The Exchanges

Q When it comes to sitting down with a client and trying to understand their risk tolerance, how do you both define that and figure out what that is for that person?

A It's art, science, craft, all the above. I think institutions have four horsemen of risk. There's shortfall risk, which is the probability that over time you will just not meet your liability stream. So you need to have a portfolio that Gives you a fighting chance to get there over long periods of time, and that's just a candid conversation about what the purpose of the capital is. What are you trying to do with this? For endowments, it's pretty straightforward. There's typically a real growth element, and there's a stable supportive operating budget element, and you can model those out pretty clearly. There's also drawdown risk. So drawdown risk is about the path of returns. Can you live with the volatility that is endemic to markets? That has a practical element, which is you can't have too much volatility of the operating budget. And so you have to be able to control that to make sure that the CFO and the finance teams of these institutions can draw a stable amount of capital every year. And it also has a behavioral element, which is how much can the committee tolerate? Because everybody has a breaking point, and you have to know going in what that is for people. So we try and be very clear with folks what equity tolerance they have, because equity is going to be the primary driver of volatility in any of these portfolios, and what that may mean from a path of return standpo…

AI assessment note: “I think institutions have four horsemen of risk. There's shortfall risk”

Q So the end of that enterprise assessment, you can imagine some type of a spectrum of, you could say, risk tolerance or what they're trying to accomplish. You then have to put that into action. How do you think about what to do now that you've made that enterprise assessment?

A The nice thing about it is each of those risk factors that we talked about, shortfall risk, drawdown risk, illiquidity risk, variance risk, maps pretty cleanly to a form of risk exposure that you might have in the portfolio. You know, as a endowment investor, that your nominal return goal is going to be high enough that you need a very healthy dose of equity in there. It's going to have to be at least half of the portfolio, probably a little bit more than that. And then the question is, what forms of diversification away from that do you need to incorporate? The first thing for us is always deflation hedge in the form of interest rate risk. There are also periods of unanticipated inflation beyond that. You use things like commodities and real estate to hedge those particular periods. And you can run all of these factors through your model and figure out what is the optimal mix that gets the client to its goal within the constraints of its risk budget. You overlay obviously the alpha that you think you can generate in each of the opportunity sets that you'll ultimately leverage. How much can you get from private assets? How much can you get from public assets, et cetera, and bolt that on top of what the beta is providing you from a return perspective. But it's a fairly straightforward model. I don't believe that we're trying to win in terms of portfolio construction in the way t…

AI assessment note: “each of those risk factors that we talked about... maps pretty cleanly”

Q As you're investing today and you look out over the next couple of years, what are the different ways you're thinking about the process of manager selection compared to what you've done in the past?

A There's always an arms race in terms of the execution here. And so our team is laser focused on how do you continue to scout and access talent effectively? I think there are a couple of things that are going to continue to be very important. Number one, Is relying on the causes that our clients serve. We are blessed to have this handful of clients who have discrete missions, things they support, programmatic objectives, and it is very rare for us to be unable to find a cause that really resonates with a GP within our client base. The universities have been using this for decades, and we effectively have 40 some odd Different missions that we can point to, which is really, really powerful. A lot of these firms have decided they really only want to serve LPs that are doing social good in some way. And so whether it's scholarships or medical research or social equity or whatever it might be, there's someone in our client base that's really pursuing that objective. Number two is just burning shoe leather. We live on airplanes doing residencies and In Europe, in the Bay Area, we have a colleague now who's in Singapore full time covering Asia for us. There's just a lot of intensity that goes into the consistent need to top grade the portfolio. The sourcing construct is something that Jay brought over from his private equity days, which was this view that if your deal people are doing…

AI assessment note: “our team is laser focused on how do you continue to scout and access talent”

Q Why don't you tell a little bit more about the history of Gem until you showed up?

A Jem was founded in 2007 by the CIO at Duke University's endowment, Dumac, Thrus Morton, his head of privates, and Stephanie, who at the time was the CIO of the Duke Endowment, which is the family foundation in Charlotte. The premise was to deliver the governance model that the leading universities were utilizing, which appeared to be at that time an extraordinary advantage relative to consultant-led or committee-led institutional pools of capital. And also the portfolio sophistication and access that came from having a dedicated team working in these markets all the time. That was a well-trodden path. There were some other firms that had done similar things. Alice Handy at Uvimco spinning out earlier in the decade to found Investor. Mike McCaffrey and the team at Stanford founding McKenna and Palo Alto. There were a couple others as well, but we were the Duke team. The model was really to just bring to bear all of what we'd learned from that experience and that form of engagement with a single client and spread it across a select group of smaller institutions that lacked the institutional scale to do it themselves.

AI assessment note: “Jem was founded in 2007 by the CIO at Duke University's endowment”

Q What led you to moving over to the allocator side of the business?

A So in 2007, my dad passed away unexpectedly. It was really a shock. He was relatively young, relatively healthy. That's one of those moments in life that really sets you on a different course. It causes you to reflect on decisions you've made, things you've done. And I recognized in myself that I hadn't been quite purposeful enough about career decisions I'd made. I was drifting through my experience. Really ruminated on it for a long time and decided I should just go back to business school, pick myself up, figure out what perspective I needed to get on what the future looked like. Through serendipity, I met a guy while I was at business school named David Salem, who you had on the podcast not too long ago. I met David for lunch one day and we bonded over David McCullough books and constitutional history and a whole slew of things that had absolutely nothing to do with allocating capital or investing in any way. And it was really my first entree into this liberal arts approach to investing, thinking about Organizational design, psychology, some of the history of markets, things that really lent themselves to the curiosity that I had about the space. I hadn't been exposed to the allocator world prior, but David had just left TIFF, and he was setting up a small private partnership in Boston at the time, and I decided to join there between my first and second years of business sc…

AI assessment note: “I decided to join there between my first and second years of business school”

Q What have you seen when there's a committee that isn't following these basic principles in terms of how you go about helping move them forward in the right direction?

A First of all, the forms of dysfunction are varied. They can come from a lot of different places. The first step is obviously diagnosing what it is that's going on. Is it political issues related to committees relative to other committees? Is it a weak chair relative to what the needs are for that particular institution? Is it the composition of the committee? Is the construction insufficient to deliver what the institution needs? Charlie Ellis would tell you five to seven committee members is the right number. We see some institutions where they have 14 to 17. That's too many. It's very well understood that after a certain point, the loss of motivation and the loss of coordination of a committee operating that way undermines any of the overarching objectives they might have. The skills and resources that committee members bring to bear is a critical piece too. There's a view that, well, if somebody is any way related to investing, they must be useful on an investment committee. And I have found that to be true in spots, not universally true. The more important things tend to be the soft skills. Is this person a good listener? Is this person open-minded? Do they work well and collaboratively in a group? Those are things, interestingly, that often aren't typical of really successful money managers because they're used to being the sole decision maker. It's everything from committ…

AI assessment note: “We share our views on these issues in delicate ways. We write a lot of white papers”

Q On the public side, that core part of your exposure, how do you think about the movement to passive management?

A There's two kinds of passive. There is what I'll call anti-active Which is really a philosophical view that active management in public markets is a loser's game. To borrow Charlie Ellis' term, it can't win. No one can win. It's not worth trying. There are clients of ours that hold that view, and we are perfectly capable of building portfolios that incorporate a portion of a portfolio that's passive. I have a very strong view that the portfolio a committee can stick with is the best portfolio for them, and if you constantly bang your head against the wall trying to get someone to believe that active can be better, The first whiff that it underperforms, they will immediately scrap the whole thing and shift to passive and at great cost to them. So we're happy to build a portfolio that has passive component to it. As long as people recognize you now have a higher alpha bar at the And therefore may need additional illiquidity or something else to try to increase expected returns. I think from here, passive, the anti-active version is just less compelling than it has been in a long time. If you go back to 2014, and you look at the expected returns for equities at that time, and you run it forward, it was about four percent, and what we've gotten is nine or something extraordinary. 1.8 standard deviations over what we expected at the time. If you do that from here, where expectations…

AI assessment note: “I think from here, passive, the anti-active version is just less compelling”

Q When you thought about the investment side, what were some of the first principles that most resonated with you?

A One would be risk first in all things. The market offers what the market offers. You cannot will the market to offer you more. What you really need to understand first and foremost is what a client's risk tolerance is across a couple of key dimensions. From there, you can figure out how to deploy capital on their behalf, but without a sense of what they're willing to live with, what types and degrees of risk they're willing to incur in pursuit of their goals, you can't deploy their capital. So that part of the process, let's get structured for success. That aspect of things that happened well before the first dollar was invested in the first asset was a critical part of it. The other one, just in terms of how you go about finding opportunities, was looking for people that were really psychologically aligned with generating good returns. I've come to view the money management world as really being subdivided into firms that are looking to find their way into the AUM Hall of Fame and others that are looking to find their way into the Returns Hall of Fame. And those are very different sets of incentives. It's very different structures. They look very different. And so making sure you align with folks that want to be partners with you for the long haul, I think is a really critical feature.

AI assessment note: “One would be risk first in all things.”

Q Why don't you take me back to your path that led to investing?

A Well, to say I wasn't well suited for the professional world initially is an understatement. I spent every break in college climbing mountains with friends. We would go to Ecuador, Patagonia, Alaska, Switzerland, Colorado. Never thought I needed to get an internship. Never expected to have to do anything. My line of sight ended at graduation, it seems. Beginning of senior year, I ended up getting a little bit spooked by watching all of my friends getting their investment banking jobs and decided, hey, you know what, maybe I should go to New York for a couple of years. Decided to work at a law firm, thought that gave me some optionality coming out, and within a year was fortunate enough that the recruiter at Goldman saw enough on my resume to offer me a job there. They had a hole on a principal investing team. I fit the bill, joined that firm in 2005. And really the rest is history. I spent a little bit of time there, eventually moved with a partner over to the asset management business within Goldman, which was a strategic priority into and around the global financial crisis, and had a terrific experience there. First time really being around people who were as ambitious and driven and committed to excellence as folks were that I got to work with.

AI assessment note: “within a year was fortunate enough that the recruiter at Goldman saw enough”

Q So what'd you learn over the path of the time you were working with David?

A So I was involved in every aspect of building the firm, as you could gather from the fact that there were really three of us there initially. That was asset allocation, portfolio construction, manager selection, putting together marketing decks, putting together the trading apparatus, anything you could possibly do, I was involved in. And so first off, there was this breadth of exposure that I think was critical in my development. Second of all, David's very much a first principles thinker. It was a great education and curriculum in how to think about deploying capital for perpetual or multi-generational clients. The thing that really struck me most of all through my time there was just a recognition that the trust bar that is required to take discretion over is really, really high. I always say anytime you're trying to be the investment office for an institution or a family, you have to clear the highest trust bar in asset management. For a family, it's their hard-earned legacy. For an institution, you're often engaging with a committee whose capital it is not. They are temporary stewards of that resource on behalf of an institution. And the idea of handing that responsibility over someone else is momentous. Just the fact that you needed to approach any of these engagements with the utmost candor, integrity, and client-centric mindset, I think, was all critical.

AI assessment note: “It was a great education and curriculum in how to think about deploying capital”

Q What did that do to the OCIO business when the bells and whistles of active management didn't really matter in that phase two?

A Psychologically, what it's led people to believe is that OCIO investing, total portfolio investing, endowment investing, however you want to characterize it, has become commoditized. When things become commoditized and industries mature, they consolidate. And so what you've seen is a lot of consolidation in the space. You've seen wealth aggregators buying up OCIO businesses, bolting them onto their practices, recognizing that Geez, I think we need more scale here in order to distribute more products through the pipe, and that will be the key to generating the kinds of profitability that we need as a business. We don't think of ourselves as business people. We view this as a profession rather than as a business per se. Doesn't mean we're blind to the business pressures associated with it, but in general, the philosophy is different. We've resisted Those siren calls for consolidation and come to the view that our independence is actually critically important in our ability to do the right thing for clients. No shareholders looking over our shoulder with a revenue target for us. We don't have salespeople running around the world looking for OCIO mandates. We are going to win on investment excellence and our deep integration. Fast forwarding now into phase three. We're in a different environment now. We can all talk about the nature of the market regime that we're in. More inflatio…

AI assessment note: “what it's led people to believe is that OCIO investing... has become commoditized.”

Q What are some of your favorite tips for how to ask good questions?

A The biggest one is being quiet after you ask. There is a strong tendency psychologically to fill space with words. Oftentimes it's elaborating on a question or changing the framing of a question if you don't immediately get an answer. And instead of doing that, just be quiet. Just hush up, let the person sit with it, and figure out how they're gonna deal with it. That tends to be the biggest thing you have to coach out of people. The other one is asking things that are truly open-ended, meaning you're not encouraging a particular form of response. You just ask it in a manner that is almost curt sounding when you phrase it, because you need them to not only answer it, but interpret what it is you mean, and oftentimes they'll get anxious about that if the interpretation could be in a negative way. So there's a lot of little tools and tricks, and The team is constantly trying to refine those and share them.

AI assessment note: “The biggest one is being quiet after you ask.”

Q So let's turn to the last pillar of your assessment in alignment. When you think about alignment of your capital with your managers, how do you try to implement that?

A We have seen this every which way over time. There's forms of over alignment. There's forms of under alignment. I think what you're trying to solve for is, first off, what motivates the person across the table from you? What is the intrinsic driver of their commitment to success? Are they returns focused? Are they committed to integrity? Are they going to do the right thing, irrespective of whether this goes well or poorly? That becomes a critical analysis piece, because you cannot structure your way into alignment if it is not inherent to the person you're across the table from. Now, you try, you try to defend yourself in some instances. In terms of fee structure, we try to make sure that we're paying for alpha, not beta, paying for the outcomes that we're going to be happy with, and we try to make sure that the level of fees is appropriate for the strategy that the manager's running. And then you think about terms broadly as well. What's the liquidity of this overall portfolio? Is there a trade-off to be made there? What are capacity rights that you might secure? Because you don't want managers to outgrow the opportunity set too soon, and so you almost are willing at the early stages to pay a little bit more than you otherwise would in order to incentivize that form of behavior. You're trying to lead breadcrumbs down the path to really good outcomes for you and for the manage…

AI assessment note: “In terms of fee structure, we try to make sure that we're paying for alpha”

Q So to get at more data requires more time. How do you balance your interest in a fund that's been around for a longer time, and therefore you have more data to assess with something that's earlier in their stage of development?

A There's typically things you can see for day one launches, and there's things you can't see. The thing you can see often is business analysis, research intensity. You can reference those things with peers and former colleagues and bosses. What you can't see are things like portfolio management and temperament. You spend an inordinate amount of time trying to predict how people will behave and act, but it's always imperfect. There's other things that can creep up that cause challenges too. How is this person going to build a team over time to support them? Oftentimes young managers haven't had to deal with that. We try and lend our expertise in some of those areas to help them through those processes. But again, you don't know ex ante. Part of it is how you size and how you control the risk within your own portfolio. I think we're always trying to build conviction. One of the things that we do with a lot of relationships is look to secure capacity rights in the future. That tends to be the scarcer resource because once it's obvious, the manager's good, it's too late. And so you'd better have a relationship early. You'd better have added value in some other way to them. You've better been a good LP along the way. So we just try to make sure that we're crawling, walking, running with people who are building their own firms for the first time.

AI assessment note: “Part of it is how you size and how you control the risk”

Q What was the core of how you would describe that governance model that was successful for Duke historically?

A Governance is one of those things where the best practices are all very well understood, and yet the execution is very inconsistent across institutions. I think what the leading universities figured out was, for one thing, the independent management construct was really, really helpful. You had independent management companies that sat alongside the universities, where they had a single client, they were deeply integrated with the needs of the institution, and they understood how to construct the portfolio to meet those Yale's built differently from Harvard, built differently from Stanford, built differently from Notre Dame. They all had their own unique approach to that, but it was tied in with the university's specific objectives. You also had a collection of individuals on the boards of these places that were well ensconced in what was expected of them. What we observe at smaller institutions is sometimes inconsistent expectations around committee engagement, what that means, and requires a lot from an investment committee chair to effectively shame the people who don't participate, who show up cold to meetings, who can't follow the material, etc. And I think that The large universities obviously had the advantage of really sophisticated alumni bases from which to draw those folks, but they benefited meaningfully from the really deep engagement and love for the institution t…

AI assessment note: “the independent management construct was really, really helpful”

Q For the corollary of public market managers, how do you think about the assessment of data that is available?

A In normal times, when there are distributions and other sorts of things that lead to funds opening and closing and having a natural life cycle, you do have quite a bit of data. It's not a lot of swings, and we've had situations where a manager's historical track record is mixed at the firm that they're with, and yet we decide it's a good investment opportunity given how they've reshaped their approach, what their deal box is, where they're going to spend their time, how they've built the team, what their sourcing edge is, So you have to take it in context. I think one of the things that we've done over time is backed managers in a deal by deal format and an independent sponsor context. That's been compelling for a number of reasons. One is the returns that have been associated with that strategy have been excellent over time. Another though, is that you get a lot of insights into how deals evolve that you wouldn't have gotten otherwise. That as a fund one LP trying to diligence a pre-fund track record, you would not have been able to monitor over time. Obviously, you're doing this all ex post. Watching someone live through a collection of deals, engaging with them along the way, helping them navigate different things that pop up with businesses, CEO resign, something goes wrong, COVID happens, is incredibly helpful. One of the things we've done, obviously, to amplify our own ab…

AI assessment note: “you have to take it in context. I think one of the things”