Since 2005, Kathryn J. Crecelius, CFA, has served as chief investment officer at The Johns Hopkins University's $4B endowment. Crecelius holds a PhD in French literature from Yale University. Prior to Johns Hopkins, she was managing director for marketable alternative investments at the Massachusetts Institute of Technology.
Crecelius was recently named to two Trusted Insight lists: Top 30 Women At University Endowments and Top 30 CIOs With Ivy League Education. She graciously spoke with Trusted Insight on Oct. 23. The follow interview has been edited and condensed.
Trusted Insight: Let's begin by talking about the first list you were named to: The Top 30 Women At University Endowments. Many of the women Trusted Insight has interviewed expressed some degree of surprise about there even being 30 women in endowment investing. What was your reaction?
Kathryn J. Crecelius: I would probably say there are probably fewer women today than there were five years ago interestingly enough. There aren’t all that many of these jobs. I haven’t done the count, but there are probably fewer women today. That may simply be that these jobs come up and someone fills them and there are only two genders, rather than any mega trend.
It’s always an interesting question when you look at professions that women do or don’t go into. There’s been a lot of demand outside of the endowment space. It used to be that being an endowment CIO, or even investment officer was the summum bonum. I wonder if these jobs in the next five to ten years will be as desirable given the growth in outsourced CIOs, family offices, sovereign wealth funds. There’s a lot of competition out there for talent and some of that competition pays better than universities. Even though universities, especially larger ones, pay well.
Trusted Insight: Women do seem to be better represented in endowments, as opposed to other institutions. Why might that be?
Kathryn J. Crecelius: It remains surprising to me that I will go to meeting where I am the only women in the room. People know it's a tough place in venture capital and private equity and hedge funds. The one area where I found more women, and I have absolutely no idea why, was real estate. Usually real estate funds are headed by two people rather than just one, and there are women in the top two or the top three partners.
I’ve talked to other women about this. The question of how do you get women into the pipeline for investments broadly is a really vexing one, because there is absolutely no reason that they can’t be good at it. We have shown ourselves to be good at it. It is endlessly intellectually stimulating. I just don’t know what it is: either something turns them off, or the selection process selects against them.
Interestingly enough, that’s not necessarily the case in firms outside the U.S., particularly in Asia. I think that’s true across the board, which is counter intuitive. I can think of Asian banks that have been run by women long before there were senior women at American banks. Some of it may be a cultural thing as well as other influences here in the U.S.
Trusted Insight: Let's switch gears to education. You are a Yale graduate. To what degree did your Yale education help you achieve your current success? Was the fact that you went to Yale, as opposed to another university, that important?
Kathryn J. Crecelius: I have been thinking about that ever since I got the email [notifying me of being named on Trusted Insight’s list of the Top 30 CIOs With Ivy League Education]. I guess I could answer it both ways.
In general, despite the emphasis of getting your kids in the right schools, there’s a lot of discussion of if you aren’t eligible for scholarship aid, is it worth it to go into debt to go to these schools? Here at Hopkins, we think about that all the time as do people at other institutions. Are you better off going to a state school and graduating debt free and then going to grad school somewhere else? It’s a very complex and thorny question.
I am fortunate that I did do my education before the cost went over the top. Although, on the other hand, it looks cheap today, but it didn’t feel cheap when I was doing it.
My short answer is that anybody who is a good student will be able to learn and be successful virtually anywhere. I think that there are a lot of great schools out there that might not have brand names.
I also think that for young people, fit is really important. Going somewhere where you are happy and feel like you fit in, even if it’s not an ivy league school, is perhaps even more of an influence on your ultimate success there and your success elsewhere. That said, clearly top firms like to recruit at schools that they perceive as top schools. There is not only a self referential, but a self perpetuating, machine.
I was a graduate student at Yale. I had a great experience. It was, and perhaps still is, the number one program in French literature in the world, with world-class professors and students. I had some fabulous professors who were great mentors then and one of whom was a great mentor after I left academia.
Do I think that being part of the Yale network and having a Yale degree has been a help? I think it has. I am very proud of being a Yale alum.
Trusted Insight: Tell me about Johns Hopkins endowment and how you came to be a part of it.
Kathryn J. Crecelius: I came to to John Hopkins in September 2005, almost exactly 10 years ago, as their first CIO. Prior to that, they had a treasurer/CIO that was doing essentially two full-time jobs. They realized that the endowment had gotten large enough; as a matter of fact it was long past time, to split the two jobs.
I came on in September and took over all of the investment portfolios. There were only two people here: one investment officer and one operations officer. It was a chance to really build out an investment team and also an operations team and to take a portfolio that was 56% invested in public equity, 42% of the portfolio was in U.S. public equity, very little in alternatives and to really take that portfolio and move it into the 21st century.
Trusted Insight: Tell me about the experience and process of building the investment team from the ground up.
Kathryn J. Crecelius: Endowments management is really an apprenticeship business. You can’t learn to do it in school; you have to learn by doing. I prefer to grow my own team rather than going out and hiring senior investment officers.
There was one investment officer already here with really strong experience, and we hired one other person at the investment officer level. Everyone else we hired, we hired as analysts.
One was basically two years out of college, was working for one of the investment banks in wealth management and had started working on his CFA. So he had gotten his feet wet in the investment business, but was really at a stage where we knew we could teach him and train him.
That was the pattern that we applied to everybody else. All of those analysts have since been promoted to investment officer. We currently have one analyst now that will probably be promoted within the next year or so, and we are likely to hire a new analyst at the end of the year to start the process again from the bottom.
It was also part of my vision that I wanted the team to be generalists. When I came, I felt that if ever the world had been neatly compartmentalized into public equity, private equity, real estate, etc., that the boundaries of the different asset sub-classes are weakening.
I want people who are going to understand all of the asset classes in which we invest, and when it came time to making a manager decision, they would be able to weigh a manager against all other opportunities. There’s a temptation if all you do is one asset class, you are always going to find a really good manager out there. The question is: Is this small real estate manager really the best use of our capital today versus the public equity or private equity or whatever? I want to have that kind of dialogue within the team.
The other reason I wanted generalists was the fact that while many of our decisions have to do with manager selection, a lot of what we do and need to do is to focus on broader asset allocation questions. How do we protect ourselves against inflation? How do we protect against deflation? Is real estate an inflation hedge? Well, the answer is: it depends on what kind of real estate you have.
I want people to be able to engage with those big picture asset allocation questions and not simply the more silo-ed asset class questions. That has worked out extremely well. We do have a really robust dialogue amongst the group. I also think the fact that everybody is cross-trained on the portfolio, everyone has met all of the managers in the portfolio, really enables us to punch above our weight. It is, by my own choice, a relatively small team, compared to other endowments of our size or even smaller endowments.
Trusted Insight: Tell me about the endowment portfolio.
Kathryn J. Crecelius: At this point, versus 2005, our broad asset allocation is quite similar to that of our large endowment peers.
One of the things that is different for us and for some of our other peers is that Hopkins, very early in the 1980s, decided to invest in private equity. They were a pioneer. Unfortunately they dropped out in 1989. The investment committee was concerned about liquidity and having enough liquidity. So they stopped making commitments to private partnerships. Then in 1993 or 94, they did the same thing that the NYU investment committee did, they moved heavily into fixed income. They were just nervous about equity market valuations. So Hopkins basically missed the 90s in private equity and venture capital and also in public equity because they were under allocated.
When I came, my mandate was to build out the portfolio and that’s what we have done. I think we have been very successful at getting into a certain number of funds that are very much in demand.
The one thing we have very little of is venture capital. In a year like this past fiscal year when those that had 5% and 10% of their portfolio in venture capital and saw fabulous returns, we simply did not participate. Although, our small venture capital portfolio did very well. I think it did more than 40%, but it’s like 1.5% of the portfolio. One of the things that is interesting to me is the fact that, compared to what I thought when I came, those few VC firms that were very much in demand became even more in demand. One of the decisions you have to make is how much time do I spend knocking on doors that may never open. That’s one aspect of the portfolio.
While we are now about 50% in alternatives, we still have more public equity than some of our peers. We are overweight and have been overweight for a while to international public equity in part because we thought it was undervalued and in part because we have some really, really good managers who have generated alpha.
We’ve been overweight emerging markets. We thought we were quite overweight, but we actually looked at an asset allocation survey of our peers and we realized that several were even more overweight than we are. Again, that’s a long-term allocation. It certainly hurt us over the last year. We were able to add to some of our managers over the summer and the fall. So hopefully we are buying in at lower valuations.
Trusted Insight: After witnessing returns others made from larger allocations in venture capital, is that a portion of the portfolio that you aim to grow?
Kathryn J. Crecelius: The point I wanted to make was, in my view, for most of those investors what we have seen in the last year or so, those returns are a result of the relationships those institutions have had for 25 years. They started funding VC and private equity in the early 90s or even earlier.
Venture Capital goes back even further. I think it was in the 90s when institutions started committing more capital to those funds and did very well. Frankly a lot of people got hit after 2000 in the tech bust, but if they stuck with those managers and continued to invest long-term, they’ve had incredible return.
The point I was trying to make was Johns Hopkins did not have those relationships in 90s. Therefore when I came in 05, we had some that we are very pleased to have, but there are many that we don’t have. We knocked on some doors and didn’t seem to get a lot of traction there and decided to put our energy somewhere else.
We like venture capital. We are long-term investors, and we are hoping over the next five to ten years, in addition to the established marquee names, there will be newer funds that we will be well positioned to invest in. We are not afraid to invest in first time funds. Ultimately, ten years from now, we hope that will have a bigger allocation.
Having said that, I think venture is the one area where past performance really does predict future performance. While you are always going to be open to new funds and taking a flyer, I think it’s very dangerous to say I want to commit X percent to VC, so I’m going to fund these people who are raising funds. Your chances of losing money and destroying value are much greater. We are not trying to increase our allocation in any active way, but we do continue to meet with venture capital funds and knock on doors and see where it goes.
Trusted Insight: It's a tough environment in both public and private markets right now. What’s your outlook for both public and private markets headed into 2016 and beyond?
Kathryn J. Crecelius: Tell me about it. Sometimes you just want to go home and pull the covers over your head.
I could give you an opinion on the next year. It wouldn't be worth all that much. We do tend to look at a five-to-ten year view. I say five years only because it’s hard to see out much farther than that. But I also say 10 years because many of the private funds that we are committed to have a 10-year life.
What’s really important now is to be invested with managers who have as much varied market experience as possible. I’ve seen this before. I’ve lived through the tech bubble and bust and so have many of our managers. We have one manager that is in his 70s and he was talking about managing in 1974. Two of my colleagues rolled their eyes. We were on a call and I said, “Some of the people on this call were not born in 1974 and others were not managing money.” In fact, it’s very valuable to talk to people who have been there, done that and who are not running around like Chicken Little.
Specifically to VC, private equity and real estate, the last year has been great for selling. The very conditions that make it good to be a seller, make it hard to be a buyer. We really rely on our managers to either look for those opportunities that are less market dependent or to simply sit on their capital. I feel as though we are paying people to make the determination as to whether a deal fits their parameters. Sometimes the best thing to do is nothing. And I'm fine with that. I would much rather a manager not call capital for a year or so than to find that they bought a bunch of stuff and then two years from now say, "well, in retrospect, we overpaid."
These are really difficult times. Even for those of us with experience, we have not experienced this before. Some of us remember high interest rates, but none of us have managed through these virtually zero interest rates. I don’t think any of us expected rates would stay so low, so long. And may continue to stay low.
We try to stay away from anything that appears short-term hot. If we don’t have it, we are not likely to initiate a relationship. Some of the things that have been terribly beaten down, like energy, we do believe that nobody is going to stop using gasoline and natural gas. We are not going to stop air conditioning our homes or driving and it’s a worldwide phenomenon.
Trusted Insight: What's the #1 Lesson you’ve learned during your career as an institutional investor?
Kathryn J. Crecelius: No matter how much experience you have, no matter how much you’ve seen, markets are always different. That’s what makes this job endlessly stimulating and endlessly fun. That’s also what’s difficult. I am very much, not surprisingly given my background, a believer in learning the lessons of the past and studying the past to try and understand markets and patterns. It’s also really important to remember that while it's true that “this time it’s different” are the four most dangerous words in the English language, sometimes it genuinely is different. Trying to figure out what is different now and what is a trap and appears different is sort of the goal of what you aim for as CIO.