In this interview, he discusses what makes KU Endowment an incredible long-term and stable partner with its 128-year history; the wealth of experience he absorbed at the Kauffman Foundation; and the idiosyncratic opportunities that the KU investment office is eyeing.
James Clarke was named on Trusted Insight's Top 30 Institutional Investors In The Midwest.
Trusted Insight: Established in 1891, KU Endowment is America's oldest foundation for a public university. What separates KU from its industry peers?
James Clarke: Well, we certainly have the best college basketball team in America, so that's an easy place to start. As an investment office, we have a couple of competitive advantages. First off, we're an incredibly long-term, stable partner with a 128-year history of supporting KU. We've endured through 5 financial depressions or panics, 22 U.S. presidents, and 15 university chancellors. There’s been two world wars, a cold war, and over a dozen economic cycles during this period. We're still here and making sure we’re prepared for what comes next is a big part of my job.
The members of our investment committee have served on average for over a decade. Our investment staff averages over 10 years as well. My predecessor was here for 31 years and my boss has been here for 38 years. We've had a two-decade relationship with our investment consultant. The stability and shared values built up over the years in these relationships are a source of competitive advantage.
"We're an incredibly long-term, stable partner with a 128-year history of supporting KU. We've endured through 5 financial depressions or panics, 22 U.S. presidents, and 15 university chancellors. There’s been two world wars, a cold war, and over a dozen economic cycles during this period."
I'm a big believer in transparency and establishing a shared philosophical approach. Without adding these, nothing in governance or staff cohesion seems to work well. There are situations where there’s a revolving door of either trustees or staff, and you keep rebuilding every few years; it’s two steps forward and then one step back. We've avoided the worst parts of that at KU, so we’re ideally suited to be a long-term partner with our investment managers.
Trusted Insight: What were the biggest lessons learned during your time at the Kauffman Foundation?
James Clarke: Kauffman was a fabulous experience. I count Kauffman as almost my third alma mater because I learned and grew so much there. In a lot of ways, Kauffman is a think tank with a very large checkbook. I had exposure to a number of brilliant people, both on the investment and programmatic side.
"I've been really fortunate over the last 15+ years to work with some amazing people... Now, part of my challenge here at KU is to try to share a few of those things as we grow and develop the team here."
I had a great boss who hired me, David Marolf. David and former-CIO Dan Kingston were incredible mentors to me. I had a chance to work with Mary McLean for a couple of years. Mary's an incredibly thoughtful and disciplined investor. I also benefited from towering investment committee chairs including Tony Mayer and Ramon de Oliveria. I also had the opportunity to go around the world and research a number of topics. We spent a great deal of effort trying to find new and interesting ways to generate returns while controlling risk. They provided that freedom and encouraged curiosity. I've been really fortunate over the last 15+ years to work with some amazing people, and hopefully, I've learned from each of them along the way. Now, part of my challenge here at KU is to try to share a few of those things as we grow and develop the team here.
Trusted Insight: Speaking of interesting ways to generate returns, what is KU Endowment doing with alternative assets?
James Clarke: We've had a private investment portfolio at KU for 10 years now. We're not the last ones to the party, but we're somewhat late. I believe the private equity portfolio I inherited when I got here three years ago is incredibly well built. It's delivered great results, especially during the last few years and I feel optimistic about where we are at. There's still some building and some modifications and some fine-tuning to be done around the margins. We're building on a strong foundation though, and so it’s an enviable place to work from. We continue to build and expand other parts of the alternative program.
"[KU Endowment's] looked at the interplay between the rise of renewable fuels and autonomous vehicles... It’s not sexy like AI but moving those molecules is a huge market opportunity."
In the past 18 months, we made some sizable adjustments to the hedge fund allocation, and now more recently we have added a new category we call alternative credit. The alt credit allocation includes everything from structured finance to transitional real estate lending so it’s a big, diverse mandate. It’s an immense challenge, but it’s part of the work I really find stimulating.
Trusted Insight: What are the KU Endowment’s next steps in the venture world?
James Clarke: We have a well-defined venture portfolio built around about 20 managers. About 15 of those are what I would term core relationships. There are some opportunities for a little bit better geographic exposure, particularly outside the U.S., but by and large, I think, our venture portfolio is well constructed.
There are always efforts to try and improve either our access or our allocation among the most selective managers. That will be ongoing for as long as the venture business exists. At the same time, it's about trying to find new opportunities, very selectively. We might add one new venture manager a year, or we might not add any. Again, we're building off of a strong foundation, which means we're stable, but we're never standing still.
Trusted Insight: Asset allocators are increasingly eyeing innovation in the tech sector (e.g., machine learning, artificial intelligence, quantum computing). What is KU looking at closely?
James Clarke: Being an LP and running an endowment portfolio is a process of continuous learning. We haven't made a concerted bet into AI, machine learning, or crypto. Stuart Mason, CIO at the University of Minnesota, has had tremendous success by being a few steps ahead of big technology trends. I have to tip my hat, of course, to David Swensen and the pioneering work he and his proteges have performed. I admire what they’ve done, but that’s a tough yardstick to measure up against. We’re just trying to be smart about how we allocate capital.
We've spent the last several months thinking about the future of energy markets. We’ve looked at the interplay between the rise of renewable fuels and autonomous vehicles. The U.S. is now the leading producer of hydrocarbons in the world. It’s not sexy like AI but moving those molecules is a huge market opportunity. At the same time, here in Kansas nearly a third of our electricity now comes from wind and the University is going all-wind next year. We’re also exploring opportunities in large scale solar and water reclamation. It’s an exciting time.
Trusted Insight: What about applying new technologies in an institutional setting?
James Clarke: I haven't seen anything yet which causes me to think that the work within the investment office is going to fundamentally change anytime soon. David Siegel, one of the founders of Two Sigma, said a few years ago at a conference something along the lines of “Anybody under the age of 40 right now, working in finance, should find a new industry to work in. Soon it will be 10 people and some computers." It was a bold prediction, and there were a lot of long faces in the room.
That may be a bit optimistic, but I think it's very much directionally accurate. How to better use technology to do our job is front and center for our objectives in 2019. It's little things from, managing paperwork to more important things like, gathering data from underlying managers and aggregating it in a way to make sense of it. Ultimately, that information should help us make better decisions about how we construct and manage the portfolio. We have to do better than just manage a portfolio of managers when there are tools and resources available for us to manage risk and return at the factor or security level. In the meantime, I try and be nice to my Alexa just in case it’s keeping score.
Trusted Insight: What does it mean to you invest on behalf of your alma mater?
James Clarke: It's a lot of fun and very rewarding on a lot of different levels. Throughout most of my career, I've been around higher education. About six years ago, I was named a trustee of my undergraduate alma mater, Washburn University. At the time, I was the youngest trustee, and six years later I’m still the youngest trustee. At KU, I’m also a trustee of the Endowment now. It still feels a bit odd in both cases to be on a first-name basis with the person who signed my diplomas. It’s also given me a heightened appreciation for the complexity and challenges of running an organization with tens of thousands of stakeholders while working under a microscope.
I enjoy being at the University a day or two before fall classes begin, because there's just an energy, it's almost palpable. I love to see the stories about alumni who came back and endow a scholarship or a professorship because something touched them in their experience here. It's just a great way to remain connected, and there's always interesting stuff going on.
Trusted Insight: Any final thoughts?
James Clarke: I think we all have to be careful about how we communicate what we are doing with the portfolios we are entrusted with and the objectives and risks that come with that charge. Different institutions have different risk tolerances and different objectives. We may have significantly different spending policies and priorities. The horse race stories are interesting, but they can be both misleading and encourage bad behavior. I admire investors who have the courage to stand apart from the crowd and focus on running their own race.
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