The Exchanges

Q So to figure out all these signs of the apocalypse, you had to start somewhere at a business school. So why don't you take me back to your investment experience?

A I interned at Putnam Investments and loved it, thought it was an amazing experience, but ended up at a firm, RS Investments out in San Francisco, which is the old Roberts and Stevens funds, and I had a couple choices of where to go. A big firm like a Putnam or a Franklin Templeton or a boutique like this that's owned by the managers that had a smaller lineup of funds, and Andre Parole, my very wise advisor who I Idolized after taking his class said, obviously you go to the boutique firm. And I think what appealed to me at that time was just the entrepreneurialism of going to a smaller place where they said, if you see a nickel on the floor, go get it, go pick it up, it's yours. So there weren't as many rules about what you could do, what you couldn't do, what you could look at, how you could add value, and that seemed exciting to me. 2627 years old, you're like, that's what I want. And I was there 11 years, all the way until I went to Rice University to become the CIO.

AI assessment note: “I interned at Putnam Investments and loved it... ended up at a firm, RS Investments”

Q When you started, you held some of those assets. How have you evolved to expressing the real assets portfolio today?

A We've always held a significant portfolio of directly owned assets in those areas that we manage internally using consultants on a very cost effective basis. And not only are the consultants cost effective, but just the fee burden avoidance is very effective. And I think we have stuck with that strategy and where it made sense, taken some more things in. We have been opportunistic as well on co-investing where that's made sense. With managers in projects that I guess I would say are follow that high yielding, high margin of safety, 10 to 14% returning projects. So not trying to get 25% IRRs and living in the world of the most aggressive projects out there, building hotels and drilling oil wells. Not at all what we're doing, but more on the infrastructure side. The other thing is If you're awake and alive right now as an institutional investor, you must have a view on the carbon situation, global warming, greenhouse gases, etc. And Rice, I am very happy to say, has walked a good path on this in the sense that we have decided that the university will become carbon neutral by 2030, but additionally, the endowment is committing To make its oil and gas assets also carbon neutral by that same date. Now we will have to buy offsets in order to do that, but we have been engaging versus divesting. And so we spend a tremendous amount of time talking to our investment partners, talking to …

AI assessment note: “We have been opportunistic as well on co-investing where that's made sense.”

Q How did you find your way from RS back to Rice?

A I got a call from the headhunter, and they said, we're looking for names and ideas about who might be a good chief investment officer for Rice. They really would like someone to stay. It's in Houston. Do you have any ideas? And tell us what you've been up to. And I said, I can tell you what I've been up to, but I don't have a resume. I haven't interviewed in 11 years. I'm a partner. But I think it was such an intriguing conversation as it unfolded, thinking about this is basically the dream job of most people who are long-term investors, right? You have one client. They know what they need. They know what they want. They have a very long time horizon, and if you come in and do a great job, you can have a tremendous impact on affordability at the university where you attended, and so it was just too magical to not go after it, and so what I said to them is, hey, if you find somebody better than me, I'm an alum. I want you to hire them. Go for it, but I think I could do a good job at this, and this is how I would approach it, and there I was. I ended up with the job, which is Still gives me chills. I'm like, how did that happen? I don't know.

AI assessment note: “I got a call from the headhunter, and they said, we're looking for names”

Q And has that been a conscious choice to be in real assets?

A It's been a conscious choice to be in real assets, and then it keeps self-reinforcing via what we see from the bottom up. So from the top down, what we loved about it was you have a margin of safety because you have a real asset, right? You have an asset that has a liquidation value. It is not goodwill, brand, etc. You have tangible, real things like forests and trees and mineral royalty rights and real estate, and those could be sold. They don't go to zero. The other thing they do is they pay dividends, and in this last 15 years, there's been no coupons anywhere, and we're a spending institution, and so you looked at these portfolios and say they yield over this decade probably two or three X the S&P 500. Currently, they're yielding four X or five X the S&P 500, and it makes it very hard to sell because they're fairly lowly valued on an EB to EBITDA basis. Or even on a market value to book value or residual value or salvage value, and then they generate cash. I think that's one of the reasons we felt like it remains a place where the university sees opportunity.

AI assessment note: “It's been a conscious choice to be in real assets”

Q Why don't we go back to your path to getting into investing?

A Right. I'm going to have to look back to Merrill Lynch investment banking days, and it was an interesting time. I worked at Merrill straight out of undergrad in Houston, Texas, and Merrill Lynch had a large office, like, 25 bankers at that time. That was a big office for Houston, so they did all their deal execution out of Houston. So it was a great experience. Those guys were the Enron bankers. John Olson sat down the hallway in an office, and that was a really tense relationship. John Olson had to sell on Enron. And the bankers who were the bankers to Enron. And watching that said to me, I do not want to be an investment banker or a sell side analyst. And so I went to business school. And at that time people said, hey, you know what you ought to think about? Maybe you should be the person sitting on the other side of the table. You sound a lot more like those people than you do like us.

AI assessment note: “I'm going to have to look back to Merrill Lynch investment banking days”

Q What was the history of how Rice invested before you got there?

A I don't know if this is true everywhere, but it's a board-driven strategy, and it's you get what you were given and you don't really sell it. So we are the proud owners of a wide variety of assets that people have given us, and it wasn't until maybe the last 10 or 15 years that we've done much disposal of assets that have been given to us. Although Yankee Stadium, which was owned by Rice, was given to us by an alumni In the sixties, we probably would have kept holding it, and I would have inherited it, if not for eminent domain. So it was, uh, recaptured for a giant renovation project, and Rice was forced to sell Yankee Stadium. We still own the original forest that William R. Rice gave us in Louisiana, 50,000 acres of timber forest, and we own parcels of land that notable Houstonians gave to the university, and that's just how boards do it, I think.

AI assessment note: “it's a board-driven strategy, and it's you get what you were given and you don't really sell it.”

Q What have you found from doing that research on energy transition over the last year, year and a half?

A It's a total sea change in terms of corporate America and big companies appetite for solutions. So 10 years ago, there was relatively limited interest from big companies about greening and cleaning up their footprints. And so if you could offer a cost superior and scale solution to them, they might buy it. Today, I think even big companies will take an experimental contract with someone who can help them. Clean up their footprint and make it more green and more friendly. And whether that's because those managers are younger and they believe in it, or because the customers of the company believe in it, or because government regulation is coming, I don't know, but it enables businesses that would not have possibly been able to get started to become viable today. I think with every year that goes on, that's becoming more true. And we're really at a phase that there's a lot of early stage things going on that That may pay off, but almost require venture philanthropy to back them. And then there's a lot of very late stage things that are totally predictable that you can put big dollars to work in that are infrastructure returns. And in the middle is this enormous swath of companies that probably are going to offer great returns, but also have a lot of science risk or execution risk in them still. And so we're trying to learn more about what risks are we willing to take.

AI assessment note: “It's a total sea change in terms of corporate America and big companies appetite”

Q How have you created the incentives for the people on your team?

A So I don't believe in silos. Whether that's good, bad, or indifferent, my view from watching it at RS was it incentivized not sharing of information, and the more that you have a diffused team that is getting information from wildly different sources, but that needs to collaborate. If you manage in silos, there's no incentive for collaboration, and our team is too small to, in my opinion, to have those information silos, and so we have incentives That are much more around one team, one portfolio, right? So if you and I were on the team and you had a great year and I didn't have a great year, we do the same. And because most likely next year I'll have a great year and you won't. And I want both of us motivated all the time, but it's also hard to make sure that you don't have the free rider problem in that type of situation.

AI assessment note: “we have incentives That are much more around one team, one portfolio”

Q I have to ask you about your public equity portfolio, given your experience. So what do you believe about how you should execute in the public markets?

A World's most frustrating market ever. In general, we believe that it matters what you pay for investments. And from that statement, you can assume that our public equity portfolio has not outperformed over the last three to five years. It's just a mathematical reality, which is if you believed in any value or GARP orientation, you have underperformed. You needed to be a momentum investor In your asset allocation, as well as owning those type of managers. We have struggled with that, and we're actually revisiting our public equity portfolio strategy right now because it just continues to be a giant issue, which is most managers do not outperform the indices, and therefore why would you not be better off paying two, four, six, eight basis points and just indexing? On the other hand, one of our most Successful and impressive managers has managed to outperform the S&P 500 consistently every year. So I do believe it's possible, but it's very hard to find the needle in the haystack.

AI assessment note: “In general, we believe that it matters what you pay for investments.”

Q She spent a little over a decade working at a manager, a little over a decade investing in a bunch of managers. What have you taken as best practices that you're trying to implement?

A That no silos, close team, all pulling the boat in the same direction was one of the core tenets. No yelling, no bad behavior, no bad actors. It's just so disruptive to a team dynamic. The communication is one that I haven't seen a lot of great best practices on that one, and so it's one of those that we're working on on our own. One of the other things that I learned being a direct investor is that the information can change, and you need to be flexible enough to change your mind, so this is always be curious. You're always looking at the data and reserving the right to change your mind, because sometimes you're just wrong. I do think it's something the allocator community Maybe doesn't have as much experience with as a direct investor would, right? Because when you're a direct investor, you have a faster cycle time because it's not in a portfolio. You get one investment, one P and L for each investment. And it's much more clear to you more quickly that you have made a mistake. And it's clear to everyone else that you'd made a mistake. Whereas when you're allocating to a portfolio, so it takes a longer time for the portfolio to look bad, even if there were some things in it that were bad. And honestly, what's bad? What if it Is a 1.6, but it should have been a two X. You can't really prove that it wasn't as good as it should have been. And also you can blame the manager. And s…

AI assessment note: “no silos, close team, all pulling the boat in the same direction”

Q So there's a corollary in saying You need to get close to the investments, but you're the coach, not the player in your time at RS, which is there's some people that say, well, you really should have operating experience to invest in stock. So how did you think about how you want to spend your time?

A That's such a good question. And I'm quite sure some of the CEOs thought, why is this person allowed to ask me questions anyway? Right? I mean, that's the nature of those conversations always. You can get too close to the situation, right? There's the hammer nail problem. And some of the time in being a portfolio manager or a stock picker, you have to just let something go. And I think the closer you are to an operator, the less you've been trained to let something go. You're at one company and your job is this one company and make it work. And the reality is You're a portfolio manager. You have at least a hundred choices across the sectors you cover, and many hundreds if you're at the portfolio level, and now at Rice, it's a global, anything goes that it wouldn't do harm to the university type of mandate, and so I almost feel like being too deep into one industry or company could be a disadvantage.

AI assessment note: “I almost feel like being too deep into one industry or company could be a disadvantage.”

Q What are some of the other asset classes or categories you're investing in that are on your mind?

A I love the tech rec story, right? Maybe everybody loves it. I don't know. But for me, it's not really about the magnificent seven tech stocks, even though I think it's important for them to have done what they've done. The year of efficiency and really show smaller cap companies and show all the private startups that you can run your business more efficiently and do well for yourself and do well for your customers. What Meta did this year is pretty important as a signpost. But for me, I look at that sector and I say, all right, we went from five to seven times EV to revenue multiples for enterprise software companies to 20 times, and now we're back to five to seven times. But over the, say, 23 years dating back to 2000, software is eating the world, and software is gaining share, and technology is continuing to become a deeper and deeper embedded part of all of our lives, and so I cannot help but believe that there are some babies that were thrown out with the bathwater in this pullback. And so we're looking across our portfolio where we have the most tech and saying, how do we take advantage of that? So Publix and Alternative is a little bit, but also a venture capital and saying, how will we position ourselves? So we've done literally hundreds of meetings on this topic.

AI assessment note: “I love the tech rec story... Publix and Alternative is a little bit, but also a venture capital”

Q So when you came into the seat and started structuring the portfolio, how did you assess our risk reward and liquidity?

A Rice is highly endowment dependent. It's 40% of the budget is covered by the endowment. And Rice charged no tuition through 1965. So from 1912 to 1965, if you could get in, there was no tuition. And I bring that up because it's part of the DNA of the school, that we are highly, highly about affordable education. And in fact, even today, you pay nothing under 70,000 dollars, which is true in many of the Universities that are fortunate enough to have large endowments, but Rice has expanded financial aid to the point where you don't pay tuition up to about a 120,000 in household income. That's one of those core things that's important for a CIO to know. If there are extra returns, they're going to go towards subsidizing tuition, towards growing number of seats so we can take more students in at an affordable price. It's a really interesting conversation, which we've been having again as we have inaugurated a new president a year ago, which is if you're highly endowment dependent, should you take more risk or less risk? It's not totally clear what the answer to that question is. You might say we're highly budget dependent on the endowment. We should take less risk and make sure we can always pay the distribution. But on the other hand, over long periods of time, that's disadvantageous because you really need the returns. In order to enable your school to grow and keep up with infla…

AI assessment note: “if you're highly endowment dependent, should you take more risk or less risk?”

Q One of the other areas when you think about this return profile, the yieldee, as opposed to the growthee, is this whole area of hedge funds. And it's changed a lot. How are you participating in that space?

A This is like, you're the expert, and you're asking me? I don't know, Ted, how should I deal with it? We have, for the good or the bad, really not participated in the pod model, multi-manager model, and so I'm intrigued by it. I always want to learn more. I think this is one of those things where I'm like, we haven't done it. It doesn't mean it was a bad idea. The numbers are good. Let's look at it again. But at the end of the day, if I cannot explain it to my board, it's pretty hard for me to participate. Hedge funds are the least liked asset class by the rice board, and so I think it's a hard asset class to Defend, too, because it's every flavor out there. Private credit is sometimes in there, and unloved loans is in there, and royalty structures are in there, and then long short is in there, and long bias, and macro. I find it one of my more challenging conversations is to say, here is what we are trying to do at Rice in this portfolio, and what you as a board should expect from it, and what we as fiduciaries should target from a return standpoint in the bucket. One of the unresolved questions that our team has is how does a higher rate environment impact the hedge fund industry and the managers more specifically? You would think that's a simple question and I have not gotten a simple answer.

AI assessment note: “We have, for the good or the bad, really not participated in the pod model”

Q One of the things you've done as well within the university is manage the debt of the university. How has being involved in the fixed income markets for the university impacted how you think about the endowment?

A What we do very well is we interface with the outside world, and we negotiate with them. Our job is to make sure that the outside world is not giving Rice University a bad deal, and that's not a core skill set that most people on the university administration side have. They're mostly running the internal operations of the university, and I think that's one role that we get to play. I had a very visceral view of the university's debt portfolio when I came in, and I think the President and others agreed with me, which was, look, we have a fairly simple and stable business, and we use debt financing to finance very long-dated capital projects like dormitories. We should have the most boring portfolio of debt ever. It should be long-dated, and it should be a fixed rate to provide budget certainty. If we're going to take risk, we shouldn't be taking it in our financing structure for the university. And so we have unwound variable rate demand bonds that someone sold us once, and All sorts of things that were good at the time, but added complexity to the university, and so we now have an extremely boring portfolio at a great fixed rate, and that is what it is.

AI assessment note: “If we're going to take risk, we shouldn't be taking it in our financing structure”

Q As you look out over the next, say, 10 years of your time at Rice, what are the things you'd like to be diving into that you haven't yet?

A I'm personally very interested in the governance topic. I thought at one point while I was at business school about going to get a PhD and got as far as applying, and it really wasn't the path for me because they said, you need to drop out of your MBA, and I was like, why would I ever drop out of my MBA and not complete it? And they said, that means you don't really want a PhD, and I said, okay, I guess that's true. If those are the conditions, I don't want one. But people very much do what they're incentivized to do. I think one of the things that makes your institution's unsuccessful over long periods is governance. And I think that's true at companies, too, and so it's an interesting area that I would be intrigued in learning more about.

AI assessment note: “I'm personally very interested in the governance topic.”