The Exchanges

Q So as you look back at that path, you go from fixed income to options to equities to a hedge fund, high quality, low quality, across the capital structure. What did you take out of all of that in the most important lessons when you started to put the hat on of sitting at Baylor?

A There are a couple of things. First of all, every niche in the finance industry has its own language, its own vocabulary. I came from fixed income land and prices, and you trade things with accrued interest, et cetera. And then you go to derivatives land on the interest rate desk, and they're talking about clean price versus dirty price. And I'm like, I've done fixed income stuff for four or five years. What are we talking about? And they're like, oh, the clean price is without accrued interest. And the dirty prices with accrued interest. There's two things that are right next to each other, and yet the language is very different. When I first walked into sell-side equity seat, we're talking about options, because options are part of the pay structure for C-suite executives. These options have value, and the response from my senior analyst was like, no, they don't, because they're out of the money. And so you're like, no, no, no, they're not worth zero. So every piece of the industry has its own vocabulary, and that's actually really difficult. At the end of the day, running an endowment isn't any different than running any other portfolio. In fact, based on what endowments are invested in, they're a lot less complex than a lot of hedge fund portfolios. They're predominantly long biased. Even on the private side, things are equity. It might be locked up. Now, I would say the on…

AI assessment note: “There are a couple of things. First of all, every niche in the finance industry”

Q All of your past experience lends itself into that in the marketable security side of what you're doing. How do you blend that idea of a more top-down approach with the private allocations?

A Less so, but the approach that we've taken on the private side is, let me use energy as an example. It's something that I know really well. And it can be found both on the public side and the private side. So, 10 years ago, there was a private public ARB in the MLP space. You could cobble together the MLP Greenfield at three, four times EBITDA, and then you could sell it to the public markets at 12 or 14 times EBITDA. My partner in crime, Rene, who looks after the private portfolio for us, will sit down And in situations like that, we'll say, is there something in the markets today that suggests that this should be prosecuted on the private side or the public side? So in that case, we did MLP stuff on the private side. For as long as that lasted, that was like free money. If you think about where we are today in the energy markets on the E&P side, it's like super cyclical. We had a whole bunch of energy companies go bankrupt in the mid to late teens, and then we had crude prices get sub-thirty with a pandemic. If you're in a seven to 10 year investment vehicle, and you don't know where the underlying market is going to be seven to 10 years from now, That's a real problem, because you could invest for seven to 10 years, and then by no fault of your own, or the manager actually, It ends up being zero percent return or negative in something as volatile as the energy space. The rea…

AI assessment note: “we'll say, is there something in the markets today that suggests that this should be prosecuted”

Q Related to that, how do you think about the sizing of private allocations? Given that as soon as you lock up your money, you're losing that opportunity for the next 10 years.

A That, I think, is the super tricky bit of this job. I am coming around to the view that things are different when you have very, very big portfolios, so Yale or Harvard, for example. We're in a different geographic part of the country, and so this example doesn't pertain necessarily to Connecticut or Boston, but We think about what happens if a tornado goes through campus. How much cash do we have to come up with to fund what's going on here? Those are big organizations. They have a lot of building, property, plant, equipment, et cetera, like five billion dollars. For Harvard, that's 10%. That's not that much. So they can have very, very big private portfolios. We're talking about, for us, I think the endowment now is around 2.2 billion, something like that. If we have to come up with a billion dollars, that's half the portfolio. This isn't just blah. A tornado went through Waco and raised the town in the fifties. So it can happen. Good stewardship suggests that we have a billion dollars that we can get our hands on. Setting that aside, it increasingly seems to me that something around fifty-fifty feels right, and the reason for that is because of the valuation lag that occurs in private markets. So you have the situation that we've just had. So private markets were fantastic off the charts, and then you've had this winter. You've had this IPO closure thing, and Because the inv…

AI assessment note: “it increasingly seems to me that something around fifty-fifty feels right”

Q I'd love to turn to how you fill your investments. You mentioned it's all through managers. How do you start the process of thinking about what types of managers you want to have in the portfolio?

A For us, at least on the marketable side, we identify the strategies in which we want to play. The strategies are markets. And because we're running an active allocation portfolio on the marketable side, we can only be in liquid categories. We would participate in US high yield and European high yield, but we would not participate in Asian high yield because it's easy to buy something. The trick is getting out of it. And so if a market or a strategy is not Liquid or deep enough to get out of it when we want to get out of it, then we simply decide not to play because our entire ethos of how we invest, our entire philosophy is built around this idea of being able to take capital from the thing that is doing well and give it to the strategy that is not doing well. And if we can't get out of that, then the whole thing breaks down. What we have tried to do is pick the markets, the areas, the strategies in which we want to participate, and then go find those managers in those things and stock our pantry, if you will, in that manner. We allocate, broadly speaking, between zero and a hundred million to individual managers. And we have some managers right now that have a hundred million dollars from us, and we have other managers, strategies that have 250,000 dollars, and the high yield strategy does not have a lot of money in it right now, but it could at some point in the future. We st…

AI assessment note: “we identify the strategies in which we want to play.”

Q How do you think about cost of capital trade-offs across different investments you can make?

A This is one that I think we do particularly well. ENF portfolios are way more diverse than the S&P. We're invested in everything under the sun. It's crazy how diverse ENF portfolios are. Given that, as a backdrop, the new analyst walks in and we're like, what do you think the odds are that we come up with a 20% annualized return opportunity sometime over the next four years? They're like, I don't know. Probably pretty high. Like, let's just say it's a hundred percent. About four years is a long time. We're looking at everything under the sun. We'll probably find something somewhere that's going to earn us 20%. If that's the case, then the opportunity cost is five percent a year, and so that's how we think. You have treasuries that are two-year, five-year treasuries that are five percent plus five percent, and the hurdle's 10%. And we think about it that way. So in 2019, we were having trouble finding things that had 15, 20% return opportunities in that environment. And so I think the endowment here at that time was maybe 1.3 billion or something like that. We had 80 million dollars in long ball and a hundred million dollars in cash. Because we couldn't find stuff that we thought was paying us for the risk. And at that time, you're earning zero on cash. But the opportunity cost is five percent, and so we are not afraid to hold cash if we feel like we're not getting paid for the …

AI assessment note: “If that's the case, then the opportunity cost is five percent a year”

Q more. In the AI era, asset and wealth management firms moving to Ridgeline gain a 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. So given the complexity of those different, I mean, categories used as simplification tools, how do you look at your portfolio?

A Yeah, so we look at it all of those different ways. We have it broken down in spreadsheets a bunch of different ways. From the standpoint of providing some clarity or some generalized exposure metrics to our constituents, which is the university, its alumni, bond rating agencies, we use the standard, what I just said, fixed income, equity, hedge fund, privates. But internally, we're for sure looking at things like sectors. So that's something that we do different. I think it's different. I don't really know what everyone else does. But on the private side, it's our view that the age of the company does not accurately describe the most risk when you're investing in funds. So I think if you look at the venture capital industry, The industry in total over a 10 year period, I don't think has ever lost money. I'm not sure if I'm a hundred percent correct on it, but as close. And you're like, well, these are all the smallest companies with the most risk by definition. You're like, yeah, but the managers are pooling them in such a way that over time, that manager thinks that they're going to win. Well, if everyone's doing that, then over time, The whole thing doesn't lose money. Well, if it doesn't lose money, then it's not the most risky thing. Now, a single venture capital company is a risky thing, but in how we're investing via funds, it's actually not that risky. So from our persp…

AI assessment note: “internally, we're for sure looking at things like sectors.”

Q So you've recently taken to Twitter X, been sharing a bunch of your thoughts about how you go about doing what you do. Why did you decide to share your thoughts on that form?

A It was actually a suggestion of a couple of the investor relations people, some of our managers. I tend to prefer to be behind the scenes. I don't really like to be out front. What they have said to us is you ask questions that we don't get asked otherwise, and you do things differently than what we see or almost invariably what the rest of the universe is doing. You're not doing, and you're doing something else. If you believe that this is a social good, then maybe you should share this. There's honesty and truth there. So I started doing it just to be helpful. People want to hit the delete key. Great. If it's beneficial, whatever, it's super. We're just trying to be transparent and helpful.

AI assessment note: “It was actually a suggestion of a couple of the investor relations people”

Q Why don't you take me back to your beginnings in the industry long before you got to the seat of Baylor?

A Probably, like, with a lot of people who are in this industry, in this seat, I enjoyed the game, money, buying, selling things, even when I was younger. Growing up, my favorite board game was Monopoly. Takes forever. Now I don't like playing it. But it was fantastic growing up, so I went into college interested in investing. I went to a liberal arts school, so the degree that I have from undergrad is a business economics degree, which Teaches you how to think, but doesn't teach you a whole lot else. So I came out of school. I had no idea what an investment bank was. I think I actually had an interview with an investment bank, and going into it, I was like, can I make a deposit? No, that's not how these work. And I was like, that is the strangest bank I've ever heard of. So I got a job out of school. I was actually doing stuff with community banks, so it was high-grade fixed income. Things that banks would have in their investment portfolio. And so I became very aware, used to dealing with all of the different credit categories, but all in high grade fixed income. So treasuries, agencies, mortgages, high grade corporates, taxable munis, et cetera, et cetera. From there, I ended up going to the old CRT, the Chicago Research and Trading Group that they and O'Connor figured out That the vol smile wasn't flat across strikes way back when. So that was a completely different world. Al…

AI assessment note: “So I got a job out of school. I was actually doing stuff with community banks”

Q Within that framework of thinking about really a contrarian approach to that side of your portfolio, how do you go about implementing it?

A Yeah, so it's all through managers. We don't do anything directly. And you do need to be upfront with the managers. You're saying, this is how we run our portfolio. Are you okay with this? Because we have actually run into managers who are like, yeah, yeah, yeah. We don't really want the in and out cash flow of what you're doing. And so we just like, that's great. I often think of our role as that of the GM on a baseball team. And so you could be talking to a third baseman and be like, Hey, this is how we run the organization. And they go, yeah, that doesn't really work for me. Great. Then we won't trade for that player. That's fine. But we are very upfront with managers and saying, Look, when things are going right, and you're making lots of money, and people are knocking on your door trying to give you more money, we're going to be pulling money during that time. We just are. That's how we roll. And that shouldn't bother you because everyone else is lined up outside your door to give you money. So we're not impairing the business. And conversely, when there are people who are leaving, We're likely giving you money. And so, collectively, that should make your business more stable and therefore more valuable. The more valuable thing ended up being implicit 10 years ago until there were GP shops. Now it's explicit, so it is verifiably beneficial to the manager. I've sat in that …

AI assessment note: “it's all through managers. We don't do anything directly. And you do need to be upfront”

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

A There's one in particular, Michael Holmberg. He's a Neuberger Berman presently. We've known each other for. 22, 23 years. Easy to say he's my best friend in the business. Probably one of my top five closest friends. And we talk about everything under the sun. I think in this business, because it's very difficult, it's given to all the Monday morning quarterbacking and People think that it's easy. They're like, ah, you should have just done that. And I'm like, come on in. The water's warm. I think it's really important to have somebody else in the business that understands that you can talk to, particularly in those times when nothing's working. And that happens periodically in this business where quote unquote in the box and you can't see a way out. Michael's been that for me for 20 plus years, but it goes well beyond that family and on the personal front, et cetera. I've told my wife if something happens to me, call Michael. He'll help sort it out. He's 10 years older than I am, and so there's some wisdom there as well that comes my way that those times where you feel like you're not on the right track and you don't know which way is up, to have somebody that's, again, on the path further ahead of you to say, no, no, no, you're on the right path. You're doing okay.

AI assessment note: “There's one in particular, Michael Holmberg. He's a Neuberger Berman presently.”

Q When you look at approaching your portfolio top-down, I used the example of high-yield spreads as a metric for Being in or out of high yield. How do you think about where you can be right more often than wrong in making those top down assessments?

A We're just trying to do what the market is telling us to do. So you do have to have the wherewithal to look into the abyss a little bit, but that's not dissimilar to what we were doing last year, which is everyone thought that a recession was forthcoming right around the corner. All these prognostications, equity markets could be down 30, 40, 50% when this recession occurred, and so the equity risk premium was really wide. And we looked around at each other and we're like, like seems like with S&P at 3600 that we're seeing a lot of 20% return opportunities around. So to some degree, we're a little bit hands in the air going, I think I'm being paid to take 20% return opportunities. And the alternative is that somebody comes to you and says, yeah, but if you're wrong, it could be a 25% return opportunity or 28% return opportunity over the next five years. You're like, yeah, but five years from now, if I'm putting up 20% annualized returns over five years, I don't think that the administration is mad at me. And so that's how we wait. We also stage things in, we're not doing this from a hedge fund perspective. So if the market's up or down one, two, we don't care. We're long-term investors. We think about everything in terms of 10% market moves. If the market were down 10%, would we add? Maybe. Depends on what the value is. If the market was down 20%, would we add? For sure. And th…

AI assessment note: “We also stage things in... We think about everything in terms of 10% market moves.”

Q So much of the approach you're taking It comes from your two decades of experience investing. I'm curious, how do you take what's in your head and turn that into a process so that you can train your team so it's not just dependent on what's in your head for the long term?

A That's hard, and that, I would say, is a work in process. We have a young team. Aside from myself, we have four other investors. Renee, Jen, and Kaylee focus on the private side. Maggie's working with me on the public side. Some of the sciency things are pretty easy. How you actually get to picking a manager, that's pretty sciency. Even the subjective bits about character and If we're hiring people here who have the same perspective and philosophy and what matters, Character wise and individual. We want people that are kind, that care about the people around them, that care more than just about money, et cetera. Then even the subjective bits are pretty easy to get to. The next stage is half science, half art. It's the bit where some of our older investors are at, where you can pick managers. But then how do you decide, should I allocate to this manager when I could allocate to eight or 10 other things? The midpoint between manager and portfolio construction. So you have the manager level, then you have what I'm talking about, the other opportunity set. How do I compare a manager that's in fintech, but should I allocate to fintech? Right, so then the discussion isn't around the manager. If the answer is fintech, yes, then I have the manager. But the question is, FinTech, yes or no? Compare FinTech to energy, compared to what's going on in rates, compared to some sector in the eq…

AI assessment note: “That's hard, and that, I would say, is a work in process.”

Q What are some of the types of questions that you like asking in manager meetings?

A Well, we start almost all manager meetings, at least on my side of the book, saying who we are. Managers have said to us repeatedly that nobody does this. And it's really from a partnership perspective. Yeah, we need to know you and understand your process and business and whatever, but you should understand who we are as an organization and what we're trying to accomplish and how we do things. And if that doesn't work, we should just part ways. Now we probably spent the first 20, 30 minutes talking about us. In manager meetings, if you're in our office, there's already been this sorting process to get there. So we usually start with a deck, say, send us a deck, because we can tell you in five minutes whether it's a fit or not. So we go deck, zoom, in our office. If you're in our office, then that's probably a pretty lengthy meeting. That's probably at least 90 minutes up to like three hours. And then we're asking All sorts of questions, and it depends on who you are. If you're a young single guy, I'm asking you what your favorite drink is when you go out with friends, because that tells me something. If you're married with kids, I ask questions around vacation time, and is your spouse in agreement with you doing this? I have one manager in our book, and it was early in the life of this firm. I already had known the guy, but he was starting this new firm, and I actually called …

AI assessment note: “If you're married with kids, I ask questions around vacation time”

Q What are some of the other things you've seen in, say, larger endowments and foundations that you've learned from that you'd like to get to over time?

A Here's the question that I have. We're sitting at a little over two billion dollars. We obviously know how to run that because we're doing it every day. I don't have the foggiest idea how to run twenty billion dollars. There's a whole different set of can'ts or shoulds or think about this that I don't understand. We have started to connect with Folks like Seth Alexander at MIT has been very kind and gracious, helpful, and explaining some of what they do, and Allison Thacker at Rice has been exceedingly generous and helpful. What they do, what they've seen, the quote-unquote don't do this, oh my gosh, that's hugely helpful, and we're happy to chat with anybody because our view is that Helping kids go to school when they wouldn't otherwise be able, it's a social good. We have this huge rivalry, Baylor does, with TCU, who's up the street. But I know Jason really well, and do I actually care whether a student who is considering going to college and might not be able to go to college, or if they're a Baylor student or a TCU student? Of course not. Education changes. Their lives, their families lives, their neighbors lives. It's a generational thing. So we're happy to help and talk. To answer the question, I don't know exactly. It's a little bit of, I'm not there, so I don't know. But the industry, I think, is of the sort that it's gracious enough that people are willing to help.

AI assessment note: “To answer the question, I don't know exactly. It's a little bit of, I'm not there”