Paul Chai is the director of investments at the Kansas State University Foundation, where he is responsible for assisting portfolio management of investable assets, conducting due diligence on existing and prospective investment managers and analyzing pooled funds.

In part two of his interview, he discusses why being a small/medium-sized institution can lead to idiosyncratic returns; the common challenges that endowment peers are currently facing; and KSU's 10-year plan to help improve the economic prosperity of their city of Manhattan, Kansas.

Paul Chai was named on Trusted Insight's Top 30 Institutional Investors In The Midwest. 

Trusted Insight: Asset allocators argue that being a small/medium-sized institution makes them meaningful, yet also flexible and nimble. Is that an advantage for your organization?

Paul Chai: Being nimble is an advantage for small to mid-sized institutional investors, as it would be easier to make more meaningful allocations to more niche opportunity sets that can generate idiosyncratic returns and outperformance to a broader market benchmark. On the other hand, taking an off-benchmark active risk would also put such smaller investor at a higher probability of underperforming the broader market benchmark, should the broader market be in a low volatility bullish environment like what we have witnessed for some periods over the last 10 years.

 

"The Long-Term Investment Pool as a whole is probably more liquid than many of our peers and has a lower-than-average exposure to private equity investments comparing to the larger Ivy League school endowments."

Additionally, there are also a number of advantages of being a larger institutional investor: better access to restrictive top-tier fund managers, leverage on fee negotiations (lower cost) and friendlier investment terms (better liquidity). It is difficult to prove the advantage of being more nimble outweigh the advantages of being a larger institutional investor, as empirical evidence appears to show higher average investment returns for larger institutions, as opposed to the other way around.

Trusted Insight: Does KSU’s asset allocation strategy involve pushing more into alternative investments?

Paul Chai: Both asset pools managed by the Foundation have strategic asset allocation targets that are reviewed and updated every couple of years. We work with external consultants to provide objective capital market assumptions and try to construct the portfolio in accordance with the finalized asset allocation targets. Because of the relatively smaller endowment size and the need to invest in fundraising to grow the fund, the endowment’s total annual spend rate is higher than many peers in the space. The need to fund a higher spend rate increases liquidity requirements for the portfolio. The Long-Term Investment Pool as a whole is probably more liquid than many of our peers and has a lower-than-average exposure to private equity investments comparing to the larger Ivy League school endowments.
 

"The Foundation is working with the school and local government on several initiatives to improve the economic prosperity for the region and the city of Manhattan, Kansas over the next 10-15 years."

We generally try to allocate in accordance with the policy asset allocation target range, but do take an off-benchmark active risk when good opportunities present themselves. We monitor and track active risk attributions periodically to ensure active risks are taken in a prudent manner.

With regard to alternative investments, since the investment pools allocate in accordance to top-down asset allocation targets, they tend to show little changes over time. We are not looking to aggressively increase alternative investments nor are we reducing alternative investment positions at this time. With that said, if we come across an alternative fund manager with attractive risk-adjusted returns and low correlations to the portfolio, we will spend time to analyze the opportunity and see if this may be a worthwhile active risk for the portfolio.

Trusted Insight: What are the biggest challenges being faced in the university endowment space?

Paul Chai: We talk with some of our endowment peers every once a while, and are often reminded of how many common challenges we all face and share, despite the many differences of our prospective institutions. I would say the two challenges we share and have most often heard from our peers are:

1. Positioning portfolio in a late-cycle environment with lower return expectations and higher downside risk.

2. Communicating with the Board and the Institution on the lower return expectations on the horizon, and to develop a sensible distribution plan balancing present and future needs.

"Being in the investment space and moving from California, I see first-hand the resource disparities and the lack of national recognition for the people in Kansas, if you compare to the coastal states."

Trusted Insight: Any final thoughts?

Paul Chai: Thank you for the opportunity to share a bit about what we do at Kansas State University Foundation. While I have just been with the team for over a year, it has been a tremendous experience working here. I am grateful to CIO Lois Cox and the community for welcoming our family to be a part of this extended family. The Foundation has a vibrant and fun culture, everyone I have met here is passionate about his/her work, and buys into the vision of advancing present and future K-State generations.

I also have the privilege of mentoring a number of students and have been very impressed with their humbleness, hardworking and the “can-do” qualities. I think our best students are on par with the best students from any school in the country, and any employers can appreciate the work ethic they bring to the table.

Being in the investment space and moving from California, I see first-hand the resource disparities and the lack of national recognition for the people in Kansas, if you compare to the coastal states. The Foundation is working with the school and local government on several initiatives to improve the economic prosperity for the region and the city of Manhattan, Kansas over the next 10-15 years. There are some very exciting things happening here, and I am very much looking forward to being a part of this positive development for the future!


Check out part one of our discussion with Paul. View our full catalog of interviews here. 

View the full list of Top 30 Institutional Investors In The Midwest.