we've got 1% of the S&P 500 and 25% of the market cap. And so as a result, a lot of our clients have more capital allocated to Apple, for example, than the rest of the tech universe. And we've got this fundamental disconnect between where most investors are positioned in tech US mega cap and where we see the most innovation, smaller cap, as you mentioned, outside the US and including emerging markets. And so that's why we've chosen to approach it this way to invest in companies below a hundred billion, search around the world including in emerging markets, and really often investing in businesses that are not core businesses of the FANGs to help us identify and get our clients invested in the future tech leaders.

Josh King (27:22):

I think it's worth pointing out that the fund raised almost 200 million in inflows, making it one of the most successful product launches in Goldman's history. Why was it also important to focus on the investible universe of these funds to include these global companies? Where are you finding the opportunities when you go out and look around?

Katie Koch (27:40):

The US still has some great companies, and there's obviously a lot of US listed companies in this ETF and in what we invest in across the whole business, but there are increasingly very interesting local winners in the technology space. You mentioned in your opening Mercado Libre, which is the Amazon of Latin America, and there are many other local winners listed in countries all over the world. There's even some great tech companies in Europe, which wasn't the case when I started in this business 20 years ago. And so if you're really going to invest in the best tech companies, you need to take a global lens to do that.

Josh King (28:15):

So you were mentioning earlier the way some of your investors have been overweighted in the FANG stocks in the US, but toward the end of September, we saw the spike in treasury yields that led investors to erase nearly 300 billion across the FANGs as investors sought to distance themselves from tech, it's certainly getting beaten up in Washington today. Facebook is. You're quoted in that Baron's piece that Eric Savitz wrote saying, "Many investors are overexposed to mature US mega cap technology companies." And you went on, "We believe the dominant tech franchises in 10 years will be very different from the platforms we all know today." So let's look in the crystal ball key, what would they look like in 10 years?

Katie Koch (28:57):

First, I just want to pick up on that comment about the FANGs. There are some great companies amongst them, and we're not suggesting that everybody should go out and dump their ownership of all of them. In fact, we own some of them. Some of them will have pretty reasonable compounding growth trajectories. This GTECH fund is just expressing the fact that there are other winners that will have even potentially higher compounding growth trajectories. The FANGs are facing some challenges, including regulation, which is obviously in the news right now for some of them. They're also facing relatively saturated end markets. If you look at the S&P 500 30 years ago, 52% of those companies no longer exist. Now, some of them are acquisitions that was acquitive to the people that own the targets. Some of them are just out of business, right? This is creative destruction. And so that's the thesis here that there'll be other winners.

Katie Koch (29:49):

We're very excited about cybersecurity. And there's two main things that are driving it. The first, of course, is that data has become the world's most valuable commodity and it's increasingly vulnerable. 64% of companies worldwide have experienced some form of cyber attack in the last year. One of the incredible parts of this great job that I get to do is that I get to meet with management teams of companies all over the world. Consistently it's one of the top three things they're worried about is cyber. So that suggests to me that we're going to have an enormous amount of spend into this space. The second thing that's happening at the same time is that there's this move to the cloud. And some of the FANGs obviously are beneficiaries of that.

Katie Koch (30:28):

This is going to take a while for everybody to move their workloads there and there's going to be really tens of trillions of dollars that's going to be spent as we shift. And we're probably only five to 10% done of moving stuff from the network to the cloud. And as that happens, that's going to create new security environments and new security protocols and new security needs. And so we're really focused on who are the companies that are going to secure data as we move from the network to the cloud. One that comes to mind is Palo Alto Networks, which is pivoting businesses from firewall cybersecurity software to cloud-based cybersecurity platforms.

Josh King (31:04):

As we make the full circle of our conversation, Katie, let's bring it back to ESG investors. So increasingly paying attention to ESG considerations, looking at 2020 assets, flowing into ESG funds have grown to more than 35.3 trillion. How should we be thinking about ESG today and how do you incorporate ESG analysis as part of the investment process for your two funds that we've talked about today?

Katie Koch (31:30):

Yeah, really big picture. I think that ESG is a very powerful lens for avoiding risk in portfolios for fundamental managers and also for generating returns. And I'm happy to give examples of that. I think it's very suited to fundamental investors to work through all of that and to figure out which companies are at risk because of some of these issues and which ones are actually positioned potentially to outperform because they're leading on some of these characteristics. You can't rely on these outside data providers for ESG scoring, for example. And I'll give you a reason why, that kind of something I think about a lot, when you think about like credit rating agencies, the major credit rating agencies have a correlation of 98% agreement on the general credit rating of issuers. The major ESG vendors have a correlation of about 30% agreement of ESG scores across issuers, so there's really very little consensus from those data providers. And so therefore you have to do your own fundamental work.

Katie Koch (32:35):

And by doing that, we have found a company for example, large company and listed in the US owned by many people where we have seen that they made a product that has a lot of PFAs, which are, we know now, carcinogenic and are toxifying the water supply, and they are carrying, although it's not written that way at the moment, a multi-billion dollar liability on their balance sheet. That's something I'd like to avoid for my clients, regardless of whether or not how much they say they care about ESG, that's a lens that you can apply and you can avoid because that's a risk you want to avoid. And then there's on the opportunity part, I see a very bright future for solution providers to this space.

Katie Koch (33:20):

We talked about the environment, but take the S in ESG, we're invested in software companies that do the HR function, including diversity dashboards, because all of these corporates are rightfully being asked to focus on the diversity of their workforce, or we're invested in childcare companies because if we truly want to fully engage women in the workplace, they bear the disproportionate responsibility for child raising and we're going to have to give more options to the American family for childcare and corporates are going to step up and spend more on that and we're invested in a beneficiary of that. So I think, my summary would be that I believe that ESG analysis really lends itself well to the fundamental investor. And if you approach it in the right way, it's extraordinary powerful for avoiding risk and also for generating return.

Katie Koch (34:06):

And the other last comment I would make is that you want to look also for companies that are improving on that, because I think that there's a lot of alpha or excess return potential on finding companies where perhaps there's a new management team, and maybe we love that management team at another company, and they've taken over this company and they don't look the best on ESG at the moment, but they're going to make some discernible improvements that could unlock shareholder value.

Josh King (34:34):

In addition to your work at Goldman, you serve on the board of TIFF Investment Management founded 1991 by the MacArthur and Rockefeller foundations to help non-profits. They called it the Investment Fund for Foundations at the time that lacks sufficient resources to pool all of their resources to access the strategies used by the big guys. Can you tell us about TIFF and the intersection between community and investing?

Katie Koch (34:59):

I am really proud to serve on the board of TIFF and it's just really gratifying and fun for me to do because it's at the intersection of two things I love, which is investing and also service. And so the mission here is that there are so many amazing endowments and foundations all over the United States, but very few of them have the scale to have a full investment staff and to be at the leading edge of strategic and tactical asset allocation, and to find the absolute best managers that can help them produce the returns that their beneficiaries depend on. And so what TIFF is able to do is it brings in some of these smaller endowments and foundations and by bringing them all together, they are able to get to a very robust asset size and therefore they're able to provide highly institutionalized service to those clients in terms of asset allocation and manager selection and produce some really best in class returns. And I think this is a tremendous service to the endowments and foundations that deserve it, that deserve this very high quality institutionalized approach to asset management.

Josh King (36:05):

You mentioned at the beginning of our conversation, one of the things that you did to turn your group around was to build the team. Tell me about how you put the team together and the type of people that you're looking for when you add to it.

Katie Koch (36:18):

The number one characteristic that I've found makes a successful investor of the 20 years I've been at this is humility. And so that is foundational to our investment culture, which is humility collaboration, diversity of thought. So those are the most important things to us when we look at investors and they are a great lens through which to hire people. And just to expand on humility for one second, in this business I really believe that you are either humble or about to get run over. And I say that to my team every day. And it manifests itself in two important ways. The first is that know what you're good at, because this is really hard business. And we got a lot of smart people in it and it's easy to get seduced by the incredible complexity that exists in financial markets, whether it's trying to time markets, are they going up or down or different sectors or countries or currency bets, are we good at all that? We're not on our team.

Katie Koch (37:16):

So we have to have the humility to know that what we're good at is picking and identifying long term trends that are going to change the world and then identifying the best companies within those. And so we have to understand what are key edges and build a process and a risk management framework that allows us to execute against that. And the second aspect I think is so important about humility is that you will be much more inclined to look to the outside world for answers. Something I always say to my team is the answers are outside 200 West, which is, of course, the current address for Goldman Sachs. But you got to get out of the building and talk to people and know your competitors and meet the portfolio companies and meet their competitors and meet their clients. And that's how we're going to get an edge on the market and you just have to have this kind of delight in the things that you don't know. And so that aspect of humility I think is so foundational to being a successful investor.

Josh King (38:09):

You've also spoken about the importance of, in addition to humility, plurality of perspective, you've made it a very important point to have a diverse team. Half of the portfolios in the GS Asset Equity Management team are run by women. What's the business case for diversity and why is focusing on inclusion so important to the clients you serve?

Katie Koch (38:29):

So Goldman Sachs Asset Management Equities teams, half of the assets are run by portfolio managers that happen to be women, Morningstar suggests that that's less than 10% of named PMs in the universe, so that's great for us. So why do we care about this? We believe that diverse teams will drive better performance and this is particularly true in the fundamental space because that healthy tension of variant perspectives drives better outcomes. Like it seems so obvious to me, maybe it's not as obvious to everybody, but if you're trying to drive differentiated returns, which by definition what we're doing in this business, then you need to start with some differentiated inputs. And so we believe that. And I would say that if anyone wants to make progress on diversity in whatever organization you're running, you need to have a mission statement that actually does believe it, that will drive better performance for the organization, because what's the one thing I can promise you everybody in this industry cares about is performance for our clients.

Katie Koch (39:31):

And so if we think diversity is going to give us a competitive edge in getting there, then I believe many people will be committed to making progress on that. And I'm so delighted that we've gotten to that place and that it's a real competitive advantage for us. I do just want to say, we're talking about gender here, very important, but diversity of thought is also beyond gender, right? We were talking about before, you were kindly observing that I'm not as cool, or maybe I did and you agreed with me, as cool or as young as some of the people on my team, this is very important to have cooler and younger people investing alongside you, because they are going to be earlier to spot these trends than I would be, right? So, we have a woman on our team who really helped us get on the right side of the millennial consumer, understood tech enabled consumption in a way that we really weren't able to understand, was able to early anticipate the shift into that cohort wanting experience over things, for example.

Katie Koch (40:30):

These are helpful to have that different perspective. Or other example, the gentleman on my team that helped us, really was the architect of Goldman Sachs Future Planet is a European and grew up on a farm in France, not a very typical background for most Goldman Sachs employees, but he did, deep connection to the planet, had a lot of experience in ESG because he worked in Europe for 15 years and came to the US and said, "Hey guys, this is a thing. This is good. This is a revolution actually and we should be focused on it." And we really benefited from having his perspective. So I would just say, you want to bring people with different life experiences, yes, part of it's gender, but it's across all of these other vicissitudes that we'll get you to a better outcome for clients.

Katie Koch (41:15):

I want to add that I get asked a lot because we have this team where half the assets are run by women, how did you do that? Like what is it that women want? And I say, let me make this easy for you. What women want is they want to have influence. They want to be risk-takers in portfolios. They want to allocate capital for clients. They want to generate great results for our clients. And on the back of that, they'd also like to be rewarded. And it's kind of that simple. And the great part for diversity as a journey is that once you get to a critical mass, right? So as we said, half the assets run by women, the diverse talent just finds you. You don't have to talk about it as much, which it's like boring to talk about all the time, but you don't even have to worry about it because they find you because they come and they say, "Wow, look at these amazing woman running all of these incredible portfolios at Goldman Sachs Asset Management producing great results for clients."

Katie Koch (42:16):

That's the best proof statement that diverse talent can come and win, to see other people having done it. There's no glass ceiling. There's no invisible barrier because you can join us and you can do it with us and it will be amazing. And I hope that people will persist on this journey because, number one, it's an absolute competitive advantage for driving better returns and our clients need it. And number two, the more women we get into this industry in these portfolio management seats, the more we'll get, if you will. It's just an incredible flywheel.

Josh King (42:48):

So putting the gender tag aside then, putting the diversity tag aside then, you're all on the team and you are all as equity managers owners of the companies in your portfolio. Now, whatever your gender is, you have a voice in how a company is going to be run and have the ability to vote and shape the decisions that the company makes. How do you think about proxy voting as part of the toolkit at your disposal as an equity manager when you're investing in a portfolio company?

Katie Koch (43:14):

Very important. I think that we take it very seriously our role as not just active managers of these portfolios but active owners of the companies. We have our own customized voting guideline that we execute against and we are engaging companies often in trying to ensure that we're unlocking shareholder value for our clients. And sometimes it's engaging them in the topic of, "Hey, we're long-term shareholders. We're okay if you dilute us in the near term to push equity down to the factory floor to get more employees, equity ownership. We think that's really good for a long term trajectory," that could be one conversation.

Katie Koch (43:54):

The other conversation we might have or where we've actually used our proxy voting as we just talked about how we think diverse teams outperform, if we know that's true of ourselves, then we actually want our portfolio companies to look like that too. And so we've actually voted our proxies in that direction. We were the first major asset manager to vote against the nominating chairs of any US company with no women on the board. We did that in 2019, voted against 200 companies. And by the way, 67% of them as of today have added a woman to the board. So this is very important and we are really focused on actively engaging our companies and voting our proxies in such a way that we will unlock shareholder value for our clients.

Josh King (44:39):

So as you wrap up Katie, running a fund that is called the Future Planet Equity Fund has to make a parent think a lot about what that planet is going to look like for their kids. How are the decisions that we're making or the actions that we're taking today going to affect the planet that your kids, my kids live on when they're applying to the Goldman Sachs Analyst Program, what, 14, 15 years from now?

Katie Koch (45:03):

Yes, this is a great question. And I actually think a useful consideration for long term investors when you're thinking about what companies to buy. Are these companies engaged in a way in the world that will help produce a planet that we want our children to inherit? I think that's a great question to ask, not just for the future planet fund, but really for any company you're investing in and it comes back to this, are they doing the right thing? Because that's going to set them up for durability and have them operate, again, in a world and create a world that we want our kids to inherit. So I think about it a lot and my fourth is nine-months-old and so we've set up his college account and we own some China in there, which I think is facing its own challenges, but we'll probably work out in the 17 years until he applies for school, for college.

Katie Koch (45:55):

And then also it's the future planet, I own that for all my kids, because I think that's a great way to align something that I know is going to or something I believe will generate great returns over the long term and we'll invest in the solutions providers that are going to help create the planet and I want them to inherit and I think it's a great idea to align the way you're investing with what you want for your children. And I actually very much believe that if you're expansive enough in the way you look at the opportunity set, you don't have to sacrifice your value for your values. There's many tens of thousands of companies out there and you can own several dozen of them that are able to do just that, to generate great returns while also having these important and sustainable characteristics.

Josh King (46:40):

It's going to be a long time before the nine-month-old has to cash in any of that fund to pay for college, but like now that you are still overseeing this young brood of four, how are you managing that team versus this large team at Goldman and all the impressive results that you've been able to deliver?

Katie Koch (46:57):

I have these four kids ages seven and under, and they are by far my biggest priority in life. And I think that's an important place to start that you just kind of need to know what's important to you. I'll add my husband to that list too. I like him and [crosstalk 00:47:11], he is okay too. So like that whole crew together is my biggest, as much as I love work, and my team knows that, and I want great things for them and our clients and the business, my biggest priority in life is my family. So you got to start with kind of knowing what's important to you. I was really influenced by Clayton Christensen's essay someone gave me when I was expecting my first child called, How Will You measure Your Life? Which asserts the importance of having a strategy for your life, just like you would for a business, like what's important to you and how do you organize your time around that?

Katie Koch (47:40):

And so I'm really focused on having a relationship with my family that will be an enduring source of happiness for me. It's very important to remind yourself of that because people with a high need for achievement, which probably includes everybody listening to this podcast, tend to allocate resources towards tangible accomplishments, right? I have an extra hour, so I'm going to meet this client and hopefully I'll have a positive result or I'll meet this portfolio company and then I'll make a decision that impacts the portfolios.

Katie Koch (48:05):

And kids don't offer that type of immediate gratification, at least mine don't. They test your patience, they misbehave, and we're not going to know, my husband and I, whether we did anything right probably until they need that fund, right? That we just set up for them in 17 years. But if I know that I want my relationship with them to be an enduring source of happiness, then I'm going to be able to prioritize our time together. Bedtime stories, long walks, and weekends, pizza nights, school run. And with my nine-month-old, who still wakes up sometimes, just holding that baby. And do you have children?

Josh King (48:40):

I have two.

Katie Koch (48:40):

So you have two, so you remember those when they, are they older?

Josh King (48:42):

They're a little older now but you know.

Katie Koch (48:43):

Okay. So you'll remember when they're babies, just that feeling of the weight on your chest and you breathe, and you breathe. I really believe all of those things are so important. And I guess ultimately what I do is keep them as a priority and I do what the head of my oldest daughter's school says is to try and be there for the ordinary extraordinary moments. And if I do that enough and I keep them as a priority, then it should be a source of happiness and it's important to me. And it's not easy all the time, but as my oldest says, and she's got a lot of wisdom, "Mommy, all we can do is try." And so that's what we do, we just try.

Josh King (49:22):

Katie, all we can do is try.

Katie Koch (49:23):

Yes.

Josh King (49:24):

Thank you so much for coming in and sharing some of that with us inside the ICE House.

Katie Koch (49:28):

Thank you. It's been a pleasure to be here.

Josh King (49:30):

That is our conversation for this week. Our guest was Katie Koch, Partner and Co-Head of Fundamental Equity at Goldman Sachs. If you liked what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us at ICE House Podcast. Our show is produced by [Stefan Caprio 00:49:53] with production assistance from Pete Asch and [Ken Abel 00:49:57]. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. We'll talk to you next week.

Speaker 5 (50:06):

The information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties, expressed or implied as to the accuracy or completeness of the information and do not sponsor, approve, or endorse any of the [inaudible 00:50:22]. All of which is presented solely for informational and educational purposes. Nothing here constitutes an offer to sell, a solicitation of an offer by any security or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of legal clarity.

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Information contained in this podcast was obtained in part from publicly available sources, and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice.