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A Look At Carnegie Corporation's ‘Cognitive Diversity’ | Ken Lee, Director Of Investments | Exclusive Q&A

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Ken Lee is the director of investments at Carnegie Corporation of New York. He is one of five senior investment professionals managing a $3.3 billion endowment allocated to a range of traditional and alternative assets. Previously, he was a senior investment analyst at Fauchier Partners, where he was part of a team managing a $7 billion hedge fund program. Before that, he was an investment associate at Horsley Bridge. Lee holds an MBA from the University of Pennsylvania -- The Wharton School and a B.A. from Yale University.

In this interview, Lee discussed the ins and outs of working within a smaller investment team; identifying great managers and idiosyncratic opportunities; and why Carnegie’s investment team is fond of cognitive diversity.

Lee was recently named on Trusted Insight’s Top 30 Foundation Rising Stars. He graciously spoke with us on June 29, 2017.

Trusted Insight: What was that transition like from like an investment management company, Fauchier Partners, to a nonprofit institution?

Ken Lee: The biggest change has been the connection I feel to the Corporation’s larger purpose. That is a big deal to me. In addition to knowing that I serve a mission I believe in, I have also enjoyed being in a smaller team setting, working toward a longer time horizon.

In this smaller setting, we are pushed and encouraged in two ways that you don’t see very often. We challenge each other to make the best possible investment decisions, and we don’t have the hierarchy that can make it harder to disagree with a colleague. We are under pressure to make money just like everyone else, but we are not answering to investors who demand short-term gains. We have the freedom to look at investments for the long term. Both the process and the time horizon end up paying off in greater returns.

There are always tradeoffs. In this case, it's having fewer resources at my disposal. At Fauchier, I was part of a large team focused exclusively on one asset class, hedge funds. I was an investment person, and I had in-house colleagues doing risk management, operational due diligence and other adjacent work. I could just focus on investing, finding the best fund and making the right portfolio management decisions. When I got to Carnegie, I had to look after more than just hedge funds. I added several other asset classes to my coverage, but at the same time I didn’t have as much leverage. One of the biggest challenges was figuring out how to do more with fewer resources. That's been a great learning experience because it's helped me work smarter over time.

Trusted Insight: As you mentioned, you are now looking over a range of asset classes for the portfolio. How is the investment team structured? Is it more of a generalist or specialist team?

Ken Lee: We're somewhere in between specialist and generalist and that's by design. Part of it is a reflection of the skills that different members of the team brought when they came to the Corporation. Another part of it is what's needed on the team at any given time. Lastly, staffing assignments are a function of what each person wants to add to their knowledge base. For example, my first job in investing was at a fund of private equity funds that focused on venture capital. As a result, it was an easy fit for me to work on the Corporation’s venture portfolio even though that was probably not the number-one thing in my job description.

Because I worked on hedge funds before, it was easy for me to look after part of the hedge fund portfolio. Ironically, traditional asset classes like cash, fixed income and long-only equities in the developed markets were completely new to me, but I've learned a lot over the last five years and I've come to appreciate traditional asset classes quite a bit. 

Since we're always learning new things, there are also opportunities to work across asset classes. Certain opportunities benefit from collaboration across disparate areas of the portfolio. Our team has made a special effort to do that. That helps all of us build on our areas of specialty and learn about new areas.

For example, there have been a lot of interesting opportunities for me to work with Alisa Mall, my colleague who leads the real assets portfolio, both real estate and natural resources. Several of the most interesting market opportunities over the past few years have been at the intersection of credit and natural resources, or credit and real estate. It's been so much fun working together when each of us can bring a different part of the puzzle together.

Trusted Insight: There’s been a pattern throughout your investment career where you started as one among 14 investment professionals that managed billions to being one of 5 professionals. Do you find a smaller team to be more efficient?

There are some things that we just can't do, because we don't have the resources. Instead, we have to find smart ways of answering the same questions as our for-profit competitors.
Ken Lee: We have to be more efficient, because we're resource constrained. There are some things that we just can't do, because we don't have the resources. Instead, we have to find smart ways of answering the same questions as our for-profit “competitors,” but without all the personnel hours and resources that a dedicated specialist firm might have. Part of it is working smarter. Another part is not investing in as many different subcategories within an asset class. For instance, there are many parts of the hedge fund universe that we just don't participate in here at Carnegie, but I had to cover them before when I worked at a fund-of-funds.

At Carnegie, we just try to work a little bit differently. If the endowment is about $3 billion, spread across many different asset classes, that means that any individual asset class is at most $500-700 million. So, it's possible to have a much more concentrated portfolio in any one asset class.

In contrast, when I worked at the Fauchier fund-of-funds we might have had 45 or 50 manager relationships in the hedge fund space alone. At Carnegie we don't need to have 50 managers in the hedge fund space. We can have a dozen or so, with better results because the best investments aren't diluted down.

Trusted Insight: During our interview with your CIO, Kim Lew, in 2015, she described Carnegie’s investment philosophy as quite risk-tolerant. She said, "You don’t have to be right all the time; you only need to be right 51% of the time.” How does that mindset play into your portfolio and manager selection?

Ken Lee: I think what Kim's getting at is that if you’re always trying to avoid risks there's a good chance you're also going to avoid a ton of profit along the way. When you're an investment professional, you are in the business of taking risk. The idea is to take the right risks and to be thoughtful about how you do that.

If you're looking at a given asset class, there are certain risks that are unavoidable. That's true not only of asset classes, but also of strategies and fund managers too. There are always tradeoffs you have to accept. As long as you satisfy yourself that those are acceptable tradeoffs, and you understand how the investment works, which by the way takes a lot of research, then you can feel comfortable taking an intelligent level of risk. That allows us to accept what looks superficially like a higher level of risk, because it's knowingly something that we have judged and want to take on.

Trusted Insight: Are there any investment trends or areas of focus that spark the foundation's interest at the moment?

Ken Lee: Right now is a tricky period, because if you look at the capital market return expectations everyone uses a common starting point, there are few obvious pockets of value other than potentially a few geographies in the world. That means that we have to look more for managers who are able to do something different, or who have built a competitive advantage in an area that we think is especially inefficient. So, if the broad market returns aren't going to be what allows us to achieve our risk and return targets, then it has to come from active management. Individual managers and strategies can help us bridge the gap between capital market returns expectations and the absolute return that we need to meet our overall investment mandate.

The short answer is that it's less to do with any particular asset class today and more to do with identifying great managers or great idiosyncratic opportunities. That's a more difficult game, but a fun one. It gets us out there looking creatively for new things.

Trusted Insight: Carnegie considers the advancement of education and knowledge to be one of their most paramount causes to fight for. How does your interest in East Asian studies and art history correlate with your role at the foundation?

Ken Lee: When I was thinking about coming to work for Carnegie, my educational experiences were a big part of my motivation. However, it wasn't East Asian Studies that brought me here. It was the fact that I went to a public high school. During those formative years in high school, I met people from a wide range of backgrounds and circumstances, and I learned a lot. Public school, as I experienced, was a meritocracy where people grew up with fewer advantages than I did and were nonetheless ferocious competitors. That was an inspiring environment. I left high school as a strong advocate of public education. When I found that I was good at investment work, and I could apply my skills to serve public education in the United States, that was a huge motivating factor for me. I support a cause that I believed in with the skills that I've developed.

At the end of the day, our role on the investment team is to make great work happen, by making it financially possible over the long term. It is wonderful to be able to connect the Corporation’s grant-making work with my own work as an investor.

You can't have a bunch of people who think in exactly the same way, talking in echo chamber and expect to come out with a good decision that takes competing perspectives into account.
There's been a huge push on the investment team to think about diversity themes in a specific way: cognitive diversity. You can't have a bunch of people who think in exactly the same way, talking in an echo chamber and expect to come out with a good decision that takes competing perspectives into account. You need people who come from different perspectives to bring those together, potentially with a little bit of constructive conflict, to help you get to an answer that's better for everybody.

Our team is now incredibly diverse by gender, social background, sexual orientation and personality. That leads to much better discussions internally and in turn, to better decisions. Outsiders are surprised sometimes that our team makes such an effort to travel and study other parts of the world when New York has so much investment activity in its backyard. That's because we're looking for cognitive diversity.

If all we ever did was invest with a small group of New York-based fund managers because we're a New York foundation, I'm not sure our results would be as good. Of course we want that New York perspective, but I also think that there's a lot of value in other perspectives. In fact, I have two long-only managers in the state of Texas and when I go to Texas they're often surprised to find out that our long-only portfolio is so concentrated in their state. We try to get out there, to do something a little bit different and bring cognitive diversity to the portfolio of fund managers, in addition to our team.

A couple of years ago, I led a study tour to Europe so that we could meet fund managers, public companies, banks and other local players in a countries across Northern, Southern and Eastern Europe. The trip helped us gather fresh insights that others weren't getting. We did our tour during the European debt crisis. The contrasts were fascinating between Spain, Greece, Romania, Estonia and Italy, compared to what is traditionally considered core Europe. We left with a great sense of the region and could approach the opportunity set from a different angle.

Trusted Insight: If you could share a piece of advice for someone looking to enter institutional investing, what would it be?

Ken Lee: The best advice I can offer is to think about your career as an investment decision with a very long-time horizon. It’s sometimes tempting to take career shortcuts, or to take a job you’re not committed to. That can be shortsighted if you think of your career as a series of long investments in yourself. You have to make the most of each one. When I've considered potential career moves in the past, I always asked myself whether it is a commitment I want to make for at least five years, if not longer. If the answer for you is no, then that's not a job you should be taking.

If the answer is yes, it means it's a place that resonates with you. It means you can see yourself growing in that role, being part of that organization and giving your best to that organization over many years. That long-term mindset is what sets you up to do more than what you thought was possible. We're past the era where someone can join a company out of college and work there for the next 30 years before retiring with a big pension. But at the same time, I reject the idea of maximizing in the short term. The more you can extend your time horizon, the better of you’ll be, because it'll lead to better decisions. Not just in investing, but in life too.

Trusted Insight: What’s your favorite part of the job?

Last year, I set up a program we called Carnegie University to provide a strong foundation for new investment analysts, and that's been a fantastic experience so far.
Ken Lee: Without a doubt, my favorite part of the job is learning and teaching, which go hand-in-hand. Last year, I set up a program we called Carnegie University to provide a strong foundation for new investment analysts, and that's been a fantastic experience so far. You might think it sounds a little crazy to spend eight weeks on a training program when we are so resource constrained. But the long-term return on time is really high, so it's something that other long-term investors may also want to think about.

In addition to teaching, there is also learning. When you're an investor, you always have a chance to look at a wide range of things. You're always out there learning new things from smart people, and you should also want to be able to teach others. I've had a chance to work with people at different levels of the organization, help them grow as investors and as professionals. To me, that's really rewarding. It’s essentially molding the next generation of people who can challenge me. We should all want to be challenged in that way.

To learn more about foundation investing, view the complete list of Top 30 Foundation Rising Stars.

You can view our full catalogue of interviews with institutional investors here.