How I Invest with David Weisburd
00:21:39 · David Weisburd, Christopher Donahue
[00:21:39] S0: It's funny because a lot of people might say, why do a podcast on cash? And I think there's somewhat of a cognitive dissonance here in that everybody wants to think that they're... They have some crisp... Perfect crystal ball. They're perfectly efficient allocator of capital where they they look on their balance sheet, and there's always just a couple $100 in their cash, and everything is perfectly allocated. But if you look at people's behavior, and it's rational, you have to have... If you look at... You know, I'm probably up $2,030,000 dollars in just cash. Why? Because I have to pay rent, or I just have to make some decisions with it, or I'm busy those couple weeks that I got that cash in, and I have to make a decision. So having this default strategy on your cash is actually pretty [00:22:24] S1: Or you get to pay for a growing family. These are new expenses that didn't exist five minutes ago. We are well experienced in that. [00:22:33] S0: Talk to me about your business model for Federated Hermes. How is it that you guys get money?
00:22:33 · David Weisburd, Christopher Donahue
[00:22:33] S0: Talk to me about your business model for Federated Hermes. How is it that you guys get money? [00:22:43] S1: We are investment advisers, and so what we do is present the product to the customer. The funds generally are headed up by an independent board of directors as per SEC regulation, and that's the fund side. And then we go direct where we offer mandate to get mandates from institutions, pension plans, and the like. Now, we charge an investment advisory fee, an administrative fee, and then we have two thirty some salespeople who go out and tell the story. So, the best way to think about Federated is really the Pittsburgh geography, where we have three rivers. The one river the Allegheny comes down, that's investment performance. You got to have that or you are out of business. The other river is about Monongahela, which is the sails. You got have somebody tell them the story. Then you have the banks of both rivers are important. They flood. They commit. They have to be controlled. One bank is the bank of compliance, also known to humans as trust, because you've got to have trust. The other bank, customer service. You've to have that. We call that love. So in each bank, both the rivers, you have love and trust. Then they form together in the Ohio, and you go West, young American, go West. And that's how Federated Hermes is basically structured. You've got to have the investment management. You've to have somebody telling the story on the distribution side. And you've got to get each of those banks with love and trust. And that's our business model.
00:24:18 · David Weisburd
[00:24:18] S0: We referenced earlier the the data center build out and the large tech companies. AI is coming for every industry. What risks or opportunities does AI pose to your company?
00:24:32 · Christopher Donahue
[00:24:32] S1: I would look at it as primarily opportunities, although there is some beware the jabber walk. Okay? But to me, we aren't gonna have less than 2,000 people which survive what we have now down in the road. When we have our summer interns come in, the first question is always, Well, AI is going to take care of me. I won't be able to have a job. And my answer is always, Look, pay the extra $20 a month, learn how to use AI, and then you'll get the job. And we are going to be looking at it more as a developer of quality. I tend not to use the word efficiency when we're talking about AI, especially in an employment circle, because efficiency means FTE, I'm dead. Quality means, Oh, I could do it better. One example of that is we get a lot of phone calls from investors, and they have to be screened, and then you have to have quality control and all that. And the managers do that. And then they grade them. Well, when you have AI do that, all of a sudden, instead of only listening to one out of every 50 or 100 calls, you listen to them all. And then the AI grades them on things that are really good. Did you show love? Did you use the name of the customer while you were doing this? Were there a lot of I don't know. So, you know, things that distract from a direct communication? Did you get the answer right? What about the substance? Do we have less managers because they don't have to do that job anymore? No. We have higher quality calls, higher quality training, and a better overall result. And the same is true with requests for proposal, RFPs, where you can continually enhance them. Humans involved all the time. But those are just a couple of examples where it's going to work. The fears, they're all well publicized in the marketplace. And, you know, I don't buy that they're gonna blow up human beings. You know, 2001, A Space Odyssey. I know Hal wins, but I don't think Hal is gonna win. And I think it's no different in pattern than product liability. Your responsibility put a good product on. If you don't, you're gonna get hammered. So be responsible for what you put out. And I think a lot of that is hitting home with the AI companies. You know, when they delay coming out with something because they're worried about what it's gonna do And all the stories about escaping the sandbox, well, you let them escape the sandbox.
00:27:13 · Christopher Donahue, David Weisburd
So don't let them escape the next time. [00:27:17] S0: One of the industries that I'm really fascinated by right now that I think is undercover, cybersecurity. How much are you investing to cybersecurity, and how much more of an issue is that today with AI? It is a huge issue and very big. And how much investing? A lot of [00:27:36] S1: our investing is done with our custodian banks and transfer agents. They are all on the glass wing operation where they're studying what has happened with that release of the Mythos. Mythos. And they are putting the big money because we don't do the custody, the handling the money, the transfer agency work. And that's where you really need the good... Now we have our own cybersecurity. We get attacked all the time just like everybody else, and we have the concentric rings of defense just like everybody else does. But I can't tell you how much money we're spending on it. I don't know. [00:28:23] S0: You're known in the industry as, if not the longest serving CEO in the mutual fund industry, certainly one of the very longest serving CEOs. What's been the secret to your tenure?
00:28:36 · Christopher Donahue
[00:28:36] S1: The founding of the company was by my father, and two of his buddies went to the same high school I went to. In Pittsburgh. In Pittsburgh. So I cheated. Okay? On the other hand, I started working there in 1972 or so, and I've worked in a lot of different positions. And it's the culture that really drives the truck. And it is preserving the culture established by those founding fathers that I am very articulate with and very comfortable with, and it helps a lot. Like, for example, we had several big changes in people succession this past year and a half, where we were replacing forty year people with twenty five and thirty year people. Now, how does that happen? It's because of the culture. And the culture can be made up of a lot of things, but maybe the way to talk about it is in terms of some of their rules of thumb. My dad's one rule of thumb was, we want everybody to enjoy coming to work. Well, that's a good rule of thumb. If don't, then can we fix it? Well, if we can't fix it, maybe you should graduate. And then by the subtraction method, you get a lot of people enjoy coming to work. That makes everything a lot better. Another one of their statements was, You know what? If you get hired at Federated, you get to paint your own picture. You just have to stay on the canvas. What does that mean? That means that you as an individual have dignity and respect because you're an individual and because you have this position. So the PMs and their team have the paintbrush on the portfolio. Salespeople and others can say, well, you know, you need some more red in that or more yellow. And they could say, well, that's a very good idea. No. Because they have the brush on painting that picture. Sales individuals can say the same thing. This is my territory. I got it figured out. The M comes and says, Look at the record. This thing is terrific. You ain't selling nothing on it. You say, Well, yes, but the customers don't want that yet. And so, you can see how that kind of culture allows the thriving of People