How University Of Oregon Gained 2.4% In Year Of Endowment Losses | Exclusive Q&A With CIO Jay Namyet
Jay Namyet is the chief investment officer of University of Oregon Foundation. He joined the endowment in 2000. Over the span of 17 years, the endowment’s asset size quadrupled to $800 million, as of January 2017. Previously, Namyet had worked at major institutional investment firms such as Paine Webber, Refco and Smith Barney. He earned a bachelor’s degree in economics from the University of Pennsylvania and an MBA from New York University.
Currently, the Foundation’s investment office has five professionals on staff who work with more than 40 external asset managers. In 2016, despite lackluster returns at many university endowments, University of Oregon Foundation’s portfolio achieved a 2.4 percent return. In the decade ending 2016, Oregon returned 6.4 percent annually.
In this interview, Namyet revealed what contributed to the endowment’s gain in the past year, and his unconventional strategy to find managers with untapped potential.
Mr. Namyet was recently named on Trusted Insight’s 2017 Top 30 Endowment Chief Investment Officers. He graciously spoke to us on February 3.
Trusted Insight: What’s the makeup of your asset allocation?
Jay Namyet: We have split our assets into three categories: 60 percent growth, 25 percent risk reduction and 15 percent inflation protection. We subdivide the growth into 40 percent marketable and 20 percent non-marketable. These are long-term equilibrium targets subject to change based on valuation and opportunity set.
Within risk reduction, we have 10 percent in liquidity -- a very low duration allocation- and 15 percent in absolute return, within which we have multi-strategy, merger arbitrage, market-neutral and credit funds. This allocation is designed to generate a reasonable return regardless of market environment.
Trusted Insight: How is your investment team structured?
Jay Namyet: I have four people who work with me -- three are dedicated investment people and one is an operational due-diligence person. Our Director of Investments has been with me for 13 years. The other two investment analysts have been here about two years each, and those positions have been added as our assets have grown.
The operational due-diligence person has been here 14 years. When we underwrite managers, we look holistically t investment, due-diligence, as well as operational. Since they require different expertise and we do all of our own work, we have somebody who's dedicated to the operational space.
Trusted Insight: The University of Oregon Foundation returned 2.4 percent in 2016, which is very impressive compared with your peers. What did you do right?
Jay Namyet: I always like to lead with a little humility. I like to think that in any one-year period, you can get lucky, you can get favorable marks, but I would look to the fact that not only did we have a good one year, but we've had a good three, five and ten year run as well.
In 2016, we had a couple of meaningful venture capital exposures that did exceptionally well. We also, more granularly, had opportunistic exposure to Argentine equities. Argentina went through a presidential election in 2015 and elected a new pro-growth, pro-business administration that is rectifying a lot of the wrongs of the previous decade-long administration.
We also had two of our equity long-short managers produce mid-20 percent returns for the year. We have a fairly concentrated portfolio, so if a manager has a really good year, it moves the needle for us. So, in sum, the majority of our returns were concentrated in a handful of managers.
The other thing that really helped us was that we had no real detractors. In fiscal 2016, there were some bumps for lots of managers, but we were fortunate that we didn’t have any exposure to those areas.
Trusted Insight: Speaking of detractors, many endowments were hurt by real assets in 2016. Do you have any real assets in your portfolio?
Jay Namyet: We do, and there was some good performance there but nothing outstanding. Some investors had more exposure to oil and gas than we do, which hurt during that time period. We have very little oil and gas exposure in our portfolio, so we did not get hit by that.
Trusted Insight: Your fund size is on the smaller side of endowments. When you select external managers, how do you compete with peers with bigger fund size and get access to the best managers?
Jay Namyet: It’s never been a problem. When I first got here 18 years ago, the endowment was a lot smaller and I knew that I wouldn't compete against some of the bigger and better known names in the country with large teams and networks. I was starting a department from scratch.
What I had to figure out was: Where do we have an edge? Is there any way we can make “small is beautiful?” If you look historically, the best returns typically come from young, hungry managers, early in their careers, with good pedigrees who are trying to make a name for themselves. What we've done -- and I think our current portfolio is still representative of that -- is methodically invested in a very talented cohort of younger managers with fewer AUM. Initially, they may not be household names, nor have three-year track records, so they are not necessarily on the institutional radar, they may not advertise, they may not employ an IR team, and sometimes, rarely though, we are literally the first institutional dollar in the door.
More typically we need to know who the other LPs are because, just as with the manager, we need to make sure we have alignment amongst LPs too.
That is okay because I also realized that to succeed at this we had to do all the manager research ourselves, not be reliant on anyone else’s work, and so, as we have grown, we have added talent to support the initiative. I am blessed to have a great team.
As a result, we don't usually have challenges with access. We develop good meaningful long-term relationships with these folks because our size and significance to one another are aligned.
Trusted Insight: How do you identify promising managers who lack track records?
If you look historically, the best returns typically come from young, hungry managers, early in their careers, with good pedigrees who are trying to make a name for themselves.
Jay Namyet: If a manager truly lacks a track record we have no interest. On the other hand, if a manager is launching his or her own new fund based on years of a demonstrable track record elsewhere using the same strategy then we will put the effort into underwriting that manager. We spend a lot of time trying to get to know the manager, their motivations, biases, beliefs, how they think, how they behave when markets are going against them. Because you learn nothing about a person’s fortitude or decision-making skills when things are just humming along. It's how people behave under stress that shows true talent.
In addition to being a good investor, we have to get a sense because it's a completely different skillset -- Can they be good business people? Can they be good leaders? Can they be good businessmen? There are a lot of ways to trip up in this business when you go solo. So we spend a lot of time, however long it takes with a number of onsite visits and calls learning, looking for consistency, paying attention to their real-time portfolio management and asking why they're making the moves they're making.
More broadly, we look for special people in special niches. We don't like to invest where too much capital is deployed and alpha is hard to achieve. So we're always trying to find under-the-radar opportunities where there's a lack of capital. If we find a really talented investor that can deploy capital in such an area, chances are we're going to get better risk-adjusted returns. The combination of too much investable capital sloshing around the global markets with too many brilliant, hard-working investors, all with access to unlimited amounts of real time data, looking to deploy those assets sets us all up for a dearth of alpha opportunities.
Trusted Insight: Can you share an example of a niche-market manager you had success with?
Jay Namyet: This is about as niche as one can get. I was reading Grant’s Interest Rate Observer five years ago and there was one little paragraph about a team doing something very interesting.
Back to 2012, when real estate was recovering from the Great Financial Recession, there was one manager that was doing something very interesting in Alabama. It initially caught my attention because it checked one of my boxes of being under-the-radar. The next question was, Are they special people? I figured “eh, no harm. I'll give them a call.” I was impressed by the person I was chatting with in terms of his knowledge of the opportunity set and his team’s game plan.
I went to Mobile, Alabama and spent three days with these folks driving around Baldwin County, looking at all of the specific properties they were thinking of investing in. A combination of the recession and the BP oil spill had taken its toll on this area’s property values. The local real estate professional who was guiding the acquisition strategy had an absolutely encyclopedic knowledge of all of the commercial real estate in this area. Driving around it was clear there were some very attractive, inexpensive parcels of land to buy, there was no institutional competition at the moment, and there were strong economic tailwinds developing to support an exit strategy.
We allocated a meaningful amount of capital for us and their fund. Fast forward to today, they've been selling these properties over the last year or two, booking nice profits. We felt there was very little downside risk in this investment. It was illiquid though so it was more a question of time to exit and thus IRR reduction rather than a hit to the multiple. The Fund still has two major assets to sell and that will dictate whether this merely a really-good investment or a home run.
That's an example of the kind of investments we look for. Granted, they are few and far between, but when we find them, we're willing to roll up our sleeves, do the hard work, underwrite them, and invest if we believe in the people and the thesis.
Trusted Insight: You've been with the university foundation for 18 years now. What are some of the most memorable things at the endowment you recall?
Jay Namyet: Both of my parents were educators, so for me to take my investment skills acquired prior to coming to the UO Foundation and put them to work in an academic setting to help fund scholarships and education in general feels fantastic. It is a mission that for me is easy to be passionate about. I am forever grateful to the people here who hired me 17 years ago.
Another thing I'm proud of is something that I think doesn't get enough attention and that is institutional governance. By that I mean the entire oversight and decision-making chain from staff through committees to the full board. We have worked tirelessly in evolving our model over the years to a point where it was recognized by our peers last year as one of the best in the country. I believe quite simply, good governance translates into good returns, while flawed models generate not-such-good returns.
Our Board and Investment Committee appreciate that investing isn't just about adhering to some artificial benchmark like a 70-stock/30-bond benchmark. Rather, it's about finding great opportunities for strong risk-adjusted returns. They don't focus on monthly, quarterly and annual performance relative to a benchmark or peers. They don’t focus on x amount in real estate or y amount in venture capital. While they look at the above, and want to understand what it is telling them, they focus on the most important thing, which is how we fulfill our institutional mission.
We report on a quarterly basis and we're exhaustive in our disclosures, but I would argue that flexibility granted to us to invest where we see the best risk-adjusted opportunities to try to earn our 5% real return bogey, gives us the ability, in a world where interest rates are historically low and stock valuations are historically high, to research and hopefully find other types of investments to support our overall mission.
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