Denison University's Alts-Heavy Approach Continues To Be A Strength | David Barcus, Director Of Investments | Q&A
David Barcus, director of investments, joined Denison University in 2011 and is responsible for manager selection and investment monitoring across all asset classes. In this interview, he discusses the very successful transition welcoming their CIO, why Denison continues to have a significant allocation to hedge fund strategies, and how they plan to build a small but impactful venture portfolio.
David Barcus was named on Trusted Insight's Top 30 Institutional Investors In The Midwest.
Trusted Insight: It’s been over two years since your previous interview with us. What are some notable changes at Denison University since then?
David Barcus: We underwent a successful CIO transition welcoming Kathleen Browne as our new CIO. Kathleen joined about a year and a half ago. She was previously at the Wellesley College Investment Office.
One of the great things about her arrival was that it really allowed us to take a fresh look at the portfolio. Kathleen, our other Director of Investments Josh Beitzel, and I were on the road a lot those first few months. We had many meetings introducing her to the managers in our portfolio. I think that process allowed us to strengthen a number of relationships. She also introduced us to many high-quality managers in her network, some of which are now in our portfolio. After 18 months of hard work, I feel like our portfolio's probably as strong as it’s ever been. In that regard, it's been a very successful transition.
"Denison's hedge fund portfolio continues to be a strength for our endowment and has served the college well. We continue to have a significant allocation to hedge fund strategies."
We also initiated a student intern program building somewhat upon our successful analyst program. We launched our analyst program about three years ago in which we hire recent graduates of the college. Our first class of analysts is reaching the end of their terms, and they've been fantastic. Both are moving on to great roles in this industry, which we think speaks to the experience they had at Denison. I look forward to welcoming our third hire in the program this summer. We also had two Denison sophomores working with us last summer and will have a few more this year. We employ students during the school year in this program as well. All in all, we're performing at a really high level right now, and it's exciting.
Trusted Insight: In that interview, you spoke highly of hedge fund performance for the University. Is that still the case or have you reduced the allocation considering the news on the poor performance of hedge funds recently?
David Barcus: It's a great question. Denison's hedge fund portfolio continues to be a strength for our endowment and has served the college well. We continue to have a significant allocation to hedge fund strategies. About half of that is in equity long/short strategies, with the other half largely in multistrategy, event and credit strategies.
"Manager selection is a balance of art and science. We use data analysis as much as possible to get a sense of the manager's qualities."
When Kathleen joined, one of our first priorities was to review our asset allocation and determine where we wanted the portfolio to be over the medium- and longer-term horizon. Given our manager roster, we felt that the alpha potential in this portfolio would continue to materially contribute to overall returns. Accordingly, we chose to maintain a high exposure to these strategies. In the last few years, we also expanded the strategies in that portfolio to diversify the risk profile, which we believe is serving us well.
Trusted Insight: Can you tell us more about returns being driven by manager-related risks as opposed to strategy-related risks?
David Barcus: It's an excellent question. Manager selection is one area where, quite frankly, experience matters. We have a very experienced team that has spent years conducting manager due diligence and making investment decisions. We also benefit from expertise on our Investment Committee, with some members having spent decades in and around the hedge fund industry.
Manager selection is a balance of art and science. We use data analysis as much as possible to get a sense of the manager's qualities. Ultimately though, you need to make a judgment on the people at the firm and understand what sets that manager apart. I’m always honing that skill in myself.
"Venture has been an area of focus in the last year and a half since Kathleen joined. She has a long history working in venture, and we believe we can build a small but impactful venture portfolio."
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To share a story, early in my career I could be easily impressed in a manager meeting. However, over time, by watching and being mentored by the senior investment professionals in my office, I developed my own investment judgment. We see this with the young folks in our office, and it’s important that we provide that same guidance and apprenticeship for them.
Trusted Insight: Are there any areas you’re trying to get a better grasp of in this technology-enabled world?
David Barcus: From an investment perspective, you always must be mindful of how vulnerable your portfolio is to the next major market disrupting innovation or company. We're also very mindful of how we can embrace technology internally to try to improve our efficiency. To that end, we're exploring some portfolio risk management tools that we think will help speed up some of our analytical functions that, right now, take quite a bit of time and effort for us.
While hedge funds are important for our portfolio as we discussed, there are other areas that we think can be portfolio drivers. Venture has been an area of focus in the last year and a half since Kathleen joined. She has a long history working in venture, and we believe we can build a small but impactful venture portfolio. We stepped back from some legacy relationships, strengthened a few others and are making some very attractive new investments. This is one area where our size may be a strength for us, being just under the $1 billion mark. Small commitments to a venture fund can have a very meaningful impact on our overall endowment relative to some of our bigger peers that have to put more money to work.
Trusted Insight: You bring up an interesting point. At what endowment size does that ‘sweet spot’ investing end?
David Barcus: I’m not sure. At some point, it no longer makes sense to have a generalist approach and you need more specialization with dedicated people focused on major asset classes. At that point, you run the risk of optimizing at the asset class level as opposed to optimizing at the portfolio level. I don’t think you get there until you are running multi-billion dollar portfolios. With a small team working as generalists, we have the benefit of looking across the portfolio and may opt to overweight a certain region or sector in one part of the portfolio balancing it out in another area of the portfolio. I think that approach gives us a high level of flexibility to take advantage of unique opportunities.
Trusted Insight: What distinguishes Denison University from its endowment and institutional peers?
David Barcus: Denison was a relatively early adopter of alternative investment strategies. We made our first allocation to a hedge fund in 1988. That investment remains in the portfolio today, which I think is fantastic and is representative of our long-term mindset. I suspect this alts-heavy approach makes us look a bit more like some of our larger peers.
Also, we have a fully staffed internal team here. We recently added a dedicated manager of investment operations. Josh (my fellow Director) and I used to spend a considerable amount of time on operations and performance reporting. Now we can focus exclusively on investing.
Denison also benefits from a sophisticated investment committee comprised of trustees of the college. This group helped guide the portfolio for decades. It's thanks to their foresight that we adopted alternatives when we did.
Trusted Insight: What are your thoughts on the importance of a clear and consistent governance structure?
David Barcus: A clear and consistent governance structure is vital. We are working on a shared goal, managing an extremely important asset for the college, so we're all on the same team. We have clear lines of responsibility which I believe foster accountability. That ensures everybody is on the same page in terms of what they need to do to continue doing a great job for Denison.
Governance structure and process was something that Kathleen focused on during her first year here. As part of that, our investment office significantly expanded our reporting to the Committee in a way that facilitates its oversight function. Watching that process unfold, I’ve gained an appreciation for the importance of strong governance and meaningful communications between the investment office and investment committee when pursuing our shared goal.
Trusted Insight: Is there anything you’d like to share with our community?
David Barcus: Denison is a special place. For my investor peers out there with high school age children, put it on your list of campus visits. The alumni network here is nationwide and it's incredibly strong. We see it on full display here through our interactions with our trustees. The trustees care, the faculty cares, the administration cares, and the students are impressive. I'm thrilled to be part of this institution and I take great pride in the difference our hard work can make. My own children are still in the early stages of grade school, but I would be thrilled if their paths brought them to Denison.
The full list of Top 30 Institutional Investors In The Midwest can be found here.