A Student Perspective on the Endowment Management Forum
By Alvar Soosaar
On a cold and stormy Wednesday January 26, I boarded the train from Philadelphia to New York City for the NACUBO Endowment Management Forum, giving myself several extra hours to make the trip. Mother Nature prevented one of the three sessions that day from taking place, but the weather did make the day a much more intimate affair, and allowed for easy dialogue between presenters and audience, as well as among audience members.
I was there as a student, and enjoyed every minute. By way of background, I have 10 years of experience in investment analysis and investment management, and currently work as a managing director at a publicly listed real estate finance company managing a $3 billion portfolio of debt securities. I will be receiving my MBA from the University of Oxford's Saïd Business School in June through Saïd's Executive MBA program, and part of the curriculum is a capstone entrepreneurial project, which involves the creation of a company—real or hypothetical—and the application of lessons learned from the program's accounting, finance, marketing, and other courses.
I chose to "found" an outsourced CIO company for educational and foundation endowments, not initially realizing that such companies already existed—and that in the last two or three years, such companies have been or are being founded both independently as well as in the form of subsidiaries of nearly every large investment firm. I interviewed a great many participants in endowment management during the research phase of my project, and gained a perspective that I had not had before: that of the investment world from the viewpoint of a multi-asset-class portfolio manager. All of that said, I hoped that attending the conference would show me what I was missing. And it certainly did.
A "Smart but Humble" Approach
First I heard Fred Dopfel, head of client strategy at BlackRock, present his insights on how endowment portfolios should be modified in light of market uncertainties. A high frequency of rare downside events experienced by endowments was explained by a two-regime framework, where expected returns and volatilities of risky assets depend on transitions between economic regimes—for example, cycles of economic growth and recession. This uncertainty about regimes raises the question of whether investors should abandon the idea of a static investment policy and instead construct tactical portfolios. Dopfel described hypothetical investors with various skill levels: two strategic investors called "naïve" and "smart-but-humble;" and two tactical investors called "myopic" and "prophetic."
Dopfel showed that the "smart-but-humble" investor, who is not overconfident about his ability to time markets, maintains a static policy portfolio that performs well in comparison to other investors' portfolios. The portfolio is hedged against bad economic regimes by reducing the allocation to risky assets. Finally, Dopfel suggested that the "smart-but-humble" investor's portfolio was a good model for endowments to follow.
Based on my conversations with other participants, Dopfel's lecture was a great one with which to kick off the conference, as risk mitigation is at the front of everyone's minds. This aspect of the endowment manager's job is less obvious to an outsider, though at the same time it is understandable given the hits to endowments over the past few years. In retrospect, despite my level of comfort with risk management in my job, I do wish I had taken more courses on risk management in business school.
The following day's opening session was presented by Celia Dallas, co-director of research for Cambridge Associates, and focused on volatility. Volatility as a concept is not hard to grasp, but what Dallas explained most effectively was that prolonged volatility to the negative side in a structure requiring periodic draws, such as an endowment, creates the real risk of permanent loss of capital. Since approximately 1980, endowments have diversified their assets substantially, and while this has "thinned" out the fat tails (outlier points on the distribution curve with higher recurrence) in returns, it has not eliminated volatility. Volatility cannot be eliminated, and so her advice essentially boiled down to this: Do what you can to minimize the impact, and then manage expectations with your stakeholders.
A combination of the weather and a progressively worse cold cut short my time at the NACUBO conference, but I learned more about the issues facing college and university endowment investment managers in the 24 hours I spent there than I had in any classroom. Whether or not I decide to make a career of endowment management, I will endeavor to attend this conference again.
ALVAR SOOSAAR is a student in the Executive MBA Program at the University of Oxford's Saïd Business School.