Nicholas Warren joined as the chief investment officer at the Office of Investment Management at Brandeis University in January 2011. In this interview, Nick discussed how their investment team operates with a modified specialist model; their core tenet in having an equity-oriented diversified portfolio; and why they're excited for the regulatory and scientific innovations in healthcare.
Nick Warren was named on Trusted Insight's 2020 Top 30 Endowment Chief Investment Officers.
Trusted Insight: Tell us about Brandeis University and its investment team dynamic.
Nick Warren: Brandeis University is a medium-sized research institution. It's relatively young as Brandeis was founded just over 70 years ago, after World War II. The University was sponsored by the Jewish community and it has retained its Jewish roots and values, even though it’s a nonreligious institution with a strong belief in diversity and inclusion. The University strives to uphold three critical tenets deriving from its Jewish cultural roots: a reverence for learning, critical thinking, including self-criticism, and tikkun olam, which is a Jewish phrase for making the world a better place. We try to reflect those values at the University investment office, as well.
The team is made up of six investment professionals and three operational professionals. We have a CIO, deputy CIO, two associate directors, and two analysts. We organize ourselves on what I call a modified specialist model to separate it from the two models that we hear most about: specialized and generalist models. We don’t divide ourselves according to the traditional specialist verticals, where one person covers hedge funds, another person covers private equity, a third person covers real assets, and a fourth covers long-only equities.
We've defined areas of specialization where there are benefits from industry knowledge and human networks. For example, healthcare is an area of specialized coverage across asset classes because of the complex scientific and regulatory environment that spans all the traditional asset class structures. It’s also a single network of people in which networking over time gives you access to better information. The network spans across asset classes and we have had success with one person specializing in and performing diligence across private equity, hedge funds, long-only managers, and VC managers.
We try to be a collaborative team that focused on the total return of the total endowment, and we try to maintain a long-term orientation. We have a relatively concentrated manager portfolio so that we can spend time as a team deeply researching each manager decision. If we have fewer decisions each year, then we can be more collaborative on each of them.
Trusted Insight: How has your team and University as a whole been dealing with the ongoing pandemic?
Nick Warren: The University as a whole took it seriously early on, because we were in touch with the hospital systems in Boston. Brandeis spent the first six weeks making sure everybody wound things down safely, and we had emergency online education to finish out the semester.
On the investment team, we went remote early on. We have a small team—only nine people total—so we can all get together every day around lunchtime to do a Zoom meeting. It keeps us connected on the work front, as well as the emotional front. Everybody has a chance to share. We try to focus on some positive things, and they don't have to be related to investments; they can be a joke somebody's heard or a video someone wants to share.
We did a lot of work in the first six weeks trying to wrap our heads around the uncertainty and the opportunity set. Our research led us to believe that the range of potential realistic outcomes was really wide. We think that it's a pretty flat probability distribution of outcomes: COVID pushed up the negative tail distribution of possible outcomes and the government stimulus is pushing up the positive tail of the outcomes.
We've been focused on researching signposts to know which direction we're heading. We're asking ourselves, "How do we react if one of those things happens?" We don't know which ones will happen, so right now we're just trying to stay flexible, given the uncertainty of the economic path and the path the University ends up taking.
Trusted Insight: You've been with the organization for almost a decade now. Has there been any discussion on rethinking the strategic asset allocation strategy since then?
Nick Warren: Our implementation changed over those nine years, but the core tenets are the same. One core tenet is an equity-oriented diversified portfolio focused on adding value by having investment partners who are able to take advantage of inefficiencies. We also have an anchor in valuations and cash flows in our research process, which will continue to stay the same.
When I arrived at Brandeis, with our investment committee, we came up with a way of measuring risk we call beta-adjusted equity exposure. We look at managers holdings and exposures and we come up with an equivalent exposure to equity. This model assumes all of the correlations of our asset classes go to one, similar to an economic crisis. We run some general assumptions against peers’ asset allocations, which suggest our level of 70% compares to peers around 85% beta-adjusted equity. Our more conservative position derives from our larger allocation to hedge funds—about 45%. We have less in long-only equities and private equity than the average peer institution.
Trusted Insight: Over the last decade, the endowment has achieved annualized returns of over 9%. Where are you guys looking to keep that momentum alive and strong?
Nick Warren: We love the current roster of managers we have right now. When I tell you about where we're looking for opportunities, it's inclusive of the fact that we have a core group of managers who are out there already taking advantage of most opportunity sets. The areas we've been looking at recently are real estate in hotels, retail, and workforce housing. Those areas are getting hit particularly hard right now, so we think there'll be some interesting opportunities around navigating that. We are looking at a couple of global opportunistic managers who have an open mandate so they’re able to go anywhere. There are two buyout firms we're looking at which are operationally focused in media and industrials.
We have four managers in different asset classes in healthcare who are all flexible in their ability to take advantage of the dislocations. That's 12-15% dedicated to healthcare and we are biased to increase this exposure. Healthcare has been a great area to focus on over the past 8 years and we think there's going to be a lot of change over the next decade, both regulatory and scientific.
Trusted Insight: Talking about real estate, have there been concerns about the workforce adapting to this work-from-home lifestyle?
Nick Warren: Yes, we have concerns. However, we believe people will still want to travel, which is why we think there will be value in certain hotels. We believe that people will continue to want to go out and be with other people, so we think certain retail will be attractive. People still have to live somewhere, and that the majority of the population lives in workforce housing. We believe attractive, affordable space will have significant demand.
Our strategy in real estate generally is infill value-added. In our areas of focus the properties are smaller, and there's always someone who is underinvesting in the physical infrastructure of the properties. We have a retail manager who focuses on the corners of the retail strip. There's usually three corners that have properties that are well managed by an owner like a core REIT. There's sometimes one corner that's managed poorly by an family who has been taking all the cashflow out of the property and not reinvesting in infrastructure like the roof, the parking lot, tenants signage and other things like that.
We believe that even though retail is shrinking there are still ways to make money from the inefficiency. For example, when you think about the retail strips you drive up and down, it is easy to see that the U.S. has too much retail. However, not all locations are as valuable and many will lose tenants, whereas others will maintain full occupancy. For example, there may be a failing JCPenney on the corner anchoring a shopping center. Also, there are service oriented business halfway through the strip not on the corner such as nail salons, hair salons, etctera. If the JC Penny is paying $4 a square foot, and goes bankrupt, it is profitable for the nail salon and other tenants paying $10 a square foot along the strip to move to the corner. The corner survives and there may be opportunities to increase the cash flow, even though retail itself might be vacating along the strip, because location still matters.
Some of the same dynamics apply to hotels, especially in limited service hotels where we have focused. In housing, smaller properties with less than 20 tenants or workforce housing have not become as institutional as other areas of real estate, so there are greater inefficiencies.
Our real estate investments are implemented on a micro basis. We are subject to the overall real estate and interest rate trends, but we can dodge and duck some impacts with our strategy.
Trusted Insight: When speaking with your CIO peers, they mention tail-risk hedging strategies, and how that’s done well when there is a crisis. What are your thoughts on such strategies?
Nick Warren: We don't use tail-risk hedging strategies. These strategies are too difficult for us to execute as a small office. We've chosen to have lower risk rather than higher risk with tail hedges.
Trusted Insight: What ideas are your team trying to get a better grasp of and keep you up at night?
Nick Warren: We've been finding that the private equity industry’s slow creep in fees and less attractive terms has gotten to the point where we've been having a harder time finding new managers.
Trusted Insight: What makes Brandeis unique that separates it from the herd?
Nick Warren: I think we are more alike than different from our peers. We all generally search for the same things. What leads to our difference in risk level is the business model of the University. Given that we're a small university with a research footprint, we have a high cost of funding. There's a lot of research being done that is not reimbursed by the government, which creates a high cost base for us. As a small university, we're dependent on tuition. We’re also young. When I first got to the Brandeis, one of the alumni from the first class was on my committee. There haven’t been 100 years of bequests, with people writing Brandeis into their wills to build up the endowment. Due to all those things, the endowment is the liquidity backstop, which has us taking significantly lower risk than our peers.
View our full catalog of interviews here.
The full list of 2020 Top 30 Endowment Chief Investment Officers can be found here.
Nick Warren was named on Trusted Insight's 2020 Top 30 Endowment Chief Investment Officers.
Trusted Insight: Tell us about Brandeis University and its investment team dynamic.
Nick Warren: Brandeis University is a medium-sized research institution. It's relatively young as Brandeis was founded just over 70 years ago, after World War II. The University was sponsored by the Jewish community and it has retained its Jewish roots and values, even though it’s a nonreligious institution with a strong belief in diversity and inclusion. The University strives to uphold three critical tenets deriving from its Jewish cultural roots: a reverence for learning, critical thinking, including self-criticism, and tikkun olam, which is a Jewish phrase for making the world a better place. We try to reflect those values at the University investment office, as well.
"We organize ourselves on what I call a modified specialist model to separate it from the two models that we hear most about: specialized and generalist models."
The team is made up of six investment professionals and three operational professionals. We have a CIO, deputy CIO, two associate directors, and two analysts. We organize ourselves on what I call a modified specialist model to separate it from the two models that we hear most about: specialized and generalist models. We don’t divide ourselves according to the traditional specialist verticals, where one person covers hedge funds, another person covers private equity, a third person covers real assets, and a fourth covers long-only equities.
We've defined areas of specialization where there are benefits from industry knowledge and human networks. For example, healthcare is an area of specialized coverage across asset classes because of the complex scientific and regulatory environment that spans all the traditional asset class structures. It’s also a single network of people in which networking over time gives you access to better information. The network spans across asset classes and we have had success with one person specializing in and performing diligence across private equity, hedge funds, long-only managers, and VC managers.
We try to be a collaborative team that focused on the total return of the total endowment, and we try to maintain a long-term orientation. We have a relatively concentrated manager portfolio so that we can spend time as a team deeply researching each manager decision. If we have fewer decisions each year, then we can be more collaborative on each of them.
Trusted Insight: How has your team and University as a whole been dealing with the ongoing pandemic?
Nick Warren: The University as a whole took it seriously early on, because we were in touch with the hospital systems in Boston. Brandeis spent the first six weeks making sure everybody wound things down safely, and we had emergency online education to finish out the semester.
"One core tenet is an equity-oriented diversified portfolio focused on adding value by having investment partners who are able to take advantage of inefficiencies."
On the investment team, we went remote early on. We have a small team—only nine people total—so we can all get together every day around lunchtime to do a Zoom meeting. It keeps us connected on the work front, as well as the emotional front. Everybody has a chance to share. We try to focus on some positive things, and they don't have to be related to investments; they can be a joke somebody's heard or a video someone wants to share.
We did a lot of work in the first six weeks trying to wrap our heads around the uncertainty and the opportunity set. Our research led us to believe that the range of potential realistic outcomes was really wide. We think that it's a pretty flat probability distribution of outcomes: COVID pushed up the negative tail distribution of possible outcomes and the government stimulus is pushing up the positive tail of the outcomes.
We've been focused on researching signposts to know which direction we're heading. We're asking ourselves, "How do we react if one of those things happens?" We don't know which ones will happen, so right now we're just trying to stay flexible, given the uncertainty of the economic path and the path the University ends up taking.
Trusted Insight: You've been with the organization for almost a decade now. Has there been any discussion on rethinking the strategic asset allocation strategy since then?
Nick Warren: Our implementation changed over those nine years, but the core tenets are the same. One core tenet is an equity-oriented diversified portfolio focused on adding value by having investment partners who are able to take advantage of inefficiencies. We also have an anchor in valuations and cash flows in our research process, which will continue to stay the same.
"Healthcare has been a great area to focus on over the past 8 years and we think there's going to be a lot of change over the next decade, both regulatory and scientific."
When I arrived at Brandeis, with our investment committee, we came up with a way of measuring risk we call beta-adjusted equity exposure. We look at managers holdings and exposures and we come up with an equivalent exposure to equity. This model assumes all of the correlations of our asset classes go to one, similar to an economic crisis. We run some general assumptions against peers’ asset allocations, which suggest our level of 70% compares to peers around 85% beta-adjusted equity. Our more conservative position derives from our larger allocation to hedge funds—about 45%. We have less in long-only equities and private equity than the average peer institution.
Trusted Insight: Over the last decade, the endowment has achieved annualized returns of over 9%. Where are you guys looking to keep that momentum alive and strong?
Nick Warren: We love the current roster of managers we have right now. When I tell you about where we're looking for opportunities, it's inclusive of the fact that we have a core group of managers who are out there already taking advantage of most opportunity sets. The areas we've been looking at recently are real estate in hotels, retail, and workforce housing. Those areas are getting hit particularly hard right now, so we think there'll be some interesting opportunities around navigating that. We are looking at a couple of global opportunistic managers who have an open mandate so they’re able to go anywhere. There are two buyout firms we're looking at which are operationally focused in media and industrials.
We have four managers in different asset classes in healthcare who are all flexible in their ability to take advantage of the dislocations. That's 12-15% dedicated to healthcare and we are biased to increase this exposure. Healthcare has been a great area to focus on over the past 8 years and we think there's going to be a lot of change over the next decade, both regulatory and scientific.
Trusted Insight: Talking about real estate, have there been concerns about the workforce adapting to this work-from-home lifestyle?
Nick Warren: Yes, we have concerns. However, we believe people will still want to travel, which is why we think there will be value in certain hotels. We believe that people will continue to want to go out and be with other people, so we think certain retail will be attractive. People still have to live somewhere, and that the majority of the population lives in workforce housing. We believe attractive, affordable space will have significant demand.
Our strategy in real estate generally is infill value-added. In our areas of focus the properties are smaller, and there's always someone who is underinvesting in the physical infrastructure of the properties. We have a retail manager who focuses on the corners of the retail strip. There's usually three corners that have properties that are well managed by an owner like a core REIT. There's sometimes one corner that's managed poorly by an family who has been taking all the cashflow out of the property and not reinvesting in infrastructure like the roof, the parking lot, tenants signage and other things like that.
We believe that even though retail is shrinking there are still ways to make money from the inefficiency. For example, when you think about the retail strips you drive up and down, it is easy to see that the U.S. has too much retail. However, not all locations are as valuable and many will lose tenants, whereas others will maintain full occupancy. For example, there may be a failing JCPenney on the corner anchoring a shopping center. Also, there are service oriented business halfway through the strip not on the corner such as nail salons, hair salons, etctera. If the JC Penny is paying $4 a square foot, and goes bankrupt, it is profitable for the nail salon and other tenants paying $10 a square foot along the strip to move to the corner. The corner survives and there may be opportunities to increase the cash flow, even though retail itself might be vacating along the strip, because location still matters.
Some of the same dynamics apply to hotels, especially in limited service hotels where we have focused. In housing, smaller properties with less than 20 tenants or workforce housing have not become as institutional as other areas of real estate, so there are greater inefficiencies.
Our real estate investments are implemented on a micro basis. We are subject to the overall real estate and interest rate trends, but we can dodge and duck some impacts with our strategy.
Trusted Insight: When speaking with your CIO peers, they mention tail-risk hedging strategies, and how that’s done well when there is a crisis. What are your thoughts on such strategies?
Nick Warren: We don't use tail-risk hedging strategies. These strategies are too difficult for us to execute as a small office. We've chosen to have lower risk rather than higher risk with tail hedges.
Trusted Insight: What ideas are your team trying to get a better grasp of and keep you up at night?
Nick Warren: We've been finding that the private equity industry’s slow creep in fees and less attractive terms has gotten to the point where we've been having a harder time finding new managers.
Trusted Insight: What makes Brandeis unique that separates it from the herd?
Nick Warren: I think we are more alike than different from our peers. We all generally search for the same things. What leads to our difference in risk level is the business model of the University. Given that we're a small university with a research footprint, we have a high cost of funding. There's a lot of research being done that is not reimbursed by the government, which creates a high cost base for us. As a small university, we're dependent on tuition. We’re also young. When I first got to the Brandeis, one of the alumni from the first class was on my committee. There haven’t been 100 years of bequests, with people writing Brandeis into their wills to build up the endowment. Due to all those things, the endowment is the liquidity backstop, which has us taking significantly lower risk than our peers.
View our full catalog of interviews here.
The full list of 2020 Top 30 Endowment Chief Investment Officers can be found here.