2022 E&F Investment Trends: What All the Cool Kids Are Doing

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Join Greg as he sits down with Wellington Management’s Multi-Asset Strategist Cara Lafond to discuss the ins and outs of the current investment landscape for endowments and foundations (E&Fs). Cara is responsible for researching investment policy and portfolio construction and advising clients on portfolio risks and opportunities, with a focus on Endowments and Foundations.

In this episode, Cara shares the top five E&F investment trends for 2022, including how institutions are rethinking their strategic asset allocations, how institutions are gearing up to face the coming environment of rising rates and inflation, her insights on navigating public-private crossover, strategies for investing in China, and different approaches to ESG implementation. She also breaks down some of the misconceptions around the endowment model, discusses how to lean into innovation, and how to determine if a manager is right for you. You won’t want to miss this episode!

Chapters

00:01:30 – Background on Cara and Wellington Management

00:04:04 – Cara’s top 5 E&F investment trends for 2022

00:05:24 – Managing strategic asset allocation in today’s environment

00:09:03 – What to do with fixed income in a rising rate regime?

00:11:51 – Navigating public-private crossover

00:15:56 – How to be sure you’re investing in the right manager

00:18:22 – Leaning into innovation

00:19:42 – Strategies for investing in China

00:25:23 – Different approaches to implementing ESG in portfolio allocations

00:29:55 – Additional E&F investment trends to watch

00:32:57 – E&F trends that are really just fads

00:34:29 – How Cara keeps abreast of industry trends

 

SPEAKERS

Cara A. Lafond, CFA

Managing Director, Multi-Asset Strategist, and Portfolio Manager

As a multi-asset strategist, Cara serves as a trusted partner to the firm’s clients. She researches investment policy and portfolio construction topics, advises clients on opportunities and risks in their portfolios, and invests as the portfolio manager for multi-manager solutions designed to solve specific client challenges. She is also a member of several internal management committees. Prior to her current position, Cara held several roles in the firm’s Global Relationship Management Group, supporting our US and Australian clients (2001 – 2006). Cara joined Wellington Management in 2001 after receiving her BS in business administration and finance, summa cum laude, from Babson College (2001). She also holds the Chartered Financial Analyst designation and is a member of the CFA Society Boston and the CFA Institute.

Host

Greg Dowling

Chief Investment Officer, Head of Research, FEG

Greg Dowling is Chief Investment Officer and Head of Research at FEG. Greg joined FEG in 2004 and focuses on managing the day-to-day activities of the Research department. Greg chairs the Firm’s Investment Policy Committee, which approves all manager recommendations and provides oversight on strategic asset allocations and capital market assumptions. He also is a member of the firm’s Leadership Team and Risk Committee.

Transcript

Greg Dowling (00:06):

Welcome to the FEG Insight Bridge. This is Greg Dowling, head of research and CIO at FEG, an institutional investment consultant and OCIO firm serving nonprofits across the U.S. This show spans global markets and institutional investments through conversations with some of the world's leading investment, economic, and philanthropic minds to provide insights on how institutional investors can survive and even thrive in the world of markets and finance.

Greg Dowling (00:35):

Ever wonder what the cool kids are doing? Well on this episode of the Insight Bridge, you will hear about all of the latest endowment and foundation investment trends. Our guest is Cara Lafond, she's a managing director and multi-asset strategist at Wellington Management, where she researches long-term multi-asset trends, including capital market expectations, asset allocation, and portfolio construction. You will hear about how institutions are rethinking their asset allocations and what they are doing with fixed income in an environment of rising rates and inflation. Additionally, we'll discuss private-public convergence, China, and investing in client change. Don't be left out.

Greg Dowling (01:22):

Cara, Welcome to the FEG Insight Bridge.

Cara Lafond (01:24):

Thanks for having me, Greg. I'm excited to be here.

Greg Dowling (01:26):

So tell me a little bit about yourself and Wellington.

Cara Lafond (01:29):

Wellington Management's a global asset management firm with over 900 investment professionals in our offices worldwide. We currently manage $1.4 trillion in assets on behalf of over 2,400 clients, including endowments and foundations that we're here to talk about today, as well as healthcare systems, pensions, insurers, and sovereign wealth funds. We manage across asset classes, so equities, fixed income, real assets, and alternatives, with an emphasis on private markets and hedge funds. Wellington remains a private partnership with all partners active at the firm, and this ownership structure helps align our interests with those of our clients and apply a long-term mindset. As a multi-asset strategist, I perform research from an allocator's perspective with an emphasis on asset allocation and portfolio construction.

Greg Dowling (02:19):

That's great. So how does one become a multi-asset strategist? It's such a cool name.

Cara Lafond (02:26):

It's hard to believe I've spent over 20 years partnering with nonprofit CIOs to understand their investment philosophies and challenges. I've actually grown up at Wellington, having joined the firm straight out of undergrad as part of a rotational training program. The program provided tremendous exposure across the business. I matched with our endowment and foundation client practice. Maybe I was naturally drawn to endowments as a recent undergrad myself, but I also found the long-term view and innovative approach to investing captivating, and I wanted to learn more about the endowment model.

Cara Lafond (03:01):

After a few global assignments, I moved to the investment side of our business. And today I'm a member of Wellington's investment strategy team. I love the breadth of my role. In my multi-asset research, I'm able to collaborate with colleagues who are specialists--be it a technology analyst, a China equity portfolio manager, a private equity principal, or a macro economist. It really deepens the research that I'm able to perform. I then have the opportunity to share perspectives and debate with endowment and foundation CIOs, investment staffs, and boards. I'm a lifelong tennis player, and I think about tennis as a game of minimizing errors and going for the big chop when you have conviction. I see strong parallels between tennis and investing, and I think that's part of my passion for the markets.

Greg Dowling (03:49):

I love it. I love the tennis analogy, that's great. And Wellington's certainly a great organization--just so many resources. I've had the opportunity in the past to attend your morning research meeting and it just...the breadth is pretty impressive. Drum roll, please. Let's hear your top five E&F investment trends for 2022.

Cara Lafond (04:10):

Sure. So as we're engaging with clients, I think that there's a few themes that come up in nearly every meeting. I'll quickly go through those for you. First, clients are taking a moment to step back and kind of reevaluate their strategic asset allocation in this environment. Certainly the markets have run up substantially and we're hitting some air pockets today. So making sure that portfolios are positioned for the long term. Second, a lot of angst and handwringing around what to do with fixed income, especially as we go into what we expect will be a rising rate regime. Third, I think, is: how do you approach private and public markets? It's pretty fascinating to study kind of the convergence that we're seeing across both the private and the public spheres. Fourth is China. A lot of discussions around the recent headlines and then how to tackle that within your asset allocation, thinking about both the structural growth opportunity as well as the risks. And then lastly, sustainability continues to be a growing area of focus for endowments and foundations. It's interesting to think back--throughout the pandemic, I think interest in that space has only grown.

Greg Dowling (05:15):

Those are some really good ones. We're gonna spend some time going through each of those and drilling down a little bit. I feel like you have to start at the top, so let's talk about the strategic asset allocation. What are people doing with that? Or why are they doing it? Is it all performance-based return expectations? What are people doing?

Cara Lafond (05:33):

When we think about this, the way that I've been framing it with clients is it's almost an allocator's dilemma, right? Both return and diversification are in short supply, so how can you construct your portfolio to really maximize the ability to meet your return objective? I've been meeting with clients and what I've been seeing them do and advising them on is thinking about finer slices within your asset allocation, having more targeted exposures into areas where we still see opportunities for both valuation expansion, as well as more reliant sources of diversification.

Greg Dowling (06:08):

That's not diworsification, right? Sometimes people over-diversify. Is that...there's a difference?

Cara Lafond (06:13):

I think there is. So oftentimes, especially when we're thinking about some of the smaller and more mid-size endowments and foundations, they have lean resources. The governance and oversight budget--they can only focus on so many things, so you have to pick your spots carefully. So I think you do want to invest with conviction and make sure that each position that you have in the portfolio is going to ultimately drive your return outcomes.

Greg Dowling (06:37):

Maybe give me and some of the listeners some specific examples of this.

Cara Lafond (06:40):

So what I've seen clients doing, if we think about core equities, I would say is leaning into more balanced factor footprints. Certainly growth has been on a 10-year tear post-GFC, so wanting to make sure that they're not over-exposed to growth in the markets. And so making sure that they do have some quality exposures as well as value-oriented exposures alongside that. Second, I would say, when we think more about satellite exposures is certainly emerging markets continues to be top-of-mind. What's the best way to invest in emerging markets? I think you want to be leaning into the growth of the future as opposed to past winners. More of the cyclically oriented parts of emerging markets and alternatives continue to play a very important role within portfolios, and that's across both liquid alternatives as well as private markets.

Greg Dowling (07:31):

What about inflation? When people are looking at their strategic asset allocation, people always should care about this, but we haven't had to in a very long time. So are they thinking about inflation when they're looking at or reviewing their strategic asset allocation?

Cara Lafond (07:44):

Yeah, it's interesting. This reminds me of that period as the commodity supercycle started to liftoff in the '03, '04 time frame. Once again, inflation's very top-of-mind--with endowments and foundations especially, but we actually see interests across client channels. We had done a recent flash survey of our clients globally, and 60% of clients had mentioned that they're looking to add to inflation-sensitive assets this year. I think that that just highlights the need to focus on it. And that's even more important for E&Fs because they do have that inflation-linked liability really embedded within their return objective, as you think about wanting, again, to kind of preserve and grow assets over the longer term. And so we have been seeing clients really refining their inflation-sensitive exposures--a lot more conversations around both higher beta inflation-sensitive exposure, such as commodities, for example, as well as areas such as real estate and infrastructure, where you can also get a bit more of an attractive yield alongside some inflation sensitivity.

Greg Dowling (08:46):

That makes a lot of sense. If you think about E&Fs, especially those that are in areas like healthcare or higher ed, we have normal inflation and they have inflation with tuition and costs around that are even a lot higher and always have been, so very important to keep that in mind. So we're talking about inflation and we're talking about lower returns; that makes me think of fixed income. So what are people doing with their fixed income portfolios?

Cara Lafond (09:11):

When I think about fixed income in this environment, I think that certainly liquidity needs--as we were reminded in spring of 2020--are paramount, so wanting to have high-quality fixed income that's really there as a stabilizer that you can draw upon as needed. I think that's especially important for healthcare systems as well as endowments, as you had mentioned, just given increased need for their draw from their portfolios. So that's how we think about sourcing liquidity, but certainly as you said, there is an opportunity cost to holding core fixed income in this environment. And it's been a story of just very low yields, but now we're likely seeing negative returns as we expect rates to rise going forward.

Cara Lafond (09:54):

What I've been seeing clients do is kind of two paths: one going modestly out on the risk spectrum, complimenting some of their core exposures with more rotational fixed income strategies that might have a broader opportunity set across different types of fixed income sectors just to eke out a bit more yield. I think you have to be careful though, as you do that, to not amp up the risk profile of these assets too much. So I think that you do have to thread that needle. And then the second one, we'll see clients who are more comfortable with complexity leaning into some more market-neutral strategies for diversification. So instead of just having interest rate risk or duration as that source of diversification, having some more active risk alongside it. And we do think that this will be a better environment, as we have volatility return to the markets, for active risk, because we should see a lot more dispersion. Certainly we're getting a taste of that year-to-date in the month of January. But we do think that the setup for greater levels of dispersion will be positive for these more market neutral or relative value strategies.

Greg Dowling (10:58):

What about on the private side? I certainly see some barbell approaches where people have their kind of very traditional core fixed income--rate sensitive--because they need to have liquidity. And then there's this other bucket that they can put towards like private debt. Is that gonna continue to be a trend or are there some variations of that in this new year?

Cara Lafond (11:16):

I think that that trend will persist. Coming out of the GFC, I think the theme was "go into where the banks are leaving" and a lot of E&Fs were early-on in that story. We have seen yields compress somewhat just because of greater capital flow within private credit. But to your point, I do think that this is an asset class that's here to stay and is worthy of an allocation, the ability to play that diversifying role and also get some more interesting yield profiles.

Greg Dowling (11:42):

It's interesting. The banks left that space, so you had this kind of shadow banking system emerge, but now we actually see banks offering private debt products, which I think is hilarious. But maybe that's another podcast. All right. So we talked about fixed income. You had mentioned this crossover--I'm calling it a crossover--this public-private overlap that we're seeing. And for those who don't know what we're talking about, maybe can you define that a little bit and then I've got some questions for you.

Cara Lafond (12:07):

Sure. Yeah. This has been a fascinating area for me to research, and an area that I've been focused on for much of the past year. When you think about what's happened, we've really seen a change in market structures, and this is true across public and private markets. So let me just focus for a moment on public markets. If we think about the number of listed companies within the U.S., just to pick one area, the number of listed companies has consistently declined since the mid-90s, kind of before the tech bubble popped. And so we've seen that consistent decline in terms of the number of listed companies. At the same time, the companies that are listed have become larger, more mature, and so much more concentrated in terms of the profile of public markets. And what's interesting too, if we look at public small caps, they've been really altered because of this dynamic.

Cara Lafond (12:57):

If we think about the themes where companies are choosing to stay private longer, the way that that's transmitting into the small cap markets is that there's a lot less of that hyper growth phase available within the public markets. When you think about what a small cap allocation was in the early 2000s, you were typically seeing--within the Russell 2000 Index, the majority of that index was sub a billion dollars in market cap. Today, less than 12% of that index is sub a billion dollars. It's just completely shifted in terms of the market composition there. What I think that says to allocators is to get that type of growth profile, to recognize that companies are staying private longer, they're able to fund growth in a number of different ways, as opposed to just going through that more linear IPO cycle that we had seen decades ago, you actually need to be complementing your public market exposures with privates.

Cara Lafond (13:55):

Going back to that, reevaluating your asset allocation. With returns in short supply, you're very reliant upon growth wherever you can access it within the portfolio. I do see a lot of allocators stepping back, thinking holistically where they can find these more innovative exposures. And I do see private markets continuing to play an important role--and that's for E&F across the board. I don't think private markets are only for the most sophisticated--the Ivys--as they would've been when the markets were less mature.

Greg Dowling (14:28):

So how do you get exposure to that? There's these crossover managers who are doing a little bit of both and then there's certainly just dedicated venture managers out there. And you can go from early stage all the way to--gosh, now there's series D, E, and F, things that are later stage. How are people playing this? Is there a recommendation that you have?

Cara Lafond (14:49):

I think that there is the opportunity... Because there's greater depth in private markets, to your point, there's a greater opportunity to ladder in different styles of growth to your privates program. What we've seen clients doing--those that have more mature venture growth investments thinking creatively about things like hybrids, crossover funds that you had mentioned. You want to be cautious there, certainly making sure that you're investing with a manager who has experience on both sides of the market. And I actually think it's really interesting, some of the crossover funds that are focused more in sector-specific opportunities, because I think that's where you get a lot more specialization. And also when we think about the opportunities for hybrid and crossover investing, you do have to be mindful of the liquidity. I do see clients thinking about either crossover investments as part of their hedge fund allocation as a dedicated slice of that allocation. But then also those who are using it as a portion of their private equity program, because it gives you a bit more liquidity in the ability to rebalance.

Greg Dowling (15:48):

On the flip side, we're also seeing a lot of private managers create public vehicles or these lifecycle vehicles where it's almost permanent capital. I agree these are all good things, but can you be good at everything? Privates, publics? How do you make sure you're investing in the right manager? And if you're a public manager, that you're not investing with someone who just has private equity envy?

Cara Lafond (16:08):

That's a great point because you want to avoid that greed, right? And certainly selection is everything within alternatives broadly and private specifically. But I do think you want to, certainly throughout the due diligence process, make sure that you're investing with managers who do have true valuation discipline, who have the network and have the skill set and the edge to be playing in that crossover space. I think that that's something you want to probe and really push hard on so that you can understand how they're going to be approaching the space. You know, when I think about what we've seen in private markets last year, certainly there is a lot of endowment envy, maybe not just private market envy, when you saw really blockbuster returns being reported for the last fiscal year. It was a very strong exit environment. So for those private market managers, especially in the venture space, who are able to sell and realize those gains, that was very constructive for the outcomes in the investment portfolios.

Cara Lafond (17:05):

Some managers I think were less able to actually realize those gains. So I think that that's a good test as you think about the skillset for a crossover manager: how did they behave last year? As we go into 2022, certainly as we think about constructing private equity allocations, very consistent pacing is a key ingredient for a success. We had flagged a lot of questions from clients who are saying, "Is the IPO window over? Is it closed? Should we be leaning away from our venture and growth managers?" And I'd argue that no, that's not the case. I think that high-quality companies will continue to be able to have positive outcomes in this environment. And this is gonna be a really attractive environment to deploy capital because of the sell-off that we've seen in growth stocks year-to-date. That's gonna transmit to the private markets. Usually takes three to five months to do so. But I think that that reset in valuations is really what the private markets needed.

Greg Dowling (18:04):

No, that's great. I like what you said about looking at how they behaved and what are the actions they've taken. And then also in your previous response, I think that's great too about having some sort of specialty, whether it's tech, healthcare... I mean, it's hard to be good at all things private. So kind of being a little bit more specialized may makes some sense. You're really talking about--and the reason that you're doing this is to invest in innovation and you made a comment about "leaning into innovation." So what are the innovations that investors should lean into, whether it's private, public? What are some of the bigger themes?

Cara Lafond (18:37):

I've been using the term it's this "innovation supercycle." The pandemic's only accelerated it. And this is creating a lot of very attractive opportunities. I think across the healthcare space, certainly within technology as we think about digitization and the cloud, and also what we're seeing within financials, kind of that decentralization of financials. I think that there's a lot of opportunities on the public and the private side within those themes. I'd actually tack on one additional thought there. Really all companies now have to be tech enabled, so how can you find those providers of those services to some of the largest companies in the U.S. and globally? I think that that's the second derivative to think about as you're investing in that innovation supercycle. One additional thought as well on innovation is tied to my last theme. As we think about sustainability and climate change, I think a lot of the technology and the adaptation and mitigation that will need to be invested in behind climate change is very attractive as well.

Greg Dowling (19:42):

Let's talk a little bit about China. I feel like there's a lot of controversy around China on the "should you invest" and then the "how you should invest." So maybe let's start with should you invest, for any institution that's having that internal debate. Give us the argument for the "should you invest?"

Cara Lafond (19:59):

I go back. I think it was probably three years ago I was visiting the West Coast meeting with a number of foundation and endowment CIOs, and I remember very clearly one of the CIOs, she made the statement: "5, 10 years from when we are constructing our asset allocation, we're going to invest in the U.S. and we're gonna invest in China as the core, and then have satellites around that." And so as a framing tool, that's something that I always go back to, because I think it was very thoughtful the way that she positioned that. When we think longer term about China, certainly the structural growth story is very attractive, just the size and this scale of that economy as well as the breadth that we're seeing emerge there is certainly playing an important role as clients think about seeking to meet their return objectives. Many of the endowments and foundations that I speak with, they were early-on into emerging markets. And now as China's a growing share of that opportunity set, they continue to be very engaged, kind of overweight emerging markets, really doubling down on China, be it through their global EM managers or having some of those finer cuts, those more targeted exposures to more dedicated exposures, be it on the public or the private side.

Greg Dowling (21:09):

It's hard to avoid the world's second largest economy--and soon to be the first--so you're making a bet either way, right? I mean, you're gonna have some tracking error whether you're overweight or underweight. And if you are "no China," that's also making a bet as well, right? And that probably gets to a little bit of the how, because you probably don't want to do U.S. ADRs that might be closed. And if your only experience with China was the internet stocks, that wasn't great last year. But if you looked at like A shares, A shares were okay. So is that how you would tell folks to invest? Is there onshore, offshore, public, private--what's the right kind of mix? What would you tell them?

Cara Lafond (21:50):

I do think that the movement is more towards the locally listed companies. We get A or H shares. ADRs are certainly under pressure and we think we'll continue to see companies pursue dual listings or direct listings on the local exchanges as they go public. When we're structuring client's portfolios, what we're increasingly doing is thinking about the motivations of the Chinese government, what are they seeking to achieve? We've heard a lot of noise around common prosperity, the regulation moves that we've seen coming out of China. And that has important implications for how you're accessing the market. I think you do want to be investing alongside the motivations of the government, and what they're trying to do is really build out the domestic economy, so that's where I see A shares as a really interesting exposure.

Cara Lafond (22:39):

That being said, there's a lot across the quality spectrum as you think about the companies within China. So I do think you want to have a more targeted approach, a bit more concentrated as you tackle manager selection and strategy selection within China. I think that that's very important. And then we do see the willingness to invest across A and H shares which I think is pretty attractive because it does give you a breadth of valuation opportunities. Especially, too, if you're thinking across the cap spectrum. I think that that ability to rotate will also be an important lever, because you do see a lot of movements in terms of valuations across the cycle within China. Especially important for A shares because retail does tend to be a large player within that space and can be a driver of volatility. So an active manager with more of that institutional mindset taking that longer time horizon is well-positioned to help modulate that volatility and navigate it.

Cara Lafond (23:38):

One additional thought that I would make too on China: what's interesting is that they've been doing a lot of work in terms of building out, again, that domestic economy, specific to the private markets to really smooth the path to going public in those local markets. There's still work to do there, but that's encouraging to see. And again, an area that we would expect to grow going forward. When you think about the complexion of private markets within China, they're unique in that they're more heavily slanted towards venture. And I think that makes a lot of sense when we think about the innovation and the types of local companies that are being developed there.

Greg Dowling (24:17):

We kind of hit on a little bit of the how and kind of talked about A versus H, so being more local, investing alongside of what the government's agenda is. I think you're also advocating a little bit of specialty sector, sort of that country specialist, and also being active versus just buying a passive basket. If you had your druthers, would that be the right way to invest in China?

Cara Lafond (24:40):

I think that's fair. And again, that's thinking for kind of the ideal type of portfolio structure for clients who are earlier on in terms of their experience investing within emerging markets. I think that a global EM manager can help play that role, again, wanting to be more active just because the quality spectrum can be so broad in emerging markets. Over time, as you build out your expertise, I think having that more dedicated exposure, more of that specialist, boots on the ground type of mentality can be very valuable. We only expect the A shares market to grow as a portion of the global EM index. Today is an important time to kind of get ahead of that and infuse the portfolio with those types of exposures.

Greg Dowling (25:21):

That's great. That's some good guidance. We're on kind of our last one, which can be a little bit of a black box. This is ESG, and that can mean a lot of things. Like all the cool kids say they're doing something, and the reality is a little bit different. What are people really doing with ESG and how has that changed?

Cara Lafond (25:38):

It's interesting. So I've seen clients tackle it a few different ways, and I think it's very much driven by their mission. For a number of the more environmentally focused endowments and foundations, ESG is kind of core to what they're trying to achieve. And so I've seen clients--for example, thinking about an East Coast foundation that we work with, they were going through their passive exposures, moving them to more sustainability types of passive exposures, emphasizing things like low carbon. Again, they're more of an environmental organization, so that's an alignment with that. And then, over time, kind of going on a journey, an education process to bring the board along. So thinking about, "What is the most authentic way for us to align the investment portfolio with our mission?" And having a roadmap to think about things like more dedicated impact investments and whatnot.

Cara Lafond (26:30):

Another investor that I spoke with recently is further along in terms of their sustainability journey and they're really trying to fully align the investment portfolio across asset classes to be much more targeted in terms of ESG, so they've rewritten their investment policy statement thinking about ESG from the manager selection process all the way through in terms of implementation and then key metrics that they're looking to achieve that they can report on to their board as well as to their donors. There is one community foundation that I was meeting with recently, which I thought was an interesting way to frame the importance of ESG for them. They see it as an edge for attracting donor dollars. They're saying, "This is a way that we can really differentiate ourselves. Our donors are living longer, they want to see their money put to good work during their lifetimes and we can help them do that."

Cara Lafond (27:24):

I thought that that was a unique approach, and I'm curious to see if we'll see more of the community foundations start to tackle things from that perspective. And then one last comment that I would make is thinking about some of the healthcare systems. So there's one healthcare system that I spoke with mid last year in the Midwest, and what they've done--again, trying to be in alignment with their mission--is thinking about how can they invest in innovative strategies to address their needs as a hospital system. So more of these joint venture kind of innovative hubs, I think we'll continue to see that as a trend. And I think that that falls under that ESG umbrella.

Greg Dowling (28:08):

Hmm. Yeah. Interesting. Yeah. I've certainly seen that, but I've not seen that positioned as ESG. Definitely have seen community foundations--who are often trying to compete for donors' money--have a little bit more mission-related area. One question for you though. This is definitely a long-term trend, and it's been a trend for many years, but every year it seems to grow a little bit more. Performance was great. A lot of these things, especially if you get into things like EVs and whatnot, their growth had a long run. At least early in '22, it's kind of the revenge of value and basic materials--energy, energy is doing great. So how does an institution that has--especially when they've gotten rid of their carbon footprint from an investment perspective--is there a way to hedge that? How do you make sure you don't underperform even when you're doing good?

Cara Lafond (28:57):

That's a great point. I think it goes back to wanting to have balance within the investment portfolio. How can you think about approaching the sustainability space, not just being overweight technology, to your point, but how can you think about areas of the real estate markets and whatnot that could help infuse more of that sustainability focus? I think that this is such a rapidly evolving space and the types of expressions I think will only grow in the marketplace. But I think you do raise a good point that you want to make sure that the portfolio is properly constructed and not over exposed to one specific area of the market. That goes back to, as we think about diversification and how can you have different expressions of diversification within the investment portfolio to help offset what could be a bit more of a growth footprint from those more technology-related kind of sustainability exposures.

Greg Dowling (29:51):

We have covered a lot of ground in just those top five. So did anything just sort of miss the top five that you want to throw out there?

Cara Lafond (29:59):

Well, you just touched upon it with that last question: value versus growth. I think that that's certainly an area of debate and what to do kind of going forward and thinking about that. Another area that's come up a lot is crypto. The way I would frame how I see E&Fs approaching this today, some of those with more mature privates programs really kind of touching the crypto space through more of the blockchain technology and their venture programs. A lot of discussion around tokens and how to think about that. "Could this potentially be currency type of exposure within global fixed income? Is it a substitute gold?" They haven't seen as much dollar flow into that space as of yet. A lot of discussion. So I'd say the investment lay of the land today is more so in the blockchain technologies as opposed to going out and actually buying Bitcoin as part of the endowment.

Greg Dowling (30:53):

Yeah, we'd probably fall into that camp as well. Like blockchain technology, have at least advocated for more on the private side, certainly have some younger folks who dabble in this and are true believers in all things. But it's hard, right? It's getting easier, but it's been hard from an investment perspective, a custody perspective, rebalancing your risk budget. I mean, these things are extremely volatile. One thing I tell you that probably all EMFs should do--and we've seen some clients do this--is set up the ability to accept donations that may be in Bitcoin or Ethereum or whatnot. If nothing else, make sure you can do that, because some people are sitting on tons of potential gains and it's one easy way. You take stock donations, why not take some crypto donations?

Cara Lafond (31:40):

That's a great point. I hadn't thought about that yet.

Greg Dowling (31:42):

We've seen a few folks do that. Anything else on that? Value versus growth, crypto, boy, those are the big ones. Any last ones?

Cara Lafond (31:49):

I don't think so. I think we've covered it, though I'm sure the markets will give us a new topic maybe later today or tomorrow, given the moves that we're experiencing currently.

Greg Dowling (31:59):

Every day, every day. So a couple other items. Of these, even some of the almost top five, which one of these generated the most internal debate?

Cara Lafond (32:10):

I would say crypto is a hot area of discussion and debate. Our FinTech team is certainly educating the firm around it, and there's a lot of really interesting research coming in that space. So I think that that's an area to watch and continue to monitor. I do think that private market valuations has been kind of a lightning rod, the froth in the market. And so understanding what's going on within that landscape, where there are the good citizens and those that are less so. I think that that's certainly an area to be very deliberate and selective as you approach. We've had a lot of discussions internally in terms of thinking about the types of companies that you want to own and how can you be a true partner because deal competition has been so fierce.

Greg Dowling (32:57):

Is there a trend that you hear competitors kind of call out that you really think is a fad?

Cara Lafond (33:03):

Every few years we hear about the death of the endowment model, and so I think that that is not true, but what you have to do to be successful as an endowment and foundation investor is really think about your unique institutional context. You know, the genius of David Swenson when he arrived at Yale in the late 80s was he looked around and saw: what's Yale's edge? What does that campus offer access to that's differentiated and unlike other institutional investors? How he built out the Yale model, I think was really highly bespoke and customized for Yale's experience. When I think about successful E&F investors, they do look inwards, think about their edge, and then certainly apply it consistently as they both invest as well as communicate with their managers and their key stakeholders.

Greg Dowling (33:59):

I love that. No, I think that's great. Many people try to emulate or copy Yale and they just can't. They don't have the resources, they don't have the access to managers. But they may have alumni in a certain area, and so you need to play your advantage. And I do think the endowment model's about diversification and diversification works over time. It hasn't worked in a kind of trending melt-up-type market, but you want diversification right now, diversification feels pretty good right now. But we'll see, it is definitely early in the year. I love that, that was great. So I'm impressed; you seem to know a lot about a lot. How do you keep abreast of all these industry trends?

Cara Lafond (34:36):

I'll certainly highlight my Wellington colleagues in terms of the investment dialogue. I had mentioned to you, before joining the call today I was meeting with our geopolitical strategist who was giving a read through into how he's assessing what's going on with Russia and the Ukraine, and having that access to that expertise is very beneficial for me. And then when I think about my client engagements, I learn a lot from the CIOs and investment staff and the investment consultants that we partner with. I mean, it's incredible the depth of knowledge that they bring to bear and those that are most successful, they can really take that long-term view and have a very steady hand as they approach their investment strategy. I also always encourage younger investors to build out their network.

Cara Lafond (35:22):

As you think about up-and-coming investment analysts who are looking to get into a CIO seat longer term, a lot of the conferences are terrific for that, that idea sharing and kind of collaborative nature in the E&F community is unique. And I think that that's something to lean into. I will say I've gone down a podcast rabbit hole in the pandemic; I have seen a lot of really interesting investment content coming out through the podcast channel. There's some great podcasts that you can listen to when you're out for a walk, taking a break between meetings. Invest Like the Best is terrific. Capital Allocators. I've heard that there's a terrific podcast from FEG called Insight Bridge that's a must-listen as well.

Greg Dowling (36:09):

[laughs]. Yeah, that's great advice. All the ones that you mentioned are just fantastic--Capital Allocators and Invest Like the Best. There's so much information that's out there that wasn't... Any other--because I was gonna ask you, you have this great resource called Wellington and I was gonna ask you how does one that doesn't have those resources keep in tune with what's going on? You mentioned podcasts. Any other like blogs or periodicals that people can read on their own that you'd recommend.

Cara Lafond (36:36):

Yeah, so I do love to read a lot of the research reports that come out that are not--it's not just The Wall Street Journal headlines every day. How can we think about that longer time horizon and kind of do a deeper dive into it? And I'd say too, you want to complement the more investment-driven content with other sources. So as I've been researching implications of climate change, for example, our director of climate had recommended to me a science fiction novel. It's called Ministry for the Future and it actually is incredible in terms of sketching out what the potential implications and strategy for dealing with climate change are. I think that you want to be creative and really cast a broad net. Don't hesitate to ask people, "What have you read lately that's really interesting?" I did not think that a science fiction novel was gonna be one of my top reads of 2021.

Greg Dowling (37:26):

I love it. Ministry for the Future. I have not heard of that one, I'll have to pick up a copy. Thanks, Cara, for spending time with us today. I feel like I know a lot more about what those big fancy E&Fs are doing. I feel a lot cooler, so thank you.

Cara Lafond (37:41):

Thanks very much, Greg.

Greg Dowling (37:44):

If you are interested in more information on FEG, check out our website at www.feg.com and don't forget to subscribe to our communications so you don't miss the next episode. Please keep in mind that this information is intended to be general education that needs to be framed within the unique risk and return objectives of each client; therefore, nobody should consider these to be FEG recommendations. This podcast was prepared by FEG. Neither the information nor any opinion expressed in this podcast constitutes an offer or an invitation to make an offer to buy or sell any securities. The views and opinions expressed by guest speakers are solely their own and do not necessarily represent the views or opinions of their firm or of FEG.

 

DISCLOSURES
This was prepared by FEG (also known as Fund Evaluation Group, LLC), a federally registered investment adviser under the Investment Advisers Act of 1940, as amended, providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directly to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202, Attention: Compliance Department. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third parties. The information is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments relating to it. Past performance is not an indicator or guarantee of future results. Diversification or Asset Allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss. The views or opinions expressed by guest speakers are solely their own and do not represent the views or opinions of Fund Evaluation Group, LLC.

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