At the end of the first quarter, MIT Investment Management Company, the investment team that manages the Massachusetts Institute of Technology’s university endowment, wrote a letter reflecting their last 15 years of investment. Many of the themes of the letter were not new, as far as endowment updates are concerned. MITIMCo’s performance over this period has been strong: the endowment has returned 11.7% over the past 15 years, placing it in the top 1% of the Cambridge Associates endowment universe. As MIT has grown, so has the endowment, which now stands at $27 billion. Most interesting, however, is the review of the endowment allocation strategy in the letter.
MITIMCo President Seth Alexander joined in 2006, after working under legendary endowment investor David Swensen at Yale. The Swensen model of absolute return investing became a guiding framework for endowment investing, and Alexander brought first-hand knowledge of it to MITIMCo. Much of his approach still reflects what he learned at Yale – MITIMCo has an all-weather, all-purpose approach that focuses on creating long-term, sustainable absolute returns, but with a few updates to the current market . MITIMCo indicates in its investment brochure that it invests most of its assets with external managers, although the number of managers varies according to market opportunities.
In the letter, Alexander notes that maintaining an investment edge is difficult, especially given how quickly others flock to opportunities and erode alpha. As a result, MITIMCo chose to seek asset managers off the beaten track to avoid the groupthink and clutter that other endowments often get caught up in.
Alexander explains it this way: “Historically, we looked for established companies with a long track record of success. These businesses were easier to manage, gained internal approval quickly, and were much less likely to lead to disastrous return results. Unfortunately, it was also more difficult to develop relationships with these companies,” he writes. “As an experiment, we started targeting smaller, more offbeat managers, such as brand-new companies, companies started by people who didn’t have ‘traditional’ experience, companies just starting out. in new areas, companies with unusual organization and fund structures, and any other type of business that did not fit the typical institutional playbook.
Over the past five years, MITIMCo has been the top institutional investor or among the top institutional investors in more than 50% of its new relationships. In many ways, this decision is a return to Swensen’s first principles. At Yale, Swensen was able to differentiate himself early on by building companies that have since become the big, blue chip asset managers that Alexander leaves in an effort to find the new vanguards. Doing this well requires a willingness to take risks, which sets MITIMCo apart in the endowment space.
“There’s a tendency to treat the Swensen model like a cookbook,” says Mike Smith, partner and CIO at Global Endowment Management, a Charlotte, North Carolina-based outsourced CIO office that works with endowments. and foundations. “Swensen’s focus on alternatives has been widely embraced by foundations. But the approach has been to build a passive core, and then shake some hedge funds, shake some private equity, shake a company. But if you just copy the allocation breakdown without considering the underlying approach, it won’t work as well.
MITIMCo’s approach to finding unique asset managers is based on the flat, generalist structure of the investment team. In a In a recent podcast interview with FCLT Global, Alexander said that MITIMCo avoids any type of top-down asset allocation framework. Instead, they focus on how individual managers fit into overall endowment investment goals. “We have top-down risk controls in place to ensure the portfolio remains diversified,” he said. “Our whole thesis is to find the ‘Warren Buffett’ of a given area.”
The goal, says Alexander, is to identify asset managers — regardless of asset class — who have the kind of talent that will drive long-term returns and a business model that supports creating partnerships with dispatchers like MITIMCo.
MITIMCo is not the only endowment to rely on a generalist investment team model. More and more endowments are relying on this model because it speeds up decision-making and can be a more efficient way to manage an investment team with limited resources. And, as Alexander writes, this model seems to be particularly well suited to the current market environment. Disruption is everywhere, even within asset management. Going forward, successful manager selection will likely include not only a flatter investment team, but also a willingness to work with asset managers who take a more generalist view when it comes to managing their strategies. .
“There has been a big shift within endowments from public markets to private markets,” says Texas Hemmaplardh, partner and nonprofit business manager at global consulting firm Mercer. “But now we’re starting to see that line getting a little more blurred. On the private equity side, we’re seeing more and more early-career managers stay loyal to a company and retain a stake even after it goes public. On the hedge fund side, where most of the positions have been in listed companies, we are seeing more of these managers investing in private companies. So from an allocation perspective, endowments have had to really take a step back and think about what that means in terms of portfolio construction.
MITIMCo had to adjust its understanding of late-stage business in response to these blurred lines. The team is used to co-investing alongside its venture capital managers, but has often avoided late stages because “we thought late-stage venture capital co-investments were generally a poor risk/reward, as such fundraisings were often priced by investors hoping for a quick gain in the IPO process, and such deals were likely to be procyclical investments made at market highs in largest and least attractive fund investments,” writes Alexander. But the market has changed. Companies stay private longer and the road to exit is no longer as cyclical as it once was.
“By focusing too much on the historical base rate and not enough on the opportunity before us, we missed opportunities to generate compelling returns for MIT at companies such as Airbnb, JD.com and Stripe. “, admits Alexander. Going forward, MITIMCo and other endowments will likely have to rely less on historical assumptions about certain asset classes to keep pace with financial markets adjusting to disruption.
Thinking outside the box to find managers and adapting to disruption aren’t the only ways the staffing model responds to change. Flexible investment mandates and emerging manager programs are also places where endowments seize the opportunity to realign portfolios with mission-driven goals.
“It can be difficult to make big changes quickly in endowment portfolios because of their size,” says Mercer’s Hemmaplardh. “However, we are seeing more thought being given to emerging management agendas and other areas where endowments can bring about faster incremental change. There is more emphasis on ESG objectives here.
In January, Stanford Management Company, the investment arm of Stanford’s endowment, announced that it would add a diversity, equity and inclusion lens to its emerging manager program. Stanford’s Board of Trustees has approved an allocation of university reserve funds for a new program of investment in various asset managers. The fund will invest in up to 10 investment companies run by various US-based companies. fund statement. “We hope that over time these companies will become partners for many institutional investors.”
MITIMCo also aligns part of its portfolio with ESG objectives. In the letter, Alexander says MITIMCo has created long-term goals for a net-zero carbon portfolio. In 2021, the endowment joined Climate Action 100+, an investor-led engagement initiative that puts pressure on the world’s largest emitting companies to reduce emissions and improve sustainability. MITIMCo faced pressure from student groups to divest its most resource-intensive holdings, but opted instead to engage with management teams on improvement efforts. Harvard and Brown are also part of the CA100+.
The endowment is also engaged in a process of offsetting carbon emissions from MIT’s Volpe property development near its campus in Cambridge, Massachusetts.
GEM’s Smith says these initiatives will likely continue at the boundaries of staffing portfolios as dispatchers determine the best ways to manage a more volatile market environment while working toward mission-driven goals. “Endowments have very long time horizons and they have, in some ways, the luxury of not having to focus too closely on short-term economic trends,” he says. “That said, we are simultaneously entering a new economy and a new market regime. So I think we’re going to see a lot more work around the edges to figure out the best way to invest through these changes.
Given the discussion that begins below, is it worth adding a sentence here or in the introductory paragraph about their ratio of internal versus external management?
Tags: Endowments, MIT, Seth Alexander