Guest Speaker: Andrew Ward CIO Of Boeing

Great. I've got some slides for us to kind of just... I'm not going to spend too much time, but I just want to kind of give you guys some perspective on what it is I do for the Boeing Company. I know some of the other speakers you guys have had over the years. I know you had Mr. Salvino from William Blair who manages money for individuals, and then you've had someone from I think it was TD Ameritrade, which is the brokerage where people custodies people's assets and allows them to trade. I know those are two different types of investors. I know Mr. Morgan works for an investment management firm and they do certain types of investments. What I do is something different than all of those, so I'll be giving a slightly different perspective than some of the other folks that you probably listen to. Do we have a chance to get the slides up? There we go. So I'll walk through these pretty quickly here. Thank you very much.

If we click forward here, in terms of retirement assets, the Boeing Company is the largest corporate pension plan in the country. You can see on the far right there, as of April, we had close to 140 billion dollars of assets in our retirement plans. They're broken up into two different retirement plans. One is a traditional pension, that's what we call the DB retirement plans. DB is when you retire, you get a monthly check until unfortunately you pass away. That's kind of more a traditional pension. Then what many corporations have moved towards is what we're calling the savings plans, DC, and that is a 401k. So DB means defined benefit. The defined benefit is the amount of the check you get every month. DC is defined contribution. Defined contribution means the company puts in a stated contribution into an account in which you invest on your own, given some investment options made available by the company. But if you think of all the big companies you know about, AT&T and Ford and General Motors, we're bigger than them all. So 140 billion roughly of assets.

If we can go to the next slide here. So what do I do for them? I don't run a team that picks stocks and bonds. What I'm called, and what people like me are called, are allocators. So what we do is we set an investment strategy. We're trying to figure out how should we invest these assets given the circumstances of the Boeing Company. We're a concentrated company. The only thing we do is make aerospace products or planes. We don't make a ton of different things. So that means we're going to be cyclical. We're very capital intensive, meaning every time we come up with a new product, we've got to spend billions of dollars to do it. And we're regulated. There's a lot... the pension plan is very sizable relative to our balance sheet. So all those things factor into our strategy decisions. Asset allocation comes out of strategy. So how much should we have in stocks, how much do we have in bonds, real estate, hedge funds, private equity, venture capital, infrastructure. All those things we need to decide how much we want in all those things, and we can talk about any of those asset classes along the way here. And then manager selection. Instead of, let's say, we want 30% of our portfolio in stocks, I don't have my team going out there and buying those stocks. What we do is we go out and we hire outside investment management firms that are specialists in picking stocks. So we're going to hire a firm that does small companies here in the United States that are growing rapidly, that would be called small cap growth. And then we're also going over to China and hiring managers whose offices are in China and all they're doing are picking Chinese companies. And we're doing that all across the globe. And then we're picking real estate managers to know a lot about real estate, and hedge fund guys who know a lot about hedge funds, and then venture capitalists who their only job is to figure out, okay, what's going to be the next Google, what's going to be the next Uber, how can I invest in this small kind of garage started company that's going to be the next Airbnb or DoorDash or whatever the case may be. So we invest with those folks as well.

So we hire those managers and then we risk manage. So once the assets are all invested, we want to know where they're invested and why, and then how much we're getting paid for those investments and how much risk we're taking. And then liquidity is a big part of it. I'll talk about liquidity, why we want to be able to convert our money, our investments, into cash at any point because we have to pay, remember, that monthly benefit. So every month, job one, pay the benefit at the end of the month. So we got to be able to convert some of our investments into that cash to pay that benefit. And then we do the same thing at the bottom for those savings plans, but we don't make decisions on asset allocation. Every employee makes their own decision. So we make the investments available. So we'll have a large company's US, we'll have a non-US large companies, we'll have a fixed income or a bond portfolio. They'll decide how much of their money they want to put in all those different things. So that's what I do.

Next slide here. So what do we think about when we're talking about investment philosophy? We believe in diversification. I know you're an investment club so you guys have heard about diversification. So diversification is most commonly known stocks versus bonds. So you put a mix of different assets together that are uncorrelated with each other and they're going to be better off than they were as a standalone. They say diversification is the only free lunch in investment, and that's true. But we also believe it within asset classes. So small cap versus large cap, US versus non-US developed countries like the United States versus emerging countries like Thailand or Vietnam. And then also value versus growth. We've had this period of time now where growth stocks have really outperformed value, and if you were just in one or the other you might have missed out on that. So we try to balance our style factors between value and growth. We believe in active management. I know a lot of folk stories you've probably heard think about passive management, low cost index strategies. But given our scale, we're able to negotiate very favorable investment management fee agreements with our outside managers. So we choose to be active with them in an attempt to outperform benchmarks. We are heavily invested in alternative investments. I talked about those five that have to list them here: private equity, real estate, hedge funds, real assets. You think we're going to earn about six and three quarter percent every year. That's not... I'm sorry, annualized over a long period of time. That's on average compounding, we're going to get six and three quarter. That's not every year, so we don't think on any year we'll get six and three quarter, but over a long period of time we'll get six and three quarter percent annualized compounded rates. As I mentioned, we believe in adding value through active management. And then down at the bottom, risk management. As I mentioned before, always key. We want to know where our money's invested and why it's invested there such that we don't wake up one day and, oh my gosh, all our money's in emerging markets. All that money is in Thailand or Vietnam and how did it get there? Every day we want to know, and if it gets too much in one area outside what we want, we will rebalance back and bring it back in line with what our targets and what our risk management rules and guidelines say.

Next slide. So our asset allocation framework, we have two different types of assets. We have a liability hedging asset. So I mentioned we make that monthly payment to our pensioners every month. So our liability, or what we owe, is just that stream of payments, those monthly payments discounted back in the net present value calculation. And that's our liability. So we invest in things that look a lot like that and behave a lot like that. So those are going to be bonds. What is a bond? It's just a stream of payments just like that liability I talked about, and the value of those bonds move around with interest rates. So those things are going to look a lot like and behave a lot like that liability we're trying to hedge. So not surprisingly, on that liability hedging side, that balance, you know, the scales of justice trying to balance those two things, we've got a lot of bonds in that part of the portfolio. The other part of the portfolio is what we call return seeking. These are growth assets that we're looking to outperform that liability. And so global equities is the biggest one there, equities being stocks. Private equity, which is leveraged buyouts and venture capital, growth equity, tax investments. We've got real estate in there. That's been an interesting one. Even all we just went through with COVID, not a lot of people in offices, so the value of office buildings have been falling. You guys are buying all your stuff on the internet now, so all these retail malls are all seeing their values drop as well. So that's been an interesting place to be in real estate. Hedge funds, return seeking fixed income, which is going to be things like high-yield bonds, bonds issued by emerging market countries like Thailand and Vietnam I talked about, as opposed to treasuries issued by the United States. Real assets are investments that are supposed to generate high rates of return during periods of unintended inflation, so commodities and infrastructure, energy investments are also in that basket. So you can see there's this... I put that scales of justice here because we're looking to balance those two competing interests. We have too much on the liability hedging side, we won't get enough return. If we have too much on the return side, we expose ourselves to too much risk being different from our liability and maybe creating a situation where we have more liability than we have assets, which is bad.

So the next chart, and I'll wrap up my charts here pretty quickly and we'll turn to Q&A because I know that's what you guys like. So here's our asset allocation today. I talked about that framework, liability hedging versus return seeking. The liability hedging portion of the portfolio is on the left, that's the green portion. So we have about 45% of the portfolio, remember we're trying to balance these two things, in that liability hedging side. The other pieces of the pie that are non-green, you can see global equity being the biggest there, about 30%. We've got private equity, real estate, real assets, hedge funds. There's a big alternative. We've got about 8% of the hedge funds. But you can see on the right hand side some of the bullets I've included. We've got 440 different investment mandates with over 250 external investment management firms. So once again, I'm not buying and selling the stocks. I'm hiring the firms that do that. And if they don't do it well, guess what? I fire them and I move the money to a firm that does it well. And so part of my job is not only selecting good managers, firing bad ones, but also moving money back and forth across managers because you might be really good at real estate, for example, but like I just said, real estate might be a challenging part right now. I don't want to fire you. I just don't like real estate very much, but I think in the future I'm going to like real estate. So I keep you, but I maybe take some money away from you and give it to somebody who's managing an asset class that I like better at the moment. But I know coming back in a couple years I'm going to realize I don't like real estate because it's gotten so cheap. So I want to keep you as a real estate manager, you're managing some of our money, and in the future I'm going to give you more money. So managers are hired and fired, but we're also moving money back and forth across managers based on our view of the attractiveness of what they do. And the liquidity I talked about in the portfolio, one of my goals, I've got to make every year 5 billion out of that portfolio of payments to current retirees. So every month I'm cutting a check for about 400 and change million dollars to our current retirees who are no longer working for the company. And so I've got to make sure that I've got that liquidity. That's why this pie chart, I got to have enough. I can't go all into private equity or venture capital because it's illiquid. And so when I go to make that payment at the end of the month, I can't convert venture capital into cash readily. So I've got to keep some of my assets in things that I can convert to cash at the end of the month every month to make those 450 plus million dollars of benefit payments that I'm making at the end of the month. So that's that liquidity I talked about earlier. And you can see we've got 500,000 plan participants. A plan participant is a pensioner, someone who's going to get that check. So we have a lot of people counting on us to get this job done really well. So I have a team of 18 people that work for me that this is all they do. And those 500,000 people are relying on those 18 people to do their job really well. And so every day we wake up trying to not let those 500,000 people down. And those 18 people are managing those 440 different investment mandates with those 250 outside investment management firms that we engage with.

So next slide. So now I'm going to move to the 401k. I mentioned that the 401k is what's also called the defined contribution plan. That's not where the company promises the monthly payment. They promise they're going to put in every time you get paid, so every two weeks they'll make a contribution to your 401k account. So defined contribution versus defined benefit. The defined benefit plan makes that monthly payment in a defined amount. This type of plan makes a defined contribution to your investment portfolio. And the risk here, when you're defined benefit, they're making you a payment until you die, so you won't outlive your assets. Defined contribution, they can make defined contributions to your account until you stop working, and if you don't invest well or if you spend too much, the risk here is you can outlive your assets. And so the old expression that you don't want to be eating dog food when you outlive your assets because you live too long, that's the risk of a 401k versus a defined benefit pension here.

So next slide here. So we make available a 401k menu, and so these are the investment options that our company employees can invest their retirement assets in. So you can see on the bottom we've got actively managed options. Those are options where the investment managers are trying to outperform a benchmark based on their active decisions of buying this stock or selling that stock, being different from the S&P 500. But the downside of that is you pay those managers a fee higher than an index fund, which is low cost, and there's no guarantee that that manager is going to outperform that benchmark. So you might be paying them a fee for losing you money relative to a passive or an index type of option. We also make those index options available here as well. You can see we have five of them. Those are very low cost. For example, the S&P 500 index on the left, that is just going to be an equity option that mirrors large cap US equities, and our participants pay less than one basis point for that investment option. So they're basically getting it for free exposure to the S&P 500, which many investors can nowadays as well. And if you choose to do that, you get exposure to the equity market for free. If you choose to do the actively managed, you don't get it for free, but you're looking to outperform. You're looking to get a greater return for reduced risk than the S&P 500 would. And so our job is to put together good managers who do that. And then we make some tools available. We make investment advice available. Most of the people who work for the Boeing Company are really good at building planes, but they're not really good at investment management decisions for their own assets. So we make some advisors available to folks. So you get done work, you're putting the wing on the plane, and you go home and you're looking at your investment, you can pick up the phone and call an advisor that Boeing makes available to its employees and say, hey, I don't really know if I should be in active management or in a passive S&P 500. Can you help me decide that and walk me through the pros and cons? So we make those types of benefits available. And then there's a lot of auto functions that we make available. So people can set rules about how much they want taken out of their paycheck, how much they want that to escalate, and then how they want their portfolio rebalanced every month. And so we make a bunch of tools available to them that they can just click once and have done for them automatically.

And then the next slide is here's some facts about our 401k. So you can see the pie chart on the left, where remember the defined benefit plan pie chart I showed before was pretty equally balanced between stocks and bonds. You can see this one's not. It's about two-thirds equity-like or stocks, and only one-third bond-like. So the Boeing Company employees are deciding to take more exposure to equities than bonds. And that's a choice that they make on their own, and I don't advise them on it. They do it themselves. You can see we have over 200,000 plan participants, and for every 100 employees at the Boeing Company, 95 of them participate in this plan. It's a really attractive plan. Its performance has been really good. It's very low cost, and the reason why it's low cost is I remember I talked about how big we were. Our scale or that size allows us to negotiate very attractive or low fee arrangements with those outside investment management, and we pass that on to our employees. So the last bullet here I show is Bloomberg, which is a financial media company, ranked Boeing's 401k, we call it the VIP, second among the 50 largest companies in the country. So we're the biggest and we're the best, which is what we're trying to achieve. And so I know I went through that very quickly. I was told that you guys will be very active in terms of questions. I can continue talking about what I do, but why don't we take a pause here and open it up to you guys because we can have a Q&A and I'd be happy to go in any direction you'd like.

And that's a bad connection. Yeah, Colin, I should have said hello to you earlier. You're frozen here, so maybe we'll have to shift it to one of your buddies. Colin, you got a bad connection. I can ask one of mine.

Sure. So we typically hire people that are considered not necessarily right out of college, but not mid-career either. So they have maybe three or four years of experience working in some form or fashion in a related field. And really what we're looking for is a demonstrated track record of intellectual curiosity, hard work, an expressed interest through commitment to the investment industry. And so what I mean by that is whether it be a CFA or an MBA, we're looking for them to have made a sacrifice to develop the skills that we're looking for. And so it doesn't necessarily mean that they have those skills day one, but we want them to show that this is what they want to do. And a CFA program, the Chartered Financial Analyst program, is a really difficult, requires a lot of dedication to go get that certification. And we know if they've already gone through one or two, there's three stages of it, if they've gone through one or two, they're pretty serious about developing the skills that we value. And so we're looking for them to demonstrate that. So we want them to be intellectually curious, hard-working, and have demonstrated a dedication to this space. We don't necessarily need for them to know everything about everything. We don't necessarily even need for them to be outstanding investors at that time, because what we like to do is bring people in, it's an apprenticeship business, we like to bring people in and then train them on how we do things. And they can learn with some of the more senior folks on our team who will teach them what we want them to know. And so it's... if you guys, I'm sure there's some Bears fans on the call here, and the Bears are going to be engaging the NFL draft tomorrow night. And so there's two philosophies the general manager of the Bears can have. If we need a quarterback, and we do need a quarterback, right? Or it could be your high school coach, or we talked about the wrestling coach or the football coach. Let's say it's the football coach and he's trying to pick who's going to play quarterback. Well, he could figure out, let's go back to the Bears general manager picking tomorrow, you could... let's say you're picking 20th like we are. Let's say 19 people picking ahead of you pick quarterback. And so you need a quarterback, so you say, okay, I'm going to pick the 20th best quarterback and I'll live with him. The other thing you could do is find the best athlete available in the draft and teach them how to play quarterback. And I know that doesn't happen at the NFL level, but it does happen with a lot of people who are hiring. They don't necessarily want you or need for you to know everything about what we're doing at that stage of your career, but they want you to be that athlete who's intellectually hungry, who's a dedicated hard worker, and has made a sacrifice to develop some of the skills that we're looking for. And that's kind of what we look for. We don't necessarily need for the person to know everything about everything that day we're hiring them, but we want them also to be a team player. We want them to be able to work with other folks well. A lot of times you'll get people who are really smart but don't necessarily play well in the sandbox. And in what we do, that doesn't work really well. So the holy grail is smart person who works well with their teammates. And you guys are learning a lot about that. We talk about sports, working with your teammates in a team atmosphere. That's really valuable later on in your career. I think you'll find that as well.

So I think... what is an experience or skill... I think there's kind of a portfolio of skills that if I were you guys, I'd be looking to develop. It's certainly knowledge of the investment world. What you're doing today, and by your membership in the investment club, you certainly have the curiosity in it. I would, when you're choosing your college, research well the offerings that college has when it comes to investment training. I would work in team environments in college. I'm sure you do it right now in class projects. But the reality is when you get to your job, particularly in the investment field, rarely is it that you're going to be working alone by yourself for extended periods coming up with an answer and then going telling somebody that answer. More likely you're going to be working with other teammates, other employees, or even like I said, the outside investment firms that we work with, and they don't work for the same company, but we work very closely with them. So working in a team environment, certainly having the analytical capabilities and the knowledge of investments is important, but also having that team framework, the ability to work well with others, because the investment world is too big and too complicated for any one person to know all the right answers. So more likely than not you're going to be a contributor on a team, and maybe you play a junior role at the beginning of your career and maybe a senior role later on in your career, but you're going to be playing a role on a team. And being able to complement those analytical capabilities that investment careers demand or require, but complement that with that team environment where you're working well with people. And working with diverse teams, we work with global teams and people from different cultures have different styles, and you need to be able to work well with all sorts of different people, different genders, different races, different geographies. And all of that is going to be very important because I think if you find that you've got the analytical skills and the ability to work well with people, you're going to do really well.

So my kids describe when I went to school as the olden days. So back in the olden days we didn't have as generous of offerings when it came to the investment world. When I was in high school, the closest thing that I took was economics. And I went to Fenwick, you guys are probably all going to cringe when I say that. And so Fenwick had an AP economics class my senior year that I took. And economics is different from investments, but they're kind of adjacent to each other, or next to each other, so they're somewhat related. And so that really kind of inspired my interest in investments. And then after Fenwick, I went to Indiana University undergrad, and went to the business school there, it was called the Kelley Business School, and I enrolled in some finance classes there. And I also went to graduate school at the University of Chicago here in Illinois, where I doubled in finance and economics. And prior to working at the Boeing Company, I worked at an insurance company. And I didn't sell insurance products. Many folks don't know that behind the scenes, one of the big ways insurance companies make money is actually investing all of the assets that they have. All the premiums that we pay every month into an insurance company, but we don't get into a car wreck for five years, well they're holding that five years of insurance premium that you've paid in until you get that car crash and then they pay you out. But during that five years they're investing that money that you've paid them, and they earn money that way. And so they're hoping to outperform, like I am at the Boeing Company, certain markets to create that profit. And so I worked for an insurance company in that investment field, and that's really where I learned how to invest. You learn the concept in school, as you guys know, but it's really on the job when you're doing it yourself that it really kind of becomes real to you. And that's where I learned it. It was an insurance company called Aon that's here in town, here in Chicago. And I worked for that insurance company in the investment department for five years, and where I focused a lot, Hanley, where your dad focuses, on alternative investments. So private equity and hedge funds and real estate was my specialty. And when the Boeing Company moved to town, moved to Chicago...

About 20 years ago, they had moved to Chicago from Seattle—only the headquarters. We still make the planes out in Seattle. But when they moved to Chicago, they were looking to build out a new investment team here and they were looking for someone to manage their alternative investments. I had, as I mentioned, done that for the insurance company, and they called me up. I was, you know, 20 years ago a much younger person, and they said, 'Hey, we'd like you to come over and build the alternative investment program for the Boeing company.' And that's what I decided to do. So I've been doing that for about 20 years. I started on the alternative side, and then after a number of years, the chief investment officer at the time asked me to head up what's called strategy and allocation. So that's figuring out, as we talked about earlier, one of our key responsibilities is deciding how much we want in all these different types of asset classes—how much do we want in bonds, how much we want in stocks, how much we want in this. And so the head of strategy does that. For a long time, I did strategy and allocation, and then when the chief investment officer role opened up, oftentimes what they want is someone who can do not only the alternative side but the strategy side and the allocation side. Because guess what, the CIO is in charge of all of that, so they want someone who can do all these different things. Fortunately, my career had taken me into touching upon many of those different areas. And they said, 'You know what, Andy has done well in all these different areas. Let's say there's eight different responsibilities that the CIO has, he's done six of them and we think he can learn those other two.' And so we're going to give him this job. I've been doing that CIO role for about 10 years now. So now I manage those folks who do the jobs that I used to do. And you're a lot better boss of someone if you've done their job, because not only do you know how it should be done, but you're also understanding of the challenges that they face on a day-to-day basis. It's not just about, 'Hey, did you make this number or not make this number,' but what is preventing them oftentimes from getting the job done on a certain day. If you understand and are empathetic and sympathetic to what their challenges are, you can then provide them help and assistance to get the job done when they're faced with those challenges. So that's the kind of career path I went on to get to where I am right now.

Yeah, that's—you know, if I did have the secret sauce, I'm not sure I'd be telling you because you guys would go out and do it and then it'd be no longer effective. I'm just kidding. The reality is there is no secret formula. It's a lot of hard work. For us, we have a global portfolio, so we're not just sitting here in Chicago in a non-COVID world at our offices. We're flying all over the world trying to figure out which geographies have the best opportunity, but then importantly meeting with all these investment managers. Remember, we're hiring those external investment firms, so we're meeting with those investment management firms saying, 'Okay, do these guys have the skills to outperform that benchmark? And do they have the integrity?' Let's say we're hiring a manager in a far-off place, we need to trust them that they're going to do what they said they're going to do because we're not going to be able to see them every day. So we need to trust that they're going to do what they say they're going to do. Obviously, it's trust but verify—we're always watching to make sure they're doing what they're doing, but we're not going to be sitting right next to them. So I think the secret sauce, Jack, is hard work, developing the skills on the investment side through schooling and CFA programs and other things like that, MBAs, and then establishing a teamwork environment where you can establish a network of trusted relationships across the globe that will enable you to pick good investment managers and produce good results. I wish there were some secret sauce. We believe in active management, other people don't, so we are intentionally different from other people. Because if you're just like everybody else, guess what, you're going to get returns just like everybody else. So you have to be intentionally different from other folks. You have to pick your spot: where do I want to be different? Where do I think something is underpriced, or where do I think the market is underpricing the growth of that asset? Where do I think something's out of favor that is really being beat up too much? Is this country or is this company being beat up too much given what we think their long-term prospects are? The market's being short-sighted. So we tend to be, Jack, very long-term oriented. I think one of the secret sauces of our performance is not being so blinded by next month or next quarter's return. Have a long-term orientation, be able to take some underperformance over the short term, recognizing that over the long term, if you're making good long-term judgments, your overall portfolio is going to do really well. And then the other thing I would say: hire a good team. I've got 18 people on my team and I trust every day that they're making good decisions. They report to me on everything they're doing, but I'm not sitting right next to them every day—I can't because I've got my own job to do. So I hire very smart folks, try to put them in a position to succeed, give them the apprenticeship we talked about, make sure that they know how to make the decisions we're going to ask them to make, but then importantly, once they're there, allow them to make the decisions that we've asked them to make. I don't micromanage people. I allow smart people to make good judgments and hopefully our portfolio will benefit from those judgments.

I talked about earlier—career hires. It's that intellectual curiosity, that dedication to the investment that they've had to demonstrate, and then being a team player. Those are all important ones. And then as your career goes on a little bit, those things are still important, but there's also a track record. You know, Colin, they're going to look and say, 'Hey, how did Colin's investments do?' Well, he might be a really smart person who works well with people, but if he makes lousy investments and doesn't do his homework, and because he didn't do the homework the stocks that he buys always go down, I don't want to hire that person. So as your career goes on, it's going to be that track record of success. Early on, I think it's those other attributes I talked about—the intellectual curiosity and intelligence, the ability to work well with others—being big parts of it, and then this demonstrated commitment to developing skills.

Felix said, 'Good question.' I knew that one wasn't—I wasn't going to get out of here without some 737 question. Fortunately, I don't have anything to do with making the planes, and that's fortunately for all of us that I don't do that because I don't think I'd be very good at that. They want me on the investment side for a reason, and they want the people who are really good at making planes doing that for a reason. The reality is, the 737 MAX—there were two planes that crashed, and it was a tragedy. People lost their lives, and Boeing takes that incredibly seriously. The company's heart breaks when someone—the families of the victims of those crashes. You can imagine what it would be like if it was your loved one, and we all carry that burden around at the company whether we're involved in making planes or not. That's a weight that weighs very heavily upon us. The biggest challenge for me has more so than during COVID, where the company had demand for its product because everyone on this call wasn't flying around to spring break or visit grandma or other places the way you had been before, or your parents who traveled for business weren't going on those business trips. Your mom or your dad were not flying around, so the demand for our aircraft went down. What that means is we had to reduce the size of our company to accommodate that, and so we had to reduce the size of our workforce. That meant we had to pursue layoffs. When someone leaves the company, whether through a layoff or something else, they're allowed to take—we offer them instead of getting that annuity that we talked about, that monthly payment when you retire, we offer them what's called a lump sum where they can take all that money right away and roll it into an IRA or 401k or whatever they choose to do. But what that means is I've got to have the liquidity in our portfolio because I don't know how many people would be laid off, I don't know if they're going to elect to take that lump sum or not, but I've got to be able to survive the worst-case scenario for those assumptions. There's an expression: why did a six-foot man drown walking across a river that's three foot deep on average? Because on average it's three foot deep, but there might be spots where it's nine foot deep and other spots one foot deep. It's only three foot on average, and he's six feet. When he gets to that nine feet, he can't swim any longer. So I need to be—not on average—I need the worst-case scenario. I need to be able to survive that. So the biggest challenge I had in the last year was providing liquidity for uncertain demands upon that liquidity. I didn't know what was going to be called out of the portfolio and when, so I had to maintain that really high level of liquidity but also achieve great returns with that liquidity. So that was my biggest challenge last year—selling a bunch of investments and holding cash but also producing returns.

I think the last year was probably the biggest challenge we have. The reality is it's a marathon, not a sprint. As I said earlier, show up every day knowing that there are—if we have 500,000 on the pension plan and 200,000 on the 401k side, there's some overlap so I'm double counting, but we have 700,000 people counting on us to get the job done. Every day, as what we call a fiduciary, working for their benefit, making sure that I'm making the right choices. The investment world involves risk—you don't take risk, you're not going to produce any returns. So introducing risk, you can lose money. I know that if I'm right 55 percent of the time and wrong 45 percent of the time, I'm doing my job well. So not getting down on yourself when 45 percent of the time you're wrong—that's hard because not everything works. You just need to remind people, and I think people early in their careers, you'll beat themselves up over things when they don't work out. Having that mindset that we're going to take some risks and some of those risks are not going to pay off. One of the areas I mentioned earlier—we invest all over the world. I go to China all the time, and I go to this country that doesn't operate like we do. We have a big part of our private equity portfolio invested in China. They have a different form of government, they have different rules and laws about investing, and so navigating those rules and laws that are different from ours and can change at a moment's notice is really difficult. Assessing, 'Hey, am I being compensated for that risk? Am I generating the returns that I need to compensate for that risk?' If I'm not, why wouldn't I just invest here in the United States with the laws and rules that I know? By going to China, I need to generate really, really high levels of return to compensate me for that risk of investing in a place where the rule of law might not be the same as it is here in the United States. Those are some of the challenges we face. The good thing is I work with a group of really smart folks. I talked about what we hire—we want people who are intellectually curious, who want to figure out problems, who want to work together as a team to solve a problem together. So I work with those folks and we have rigorous debates about, 'Hey, how much should we have in China? Is the risk that we're facing in China really understood or is it not? If we're investing in China, do we want to invest in publicly traded stocks that if we get long we can sell tomorrow and get our money back, or do we want to invest in those really high-growth venture capital companies that are going to produce the next Alibaba or the next WeChat or the next Tencent?' Obviously, the early-stage ones are bigger risks but much more return, and if you get it right, much more reward. The publicly traded ones might be more liquid but may not give you as much reward as those others. Assessing those trade-offs is something I really enjoy working with my team on. You don't always agree, and that's part of the process—having a respectful debate. Luke, you might say, 'Hey, I think it's A,' and Hanley says, 'No, I think it's B,' and you guys engage in a debate respectfully. No one gets their feelings hurt. Hanley is saying, 'Hey, I think it should be the more liquid portfolio.' Luke's saying, 'No, no, no, we're not going to make enough return. I think we need to go into venture capital because that's the only way we're going to make returns.' Hanley says, 'The rule of law over there is not very good, we need the liquidity.' And then you go back and forth and back and forth, and you do that enough, you guys will coalesce around what strategy you want to employ. That's the part of the job I really like.

No, absolutely. Fixed income right now—rates have backed up a little bit from their lows, but not too long ago fixed income was all risk and no return. It's a paltry return now, but at least it's something. Our fixed income portfolio has a strategic objective of hedging liability, so it's not generating a return that we're relying on. It's only supposed to dampen volatility relative to our liability—it's supposed to look like our liability. And the reality is, this might sound weird to everybody: if our fixed income portfolio generates a negative return, we're actually going to be healthier as a pension plan because our liability is 100 percent exposed to that interest rate risk that was just brought up. From our asset portfolio, only 45 percent of that fixed income is exposed to that same risk, so it's hedging about 45 percent. So if it loses money, 45 percent of our portfolio lost money, but 100 percent of the net present value of our liability went down. So when we put those together, our pension health actually improves. Just like your children, you're rooting for all your children equally—asset classes, we're rooting for them, but I'm actually rooting against fixed income because I know that if it produces a negative result, my health as a pension plan actually improves. So we try to balance those two things. We don't want all fixed income because then we're not going to produce returns, and we don't want too little fixed income because if rates actually decline further, we're exposed to that. You might say, 'Oh well, the 10-year, 1.62 today, how low can it go?' Not too long ago I would have said 162 basis points lower, but we've seen over in Europe that there is no lower bound to interest rates anymore. Interest rates have gone negative. You talk about things you think you know and you study in a textbook, and I thought I knew interest rates had a lower bound. We live in a dynamic world that's changing every day, and we've seen in Europe and in Japan and other developed economies interest rates actually go negative. So we sit here and say, 'Yep, 162 is low, but what if zero is not the lower bound? Could it go a lot lower? And if it does go a lot lower, are we really exposed to risk there?' And we are. So we've decided from that perspective, let's not go full boat into fixed income, but let's not bring it down to too little either. We're trying to balance those things on the scales of justice. That fixed income part of our portfolio—that's probably the most active debate because there's a lot of people on my team saying, 'Hey, rates only have to go higher, they can't go any lower.' The reality is when the 10-year hit 3 percent, we're all saying, 'They've never been 3 percent before, they can't go lower,' but they went all the way down to 40 basis points. Interest rates are a very difficult thing to predict—probably the most difficult thing to predict. So we try to be humble about that and say, 'Okay, let's put our bets on things that we think we have an edge on.' Timing interest rates, we really don't think we do, so we remain somewhat neutral relative to our duration. Really good question.

You know, I think it's got to be both. There are quantitative equity managers that we hire, and then there's what's called fundamental equity managers that we hire. Quantitative just use computer models—they don't even meet with the CEO, they don't care what he says, they only look at the numbers. That's more what we call quantitative equity investing. And then fundamental managers look at—they certainly look at the financial statements, but they're meeting with the CEOs and they're trying to figure out, 'Hey, is this going to be the next Google? Is Tesla really going to sell that many cars next year? Do we really think we're all moving to electronic vehicles and are we going to have autonomous driving vehicles?' The person who's evaluating Tesla is looking at that right now. The quantitative manager is probably doing less of that. I think the best investment managers, Hanley, have a little bit of both. If you're too far one side or the other, you're blinded from an important element of the investment process. We've seen managers who used to be all the way one way or all the way another way incorporate both into their investment process as a discipline. They might say, 'Hey, I think Tesla's going to sell this or sell that,' their quantitative model says something else—it's just kind of a devil's advocate check on their judgment. Because people fall in love with stories and they fall in love with companies, and CEOs can be very charming and tell a really good story. So I think the combination of having a discipline of the quantitative process with the judgment on the fundamental side is something that's very valuable. When we hire outside firms, those are some of the things we look for.

That's a great question. I think my children would wish I took some type of cooking class because that would have impacted their lives probably. But I would say the ones that I like now are on leadership, and those are some of the ones I took more in graduate school than I did in undergrad. It's about being a courageous leader. At the Boeing company, we've had to demonstrate a lot of that in the last year given the challenges I talked about earlier. It's about being empathetic to teammates and other co-workers for challenges that they have. Leading a team isn't just about—the best football coach isn't the one who just yells at the players, 'Hey, do better.' It's the one who really knows what motivates the players, is sympathetic when they're injured, or the quarterback throws an interception, isn't beating that quarterback up about it but just says, 'No, next time I'm going to call that same play and you're going to make the play. I know it, you're going to make the pass.' You guys all have had head coaches—the good ones and the bad ones. I've had bosses—the good ones and the bad ones. I think those leadership classes really help with the framework, but I also think you learn from the people around you, whether it be your teachers in the case of high school, or you'll see it in college, or your classmates, or in my case, bosses that I've had. You learn from really good teachers and good bosses about how to behave and how to treat people. But you also learn from the bad ones—there's learning experiences from bad bosses or bad teachers because you know, 'Hey, when I get to be the boss, I'm not going to act like Joe did or Sally did or Ralph because I didn't really like it when he was my boss acting that way.' So I think the combination of learning about leadership in the classroom but then also seeing it in the real world—you can learn a lot of lessons from both of those venues.

I've got about seven more minutes if that's okay.

My favorite part is twofold. One, the team I work with. As I mentioned, the hiring process—really smart people, half male, half female, very diverse, all kind of come to the world with a different perspective, all really smart. So engaging with those folks, Luke, every day we wake up and we open up the paper or the iPad and there's a new problem that the world is describing to us, and our job is to go figure out if that has an investment implication, and if it does, solve that problem. So I work with these 18 smart people—some of them are older like my age, some of them are younger closer to your age—and working with those people about defining the problem, solving the problem, debating what we should do is really fun. It's intellectually stimulating, you establish great relationships with these people, they become your friends. So I like that part. And the other part I like is with those 220 different investment management firms that I talked about, those external ones, I get a chance to engage with the best and brightest investment people in all those different areas. So the best venture capitalists who are trying to figure out the next Google, the best real estate managers who are building the next skyscraper or selling it, or the next mall—what are they going to do with this mall that nobody wants to go to anymore? The best hedge fund managers, the best bond managers we talked about—how are they going to manage this interest rate? I get to talk with those folks all the time, and they're specialists. So I'm kind of an inch deep and a mile wide in my knowledge, meaning I know a little bit about a lot of things. These folks are kind of an inch wide and a mile deep—they know a lot about one particular area of investment in one particular part of the world. And I get to engage with all those folks all the time. Not only are they incredible people to interact with, they're terribly interesting, but I get to learn from their insights in these different areas. And I think that's the favorite part of my job—interacting with the really intelligent, interesting people that I get paid to engage with. That's the one thing I would recommend to all of you. It's the old expression: if you love what you do, you never work a day in your life. You guys are all on this call already demonstrating your interest in investment. You're all smart, you're going to do really good at whatever you dedicate yourself to if you love what you do. You'll work hard if you love it, and if you work hard and you're smart, you're going to do well. So that's the one recommendation I would give to you: find something you love. The investment world's a big world, there's different buckets, different pockets of it. Find the one that you like and pursue it, because if you like it and you work hard at it, my guess is you're going to be very successful.

Well, thank you very much. I hope that was informative for everybody. And if there's ever any follow-up questions—I know I run into a bunch of you guys regularly—if there's any follow-ups, don't be shy. But I really enjoyed talking with all of you.

That sounds great. I'll bring teammates who are specific to asset classes you're interested in—some of those folks as well.

Thank you, thank you, thank you.