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POST-PANDEMIC INVESTMENT PLAYBOOK

Listen into the open discussion between two veteran CIOs on investment opportunities and challenges as we emerge from the COVID-19 pandemic. Co-hosted live by Catholic Investment Services (CIS) and FEG Investment Advisors the webinar features:

  • Scott Malpass - recently retired Chief Investment Officer at the University of Notre Dame and co-founder of Catholic Investment Services.

  • Jonathan Hook - Chief Investment Officer of The Harry and Jeanette Weinberg Foundation and FEG Advisory Board Member, formerly Chief Investment Officer at The Ohio State University.

  • FEG's Matt Finke moderated the discussion.

 

Transcript

Tom Lanctot (00:00:00):

Zela, do you think we're ready to go?

Zela Astarjian (00:00:01):

I think so. We have close to 200 people, so lets get this show going.

Tom Lanctot (00:00:07):

Great. Thanks, Zela. Well, welcome to the webinar hosted by Catholic Investment Services and FEG. Thank you for joining us today. Our topic is The Post-Pandemic Investment Playbook, featuring a discussion with two veteran chief financial investment officers. Sorry. My name is Tom Lanctot and I'm privileged to serve as chief executive officer of Catholic investment Services. My colleague Zela Astarjian, along with Matt Finke at FEG, has done a great job organizing this program. Zela is at that the Zoom control panel. Enormous thanks to our terrific panel, who you'll meet shortly. We have a sophisticated audience today, and I think you will agree that our panel is more than equal to their task. Today's format will be conversational, with Matt Finke from FEG acting as the moderator. There'll be time for audience questions after the formal part of the program. So please use the Q&A feature on your Zoom screen to submit a question. Our audience is muted and the program is being recorded.

Tom Lanctot (00:01:09):

Catholic Investment Services was founded by some of the investment industry's most respected leaders to address the investment challenges faced by Catholic organizations. We are a Catholic nonprofit serving other Catholic nonprofits. We hope this webinar provides some useful take-home value today. You've received biographical information for our speakers, but I want to add a few highlights about Scott Malpass, my boss, who is the board chair and co-founder of CIS. Becky Wood, CEO of FEG will introduce Matt Finke and Jonathan Hook shortly. Scott recently retired as chief investment officer of the University of Notre Dame, where for 32 years he was responsible for investing the university's endowment and other assets of over $14 billion. Notre Dame's endowment is the seventh largest private university endowment in American higher education and the largest at a Catholic university. Institutional Investor Magazine has called Scott an "investment titan" and MVP, and he certainly plays those roles and more for CIS. Now I'm pleased to hand off the show to Becky Wood, CEO of FEG, for a few more introductory remarks and speaker highlights. Becky.

Becky Wood (00:02:23):

Well, thanks. Thank you, Tom and Scott and CIS for putting this webinar together, we're very excited about the content and the discussion that will happen. Before we get started, just a quick overview of FEG. For over 30 years, FEG has provided investment solutions that focus on partnerships and results for institutional clients. We actually advise on roughly 68 billion in assets and predominantly 87% of our clients are nonprofit. We also are very much aligned with our clients because of our independence--100% of FEG is owned by 100% of our employees, and we think this is very powerful. The types of services that we provide are outsourced CIO, investment consulting, research services, responsive investing--including ESG and Catholic value investing. I guess I'll get back right on to introducing the rest of our featured guests.

Becky Wood (00:03:26):

I'm very excited to introduce Jonathan Hook. He is the current chief investment officer at Harry and Jeanette Weinberg foundation in Baltimore, Maryland. Prior to that, he was the first CIO for both The Ohio State University and Baylor University. He's very well-respected among his peers, including multiple honors, such as CIO of the Year and Best Endowment. But for us at FEG, it's really Jonathan being on our FEG advisory board where we can pick his brain and bend his ear to make sure we can do the best for our clients. I also want to introduce Matt Finke who is vice president at FEG. He works primarily with higher education, healthcare, and religious clients. Matt said with the bios of both Scott and Jonathan, just skip over him and let's get on with the show, so I'm going to put the talking to him. So take it away there, Matt.

Matt Finke (00:04:25):

Thank you, Becky. Whenever someone else in the presentation has the bios of Investment Titan or Investor of the Year, it's best just to go ahead and move forward and get to the topic of the day. Scott, Jonathan, thank you for taking the time on behalf of everyone on the webinar today and myself and FEG. I wanted to jump right in and talk quickly about the thought process around developing this webinar really about an investment playbook. I think we should start--take a step back one year today: March 3, 2020. A lot of people came into the year thinking about their own playbook and how they thought the markets would turn out. My first question, and maybe I'll start with you, Scott, is what kind of adjustments did you make to your playbook going into the year and how did you manage investment portfolios through the COVID-19 year that was 2020.

Scott Malpass (00:05:17):

Thanks, Matt. And welcome everybody. You know, every crisis is a little different, right? And this was obviously a bit of a blindside to everybody, but it also makes the point that you have to really know your portfolio, what risk you're taking, your liquidity parameters--you need to know all that before you have a crisis, because, by the way, we have crises every few years and this is not new. So the thing that we did was we really do pick up the manager communication. We're sort of intensely discussing with our managers potential opportunities they're seeing as a result of the crisis. Do we want to be adding money in after a severe drop like that? Kind of what they're doing in response. So just being very deliberate and having more frequent conversation with managers just to fully understand how the opportunity set might be evolving, the risks that might be emerging, that kind of thing.

Scott Malpass (00:06:21):

And then you're sort of always focusing on liquidity and making sure you're going to be able to meet your obligations or have money for opportunistic allocations. So a lot of just intense communication and review with managers to make sure we know not only what we have and how it's changing and the opportunity that might be emerging. And then, honestly, we actually deployed some capital, in the middle of that with some of our best managers. Not with everybody, but some of our best managers felt that, as Warren buffet says, "I like it when markets go down, because I can buy my best names on sale, because I'm not going to sell them anyways." So there's a little bit of that, but like I said, every crisis is different, so where are you going to put money in how it evolves is going to be a little different each time. But those were the main things we were thinking about.

Matt Finke (00:07:18):

Yeah. Jonathan, did you find yourself being a little bit more opportunistic as well?

Jonathan Hook (00:07:23):

We did, but I'd say probably after a little bit of a pause. Let me, again, first thank Catholic Investment Services and FEG for sponsoring this today as well. We as a foundation tend to be a little bit front-end loaded in terms of our grants every year. So we were lucky in the sense that as we ended 2019, we had added a little bit of liquidity. And of course we're in a situation with our organization that we don't have inflows like universities through their development offices. So liquidity is very near and dear to us. So as we started the year with a little bit extra, it definitely came in handy. On that side, we were fortunate, but I think in addition to Scott's comments about doubling- and tripling-up on contact with your managers, which is essential, but is also to really go through your liquidity plan and recheck it and make sure what the capital calls coming up look like, can you do the things that you hope to do?

Jonathan Hook (00:08:39):

And naturally we saw a big drop-off in capital calls immediately after the the pandemic hit, so that eased the issue a little bit. But after the initial blow of seeing the markets fall in February and March, we started thinking offensively, where can we deploy the capital? So from that standpoint, I'd say very similar to what Scott had mentioned as well.

Scott Malpass (00:09:12):

Matt, I might just add that I think focusing on a liquidity plan or policy, as Jonathan mentioned, was really one of the key lessons a lot of institutions learned coming out '08, '09. Ultimately because the Fed bailed out everybody, nobody really had a liquidity problem, but a lot of us thought we might. But I do think that was a good lesson for all investors--really understand your commitments, how those can be even accelerated in a challenging time and then making sure you're prepared for that. So just reemphasizing that, that was a bit of a lesson out of '08 for a lot of investors.

Matt Finke (00:09:54):

Yeah, absolutely.

Jonathan Hook (00:09:56):

Yeah. I think also, those of us who had been through '08, when this came around, you knew it'd be different. You didn't necessarily know how it would be different. But it wasn't the center post of the American business coming apart, it was an illness. And what does that mean? To think through things in terms of both the fall and then what turned out to be a quicker rebound maybe than many expected. How do you want to attack that?

Matt Finke (00:10:35):

That's great. And those are good insights leading into the next question of what are we doing now? What's the playbook into 2021? And it last year or the Global Financial Crisis back in 08-09 shifted any of your thinking? Jonathan, is there something new to the playbook that you're thinking about?

Jonathan Hook (00:10:55):

I think that the ability to think through going on the offensive is really a key point. We did add equity exposure when we were near the bottom--I wouldn't say at the bottom, because I think we were hopeful and then pleasantly surprised when the Fed came to the rescue with ample liquidity. But we started adding back at that point. And adding to the equities, as Scott mentioned, where you had comfort and you had good holdings to start and with now they're a little bit cheaper. Then also looking for special sits and distressed opportunities, see what's out there and, again, the timeframe under which those might become very attractive. So those were some key things. And then the other was looking at, if we're going to be locked down for some period of time, that working from home trade. Not that we're sitting and day trading in our offices, but how could you take advantage of it through your managers?

Matt Finke (00:12:23):

Yeah.

Scott Malpass (00:12:23):

You know, it's hard to hide $12 trillion of financing globally and the potential impact that has on interest rates, the shape of the yield curve. It's pretty constructive for global equities. Forecasts are pretty positive for GDP growth in the U.S. and in a lot of the world, this year and into next. In fact, a lot of economists have increased their projections for GDP growth, just in the last couple of weeks. So you can see... Then you've got another $1.9 trillion coming out. They're talking about an infrastructure bank, which has been talked about for quite a while. The Biden administration is clearly looking at infrastructure, looking at renewables, there's sustainability, there's a lot of areas that are going to get a lot of funding.

Scott Malpass (00:13:21):

In fact, I think government and private sector partnership, which has increased pretty dramatically in a number of ways--including the speed of which we got vaccines, which is extraordinary--I think you're gonna find the state in general, getting more involved in some of these activities in the U.S. and beyond. So, there's gonna be some really targeted areas. Biotech, obviously. I think if you have sort of a core portfolio you feel good about, and you have liquidity, and you're sort of looking for some areas to focus on, I think those are going to be some that are going to get a lot of attention in the next 12 to 18 months. And then I might add cryptocurrency and e-currency. The infrastructure for that, as that continues to--the adoption there continues to accelerate and its potential uses. So I think there's a lot of interesting, kind of niche-y things, some niche-y, some not so niche-y, some big things. But there's a lot of areas to think about.

Matt Finke (00:14:25):

Absolutely. And Jonathan, to jump off and piggyback off of Scott's comments, are any of those areas in particular ones you're focusing on, whether it's an infrastructure play, biotechnology, thinking more and more about inflation? What area excites you the most to think about actually implementing into portfolios?

Jonathan Hook (00:14:46):

Yeah. I think one of the things that we did, and again it's timely of the pandemic, but biotech certainly is something that I think we've added exposure to, and the advances there have been astounding. And certainly looking at the speed at which the vaccines have come to market, I think that just bodes well for many more advances along the way. So I think biotech--and this is something I hear from peers quite a bit as well, is biotech becoming a larger part of people's portfolios. Tech, in and of itself, is pretty pervasive. I think most people have a fairly sizable tech allocation. I think one question to ask these days is, because tech is involved in everything, do you think about sectors the same way you used to? If you're a trucking company, you have technology in the middle of your company logistics. You go on and on, all types of companies have a higher tech component.

Jonathan Hook (00:16:05):

So what does that mean in terms of whether it's stock selection or sector selection? I think it makes for some interesting opportunities. Clearly more jobs, more education going in that direction as well. Infrastructure is an area we did not really participate in until recently. We invested in an international infrastructure fund, guess it was about the middle of 2019. So before the pandemic hit. But I think infrastructure is a very good asset class for long-term investors. Certainly it matches up from a timeframe. It's not necessarily the highest-returning asset class, but it can be a very steady one and help people with their payouts. So that is an interesting opportunity. I think those have been some of the main ones, but we can talk about more as we go as well.

Matt Finke (00:17:22):

Yeah. So just a quick follow-up on that, Jonathan, have you been trying to access some of those biotechnology managers more in kind of a special specialist type model through private equity, or is this more of a general larger index fund?

Jonathan Hook (00:17:38):

Most of it so far with us has been specialized biotech managers. So it's either long-only or long short. We do have some healthcare in the private space, but if you try to distinguish healthcare from biotech, the biotech is really more on the liquid side at this point. But we are actively looking at other options and seeing how best to deploy, and we're agnostic really in terms of just looking for the best way to deploy capital into the ideas.

Matt Finke (00:18:25):

Sure. Scott, you want to jump in?

Scott Malpass (00:18:26):

I might just add that biotech historically was challenging for Catholic organizations because of embryonic stem cells, but the fact is, +90% of biotech is completely compatible with Catholic values. And so the issue was really finding the appropriate vehicles that a Catholic investor could invest in and not be exposed to these areas that are objectionable. And you're seeing more flexibility there in some of the vehicles, particularly if you are willing to do a certain size amount, there's more separate accounts available. And I think, honestly, social investing is so much more prominent in our lexicon and how even managers think about things. They're willing to be more considerate of some of those issues than maybe they would have been in the past, where it was just purely a commercial mindset. So I have seen some movement in all those fronts, and we have substantially increased our allocations in biotech, like Jonathan, mostly on the liquid side. And as you know, in biotech, they sort of tend to be hybrid approaches often, where there's mostly liquid, but some private. And then you can have some pure private equity venture plays too, but ours has been more liquid as well.

Matt Finke (00:19:47):

And is that an area that you think is readily available to the broader Catholic investing spectrum? I'm thinking more about maybe a smaller institution that has Catholic social screening. Where can they find a little bit more opportunities to really impact that double bottom line that they're looking for?

Scott Malpass (00:20:05):

Well, it does require an intense staff engagement or consultant engagement with some of these managers, and size is still important in terms of getting them to be flexible on some of these issues. So it's not likely going to be accessible for everyone. Certainly in our Catholic Endowment Fund product, we're trying to find ways to inject more biotech exposure appropriately so we can take advantage of all these really wonderful things that they're developing in gene therapies and drugs for common diseases, and things that I think Catholics really want to support. So we're working on that at Catholic Investment Services, but it isn't going to be available to everyone. It's not quite that [inaudible] yet.

Matt Finke (00:20:51):

Sure, sure. Well, I'm glad we started this conversation, because I did want to jump into a little bit more about how you both think about impact portfolios. I know Jonathan in his foundation has done a lot of work on the D&I side--diversity and inclusion--and obviously Scott, Catholic values investing and a little bit more about, ESG-type investments going forward. Maybe Jonathan could--I'm wondering if a lot of people aren't familiar with the Weinberg Foundation--take a step back and maybe talk a little bit about the foundation, their mission, and how you all are thinking about your impact investments through D&I.

Jonathan Hook (00:21:29):

Sure. I'm happy to give a short commercial about the foundation. The foundation began in 1990 and today we're roughly a $3 billion organization and have given away over $2 billion in our history. But our focus really is on under privileged populations. We tend to focus on fighting against issues like homelessness, poverty. We do it through a number of ways, but we're typically funding the direct service organizations in each of those areas. The foundation makes grants all across the U.S., both mainland and Hawaii. Hawaii is important to us because our founder had established a very large real estate holding there while he was alive. So that's where we have an office with about a third of the foundation's employees. And then also in Israel.

Jonathan Hook (00:22:42):

So we have a small but mighty grant team who have stayed busy and done a great job giving the grants away this last year. And the way we started thinking about diversity and inclusion, was it made sense as you think about underprivileged populations and then looked at the investment universe, which tends to be probably a bit more homogeneous than the average slice of America. So we picked up the diversity and inclusion idea in our portfolio while our grant team focused on impact investing, and we kind of divided those two issues. About two and a half years ago, we set up the diversity program. And if anyone is in that process of looking to start something up, if they want to reach out after this conference, I'd be glad to help out people with ideas and maybe avoid some of the issues that we went through at the beginning when you're trying to figure out how to count certain things.

Jonathan Hook (00:24:00):

We started with a process of trying to build our portfolio to 25% diverse managers within 5 years. And this year--in fact, probably by the end of this month, I think we'll be able to say we hit that goal. So we hit it ahead of time. And now the discussion is about, "Okay, what are the next goals?" It's not just hit a goal and say you're done, but I think we, we want to make sure that we have a diverse portfolio, we have representation from all types--both from a sex standpoint, women and men, as well as all races and colors. So I think we're firmly in the habit of embracing that and putting it into our due diligence process. And the team has been terrific, trying to work toward this goal. So we've been very pleased, but it is early days as well. So we think there's continued growth there.

Matt Finke (00:25:11):

That's fantastic. Thanks for that insight, and then also allowing people to potentially reach out to you and pick your brain a little bit. Scott, I think for you, with Catholic values investing, one of the newer topics that we're hearing a lot more about is investing in ESG-type solutions. Pope Francis, in his encyclical, Laudato si', spoke a lot about caring for the environment. So as you think about portfolios, where do you think opportunities may lie for Catholic investors moving forward?

Scott Malpass (00:25:39):

Yeah, maybe just step back just a minute, because I've been getting calls the last few years from other large endowment funds, Ivy League schools, etc. that feel they have to have some sort of social policy, but because they're all secular now, they don't have a foundational theology to draw on. That was something I always felt was one of the great benefits of our work, was we did have a foundational theology. We could use that as our basis for having a social policy, and then you could add to it and take it from there, but at least we had a starting point. A lot of them have struggled. So I guess for faith-based investors, we tend to have some foundation already, which is great.

Scott Malpass (00:26:24):

I think these other movements are very positive overall, it's the implementation that worries me a bit. There are certainly values in impact investing and ESG that are commensurate with Catholic social teaching, for example, but I think early on ESG became very much a commercial thing. The banks were putting out all of these commercial products that were ESG and they were based on unproven metrics, often making statements about, "Companies that score high in some of these areas are better companies. They're going to have higher earnings over time." That's not necessarily true, and I haven't seen an academic study to support that. So I don't think you can just generalize, but I do think there is a lot consistent about thinking about proper governance, proper social policies and how you treat your workers and your suppliers and customers, obviously the environment and climate change. Clearly those were all things--labor--all of that is very much in the minds of Catholics who invest as well. So it's just more about not just buying something off the shelf that you think is going to achieve your goals, because a lot of it actually probably won't, and I think that's something investors are starting to learn.

Matt Finke (00:27:47):

For either of you, I think, one of the challenges that institutions face is exactly what you said, Scott: buying it off the shelf, does it really get to your goal of what you're trying to do? Maybe talk a little bit, Scott, about how you think about tracking these things--100% compliance with USCCB Catholic bishop guidelines, trying to hit ESG metrics. And John, a little bit about the DNI part of it and what you're thinking about from a metric standpoint.

Scott Malpass (00:28:17):

Well the, the approach has really been a very balanced approach to legitimately buy research on companies, develop the appropriate restricted lists, make sure all the managers have that. And the restricted list is really the... The foundation is the bishop's guidelines on social investing, which is a very well-written document, was very helpful to Catholic investors and other faiths who are trying to achieve the same kind of thing. And other faiths have their own similar documents. What I liked about the USCCB guidelines is it was very clear on what areas where it should be absolute exclusions, and of course that's the sanctity of life areas, and then areas where they were encouraging sensitivity in picking the right kinds of companies in some of these other sectors related of these other issues, whether it's the environment, labor, defense, etc.

Scott Malpass (00:29:19):

They're not written intended to restrict every company in those areas, they're written to cause investors to think about who are the good players and the bad players in those areas that are really affecting human life in some way. I like how it's written, that's been a good starting point. And then, like I said, you try to overlay a little bit of some of the ESG metrics as well, separately, and that's fine. We do that at Notre Dame, CIS does that, but it's not a witch hunt, because we want to make sure if we're measuring something or we have some metric that it's accurate, and that it fully reflects the company's values and practices. So it's a lot of work. It's a lot of work. You're going to spend a lot of money buying the research, monitoring it, updating databases, confirming and reaffirming the appropriateness of these metrics. It's just a lot of work and it can be very expensive. I think people--I think smaller organizations in particular really struggle with that process.

Jonathan Hook (00:30:33):

And I think, Matt, on the diversity side, however well-developed the ESG area has gotten, the diversity effort is not quite as well developed. I think it's lagging in that in terms of agreement on rules or principles. Many of those are still being created as we speak. I'll harken back to a recent conference that had a panel on diversity and the discussion quickly devolved into, "Well, is it 50% ownership of the firm? Is it 33% ownership of the firm?" Got into very granular issues, which are important, but only to a point. So I think where we are right now is version 1.0. It's going to have at least another couple of iterations I think, before there is kind of a general rule book in terms of how people think about it.

Jonathan Hook (00:31:47):

And to that end, each organization can adapt to what it wants and it needs. If you wanted to put greater or lesser restrictions or rules on something, I think that's up to your own organization. Ownership of the firm is one area that people are bouncing around what is significant. Again, is it more than 50% or not? Another one is, do you count the number of managers or do you count the dollars of assets you've deployed? Both are important. Again, you have to think about the context in which each one is deployed, I guess. If you focus on younger or smaller managers like we do, then the funds typically are a bit smaller, so the dollars you can deploy may not be as high.

Speaker 4 (00:32:55):

I think all those things are, are important. Do you have to have a greater or lesser percentage of women managers versus Latinx versus Asian versus African-American? They're all things that the organization needs to consider, but what's really important for your organization probably should be at the top of that list. And for us, we wanted to make sure that we had inclusion all across the board and not trying to advantage or disadvantage any group or any asset class, but try to find, uniformly--or uniform--percentages of people across the board and make sure that we were being as inclusive as we could. Knock on wood, I think we're making progress. Some areas are harder to find managers in than others, but to some extent that's always going to be the case.

Matt Finke (00:34:07):

Yeah.

Jonathan Hook (00:34:08):

For the football fans out there, I've heard some entities talk about using the Rooney rule. So every time you have a search for a manager, make sure there are diverse candidates in that search. Well, by itself, that's a good thing. Now, how many you hire is another level. So I think there are a lot of ways to go down and many paths to go down, but I think getting more diversity and different types of people into this business is absolutely a good thing.

Matt Finke (00:34:55):

Yeah, that's fantastic. I think you bring up a lot of good points. Definitely early days in the conversation about how institutional investors should be thinking about these things and measuring as a whole. I want to--

Jonathan Hook (00:35:10):

Matt, if I could just back on the ESG side. I forget the name of the index fund, so I wouldn't bring it up even if I could, but I remember they were floundering around and trying to gain traction and gain assets--I think they had like $40 million--they decided to change their name and they incorporated ESG into their name and all of a sudden a flood of money came in. So to Scott's earlier point, there were a lot of commercial solutions to that where I think a lot of the ESG principles ultimately just fall into good due diligence when we're all looking for managers and embracing many of those issues, as you think about how that manager deploys the capital and works in that asset class.

Scott Malpass (00:36:07):

Okay. Totally agree.

Matt Finke (00:36:08):

Right. I think that that's an important point: to have great partners. Right. To make sure they're doing the due diligence understanding. And for institutional investors, that's really important--to know exactly what you own, back to Scott's first comments, especially when you're trying to get into something that's a little bit more intentional with your investments. Scott, I've seen some questions on the chat and I wanted to ask you, we've talked a little bit more of some of the newer phenomena in investing... I'm thinking back, because you've both been in the industry quite some time, about some of these traditional things: active versus passive, value versus growth. As we are today, where do you sit on those types of opportunities? You've been involved with Vanguard for some time now and they have active and passive products. Maybe talk a little bit about the appropriateness based upon, really, who you are and how you think about those things.

Scott Malpass (00:37:05):

Well, a lot of what investors should be thinking about is what is their edge? What's their brand? Are they going to be able to attract and source the top investment firms and the next emerging generation of top firms? How does their governance structure support that? What kind of staff can they recruit and retain? There's a lot of issues that ultimately affect your strategy too. And for a lot of investors, being more passive would be completely appropriate, certainly for the typical retail investor it is, where they truly don't have any edge, we know that. I would argue there's really only a relatively small number of institutions that can really execute a very sophisticated multi-asset portfolio globally and earn superior returns. I'm talking about 50 or 60 in the world. I don't think it's a lot more than that.

Scott Malpass (00:38:01):

If you look at the numbers over time, you sort of know over time who's doing well, who's not. It's just not as many as you'd think. So I do think passive can play a very important role in a portfolio. Even some of the most sophisticated endowments are using more passive or structured products than they used in the past. So yeah, I think depending on the nature and culture of your organization and what your edge is and is not, you can have a combination of both. In terms of growth value and so forth, I mean, look, technology has revolutionized and changed a lot of the way we probably should be thinking about those names. As Jonathan mentioned earlier, technological innovation affects all industries, some industries were faster at adopting technologies and some were slower. Unfortunately, a lot of the slower ones were traditional value-type sectors.

Scott Malpass (00:39:04):

You think about banks, utilities, energy. We could talk a whole session on value growth, but I attribute the underperformance of value, I guess, in large part to that, but also to the fact that interest rates are low and inflation has been low. We haven't had sort of the dramatic cycles you typically would have where some of those more cyclical names would outperform. I think it's a combination of things. But I'm not giving up on good companies with good assets and good cash flow, no matter whether you call it growth or value. And by the way, a lot of those companies that were historically more value are now sort of getting religion, if you will, and they're starting to catch up, and that disruption will continue and there's going to be some great names there. And rates are going up and inflation is... You're not getting like hyperinflation, but you're getting some reflation, and I think that's going to be good for a lot of cyclical names that tend to be more value-oriented. I guess that would be my perspective on that.

Matt Finke (00:40:11):

Jonathan, any thoughts on your end and potentially what you're doing in your portfolio?

Jonathan Hook (00:40:16):

Yeah, we have used passive a bit more of the last couple of years, certainly if we have, say, a redemption from a manager or we sell a piece of real estate and have some capital coming in from that way. If we don't have a manager set at that point, someone that we believe will be able to outperform his or her benchmark over a full business cycle, we have no problem using passive funds to do that. Right after the, the crash in March, we put more money into passive just basically to capture the beta and try to make sure that we had a market exposure there as things hopefully, but did, come back.

Jonathan Hook (00:41:16):

We tend to use passive tactically, but not--we don't have a set percentage of the portfolio that we try to keep in passive or anything like that. We've got a small team, and we have four investment people, so I think for us, keeping the manager head count down to a manageable number is important. And we really want to have good, deep relationships with our managers. So that means you can't really... An individual can't cover 25 managers--it's just too many--and really keep up to speed with who's doing what. So we try to think about a tighter band between the 40 and 50 manager range, generally speaking. So with that, we try to go deeper but narrower, in terms of our manager head count. But we augment that with passive, and we're perfectly fine with that.

Matt Finke (00:42:34):

Yeah. I'll throw in one quick plug for my colleague Greg Dowling, who heads up the research here at FEG and does a tremendous podcast that can be found on our website. If you look at the most recent podcast that he's done, I think of them as kind of the most topical of the day, we had one on diversity inclusion. We have one coming up on cryptocurrencies. So I wanted to get both of your all's thoughts on some of the things that have become a little bit more prevalent in the short term with investing. Cryptocurrencies obviously have really taken over a lot of the news coverage. You hear a lot about SPACs. We mentioned biotech--there is an argument to be made that the run-up is pretty high and maybe too hot right now. So maybe, Jonathan, I'll start with you. Give us some thoughts on some of those other areas of the market that tend to be a little bit more short term now, but could potentially be great investments for long-term thinkers.

Jonathan Hook (00:43:26):

Since you mentioned crypto I'll start with that one. It's one that I've kind of cringed thinking about for a couple of years, but simultaneously trying to get a better understanding about where this is going, what does it mean. We are working on our first crypto investment as we speak. It's not one that is directly related to the price of a coin, or many coins, but more crypto infrastructure is the focus. I wouldn't say I've been dragged in yelling and screaming, but I think it's worth taking a look at and sizing it appropriately. If it's less than as successful as you hope, you're not hurt too much by it. And I think there continues to be more interest across both corporate and retail. It's here, it's not going away, and I think it's just a good time for us to look at it and take maybe a little toehold in something and put some money where our mouth is and see how it works. But hopefully at the end of that, however it turns out, hopefully we're smarter.

Matt Finke (00:45:08):

Okay.

Scott Malpass (00:45:13):

Well, yeah, we do a lot of venture capital investing so early on I looked at this as a new technology, something that may gain traction over time, may not. We have a lot of venture companies that don't work out. We have a few that work out really big. So I was always personally very comfortable with it. I personally bought Bitcoin at $200 almost 4 years ago. I did sell a tranche when it hit $17,000 in 2018, but kept some, because I really looked at it as a potential long-term venture play. I think it was harder for institutions to do that. At Notre Dame, we ultimately did put some money in Bitcoin and Ethereum in a particular vehicle. One of our existing partners was managing a fintech partner, so I had the proper storage and appropriate fees and so forth, but it's very small. It's certainly done well, but that was done just maybe a year and a half ago or so. I think blockchain technology is very real. We'll see how it plays out in terms of the currency aspect. But look, when I started my career at the Irving Trust Company in New York City, which is a custodian bank, and I think about all the costs of doing custody, and then if you can eliminate a lot of that with blockchain technology, I think that would--that's such a powerful force economically. It's not going away. People are to figure out how to, a way to disintermediate that, and I think we're getting closer. Bitcoin is being used to settle commodity transactions--that'll continue probably ultimately into securities--and that kind of thing. So yeah, I don't think a smaller Catholic investor needs to be worrying about Bitcoin per se. But I do feel for more sophisticated funds that are already doing lot of venture investing, if you look at it that way, I think it's fine.

Matt Finke (00:47:37):

That's great. I have one last question and then I'll let the team from CIS jump back in and maybe look at some of the ones that were on the chat. You were both known for your abilities to allocate investment funds and had a great successful career doing that. The one last thing I wanted to talk about a little bit was your teams. Scott built a long-tenured team at Notre Dame. Had a lot of success working with an investment committee chair that's long-tenured as well. Jonathan, you've had people work with you for multiple years too. Maybe we'll start with you, Scott, give us some insight on what you think committee members or staff should be looking at when they're in a partnership together. What's successful to you? How does it work best?

Scott Malpass (00:48:22):

Well there has to be really good alignment. The goals of the institution have to be very clear and accepted by all. There has to be a commitment to excellence. This, this doesn't have to be that complicated--people make it complicated. I started when our endowment was $400 million and it was me and one accountant. And when I left the Irving Trust Company in 1988, I came to Notre Dame and they paid me $35,000. So we clearly didn't have a modern compensation structure even back in the 80s. Jonathan was probably making a lot more than that then.

Jonathan Hook (00:49:05):

[laughs] I don't know about that.

Scott Malpass (00:49:05):

But my point is, the alignment's critical and you have to decide what model you're going to pursue. In our case, we decided we could build out a team. We had a natural pool of candidates working at a university. I've taught for 30 years. I would always pick out the best students and they would stay and then some would go out, then some would come back as a little more senior level after working somewhere else or business school, which I always encouraged them to go do something else and then come back if they wanted to, and several did. So I had a natural pool of talent that I got exposed to. And then look, as a Catholic university, we do have a long-term horizon. I worked with, 3 investment shares over the 32 years and 2 of them were 30 of those 32 years. That's extraordinary.

Scott Malpass (00:49:58):

A lot of people would say, "Well, that's not good governance, you should change them every every 6 years or something." I actually agree with that for most committees, but investing is different and the stability and consistency--you have an alignment with the board, the committee chair, the CIO, and the team, that's really important. And we had that, I was very fortunate, we had that commitment. So we just accentuated that and our brand as an investor continued to grow as we had success and we built our team and built relationships and then it becomes kind of a virtuous cycle. And you get to see things a lot earlier than others, and you get calls from people spinning out and they're not even going to go public, necessarily. And you get all those calls. I don't think I was getting those calls in 1988. I'm pretty sure I wasn't. But we started getting those calls. So that'd be some of the things that results in our success.

Matt Finke (00:50:58):

That's great.

Jonathan Hook (00:51:02):

Yeah, Matt, I would add to that that a good set of policies helps with that alignment, making sure that everyone knows the roles and responsibilities, whether you're a committee member or a staff member. And building a team that is tied both emotionally, but also I guess their heart is connected to the organization. Scott did it at Notre Dame. I tried to do the same thing at Baylor. Again, smaller town, not a large metropolitan area, but a university has a great advantage in that you have students cycling through every year that potentially could become an employee. And, having that love from an alma mater is and can be a very powerful force. But one other thing, I think that the role of a committee member, I think it's interesting. Many of us get very powerful, business members, attorneys, all sorts of people with great skills, high education.

Speaker 4 (00:52:29):

There was one specific committee member that will go unnamed, but I deemed him my favorite committee member of all time, in that he was smart, he was inquisitive, and everything he did, I knew was for the benefit of the organization. And--oh, and the last thing, which should not go unmentioned, is low ego. That's always idiosyncratic person by person, but I think someone who's really on the committee to help your organization and make sure you're focused on the North Star of making your organization better is really the best kind of committee member you can have.

Tom Lanctot (00:53:27):

Matt, we've got an avalanche of great questions and I don't know if we're going to want to go over time today, but we'll do our best to get to these even after the session's over. But one question that I know is on a lot of people's minds and it--next to our panel, one of the smartest investment guys I know is named Kevin Burke from Chicago, and he's got a question about inflation, and that is, "One of the largest unhedged risks in many of today's portfolios is the risk of inflation. How are you thinking about this risk and what barometers are you watching to help you manage this risk?" Jonathan, you want to kickstart and then let Scott comment?

Jonathan Hook (00:54:13):

Yeah, I think it's certainly topical. It is something that--we've all seen rates rise a bit. I think we are probably not overtly inflation hawks. We had a conversation with a research person this morning, and their view I think is probably a pretty good one relative to what we think. But typically as an economy is coming out of recession, you do see some rise in interest rates, we are seeing that now. We've never seen this level of stimulus though, and that's worrisome, but I think that's something we are going to continue to watch. We're holding the Fed chair to the fact that he doesn't want to raise rates. But I suspect that it's going to continue creeping up. If we pass this stimulus bill and then follow with infrastructure, we're going to have racked up a pretty good debt load. We may be just bound to have to raise taxes as the next act. How these things come together and in what sequence is one of the things we'll be watching.

Scott Malpass (00:55:43):

I would just add that I do think investors should be more aware of it today than in the past several years where there hasn't been any inflation, there has been deflation. There are rumors, at least, of some certain potential supply chain issues are coming out of China that could affect the inflation outlook. But the biggest issue, really, is the amount of debt, and that's why the yield curve has steepened a bit and rates have gone up. So I'd say more reflation, not inflation, because you still have massive technology disruption. Demographics in this country are more deflationary. So there's some balancing factors. Yeah, I don't think I'd be worried about hedging it too much. And by the way, long-term investors--equities have been the best inflation hedge if you're a long-term investor, most of us are heavy in equity. So that's what I would stick to.

Tom Lanctot (00:56:44):

So, Scott, this one I think is for you. "Does the Catholic value screen, because it's a constraint by definition, lead to slightly lower returns over time than an equivalent unconstructed portfolio?"

Scott Malpass (00:56:59):

You know, it's interesting, a lot of the businesses where there have been at least--this has been period specific, but a lot of the businesses historically that have been restricted, oftentimes have not been very good businesses. So it has depended on the period. I guess you'd have to say, any time you take out a subset of opportunity, you're lowering the universe of potential returns. I haven't seen a really good study on that, I gotta be honest. I never really worried about it because we weren't going to change our policy. If you can find good managers that have real skill and can do it with the appropriate screens, they're gonna add a lot of value. And that's what I focused on. But I actually haven't seen a very good study on that recently anyways. But when I did look at it in a more structured way years ago, I found it was very time-specific in terms of whether it was helpful or not helpful.

Tom Lanctot (00:57:57):

Well, I think your track record certainly proves the point that its possible to achieve great investment returns while adhering to your Catholic social teaching. We have an audience participant who has been asking a lot of great questions, and here's one that I think relates to spending, it's, "What's a good spending role to use in the current market rate and expected return environment?"

Scott Malpass (00:58:34):

Jonathan, you want to take that?

Jonathan Hook (00:58:36):

Sure. For us, it's very easy because our charter mandates we have to spend 5% a year. So if you take that for a grant, plus, just call it 1% for operation expenses, and then throw some inflation on there, you get to about a 7.5% number, ish. And that's really kind of what we use as a target.

Scott Malpass (00:59:03):

We always tried to stay between sort of 4% to 5% of a 12-quarter moving average calculation. We did not use the moving average to actually come up with a spending amount. We did it on a... We had a unitized fund and we would grow the spend per unit at a certain each year all while still wanting to be in that 4% to 5% corridor. If you looked closer to 4 in good times--it looked like we were spending closer to 4% and in bad times it looked closer to 5%, maybe the lower 5%. But one thing, for example, in 2008, even at the nadir of the market, we were only at 5.3%, 5.4%. A lot of schools were at 8% and they started cutting endowment spending dramatically. We did not cut endowment spending one penny. We had one year flat, and then we continued to grow it. So you can say that's pretty conservative, but I think if you're a long-term institution, I think that's the appropriate way to look at it.

Tom Lanctot (01:00:03):

John, you raise a good point, which is that foundations by law are required to make set distributions. So the other nonprofits have a little more flexibility to manage that. Zela, Matt, you've been watching the questions. Before we close, what, what else should we ask our panel?

Zela Astarjian (01:00:22):

Maybe--there's a bunch of private equity questions. Do you guys mind covering that quickly?

Scott Malpass (01:00:30):

Sure.

Zela Astarjian (01:00:31):

So this question was, "Can you discuss your current view on the private capital space, valuations, exit opportunities, SPACs, direct listings, and how you are approaching, including any deviations in your strategy?"

Scott Malpass (01:00:50):

Well, private equity has a lot of different aspects to it, of course. When I think of private equity, I also think of venture capital because we've had a pretty extensive venture capital portfolio. I personally feel innovation was always the one theme I could count on in my entire career. We always focused on that. That wasn't cyclical, in my opinion, that was something... I mean, even Google came out in what, '03 or '04? So that was always a constant theme. Growth equity bio funds, they're a little more cyclical. But honestly, again, it goes back to the managers you can access. When you're with good managers, they're going to make money in most environments. They may go up and down a bit, but they're going to still add a tremendous amount of value.

Scott Malpass (01:01:38):

So we never tried to flex our private equity weighting in any dramatic way. Right now we're 40% private equity in the endowment because that's where we're seeing more opportunities, certainly multiples in buyout funds are high historically, but if you're buying really good assets and you see a path to earn high returns with those assets, you have the right managers, the right partners, people, it can be done. So a lot of it depends on the quality of the portfolio you can assemble. Right now you're sort of late-cycle and things look expensive and a lot of money is going into it and that sort of thing. But if you take the long-term view, I wouldn't be waiting to get access, I would start building a portfolio. And you can do that different ways, including buying secondaries and so forth. Matt can tell you more about all that. But, yeah, I wouldn't be trying to tie in private equity allocations.

Jonathan Hook (01:02:37):

Right. And just to add onto that, we didn't start building our private equity book until early 2016, so we're still fairly young in that process. We are trying to be very methodical about how we budget what we're going to do in new investments each year. Of course that ties to our liquidity as well. But we're not trying to time with it. One year is going to be better than the next in terms of entry points or this or that. We're growing it steadily, and we want to grow that percentage up, especially as we're also focusing on selling our real estate down. Those two have a natural pattern that work together. I'd say the one thing we purposely did is most of our private equity tends to be focused on the mid and small cap buyout areas. So the multiples are a bit lower and there's a lot of capital above us that we'll look to buy the portfolio companies. So that was one conscious thing we did, to look at a specific part of the market. But like Scott, we like venture as well. Multiples have grown, but the exits have grown as well. We see some good opportunities out there still today.

Tom Lanctot (01:04:17):

One last question.

Zela Astarjian (01:04:20):

Matt, do you have a question? There was a fixed income question too that could be interesting, but, Matt, I don't know. Do you have any...?

Matt Finke (01:04:28):

Yeah, the one question I was going to ask, maybe we can hit it really quickly is, "As you think about... Your endowments are pretty special--size, access, important parts of how you manage your program. For our average client, we're a bit smaller. Let's say it's $50 million, $100 million, $500 million. How would you think about investing, just really quickly, if you were maybe associated with a $50 million university or a $500 million university? Maybe those two. Just how would you think about it broadly?

Jonathan Hook (01:05:06):

One is, are you going to staff it with an investment team or do you want to go OCIO? And that's a larger institutional decision, but I think at that size, that's a very good question to ask internally. If you want to add the people you've got to have the budget, you've got to be able to build the infrastructure and have the philosophical support of the organization. Otherwise, you're, you're going to be doomed to some trouble. So I think thinking through those issues before you actually make that buy-or-build decision is very important. I don't know, I'll stop with that. Scott, anything you want to add to that?

Scott Malpass (01:06:01):

I completely agree. That is really the big question. I think the inputs to that include what you said, Jonathan, and then things I talked about earlier--the culture of the institution, the edge you may or may not have, and the alignment you can achieve. If you can't get those things right, you're better off outsourcing it and getting real experts and have more stability in your program. But I think that's absolutely the right way to look at it.

Tom Lanctot (01:06:32):

Well, Jonathan, Scott, Matt, Becky, Zela, thank you. This has been a very valuable program. I think we could have probably gone on for another hour, we've got lots of good questions. And we'll do our best to follow-up with those and maybe even get their questions answered. See if we can get some feedback for them. So we're going to have a little survey at the end of the call, so please respond with your candid feedback. Thank you very much for joining us today and please be healthy and safe. This is the end of our call. Thank you.

Scott Malpass (01:07:03):

Thanks everybody. Thank you, John and Matt Matt. Thank you.

Jonathan Hook (01:07:07):

You too. Bye.