The Exchanges

Q When you start out that portfolio and you're looking at the world, there are probably some similarities, differences. Competitive advantages you wanted to lean into. Walk me through the design of this and how you've implemented it. What's similar from other pools and what's different?

A What's similar is we have equity-centric portfolio. Just like any other endowment, we need to generate a five percent plus real return. You can't do that any other way than investing in equities. We use primarily outside managers. Those two key tenants are pretty similar. What's different are a couple of things. One is we are resource constrained. It's been a team of mainly five investors since day one. When there's just five of you, you can't do everything. You have to make a choice about things to leave out. Because you're leaving out a lot, you really have to be focused on picking the right things to lean into. Our portfolio probably looks a little bit different in that there's a lot of things that we've decided to not spend our time on. Because we believed we'd be better spent spending time elsewhere. Things like private credit, China, Latin America, Africa. We decided to keep focused on other areas of opportunity. The other real difference in our portfolios that's significant is we have less illiquidity risk. We only have about 20 to 25% of our portfolio in private assets. Some of that is a structural constraint that we have, which is that most of the assets that we manage are actually not true endowment assets. They're balance sheet assets. There's not a statutory constraint. Elroy Demson is a researcher. He wrote a paper a few years back. One of the things he looked at w…

AI assessment note: “What's similar is we have equity-centric portfolio... What's different are a couple of things.”

Q It feels like today there's either a lot of simmering or a lot of burning across a lot of areas, private equity, private credits, and emerging markets, U.S., Where are you thinking about diving in to do research?

A Some of it is in our own kitchen. India right now is going through a very difficult period. It's got a double whammy now of being in the crosshairs of AI because of IT services and the huge part of their economy that that sector represents. It's got the risk that it's facing from the Iran war, where it's so dependent on Middle Eastern oil, gas, and fertilizer. That's a place where we're spending a lot of time to underwrite what we have, to be ready as dislocations there might increase. We have been positioning our credit portfolio to better take advantage of dislocations. We've done a fair amount of work to be well positioned for what's happening in private credit. We recently reconfigured that part of the portfolio, added a new manager. We have capacity to add there. That's where there'll be tons of interesting opportunities. There will be indiscriminate selling in private credit. There's good reasons why many of those companies will be sold, but there'll be many reasons where it's just liquidity that's driving prices down. We're excited about opportunities coming from there.

AI assessment note: “That's a place where we're spending a lot of time to underwrite what we have”

Q What was different for you in what you saw from the years spent managing fixing portfolios with those two bookends of Columbia at the beginning and then Virginia afterwards?

A I came at it from a quantitative background. My interest in this all was fixed income was easy because you had closed form equations that could solve the pricing. When I got to UVA, I understood how so much alpha was generated by being able to have a more creative thought process about asset pricing. This was when the Tiger Cubs were at the height of their powers. Being able to look at the Lone Pine portfolio and see how Steve Mandel and his team could see into the future about What these high quality businesses would be worth was eye-opening. It was a completely different model for making money than I had understood in the past, and it was so much more potent. It lit a fire in me as far as thinking more creatively about investing, which fit my personal background really well.

AI assessment note: “It was a completely different model for making money than I had understood”

Q decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now back to the show. I'd love you to dive into the concept of limited time, limited resources, have to focus on the things that are most interesting. How do you go about deciding where to spend your time and energy?

A Primarily, that has come from our relationships with our managers. Some of that has also come from our own research. An example of the latter would be When we started, if you looked back on the last 10 years of our peers and where overseas they had generated all the returns, it really was in China. From the beginning of the admission of China to the WTO to 20 15, that was where the golden years of both the China economy and investing in China. That's right when we started, and we look back, you could see some of the political winds changing in China. You could see some of the political winds changing in the U.S. in regards to its relationship to China. It was also clear to see that that opportunity wasn't the same as it was in 2005. We then started to think about where that opportunity might be. We spent a lot of time in India. Since 2018, India has been Our largest overseas allocation of any region or country. That was primarily driven by an internal iteration of our own research. We've been fortunate to work with some managers who, this is a rare skill set, can see where economic value creation over the next 10 years will be. There was an individual named David Mock, who had done an amazing job at Hill House riding that China wave. We backed him day one when he launched his own fund, Composite Capital. Within two years, he had stopped investing in China and pivoted his portfo…

AI assessment note: “Primarily, that has come from our relationships with our managers. Some of that has also come”

Q If I told you today, hey Bruce, it's time to sell the entire portfolio again, take out liquidity restraints and things like that, but you could rebuild it tomorrow. How different do you think it would be from today's portfolio?

A One of the big changes would be in our private portfolio because we have such a limited private allocation. We try to focus on where the most asymmetric return opportunities are. I do think our venture portfolio has many great managers in it. I don't think we've leaned hard enough into the asymmetry. We should have more managers who are at that smaller level of the fund sizes, two hundred million and below, where their outcomes could be a 50 X or an 80 X. There's good reasons to invest with established managers. You end up paying a lot in fees for returns that might be available in public markets. Might be a better fit for our portfolio to just have a little bit more of that emerging manager risk or smaller fund risk Because the payoff when it works can be so much greater. That's probably the biggest change we would make.

AI assessment note: “One of the big changes would be in our private portfolio”

Q With that early experience, multi-asset class endowment, how do you think about what you wanted to do after business school?

A I stayed on the fixed income path. I still had this passion for understanding interest rates. I also thought of myself more as a quant. I liked the closed formed equations of fixed income land. You can answer the duration question and price a bond very clearly, whereas equity seemed more mysterious to me. I focused exclusively on getting fixed income jobs, and I ended up Getting a job at Putnam Investments, joining in August of 98, right before the long-term capital crisis. My initial boss there was this guy, Krishna Mamani, who has since went on to become CIO at Oppenheimer Funds in the fixed income group and is now CIO at Lafayette. He was a great mentor. Unfortunately, I only worked with him for a short time because Putnam stubbed their toe in the long-term capital crisis. They had a big Reorg. The work that Krishna had me doing fell perfectly into this group called the Global Asset Allocation Group that was run by Jeff Knight. They didn't have anybody who knew fixed income. If you think about the Global Asset Allocation Group, their alpha driver was this global tactical asset allocation model that they used to trade futures. They traded all the major G seven markets, both equity and fixed income. A big part of their alpha driver they had no expert in. Finally, my fixed income expertise became relevant and helped me land on my feet in that particular role.

AI assessment note: “I stayed on the fixed income path. I still had this passion for understanding interest rates.”

Q What's special about that mission as you think about managing the endowment?

A VCU is a public university in the state of Virginia, but it plays A much more traditional role of a public education institution. It tries to serve the less traditional college student. For example, more than a third of the undergraduate student body of 30,000 people is first gen. More than 70% have some kind of job while they're in school. It's a majority minority undergraduate student body, and it's predominantly in-state students. It's a unique mission among the established endowment world. It gives us a lot of purpose because when you're running that kind of institution, it's not like you have a legacy of great donors that can provide a cushion to the university. Every dollar that we generate and returns has a profound impact on the university's bottom line. Even though overall endowment spending is single digit percentage point of overall university spending, every one of those percentage points matters. We also manage money for the health system that's affiliated with VCU. That plays a similar role. It's the designated indigent care provider. Every dollar that we earn, we have a sense of impact in everything we do.

AI assessment note: “Every dollar that we generate and returns has a profound impact on the university's bottom line.”

Q How do you balance where you want to look for secular tailwinds and just global diversification saying you may not be right in picking those secular tailwinds?

A It is a balancing act. We view it as there's a huge part of the portfolio that just needs to be generic US equity risk. When we say a huge part of the portfolio, 50% or more has to be generic US equity risk. We invest on the behalf of a U.S. institution. Their expenses are dollar-based. We don't want to have too much overseas risk. It's thinking about, in the global opportunity set, call it 50% U.S., 50% rest of the world. Let's be smart about what that 50% rest of the world is and tilt the portfolio that way. The way endowment portfolios work, if you have long, short, or hedge funds, you're not a hundred percent exposed to any market. What we are is 50% U.S., 30% other, with the rest being manager held cash, short exposure, our cash. When I was at Putnam, if you were a smart international equity manager in the 19 nineties, your smartest move was to just not invest in Japan. They got to be so exploited. They started to create indexes that didn't have Japan because it was such an easy bet. We try to be ahead of those dynamics. China for us was a perfect example. China became a large part of the index when we started thinking about where is that risk dollar best spent overseas and making sure it's in the best opportunities possible. One of our big advantages is we have a healthy risk culture below the portfolio level. We're happy to take manager risk or the strategy risks where w…

AI assessment note: “50% or more has to be generic US equity risk. Let's be smart about what that 50% rest of the world is”

Q Why don't you take me all the way back to the influences from your upbringing?

A If you believe that investing is a combination of art and science, I had a very unfair advantage. My mother was a printmaker. My father was a geophysicist. I literally am a combination of art and science. I grew up in Hanover, New Hampshire, which was a idyllic college setting. My big passion was swimming. I was very competitive. I won an award because Hanover is such a small town. The newspaper came and interviewed me. This was when I was 10. There was a prize that came with it. They asked me what I was going to do with the money. I was going to invest it. Apparently it's been in my blood for a while. I went to Wesleyan University. And wanted to be an econ major. I took micro, absolutely hated it. It was the worst experience. I pivoted hard, and we're talking really hard. I became a religion major. I hadn't had a religious upbringing growing up. I was very curious about it. Wesleyan is a great liberal arts school. I decided to take full advantage and dive in. It's pretty much been a life journey since then, trying to figure out how that applies to investing.

AI assessment note: “My mother was a printmaker. My father was a geophysicist.”

Q Which two people have had the biggest impact on your professional life?

A My daughters have had a big impact because they taught me patience. I have four daughters. That's big. There have been two individuals. One is Jeff Knight at Putnam. Jeff was an incredible mentor to me. One of the things you have to have to be a successful CIO is to realize that it's not just investing. There's multiple parts of the business. You have to have relationship expertise and experience with the board. You have to have an ability to sell to managers, the mission of the university, how great investors you are. There's a lot more that goes into being an investor. Jeff gave me the opportunity to not just be on the portfolio management team at Putnam, but to also take part in pitching for business. He was having me in front of big Middle Eastern clients when I was 30 years old. I couldn't understand why he was doing that, but I was grateful for it. The other thing he did was before he put me on the portfolio management team, he said, Bruce, if you're gonna take risks, you gotta know How to do it. You got to open a futures account and start trading. I've great lessons learned from that. I traded two assets. I traded Eurodollar futures and S&P minis. I was good at one, bad at the other. That is a great lesson when you're looking at managers. It gives me a lens to understand whether or not they're in their sweet spot. Their skill set matches to what they're doing. That's rea…

AI assessment note: “There have been two individuals. One is Jeff Knight... The other person... was Nancy Everett”

Q What is it you're doing to get conviction that it makes sense to allocate to India over everywhere else in the world?

A Some of it is first principles thinking. I read this book way back in my Putnam days called The Equity Risk Premium, gripping title, Page Turner. One of the great things about that book was it did this study of the equity risk premium. What has been the exceptional equity return in different markets over time? It was fascinating. If you went back to the That investors were jazzed up about. One was the US, one was Argentina, one was Germany, and one was Russia. Other than the US, three of those went to zero multiple times over the next hundred years. Obviously, that's a risk with any emerging market investing. What are the core drivers that allow an emerging market to retain value over time so that the capital gets the accrual of the value that comes from the economic growth? Rule of law is one of the big ones. India having the English legal history was key to us getting comfortable with India as an allocation. A lot of that was our first principles thinking about what makes sense. Similarly, looking at what the drivers of economic growth have been for many of these countries that are emerging, having a demographic base that is fairly young is important. That was something where we tried to do our own research, but vet it with other folks. And there were more controversial parts to the thesis that we batted around with a bunch of different people and got different opinions on an…

AI assessment note: “Rule of law is one of the big ones. India having the English legal history”

Q How do you go about organizing your team and investment process?

A We have a strong risk culture. There's a few key components to that. One of them is the team, our board, and our relationship with our board. We couldn't take the risk we do at the strategy level or at the manager level if we didn't have the board's support, the board have our back and understand what we're doing. We have a team approach that fits well into that risk culture. We do team-based underwriting. There is a lead on every investment. Everybody on the team plays some kind of role in the process, and everybody on the team has to meet the manager. It diffuses ownership of that idea so that folks might be incrementally willing to take more risk in those ideas. There's only one person who it all falls onto if it doesn't work, and that's me. It's not their career that's at risk. There's a downside to that where we don't have a private equity person who can say, this is my private portfolio. We want to have a team-oriented culture. Organizing the team in this team-based underwriting way has been the perfect alignment for how we want to manage the portfolio.

AI assessment note: “We do team-based underwriting. There is a lead on every investment.”

Q What are some of those other secular tailings you're excited about?

A We started owning gold five or six years ago. Part of the thesis there was we have this Indian Vietnam exposure. We were worried about emerging market crises. The traditional emerging market debacle, which seems to me to be the biggest risk when you invest in India or Vietnam. Gold actually turns out to be the best hedge. The best hedge would be to be short those currencies, but those are super expensive. Gold tends to do really well as a hedge to emerging market currency risk. Initially, we held gold for that reason. As time has gone on, the case for gold as an asset has gone up. On a secular basis. We're in a period now of a total and complete restructuring of the geopolitical equilibrium. We're in a period of sustained higher inflation. There's one asset that fills that gap that's created when things change like that. All that change leads to fear, uncertainty, and doubt. Gold has historically been the asset that benefits from that. Yes, it's very hard to price. You have no idea what fair value is. Sometimes it gets frothy as it has recently. For us, that's another example of A secular theme that evolved that as we saw, again, the political environment change in the US, the economic environment change, the geopolitical environment change, the secular case for gold solidified as time went on. Artificial intelligence, there's a tremendous amount of potential there. That is an …

AI assessment note: “Gold has historically been the asset that benefits from that... Artificial intelligence”

Q Some of those thoughts leaning more towards Publix, more towards Coinvest, are at least contrarian in the sense that more channels are leaning towards privates. People are concerned that Coinvest might get crowded out by the high net worth channel. In the private markets, how are you viewing the various bottlenecks of liquidity and the new flows that may be coming in from different pools of capital?

A It's been a confirmation of some of the biases we've held. We've not done a lot in the buyout space. A lot of that was driven by, we try to not make things too complicated and think about from a valuation perspective, are the assets priced where we'll get a reasonable return for the amount of risk that we're taking? What we've seen in the buyout space since we've been invested is that that's just not been true. The valuations have been extended and some of that was related to low interest rates, But even as interest rates have repriced, we haven't seen enough of a valuation retrenchment to get really excited. When we see retail money come in, I almost worry that it's be careful what you wish for private equity managers. You get a bunch of retail investors in there who don't have a great experience. It's not a great thing for the industry. That industry is very mature and super competitive. When there's that much money chasing an idea, all the talent tends to chase it too. I don't have statistics to back this up. Anecdotally, there's been a talent vacuum into private equity. Given the predominance of indexing in public markets and that talent vacuum into another space, there might be a lot more alpha in public markets. Even if there's not, we love the option value of liquidity. Having the ability to step into those dislocations can make up for the alpha that we might be sacrific…

AI assessment note: “When we see retail money come in, I almost worry that it's be careful”