Jeffrey Heil is the chief investment officer at the Doris Duke Charitable Foundation, where he has served since 2003. Prior to joining the foundation, he was co-head of investments at the University of California, where he actively managed equity holdings of $45 billion in three portfolios.
In this interview, Jeff discussed how he built the portfolio and team from scratch as the Foundation's first CIO; how some of those early colleagues went off to become CIOs themselves; and why their biggest allocation change has been to venture capital coming out of the financial crisis.
Jeffrey Heil was named on Trusted Insight's 2020 Top 30 Foundation Chief Investment Officers.
Trusted Insight: Thank you so much for taking the time. Can you share more about the Doris Duke Charitable Foundation and its investment office?
Jeffrey Heil: Doris Duke was the daughter, only child of J.B. Duke. Anything that was named Duke was pretty much her father, Duke Energy, Duke University, The Duke Endowment, another big foundation down in the Carolinas. When he died, he split his assets into three, a third went to start Duke University, a third went to found The Duke Endowment, and then the remainder went to his daughter. When Doris Duke died in the mid-90s, she left all her assets to the Doris Duke Foundation. She had no children, so everything she had went into this foundation.
It’s a relatively new foundation as far as foundations go. At this point, it's about a little over 20 years old. I started at the foundation as their first CIO in 2004. Before that, they were just running from the board with a consulting firm. I helped build the portfolio and the staff from scratch. It's challenging but fun. I came to the foundation from the University of California where I was co-head of investments. It was a pretty different situation because the University of California manages the endowments and the pension funds and that was about $75 billion, so had a very large portfolio and 14 person investment team.
The Doris Duke Foundation is a more typical endowment/foundation, a little under $2 billion with a six-person staff. We have an operations staff member, myself, and three senior investment officers with a junior analyst that do the due diligence and research on managers. We have a relatively standard setup. As the CIO, my job is to provide oversight on the portfolio, which means more of a macro view, a top-down view on where we should be allocated.
After I make those decisions, I pass it along to my team. For instance, "let's add some more distressed credit." Then they get to work on finding a distressed credit manager, complete our due diligence, and make the appropriate fund comparisons before we make an investment decision. Then we have to run it by our investment committee, who we've had a close relationship with since I started. It's been a well-functioning team and the portfolio results reflect that. We've been top decile in performance for the past 5 and 10 and time periods.
The only thing from an asset standpoint of major importance or change was after the financial crisis. Before that, I was running it as a typical endowment model, a lot of alternatives, pretty evenly split between hedge funds, private equity and venture capital. Coming out of the financial crisis, I decided there were a few areas I wasn't as enamored with. We tilted pretty strongly away from long/short hedge funds, they weren’t keeping up with the long only funds and charging much higher fees. We also tilted away from private equity where I thought the results weren't warranting the high fees and leverage that they use.
Since the financial crisis, we've been more heavy into equities and especially into venture capital. We've de-emphasized energy and real estate, and as I said, long/short equity. Luckily, it's been a pretty strong bull market. That was a decent stance to be in from a portfolio perspective. We’ve seen very good returns, although everyone has their mistakes and there are things we wish we hadn't invested in. But today, as you know, the world is changed and changing still, so I might say we're onto the third generation of our portfolio strategy.
Trusted Insight: One of the most important aspects of any organization is hiring and retaining a strong team. How does one go about building a successful office/team?
Jeffrey Heil: When I joined, there were two people in the office. I inherited a couple people there who had been interacting between the consultant and investment committee. I added one more person right off the bat, and then worked with that very small team of three for quite a while. Then the senior person on that team, Amy Chen, left and became the CIO at the Smithsonian Institution. That's always a good sign when you have staff members who go off to become CIOs themselves. When she left, I made a junior hire and a senior hire. The senior hire that I made was Jenny Chan. She left after eight years, about a year and a half ago, to become the CIO at Children's Hospital of Philadelphia. Hopefully spreading whatever wisdom I might have around with them in running their respective shops.
With the departure of Jenny, I hired two more people, so now we have three senior people, a junior analyst and our operations person, so a team of six. The person that I hired most recently, her name is Leena Bhutta, came from a hedge fund so she's pretty steeped in alternative investment techniques. The second person, who is a little more junior, but still pretty experienced, Jennifer Katz, is now running our impact allocation for mission-related and ESG investing. We have the portfolio broadly split up into impact, equity and credit.
Trusted Insight: How closely is your team looking at the venture asset class moving forward?
Jeffrey Heil: We have approximately double the allocation of most endowments and foundations to venture. Since I mentioned the sort of sea change that we made coming out of the financial crisis, the biggest allocation in that move has been to venture capital. I just felt that it was less of a bet on markets and more of a bet on entrepreneurs around the country through these venture funds. I like the idea that it is more of a bet on people than on markets. It's a two-pronged bet. You're betting first on the people at the venture firms and then on the people at the startups and the entrepreneurs that they are investing in. Our investments in venture capital had been a big allocation, but in very limited scope. We have been investing, for the most part, in the top 20 or so funds by return and reputation. There's a couple that we're not in, but most of the well-known names like Sequoia, Accel, Mayfield, and Andreesen Horowitz are part of our portfolio. They've been strong contributors to our returns.
In the last few years, we've taken a slightly different bend, since there are no more top 1% firms to invest in. We've been utilizing what I'd call a barbell strategy, where we have the big platforms on one end (Sequoias and Accels of the world), and then newer, niche firms that we've gotten to know at the other end that is a quite bit more focused in their approach. They are usually very early-stage funds. That's the riskier part of the portfolio, but it's decently diversified.
Trusted Insight: What are your thoughts on tail risk hedging strategies? Some of your endowments and foundations peers have explored that approach.
Jeffrey Heil: I mean, a lot of investors do. Generally it's not a good bet, because you lose more in the cost of the tail risk hedge than you gain from the rare times that it actually pays off. If you think about the last 10 years, it would have been good in the 2008 financial crisis and somewhat helpful in 2015, when there was a downdraft. But in the other eight years, it really just would have been a subtraction on returns.
If you can call it, you're going to look brilliant having a tail risk hedge in place. I just feel it's a little too tactical for me. Actually, for the last 10 years, we've done the opposite. We've been selling tail risk, collecting the premium from people who want that insurance. We dropped that investment a few months ago, because coming into this coronavirus crisis, it’s not a good time to be selling tail risk hedge. We probably made 1.5% a year from selling that over the last 10 years, maybe 1%. We lost some money beginning of this year, but now we're out of it, so no further worries for now.
The one thing that we have done recently that's a pretty big effort for us is taking more of a thematic approach to what we're doing in our allocations. Specifically we're combining the impact side of our investment portfolio with the venture side and looking to have bigger allocations to healthcare, life sciences and biotech. The Doris Duke Foundation is a big funder of medical research, so most of the impact investments are in that area.
We thought instead of just having a good return from social impact, let’s do it in an area like medical research, that has a higher risk, but higher return profile. It's really something that perfectly fits both venture and impact. We've been looking at these very nichey biotech life science venture capital firms and spreading out some investments there.
Trusted Insight: How has your organization dealt with the near term market volatility and adjusting to the new norm caused by the pandemic?
Jeffrey Heil: We didn't jump in and make any big allocation changes, because we're long-term investors. If you're thinking of selling in a crisis, you have to make two perfect timing calls. You have to know when to sell and when to buy back in. I've never been a fan of that, I'd rather just ride out a storm. As I mentioned, we did cover our tail risk portfolio, so we're not doing anything in the derivative area right now, neither hedging nor selling risk.
Other than that, we have made a slight tilt from equities to distressed credit and are looking to buy into some of these dislocation funds to take advantage of what's going on in the loan markets. Not a huge amount, but just a shift, probably knock our equity down maybe 5%, and add that much to the credit side of our portfolio.
Mostly, we want to keep this healthcare theme going. We started it about a year and a half ago, we've made four or five pretty good sized allocations there and we probably want to make another three or four. We also look at small venture capital firms focused on biotech and life science, and our impact portfolio and this credit allocation shift where we bumped that up a little. Other than that, we're just keeping the course that we've been on and hopefully we all get through this okay.
Trusted Insight: What pressing topics come to mind that more CIOs should be thinking/talking about?
Jeffrey Heil: I believe even before the coronavirus, there's a pretty big question mark on emerging markets. If the world starts to break down a little, they'll get hit harder than developed markets. At the same time, they tend to carry the most promise if things swing the other way. It's something we've been debating for a while, but we decided not to reduce our exposure there.
I'd say we have, what I think, is a market weight in emerging markets. In other words, our portfolio has about the typical exposure to emerging markets that most aggressive endowments and foundations would have. We're probably about the same weight in that sense to China as well. We think of that two-pronged approach to emerging markets. All of the EM countries together in one bucket and China in the other, because it's so large and important.
We probably have maybe five roots to China. A couple of our venture funds are heavy investors there like Sequoia. A couple of our hedge funds are spread out into emerging markets, and then we have approximately three China funds that invest only in mainland China. I think emerging markets have underperformed the U.S. out of this crisis by about 5-8%. But if the world swings back to anything near normal, they'll probably have a good rebound.
I would say China, emerging markets, healthcare, life sciences, and biotech are a pretty big area of interest. We've been there for a little while, but obviously coming through this coronavirus crisis, there's going to be a lot of interest in funding healthcare medical research.
View our full catalog of interviews here.
The full list of 2020 Top 30 Foundation Chief Investment Officers can be found here.
In this interview, Jeff discussed how he built the portfolio and team from scratch as the Foundation's first CIO; how some of those early colleagues went off to become CIOs themselves; and why their biggest allocation change has been to venture capital coming out of the financial crisis.
Jeffrey Heil was named on Trusted Insight's 2020 Top 30 Foundation Chief Investment Officers.
Trusted Insight: Thank you so much for taking the time. Can you share more about the Doris Duke Charitable Foundation and its investment office?
Jeffrey Heil: Doris Duke was the daughter, only child of J.B. Duke. Anything that was named Duke was pretty much her father, Duke Energy, Duke University, The Duke Endowment, another big foundation down in the Carolinas. When he died, he split his assets into three, a third went to start Duke University, a third went to found The Duke Endowment, and then the remainder went to his daughter. When Doris Duke died in the mid-90s, she left all her assets to the Doris Duke Foundation. She had no children, so everything she had went into this foundation.
"I started at the foundation as their first CIO in 2004... I helped build the portfolio and the staff from scratch. It's challenging but fun."
It’s a relatively new foundation as far as foundations go. At this point, it's about a little over 20 years old. I started at the foundation as their first CIO in 2004. Before that, they were just running from the board with a consulting firm. I helped build the portfolio and the staff from scratch. It's challenging but fun. I came to the foundation from the University of California where I was co-head of investments. It was a pretty different situation because the University of California manages the endowments and the pension funds and that was about $75 billion, so had a very large portfolio and 14 person investment team.
The Doris Duke Foundation is a more typical endowment/foundation, a little under $2 billion with a six-person staff. We have an operations staff member, myself, and three senior investment officers with a junior analyst that do the due diligence and research on managers. We have a relatively standard setup. As the CIO, my job is to provide oversight on the portfolio, which means more of a macro view, a top-down view on where we should be allocated.
After I make those decisions, I pass it along to my team. For instance, "let's add some more distressed credit." Then they get to work on finding a distressed credit manager, complete our due diligence, and make the appropriate fund comparisons before we make an investment decision. Then we have to run it by our investment committee, who we've had a close relationship with since I started. It's been a well-functioning team and the portfolio results reflect that. We've been top decile in performance for the past 5 and 10 and time periods.
"That's always a good sign when you have staff members who go off to become CIOs themselves... Hopefully spreading whatever wisdom I might have around with them in running their respective shops."
The only thing from an asset standpoint of major importance or change was after the financial crisis. Before that, I was running it as a typical endowment model, a lot of alternatives, pretty evenly split between hedge funds, private equity and venture capital. Coming out of the financial crisis, I decided there were a few areas I wasn't as enamored with. We tilted pretty strongly away from long/short hedge funds, they weren’t keeping up with the long only funds and charging much higher fees. We also tilted away from private equity where I thought the results weren't warranting the high fees and leverage that they use.
Since the financial crisis, we've been more heavy into equities and especially into venture capital. We've de-emphasized energy and real estate, and as I said, long/short equity. Luckily, it's been a pretty strong bull market. That was a decent stance to be in from a portfolio perspective. We’ve seen very good returns, although everyone has their mistakes and there are things we wish we hadn't invested in. But today, as you know, the world is changed and changing still, so I might say we're onto the third generation of our portfolio strategy.
Trusted Insight: One of the most important aspects of any organization is hiring and retaining a strong team. How does one go about building a successful office/team?
Jeffrey Heil: When I joined, there were two people in the office. I inherited a couple people there who had been interacting between the consultant and investment committee. I added one more person right off the bat, and then worked with that very small team of three for quite a while. Then the senior person on that team, Amy Chen, left and became the CIO at the Smithsonian Institution. That's always a good sign when you have staff members who go off to become CIOs themselves. When she left, I made a junior hire and a senior hire. The senior hire that I made was Jenny Chan. She left after eight years, about a year and a half ago, to become the CIO at Children's Hospital of Philadelphia. Hopefully spreading whatever wisdom I might have around with them in running their respective shops.
"The sort of sea change that we made coming out of the financial crisis, the biggest allocation in that move has been to venture capital. I just felt that it was less of a bet on markets and more of a bet on entrepreneurs around the country through these venture funds."
With the departure of Jenny, I hired two more people, so now we have three senior people, a junior analyst and our operations person, so a team of six. The person that I hired most recently, her name is Leena Bhutta, came from a hedge fund so she's pretty steeped in alternative investment techniques. The second person, who is a little more junior, but still pretty experienced, Jennifer Katz, is now running our impact allocation for mission-related and ESG investing. We have the portfolio broadly split up into impact, equity and credit.
Trusted Insight: How closely is your team looking at the venture asset class moving forward?
Jeffrey Heil: We have approximately double the allocation of most endowments and foundations to venture. Since I mentioned the sort of sea change that we made coming out of the financial crisis, the biggest allocation in that move has been to venture capital. I just felt that it was less of a bet on markets and more of a bet on entrepreneurs around the country through these venture funds. I like the idea that it is more of a bet on people than on markets. It's a two-pronged bet. You're betting first on the people at the venture firms and then on the people at the startups and the entrepreneurs that they are investing in. Our investments in venture capital had been a big allocation, but in very limited scope. We have been investing, for the most part, in the top 20 or so funds by return and reputation. There's a couple that we're not in, but most of the well-known names like Sequoia, Accel, Mayfield, and Andreesen Horowitz are part of our portfolio. They've been strong contributors to our returns.
"Specifically, we're combining the impact side of our investment portfolio with the venture side and looking to have bigger allocations to healthcare, life sciences, and biotech."
In the last few years, we've taken a slightly different bend, since there are no more top 1% firms to invest in. We've been utilizing what I'd call a barbell strategy, where we have the big platforms on one end (Sequoias and Accels of the world), and then newer, niche firms that we've gotten to know at the other end that is a quite bit more focused in their approach. They are usually very early-stage funds. That's the riskier part of the portfolio, but it's decently diversified.
Trusted Insight: What are your thoughts on tail risk hedging strategies? Some of your endowments and foundations peers have explored that approach.
Jeffrey Heil: I mean, a lot of investors do. Generally it's not a good bet, because you lose more in the cost of the tail risk hedge than you gain from the rare times that it actually pays off. If you think about the last 10 years, it would have been good in the 2008 financial crisis and somewhat helpful in 2015, when there was a downdraft. But in the other eight years, it really just would have been a subtraction on returns.
If you can call it, you're going to look brilliant having a tail risk hedge in place. I just feel it's a little too tactical for me. Actually, for the last 10 years, we've done the opposite. We've been selling tail risk, collecting the premium from people who want that insurance. We dropped that investment a few months ago, because coming into this coronavirus crisis, it’s not a good time to be selling tail risk hedge. We probably made 1.5% a year from selling that over the last 10 years, maybe 1%. We lost some money beginning of this year, but now we're out of it, so no further worries for now.
The one thing that we have done recently that's a pretty big effort for us is taking more of a thematic approach to what we're doing in our allocations. Specifically we're combining the impact side of our investment portfolio with the venture side and looking to have bigger allocations to healthcare, life sciences and biotech. The Doris Duke Foundation is a big funder of medical research, so most of the impact investments are in that area.
We thought instead of just having a good return from social impact, let’s do it in an area like medical research, that has a higher risk, but higher return profile. It's really something that perfectly fits both venture and impact. We've been looking at these very nichey biotech life science venture capital firms and spreading out some investments there.
Trusted Insight: How has your organization dealt with the near term market volatility and adjusting to the new norm caused by the pandemic?
Jeffrey Heil: We didn't jump in and make any big allocation changes, because we're long-term investors. If you're thinking of selling in a crisis, you have to make two perfect timing calls. You have to know when to sell and when to buy back in. I've never been a fan of that, I'd rather just ride out a storm. As I mentioned, we did cover our tail risk portfolio, so we're not doing anything in the derivative area right now, neither hedging nor selling risk.
Other than that, we have made a slight tilt from equities to distressed credit and are looking to buy into some of these dislocation funds to take advantage of what's going on in the loan markets. Not a huge amount, but just a shift, probably knock our equity down maybe 5%, and add that much to the credit side of our portfolio.
Mostly, we want to keep this healthcare theme going. We started it about a year and a half ago, we've made four or five pretty good sized allocations there and we probably want to make another three or four. We also look at small venture capital firms focused on biotech and life science, and our impact portfolio and this credit allocation shift where we bumped that up a little. Other than that, we're just keeping the course that we've been on and hopefully we all get through this okay.
Trusted Insight: What pressing topics come to mind that more CIOs should be thinking/talking about?
Jeffrey Heil: I believe even before the coronavirus, there's a pretty big question mark on emerging markets. If the world starts to break down a little, they'll get hit harder than developed markets. At the same time, they tend to carry the most promise if things swing the other way. It's something we've been debating for a while, but we decided not to reduce our exposure there.
I'd say we have, what I think, is a market weight in emerging markets. In other words, our portfolio has about the typical exposure to emerging markets that most aggressive endowments and foundations would have. We're probably about the same weight in that sense to China as well. We think of that two-pronged approach to emerging markets. All of the EM countries together in one bucket and China in the other, because it's so large and important.
We probably have maybe five roots to China. A couple of our venture funds are heavy investors there like Sequoia. A couple of our hedge funds are spread out into emerging markets, and then we have approximately three China funds that invest only in mainland China. I think emerging markets have underperformed the U.S. out of this crisis by about 5-8%. But if the world swings back to anything near normal, they'll probably have a good rebound.
I would say China, emerging markets, healthcare, life sciences, and biotech are a pretty big area of interest. We've been there for a little while, but obviously coming through this coronavirus crisis, there's going to be a lot of interest in funding healthcare medical research.
View our full catalog of interviews here.
The full list of 2020 Top 30 Foundation Chief Investment Officers can be found here.