Oct 29, 2018 · 50m · capital-allocators
Karl Scheer – Competing Sensibly as CIO of the University of Cincinnati (EP.74)
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Ted Seides interviews Karl Scheer, Chief Investment Officer of the University of Cincinnati, exploring his career trajectory, checklist-free manager due diligence, institutional governance frameworks, and practical strategies for managing a billion-dollar endowment with a lean team.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 20.4% of the talking time here. How this is scored →
Ted as informed peer 4.2 Guest teaching 3.5 Guest disagreement 1.5 Ted pushing back 2.3
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 15:22 Absolute rejection of mediocre venture allocations
Karl firmly dismisses the common institutional urge to allocate to median venture funds, insisting that if an endowment lacks access to the top dozen managers, they should completely avoid the asset class.
Hardest push from Ted ▶ 31:53 Challenging confirmation bias in manager pursuitTed directly pushes back on Karl's aggressive manager-chasing strategy, asking whether spending years begging for access creates heavy confirmation bias that blinds the team to red flags during diligence.
Biggest teaching moment ▶ 40:56 Deconstructing the mathematical failure of endowment spending rulesKarl educates listeners on how rolling multi-year average spending formulas forced endowments to spend up to 10% of depressed 2009 asset values, permanently impairing real endowment capital recovery.
Ted holds their own ▶ 15:10 Probing venture peer return driversTed demonstrates his deep institutional knowledge of peer endowment performance, pressing Karl on how he explains trailing peer returns driven entirely by privileged venture allocations.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Karl Scheer's Early Career and Institutional Due Diligence Training | 4 | 3 | 1 | 2 | Ted guides Karl through his early transition from bike mechanic to VC analyst and fund-of-funds diligence at Russell and Pantheon. Ted probes on how Russell structured alternative asset surveys and how Karl honed his early diligence chops. | |
| Managing Family Wealth and Surviving the Global Financial Crisis | 5 | 4 | 2 | 3 | Karl details managing family office capital through the 2008 financial crisis and adhering strictly to a principle of avoiding venture capital unless access to top-tier funds is guaranteed. Ted asks thoughtful behavioral questions about managing client panic when severe drawdown risks feel existential. | |
| Transition to Cincinnati and Institutional Governance Setup | 3 | 2 | 1 | 1 | A brief setup segment covering Karl's move to become CIO at the University of Cincinnati in 2011 and inheriting an existing foundational governance model. | |
| Governance Dynamics, Strategic Restructuring, and Manager Selection Philosophy | 4 | 3 | 1 | 2 | Karl explains how clear delegation and offline information sessions maintain investment committee alignment without accidentally relinquishing decision-making discretion. He details cutting fixed income from 30% to 15% and leveraging alumni ties to access elite venture managers. | |
| Due Diligence Without Checklists, Fee Structures, and Discipline | 5 | 4 | 2 | 4 | Karl describes his manager selection philosophy, emphasizing eliminating bottom-tier managers rather than swinging for outlier homeruns, and avoiding bureaucratic checklists. Ted presses on whether begging for access introduces dangerous confirmation bias into subsequent due diligence. | |
| Endowment Spending Constraints, Portfolio Concentration, and Capital Allocation | 4 | 5 | 2 | 2 | Karl critiques the traditional 5% endowment spending rule as mathematically flawed in volatile and low-return regimes, highlighting how backward-looking averages drain capital after drawdowns. He also outlines Cincinnati's concentrated hedge fund portfolio paired with low-cost passive indexation. |
Statements from this episode (18)
Scheer: Teams should ask junior members to speak first after meetings
“They believe that the youngest person should talk first, right? After a meeting, ask the youngest, newest person what his or her opinion is, and you start to train people to have good opinions and so forth.”
Scheer: Avoid venture capital entirely unless you can access top-tier managers
“One key takeaway from my time in venture capital world is if you can't be with the best manager, don't do it. Not, don't spend much time on it or try to find a fancy way to, don't do it at all. Don't bother.”
Karl Scheer: Co-CIO structure is suboptimal and duplicates one job
“Tim Cavanaugh and I were co-CIOs, and that was fine. We made it work, but it's not an optimal structure, and either of us could have done the, basically two people doing one person's job.”
Scheer: Investment committees cannot effectively pick PE managers in quarterly meetings
“I think it's extremely difficult, if not impossible, for a committee to pick private equity managers in quarterly meetings. I don't think, for example, that works very well.”
Scheer: Cincinnati endowment halved fixed income allocation to 15% in one year
“We had, I guess I'll just get specific, we had about 30% in fixed income when I arrived, and we dropped that immediately to 15%. When I say immediately, we had a responsible staged migration that took about one year”
Scheer: Whipsawing during strategy changes is the most frequent cause of permanent capital loss
“There's only a few ways to lose money permanently fraud, buying something at an outrageously high price, excess of concentration or leverage. But the big one that everybody that happens the most frequently is whipsawing yourself and changes in strategy are whe…”
Scheer: Made his first venture capital commitment in 2018 after ten years
“I have made my first venture capital investment about four months ago since I became a CIO in 2008.”
Scheer: Cutting bottom-third PE managers elevates median picks to near top-quartile
“The way we look at private equity is if we can do nothing for the wrong reasons and make all of our decisions for the right reasons, Then we can probably cut out the bottom fifth quarter, maybe third of the distribution. In which case, if we pick median now, a…”
Scheer: Resetting high watermarks totally misaligns manager and investor interests
“You can't have a resetting high watermark. It's a total misalignment of interests.”
Scheer: University of Cincinnati endowment will never do another staple deal
“I'll never do another staple deal again.”
Scheer: The largest fund managers are clever at charging hidden fees
“The largest fund managers not only have astronomical fee revenue streams, but they're also the cleverest people in the world about charging fees that we can't see. And I don't want to play that game with them.”
Scheer: Checklist-free, bespoke due diligence outperforms rigid box-checking
“I think it's valuable to Make it up as you go along because it allows you flexibility to adapt to changing market environment, to identify the key issue or issues at each individual firm, and every one of these is different, and also enables you to learn each …”
Scheer: Endowment spending rules should drop to the 3% range
“The five percent spending rule makes absolutely no sense for about the last 20 years. And so a lot of folks are addressing that by reducing their spending policies. I think four is the new five among endowments. Should probably be three handle and I bet it wil…”
Scheer: Moving average spending rules effectively doubled drawdowns after 2008
“After 2008, people were spending five percent Based on the last couple of years values, which was 10% based on their 2009 values. And so what that does is it takes a significant number of dollars out of the endowment. So it is very difficult to recover. The nu…”
Scheer: Cincinnati endowment lost 40 basis points on a due diligence miss
“We invested in a hedge fund that was a low volatility hedge fund that had an outsized position in it, which I failed to identify during due diligence. It ended up costing the portfolio something like, I think, 40 basis points at the top line. So not a big deal…”
Scheer: UC endowment caps hedge fund portfolio at 10 positions
“In our hedge fund portfolio, we have 10 positions. And we think that 10 positions is about the right amount of diversification. It's about the maximum amount of diversification in order for us to be able to monitor and manage and understand and know those hedg…”
Scheer: Outperforming the S&P 500 makes no sense today
“It probably makes no sense at all to try to outperform the S&P 500 today. Similarly with our fixed income, we want to get it right one time and move on.”
Scheer stops reporting one-year returns, urges Big 10 endowments to follow
“I have ceased to show anyone one year returns versus peers, and I hope that a bunch of Big 10 endowments and those like UC that are kind of on the periphery of Big 10 endowments have agreed never to provide Nucubo, for example, with one year returns, because w…”