Wharton is fortunate to have alumni who embody the highest standards of leadership in business and society — including past Joseph Wharton Award recipients such as Victoria Mars, WG’84; Ken Moelis, W’80, WG’81; and for 2020, Dawn N. Fitzpatrick,
Dawn worked hard for many years not knowing where her career would take her. She began right out of Wharton working for O’Connor & Associates on the trading floor of the American Stock Exchange and then quickly moved to the Chicago Board Options Exchange. She honed her skills and leadership style to become Chief Investment Officer (CIO) and Head of UBS O’Connor in 2007. In January 2016, Fitzpatrick added the role of Global Head of Equities, Multi-Asset at UBS Asset Management, and then became Head of Investments responsible for overseeing more than $500 billion in assets. In 2017, Dawn was hired as CIO of Soros Fund Management.
What is the background of Soros Fund Management?
Soros Fund Management (SFM) is today a family office. It was founded by George Soros in 1970 as a hedge fund. We manage approximately $25 billion primarily on behalf of the Open Society Foundations (OSF), which George founded. OSF is one of the largest foundations in the world, and our mission is to support the roughly $1 billion annual spend.
The foundations we serve are a big motivator for the team — when we invest wisely at SFM, we can magnify the ability of OSF to effect good throughout the world. We see that work as being grounded in giving people a voice, preserving human rights through government accountability, providing scholarships and supporting the media.
What is unique about your investment style at Soros Fund Management?
Most pools of capital managed by asset managers tend to be tethered to a geographical area and a specific asset class. Usually an investment fund serves hundreds, if not thousands, of clients. SFM is a unique platform in that we have a very large pool of capital and primarily manage the assets of a single highly sophisticated investor.
Over a market cycle, other endowments typically aim for returns based on investing 60% of assets in equities and 40% in fixed income. At SFM, our goal is to produce returns higher than the 60/40 archetype, both in absolute and risk-adjusted terms over a cycle. There are moments in time we expect to deviate materially from a 60/40 construct, meaning we intend to move around risk significantly more than a typical foundation or endowment, and play to our strengths as an active manager.
The SFM platform gives us the ability to be dynamic and empowered to act fast. For instance, as CIO, I oversee investments directly into specific private or public equities, loans and projects, or I can allocate externally to asset managers who excel in specialized markets. Not a lot of pools of capital are able to invest with such degrees of freedom — across asset classes and duration — and with true nimbleness. We are a 230-person firm that has the sophistication and the expertise to do that.
What are your key areas of focus as a foundation CIO?
I began my career as a trader on the trading floor of the Chicago Board Options Exchange and then spent the bulk of my career running a successful hedge fund. My background has allowed me to think about asset allocations from a top-down construct similar to a big college endowment CIO, and I also have a bottom-up lens, given I spent a significant part of my almost 30-year career making decisions at the security level with cross-asset-class experience. So, I can combine those two approaches, which may be different from a typical foundation or endowment CIO. It plays to SFM’s strengths and point of differentiation. As a comparison, UPenn’s endowment makes big investment decisions, but almost exclusively through outside asset managers and doesn’t deviate materially from the broad risk construct of 60/40 of peers.
With such persistently low interest rates, it seems wise to challenge the 60/40 rule.
Yes, given where interest rates are today, my view is 60/40 will be challenged to produce the necessary returns for most institutions, going forward. Thus, we increasingly focus on an area in which we have excelled — security selection. Buying assets that are inexpensive relative to fundamentals and selling or shorting those that look rich. COVID-19 has accelerated secular trends. A silver lining has been it made 2020 our strongest year for picking stocks specifically and creating a robust active return backdrop generally. While passive investing has grown significantly over the last decade, my view is that security selection and active management are going to be increasingly critical to produce good returns for large investors, going forward.
Also, at a high level, there are moments in time for investors to be patient, and moments to lean into markets. I think it is important to be mindful that markets today are more subject to liquidity gaps (sellers being unable to find buyers at a reasonable price or vice versa). Due to the post-2008 financial crisis, there have been material changes to the overall market structure. My view is that, more than ever, a key to driving long-term attractive returns is positioning a portfolio to capitalize on that volatility. You must be willing to take risks in excess of 60/40 when buyers are difficult to find, and as such, market prices have become unhinged from underlying fundamentals. On the flip side, you must choose to take less risk at times, especially when fear of missing out (FOMO) dominates over rational thought.
There is a natural ability in most endowment and foundation models to buy low and sell high as a function of asset class rebalancing. The SFM team has some uniquely enhanced abilities to capitalize on the weighting and reweighting of underlying portfolio building blocks.
For example, we can adjust the portfolio based on changes in the opportunity, set extraordinarily quickly in moments like March 2020, and supplement returns driven solely by the broad direction of markets with active investing, making us less prone to have to ride over extended market moves.
I reinforced the importance of working together consistently to combine knowledge and solutions. If you can have a team that knows the equity of a company really well and a credit team that knows that same company’s debt structure, you can drive a better outcome both for your clients and for the companies you are investing in.
What are the time horizons for SFM investments?
We have teams with very different time horizons. We have the ability to make 20-year investments or longer if we believe we can earn excess return for doing that. We also can invest for just days or weeks. We look at the stand-alone returns of strategies and the correlations between those strategies. If you have two strategies that both can earn 10%, but over time, when one has a bad day and the other has a good day, then together, they are significantly more valuable than they are on their own. Part of what I do as CIO is to construct a group of investment strategies that on their own look interesting but together can look outstanding.
How does the pairing of different strategies work?
When you think about owning something in your portfolio, if there is a lot of volatility, it feels unsettling. Studies have shown that your displeasure of losing a dollar is more intense than the pleasure of making a dollar. So, if you can combine strategies, where they balance out, then individual investment theme volatility matters less. Don’t dilute the return, but dilute the volatility. It’s better as an investor, not only psychologically but also in reality.
What type of transformation, as a leader, did you bring at SFM?
One of the first things I did was to clearly define SFM’s competitive advantages and to make sure that we positioned ourselves to capitalize on them. To execute on those advantages, we recognized that we needed a strong culture and a cohesive team. It would give us the ability to connect the dots across geographies and across asset classes and make smarter decisions in terms of the aggregate results we were trying to drive for OSF. The platform had tended to be more siloed, so it was a big transformation. SFM had great teams that focused on private and public equities, and strong teams that invested in corporate debt and loans, and I reinforced the importance of working together consistently to combine knowledge and solutions. If you can have a team that knows the equity of a company really well and a credit team that knows that same company’s debt structure, you can drive a better outcome both for your clients and for the companies you are investing in.
Can you give an illustration of that?
There was a California utility company that had to raise a significant amount of capital, about $300 million for statutory capital expenditure purposes, and needed to raise the money within a short time period. Its deadline arrived, a Friday in June. While historically these raises had been easy for it, this time, due to a confluence of events, it seemed unable to raise the capital that it absolutely had to raise. The SFM portfolio manager who heads our investment-grade corporate debt portfolio received the phone call, and he did not know the utility company that well. But sitting next to him was a portfolio manager who specialized in investing in utility equities, and who knew the company extraordinarily well, happened to be long on its stock, and was able to brief the corporate credit portfolio manager on that company that it was in solid financial condition.
Because we can invest in the long term, we did not need the bond to trade in the open market after we purchased it. With the right interest rate attached to the bond, we would be happy to buy all $300 million and hold the investment until it naturally matured. We told the utility firm that we could lend it all of the money it needed, but also its underwriters could try one last time to syndicate the loan to other buyers if it could get a better interest rate. Our view was, once we jumped in the pool, other lenders would decide the water wasn’t too cold, change their mind and join the deal. Ultimately, the utility was able to borrow more money than it needed, and it was a win-win. It showed that having two portfolio managers from different teams allowed us to backstop what ultimately was a $500 million transaction within a matter of hours on a quiet Friday in the summer. We bought bonds that were profitable, and we earned goodwill as a true partner with both the utility and the investment bank underwriter.
Another transformation is having added more systematic investment capabilities. I’m a big believer that running models alongside human-led strategies makes both better.
How did you lead these changes?
Transparency about what we were doing and why we were doing it, and aligning around our core values of integrity, teamwork, humility, owner’s mindset and smart risk taking. I believe the team has bought into our strategy, understands why playing to our strengths is important, and how our culture drives our ability to leverage those strengths.
For me, being an authentic and consistent leader and making sure my actions represent and reinforce the values I advocate are imperative. Communicate often, celebrate team successes, allow failure when work was done well and learn continuously from all. You need to know who you are and not try to be someone else. I think part of being authentic is through your actions and not just words. I’ve tried to be true to who I am. I prefer to be liked, but I have never needed to be liked. There have been moments in my career that have been both difficult and lonely. That said, being steadfast in the end has always served me and those I have worked for well.
Did Wharton play a foundational role in your career?
Yes. When I was at Penn, I ran track and cross country. I was a competitive distance runner. When you run, you learn to persevere. If you want to be good, it is a necessity to be able to outwork competition and power through low points. Through that experience I gained at Penn, one of the promises I made myself early in my career was, if I ever decided to change jobs, I would only do it on a high, and if I failed, it was not going to be from lack of effort. After graduating Wharton, I found my first two months at O’Connor, an options trading firm, to be difficult. I had classmates who had taken investment banking jobs. They were working in fancy offices and taking booze cruises at night, while I was up in the attic of the American Stock Exchange matching up paper trading tickets as a clerk and studying option theory at night and on the weekends. The decision to resist the urge to tap out — to go do something seemingly easier — has served me well through my career.
You know yourself that there are so many exceedingly bright people at Wharton. As trite as it might sound, in my view, what differentiates those who succeed is simply work ethic and grit. The only way for me to have that drive, is to love what I do. This industry, I do love, because every single day I get to work with incredibly smart people and learn something new.
— In 2015, In 2015, The Hedge Fund Journal put Dawn Fitzpatrick on the put Dawn Fitzpatrick on the list of 50 leading women in hedge funds, and list of 50 leading women in hedge funds, and American Banker put her on their list of the 25 most power put her on their list of the 25 most powerful women in finance.