Tuesday, June 14, 2011 5:03:32 PM
Interrogation: Anne Martin Thinks Liquidity Is Key
From aiCIO Magazine's Summer Issue: Olympic rower and David Swensen Protégé Martin is applying the Yale model of investing at the Wesleyan University Endowment—with a few tweaks.
To see this article in digital magazine format, click here.
“I am a huge David Swensen fan. I wish I'd found the endowment management world earlier—after the 1988 Olympics and business school, I worked in the investment banking and venture capital worlds, and only came to Yale in 2004. Dave Swensen and Dean Takahashi took a leap of faith and hired me. I was a lateral hire— they don't do that often, but it worked out. I helped manage the natural resources and venture capital portfolios—Until I came to Wesleyan. We're $580 million right now, which is roughly 1/30th of Yale's portfolio. At Yale, we had 20-odd people; here, we have me plus two others. But some things are universal, no matter what the size: the tenets underpinning the Yale approach are sound—build a diversified portfolio, pick great managers, approach asset allocation and rebalancing in a disciplined manner, and maintain a long-term horizon. This approach makes a lot of sense at any size. The Yale model is basically the practical implication of Modern Portfolio Theory with an equity orientation and great judgment layered on top. That works everywhere. Still, some unique issues arise at a smaller endowment—for example, liquidity. Yale has a lot of ways to generate liquidity—it has a AAA rating and the debt markets when it needs them. Wesleyan is more limited on that front, so we need to generate more liquidity internally. So, we can't allocate as much to the illiquid asset classes as Yale. In general, endowments need to do more modeling around liquidity. The unconstrained Excel optimization process leads to an extremely illiquid portfolio. So, you have to overlay your own judgments on liquidity—we look at it, we stress test it, we look at Armageddon scenarios—but then you have to think about time horizon: How much will it cost you to manage for an Armageddon scenario? Being smaller might be an advantage in some cases; we can be more concentrated with a smaller number of high-conviction managers. We don't need to go to the 10th name on our private equity list, and we can get into terrific funds because we only need a small allocation—having room for Wesleyan is rarely an issue. Smaller endowments like Wesleyan are still considered high quality capital. We're not funds of funds, where stability and flexibility are questioned. We don't fire managers for a short-term underperformance, which other institutional investors might be forced to do for political or career management reasons. Wesleyan has a high-quality reputation; people want to help us. What has changed since I came here (in August, 2010)? Actually, Wesleyan already was very close to the policy asset allocation we adopted in the fall. Over the previous 15 years, the school had moved, like many, to a diversified portfolio. It wasn't really asset allocation that we needed to pay a lot of attention to, with some exceptions. For example, the school had been underweight emerging markets. The biggest change was instituting rebalancing. Coming from where I did, I can't help but adhere to a disciplined rebalancing policy. We've also changed a number of managers since I arrived. Much of the next two years will be focused on building out a core group of excellent managers for the portfolio.”