Last week, Trusted Insight published the first half of our conversation with W. K. Kellogg Foundation's Neal Graziano, which focused on the evolution of markets following the 2008-2009 financial crisis and how that spells the likely death of lower tier private equity and hedge funds and the industry standard two-and-twenty fee structure. In today's Q&A, Graziano discusses how his past as an asset manager has shaped his current role as an asset allocator, the characteristics that make the Kellogg investment office unique and what constitutes a worthwhile asset manager.
Graziano is a director of investments at the W. K. Kellogg Foundation, which manages $3.5 billion in assets. Prior to joining Kellogg in 2007, Graziano was an associate portfolio manager at Mastrapasqua Asset Management and investment analyst at William Blair & Co. Graziano holds a B.A. in finance from Michigan State University and an MBA from the University of Chicago. He holds chartered financial analyst and chartered alternative investment analyst designations. Graziano was named on Trusted Insight's Top 30 LPs Investing Real Assets, Real Estate.
Trusted Insight's interview with Graziano is split into two parts. Read part one here. The following interview has been edited and condensed for clarity.
Trusted Insight: You were on the asset manager side before you switched to an asset allocator role at the Kellogg Foundation. How did your experiences as an asset manager inform how you approach the asset allocator role?
Neal Graziano: I believe I am better at understanding the qualitative piece of investment management. In my earlier career as an investment manager, I was able to live and breathe the daily anxiety and euphoria of investment performance. That experience informs my understanding of the managers I meet with today, in that it allows me to better grasp how powerful the behavioral aspect of their work is.
It also taught me the importance of process, that it’s not just another box to check. A robust process is paramount to avoid behavioral pitfalls. So much of this job is doing the analytical work, but it’s also about not letting emotions cloud judgment.
Another key takeaway from my previous career is the importance of evaluating a firm’s team and culture. I believe the fundamental ingredient for performance longevity is having the right people around the table to execute the process. Whether it’s a boutique firm like Mastrapasqua, or a large global asset manager like William Blair, the people make or break a firm’s competitive advantage.
Trusted Insight: When you're deciding to invest with a particular asset manager versus another, what are the characteristics that prove one’s superiority (outside of the standard criteria: repeatable process, good team, solid track record)?
Neal Graziano: I have come to respect the importance of emotional intelligence and with it, good leadership skills. It’s not hard to find brilliant investors. What can be more challenging is finding investors that can inspire as well as think. For most of our strategies, investing is a team process. A strong leader has the ability to extract more from the team than the sum of the individuals. When you see it, you know. There are managers that have an uncanny ability to motivate individuals and create an environment of continual learning and self-improvement.
Another characteristic I look for is alignment. Across WKKF’s portfolio, we need to be comfortable that our investments are aligned with each of our managers. We need to be in this together. Alignment is multi-faceted. It needs to occur at all levels of the organization (individual, team and company) and is not just based on compensation structures. In many instances, investment professionals are not solely focused on a larger paycheck. This is where due diligence plays a key role in finding what really motivates key team members and ensuring the outside manager and the foundation do not diverge.
Lastly, I look at judgment. In a world of decreasing alpha sources, good judgment remains a persistent alpha generator. Informational edge and computing power are not enough to create a sustainable alpha stream.
Artificial intelligence was once reserved for a select group; however, with the huge decline in the price of computing power, it has migrated across strategies and firm sizes, even trickling down to the Amazon Echo perched on my kitchen counter at home.
What continues to be a differentiator is good judgment. It is our job is to find the managers that have the ability to extract the necessary information, sort on relevance and make a well-reasoned investment decision.
Trusted Insight: I understand that you're a generalist. Why operate with a generalist model over a specialist model?
Neal Graziano: The generalist model is not for everyone. We've found there is a benefit. I believe the structure is more intellectually stimulating and when operated correctly, can help the team avoid potential investment pitfalls.
It can create better decisions. For instance, if we research a geographical region, we can approach it in an agnostic fashion. Each of the directors is able to review the different asset classes and determine where the foundation’s capital would be treated best. It also creates a level of efficiency. We do not need to have different specialists travel to a geography to evaluate each asset class independently. Instead, we can take a holistic view of the opportunity set and then determine our preferred asset class.
The big caveat: in order for this model to work, the team needs to have stability, flexibility and going back to my earlier comment, emotional intelligence. We are fortunate in that we have a supportive team that has worked together since 2011. Our familiarity with each other’s diligence approach helps us anticipate where we might need to support or question each other’s research. A large part of the stability is attributable to our current Vice President and Chief Investment Officer, Joel Wittenberg. Joel brought a high level of management and cooperation to the process. He has been instrumental in creating an environment where we can support each other, and at times, ask hard questions about each other’s investment thesis.
There are two inherent drawbacks with a generalist model. The first is depth. We don't have as deep of asset class knowledge as our larger specialist peers. To help combat the deficiency, we have to leverage technology. With the leadership of one of our newest (new for us is three years) portfolio managers, Matt Shellenberger, we have dramatically increased our technology backbone. We now have a deep internal CRM/performance/file management database to help share the team’s institutional knowledge. It gives us a large advantage in leveraging our time and deepening our expertise.
The second drawback is behavioral. Teams, like individuals, have biases. With the generalist model, there is a propensity to lean toward (or away from) a preferred asset class or geography. What we've created to combat the risk is appoint a team member to oversee each asset class. For instance, I'm the lead for private equity. That doesn't mean I have the sole ownership of the asset class. Instead, I serve as the lead in crafting the overall strategy and ensuring the communication lines are open across the team.
All three elements are necessary for the generalist model to work. The right team is so important. The team needs to be intellectually curious, thrive in a team environment and have healthy emotional intelligence. The other two ingredients help bridge the potential drawbacks: swapping breadth for depth and the inadvertent time allocation risk. Technology plays a big part in increasing our depth and information sharing. The process keeps the communication lines open and helps us avoid duplication pitfalls.
Trusted Insight: What sets the Kellogg Foundation apart from its peers?
Neal Graziano: I can boil it down to three things.
The first is the team. We have a team of four senior decision makers that have not only allocated capital but have directly invested capital. That's unique. We are also fortunate in that we are able to attract and retain great talent that is equally passionate about investing and supporting the foundation’s mission.
The second asset is the governance structure. Earlier I discussed the importance of alignment across the stakeholders. We are no different. We have an advantage because our trustees provide an environment where we can make the right long-term decisions.
The third, which I believe is underappreciated, is having fun. Venture investing is a good example. Venture managers’ work hard on attracting people and creating a fun environment. They do this partially because they need to compete to attract the smartest, most capable individuals. However, they also do this because they can get a lot more out of their team if there is a purpose beyond compensation. It helps foster a sense of community that feeds back into creating a stronger culture.
Trusted Insight: What else should readers know about you, about WKKF or about foundation investing in general?
Neal Graziano: There is a strong sense of purpose working for a foundation. We are here because of the generous gift of our founder, Will Keith Kellogg. He was a true visionary. He performed a selfless act and set aside the bulk of his net worth to make a difference for the less fortunate. The investment team makes up a small portion of the foundation’s employees. I am always impressed with my greater foundation colleagues. I spoke earlier of the passion for investing; my colleagues have an extraordinary passion for what they do. They are so dedicated in supporting our local grantees and community members’ goals. The awesome work they do across the U.S., Latin America and Caribbean is truly inspiring. I love being able to tie back what we do on the investment side with some of the life-changing work done at the foundation. It gives me such a sense of pride and purpose walking through the doors each morning.
Check out our full collection of exclusive interviews.
Graziano is a director of investments at the W. K. Kellogg Foundation, which manages $3.5 billion in assets. Prior to joining Kellogg in 2007, Graziano was an associate portfolio manager at Mastrapasqua Asset Management and investment analyst at William Blair & Co. Graziano holds a B.A. in finance from Michigan State University and an MBA from the University of Chicago. He holds chartered financial analyst and chartered alternative investment analyst designations. Graziano was named on Trusted Insight's Top 30 LPs Investing Real Assets, Real Estate.
Trusted Insight's interview with Graziano is split into two parts. Read part one here. The following interview has been edited and condensed for clarity.
Trusted Insight: You were on the asset manager side before you switched to an asset allocator role at the Kellogg Foundation. How did your experiences as an asset manager inform how you approach the asset allocator role?
Neal Graziano: I believe I am better at understanding the qualitative piece of investment management. In my earlier career as an investment manager, I was able to live and breathe the daily anxiety and euphoria of investment performance. That experience informs my understanding of the managers I meet with today, in that it allows me to better grasp how powerful the behavioral aspect of their work is.
It also taught me the importance of process, that it’s not just another box to check. A robust process is paramount to avoid behavioral pitfalls. So much of this job is doing the analytical work, but it’s also about not letting emotions cloud judgment.
Another key takeaway from my previous career is the importance of evaluating a firm’s team and culture. I believe the fundamental ingredient for performance longevity is having the right people around the table to execute the process. Whether it’s a boutique firm like Mastrapasqua, or a large global asset manager like William Blair, the people make or break a firm’s competitive advantage.
Trusted Insight: When you're deciding to invest with a particular asset manager versus another, what are the characteristics that prove one’s superiority (outside of the standard criteria: repeatable process, good team, solid track record)?
Neal Graziano: I have come to respect the importance of emotional intelligence and with it, good leadership skills. It’s not hard to find brilliant investors. What can be more challenging is finding investors that can inspire as well as think. For most of our strategies, investing is a team process. A strong leader has the ability to extract more from the team than the sum of the individuals. When you see it, you know. There are managers that have an uncanny ability to motivate individuals and create an environment of continual learning and self-improvement.
Another characteristic I look for is alignment. Across WKKF’s portfolio, we need to be comfortable that our investments are aligned with each of our managers. We need to be in this together. Alignment is multi-faceted. It needs to occur at all levels of the organization (individual, team and company) and is not just based on compensation structures. In many instances, investment professionals are not solely focused on a larger paycheck. This is where due diligence plays a key role in finding what really motivates key team members and ensuring the outside manager and the foundation do not diverge.
Lastly, I look at judgment. In a world of decreasing alpha sources, good judgment remains a persistent alpha generator. Informational edge and computing power are not enough to create a sustainable alpha stream.
Artificial intelligence was once reserved for a select group; however, with the huge decline in the price of computing power, it has migrated across strategies and firm sizes, even trickling down to the Amazon Echo perched on my kitchen counter at home.
What continues to be a differentiator is good judgment. It is our job is to find the managers that have the ability to extract the necessary information, sort on relevance and make a well-reasoned investment decision.
Trusted Insight: I understand that you're a generalist. Why operate with a generalist model over a specialist model?
Neal Graziano: The generalist model is not for everyone. We've found there is a benefit. I believe the structure is more intellectually stimulating and when operated correctly, can help the team avoid potential investment pitfalls.
It can create better decisions. For instance, if we research a geographical region, we can approach it in an agnostic fashion. Each of the directors is able to review the different asset classes and determine where the foundation’s capital would be treated best. It also creates a level of efficiency. We do not need to have different specialists travel to a geography to evaluate each asset class independently. Instead, we can take a holistic view of the opportunity set and then determine our preferred asset class.
The big caveat: in order for this model to work, the team needs to have stability, flexibility and going back to my earlier comment, emotional intelligence. We are fortunate in that we have a supportive team that has worked together since 2011. Our familiarity with each other’s diligence approach helps us anticipate where we might need to support or question each other’s research. A large part of the stability is attributable to our current Vice President and Chief Investment Officer, Joel Wittenberg. Joel brought a high level of management and cooperation to the process. He has been instrumental in creating an environment where we can support each other, and at times, ask hard questions about each other’s investment thesis.
There are two inherent drawbacks with a generalist model. The first is depth. We don't have as deep of asset class knowledge as our larger specialist peers. To help combat the deficiency, we have to leverage technology. With the leadership of one of our newest (new for us is three years) portfolio managers, Matt Shellenberger, we have dramatically increased our technology backbone. We now have a deep internal CRM/performance/file management database to help share the team’s institutional knowledge. It gives us a large advantage in leveraging our time and deepening our expertise.
The second drawback is behavioral. Teams, like individuals, have biases. With the generalist model, there is a propensity to lean toward (or away from) a preferred asset class or geography. What we've created to combat the risk is appoint a team member to oversee each asset class. For instance, I'm the lead for private equity. That doesn't mean I have the sole ownership of the asset class. Instead, I serve as the lead in crafting the overall strategy and ensuring the communication lines are open across the team.
All three elements are necessary for the generalist model to work. The right team is so important. The team needs to be intellectually curious, thrive in a team environment and have healthy emotional intelligence. The other two ingredients help bridge the potential drawbacks: swapping breadth for depth and the inadvertent time allocation risk. Technology plays a big part in increasing our depth and information sharing. The process keeps the communication lines open and helps us avoid duplication pitfalls.
Trusted Insight: What sets the Kellogg Foundation apart from its peers?
Neal Graziano: I can boil it down to three things.
The first is the team. We have a team of four senior decision makers that have not only allocated capital but have directly invested capital. That's unique. We are also fortunate in that we are able to attract and retain great talent that is equally passionate about investing and supporting the foundation’s mission.
The second asset is the governance structure. Earlier I discussed the importance of alignment across the stakeholders. We are no different. We have an advantage because our trustees provide an environment where we can make the right long-term decisions.
The third, which I believe is underappreciated, is having fun. Venture investing is a good example. Venture managers’ work hard on attracting people and creating a fun environment. They do this partially because they need to compete to attract the smartest, most capable individuals. However, they also do this because they can get a lot more out of their team if there is a purpose beyond compensation. It helps foster a sense of community that feeds back into creating a stronger culture.
Trusted Insight: What else should readers know about you, about WKKF or about foundation investing in general?
Neal Graziano: There is a strong sense of purpose working for a foundation. We are here because of the generous gift of our founder, Will Keith Kellogg. He was a true visionary. He performed a selfless act and set aside the bulk of his net worth to make a difference for the less fortunate. The investment team makes up a small portion of the foundation’s employees. I am always impressed with my greater foundation colleagues. I spoke earlier of the passion for investing; my colleagues have an extraordinary passion for what they do. They are so dedicated in supporting our local grantees and community members’ goals. The awesome work they do across the U.S., Latin America and Caribbean is truly inspiring. I love being able to tie back what we do on the investment side with some of the life-changing work done at the foundation. It gives me such a sense of pride and purpose walking through the doors each morning.
Check out our full collection of exclusive interviews.