Xing Chen is the president and chief investment officer of LICR Fund, Inc., the endowment of Ludwig Institute for Cancer Research. LICR is an international research organization with a singular focus: preventing and controlling cancer. The Institute provides its world-class scientists with the resources and the flexibility to realize the life-changing potential of their breakthrough discoveries for human benefits. LICR was founded in 1971 and is celebrating its 50th anniversary this year.
In this interview, he discussed how LICR developed their own institutional competitive edge; how they built one of the best performing hedge fund programs in their industry; and how the investment team is engaged in relentless pursuit of excellence in endowment investing.
Chen named to Trusted Insight's 2020 All-Star Chief Investment Officers.
Trusted Insight: Tell us about the LICR Fund, Inc. and what your role there as President & CIO?
Xing Chen: We are not a grant-giving organization. The Fund provides direct financial support to Ludwig Institute for Cancer Research’s global operation which includes a network of 500+ Ludwig scientists around the world. These are some of the most brilliant minds in the cancer research field. The Board of LICR Fund has given the investment team all the support and flexibility to strive for outstanding performance. As the President and CIO, I am passionate about creating the best risk-adjusted returns for the Fund to support Institute’s life-changing cancer research, and everything we do goes back to that shared mission.
Trusted Insight: You’ve served the Ludwig Institute since 1997, how has the investment office and efforts evolved under your leadership?
Xing Chen: When I joined, the portfolio management function was partly outsourced to an outside consultant. And it was a simple 60/40 portfolio. Over the years, we have built a sophisticated internal investment team, brought the portfolio management function in-house. One of the most important changes is the transition from a committee-driven process to one with the investment office. Trust must be earned. It was important to have consistent and frequent communication with the Board. And you cannot over-communicate. I was able to build a strong relationship with our Board which has been incredibly thoughtful and supportive of building a world-class investment office.
We have gradually moved from the box approach of investing to the opportunistic approach of investing. Understanding some of the natural disadvantages we have relative to our larger institutional peers, who are able to negotiate terms & fees, have dedicated separate accounts & transparency, and access to established top managers, we have spent a lot of time thinking about and developing our own institutional competitive edge. We've proven we can add outsized returns with active managers. We are very competitive and are far more willing to be different. Great investment ideas are difficult to find. And, the best opportunities tend to be the ones most uncomfortable to own. It is critical to have an organizational structure and incentives that support making these investments.
Trusted Insight: How has the Fund’s strategic allocation changed over the course of the last two decades? Have turbulent times like the last months influenced any change?
Xing Chen: It has been a wholesale change from a consultant-driven 60/40 portfolio to a dynamic opportunistic investing model with the majority of the portfolio in alternative investments. We made our first hedge fund investment in 1998. Since then we have built arguably one of the best performing hedge fund programs in our cottage industry. We have done relatively well during the 2008 financial crisis. In fact, the Fund declined far less than most of our peers and was able to take advantage of the selloff to invest in some of the most sought-after managers who had been hard closed. The same phenomena happened again this time, we declined far less early last year and were able to take advantage of the dislocation to invest in many small nimble managers who really outperformed later in the year. We don’t spend too much time talking about macro & geopolitical issues. These are mostly just noise. During turbulent times, do not panic and stay the course. The real risk that matters is the probability of permanent capital loss (not volatility or tracking error). Maybe because of the long tenure, we have the confidence of the Board and therefore were able to move quickly to capture attractive investment opportunities when presented.
Trusted Insight: What are your team’s views/focus on private market investing? The last decade's endowment and foundation investors have increased allocation to private equity and venture capital.
Xing Chen: Global money supply growth and quantitative easing have created asset price inflation across the world. Specific to PE, record fundraising has been fueled by investors chasing returns that have exceeded those in public equity for many years. Concern has been growing that there is too much capital chasing too few deals in PE. That’s clearly driven up entry multiples, and in many cases caused GPs to take on too much leverage to achieve acceptable returns. Studies have shown that most of the buyout returns came from deals with low purchase multiple, so the outlook is quite challenging.
For venture capital, I do believe the human experience is fast evolving from the Industrial Age to an era of science, technology, and innovation. For example, the rapid pace of innovation in biotech and advances in science and genomic medicine, coupled with supportive regulatory policies, could make the coming decade truly transformative in healthcare. Of course, access to top managers is paramount in venture investing.
Trusted Insight: What is unique to LICR Fund, Inc., that differentiates it from its peer organizations?
Xing Chen: Unlike a University endowment which typically supports a small portion of the total budget, the Fund supports almost the entire budget of the Institute. This makes it absolutely mission-critical to have a resilient portfolio with ample liquidity. Therefore, structurally the Fund is forced to have a substantially lower private equity exposure (the highest-return asset class) than many of our peers. However, the spending needs of the Institute, which often exceeded many other organizations, require higher returns than typical endowments & foundations. This dilemma has pushed the Board and the investment team to demand extraordinary excellence from portfolio management and be highly selective of investment managers we want to partner with. The manager must have a true edge to be included in the portfolio.
Although we have a lower allocation to Private investments, we believe it is possible that an investor can post PE-like returns in public equity by investing similarly to PE managers. In some sense, buyouts are sort of like leveraged small-cap/microcap investments. A highly skillful small-cap hedge fund manager could potentially deliver comparable results with better liquidity. Similarly, an extremely skillful public biotech manager could deliver very attractive returns relative to its VC peers. These managers tend to have very limited capacity, but that’s the beauty of the strategy.
We are fully aware of how difficult it is to sustain one’s competitive advantages. Having a culture of continuous improvement is critical to maintaining and expanding the edge of our team and institution. Just like our cancer researchers who are passionately pursuing life-changing science, the investment team at LICR is engaging in relentless pursuit of excellence in endowment investing.
Trusted Insight: What is the organization's thoughts on diversity and inclusion? What are your efforts in that focus?
Xing Chen: Ludwig Cancer Research is one of the most diverse organizations in the world. Cancer has no national boundaries and our Institute’s scope is global. We have branches and centers all around the world. Our employees came from all walks of life, cultures, and regions. We believe diversity and inclusion is performance imperative. Firms employing individuals with varied backgrounds will have a competitive advantage in understanding the nuances of ever-expanding investible opportunities. A more inclusive investment team will enrich the depth and quality of the investment process. We support initiatives that empower women and minority professionals in the investment industry pipeline. We also examine our own biases and actively try to mitigate them. The resulting portfolio reflects the Institute’s global diversity with a majority of the investments outside of the U.S.
Trusted Insight: With more than two decades of experience successfully managing Ludwig’s portfolio, what are your favorite type of managers?
Xing Chen: You could divide managers into all sorts of categories. Let me approach it from a different angle and talk about personal characteristics. At the end of the day, our job is about assessing people. In order to achieve superior investment performance, we need to identify extraordinary talents. My favorite managers tend to be self-motivated, competitively driven by performance, not money. To them, satisfaction comes from outstanding performance and self-improvement. The motivation is internally oriented as they mostly compete against themselves. To some degree, this attitude extends to our investment office. We have intentionally kept a low profile. I am taking this interview as part of our Institute’s 50th-anniversary celebration.
Trusted Insight: Could you share some investment insights for superior performance?
Xing Chen: When we interview potential investment managers (GPs), we always ask them what’s your edge and what makes them unique. In fact, Institutional investors (LPs) should probably know our own natural advantages and disadvantages so we could focus our efforts on areas that offer a far higher probability of success. We should not only focus on doing things that we might have an edge or natural advantage but also avoid doing things that we have no clear advantage and are outside our circle of competence. We should give up activities that we probably could do well but are not best aligned with our edge as an institution or investment professionals.
For LICR, it means not do direct investing, market timing, quant or macro, etc., but do a lower mid-market buyout, biotech, and Asia. If you have a large pool of assets, then investigating/researching small boutique managers who have tight capacity constraints might not be the best use of your time. For us, with a roughly $2 billion endowment, the effort to engage with small/ambitious startups, ideally with strict capacity constraints, has been well worth our time. The investment returns from these small AUM managers would still be quite meaningful to us. There is often a true sense of partnership that you won’t get with large AUM managers. And I also find the resulting intellectual stimulation from the process of identifying these passionate managers quite satisfying.
View our full catalog of interviews here.
The full list of 2020's All-Star Chief Investment Officers can be found here.
In this interview, he discussed how LICR developed their own institutional competitive edge; how they built one of the best performing hedge fund programs in their industry; and how the investment team is engaged in relentless pursuit of excellence in endowment investing.
Chen named to Trusted Insight's 2020 All-Star Chief Investment Officers.
Trusted Insight: Tell us about the LICR Fund, Inc. and what your role there as President & CIO?
Xing Chen: We are not a grant-giving organization. The Fund provides direct financial support to Ludwig Institute for Cancer Research’s global operation which includes a network of 500+ Ludwig scientists around the world. These are some of the most brilliant minds in the cancer research field. The Board of LICR Fund has given the investment team all the support and flexibility to strive for outstanding performance. As the President and CIO, I am passionate about creating the best risk-adjusted returns for the Fund to support Institute’s life-changing cancer research, and everything we do goes back to that shared mission.
"We are very competitive and are far more willing to be different. Great investment ideas are difficult to find. And, the best opportunities tend to be the ones most uncomfortable to own."
Trusted Insight: You’ve served the Ludwig Institute since 1997, how has the investment office and efforts evolved under your leadership?
Xing Chen: When I joined, the portfolio management function was partly outsourced to an outside consultant. And it was a simple 60/40 portfolio. Over the years, we have built a sophisticated internal investment team, brought the portfolio management function in-house. One of the most important changes is the transition from a committee-driven process to one with the investment office. Trust must be earned. It was important to have consistent and frequent communication with the Board. And you cannot over-communicate. I was able to build a strong relationship with our Board which has been incredibly thoughtful and supportive of building a world-class investment office.
We have gradually moved from the box approach of investing to the opportunistic approach of investing. Understanding some of the natural disadvantages we have relative to our larger institutional peers, who are able to negotiate terms & fees, have dedicated separate accounts & transparency, and access to established top managers, we have spent a lot of time thinking about and developing our own institutional competitive edge. We've proven we can add outsized returns with active managers. We are very competitive and are far more willing to be different. Great investment ideas are difficult to find. And, the best opportunities tend to be the ones most uncomfortable to own. It is critical to have an organizational structure and incentives that support making these investments.
"We made our first hedge fund investment in 1998. Since then we have built arguably one of the best performing hedge fund programs in our cottage industry."
Trusted Insight: How has the Fund’s strategic allocation changed over the course of the last two decades? Have turbulent times like the last months influenced any change?
Xing Chen: It has been a wholesale change from a consultant-driven 60/40 portfolio to a dynamic opportunistic investing model with the majority of the portfolio in alternative investments. We made our first hedge fund investment in 1998. Since then we have built arguably one of the best performing hedge fund programs in our cottage industry. We have done relatively well during the 2008 financial crisis. In fact, the Fund declined far less than most of our peers and was able to take advantage of the selloff to invest in some of the most sought-after managers who had been hard closed. The same phenomena happened again this time, we declined far less early last year and were able to take advantage of the dislocation to invest in many small nimble managers who really outperformed later in the year. We don’t spend too much time talking about macro & geopolitical issues. These are mostly just noise. During turbulent times, do not panic and stay the course. The real risk that matters is the probability of permanent capital loss (not volatility or tracking error). Maybe because of the long tenure, we have the confidence of the Board and therefore were able to move quickly to capture attractive investment opportunities when presented.
"For venture capital, I do believe the human experience is fast evolving from the Industrial Age to an era of science, technology, and innovation... Of course, access to top managers is paramount in venture investing."
Trusted Insight: What are your team’s views/focus on private market investing? The last decade's endowment and foundation investors have increased allocation to private equity and venture capital.
Xing Chen: Global money supply growth and quantitative easing have created asset price inflation across the world. Specific to PE, record fundraising has been fueled by investors chasing returns that have exceeded those in public equity for many years. Concern has been growing that there is too much capital chasing too few deals in PE. That’s clearly driven up entry multiples, and in many cases caused GPs to take on too much leverage to achieve acceptable returns. Studies have shown that most of the buyout returns came from deals with low purchase multiple, so the outlook is quite challenging.
For venture capital, I do believe the human experience is fast evolving from the Industrial Age to an era of science, technology, and innovation. For example, the rapid pace of innovation in biotech and advances in science and genomic medicine, coupled with supportive regulatory policies, could make the coming decade truly transformative in healthcare. Of course, access to top managers is paramount in venture investing.
"Just like our cancer researchers who are passionately pursuing life-changing science, the investment team at LICR is engaging in relentless pursuit of excellence in endowment investing."
Trusted Insight: What is unique to LICR Fund, Inc., that differentiates it from its peer organizations?
Xing Chen: Unlike a University endowment which typically supports a small portion of the total budget, the Fund supports almost the entire budget of the Institute. This makes it absolutely mission-critical to have a resilient portfolio with ample liquidity. Therefore, structurally the Fund is forced to have a substantially lower private equity exposure (the highest-return asset class) than many of our peers. However, the spending needs of the Institute, which often exceeded many other organizations, require higher returns than typical endowments & foundations. This dilemma has pushed the Board and the investment team to demand extraordinary excellence from portfolio management and be highly selective of investment managers we want to partner with. The manager must have a true edge to be included in the portfolio.
Although we have a lower allocation to Private investments, we believe it is possible that an investor can post PE-like returns in public equity by investing similarly to PE managers. In some sense, buyouts are sort of like leveraged small-cap/microcap investments. A highly skillful small-cap hedge fund manager could potentially deliver comparable results with better liquidity. Similarly, an extremely skillful public biotech manager could deliver very attractive returns relative to its VC peers. These managers tend to have very limited capacity, but that’s the beauty of the strategy.
We are fully aware of how difficult it is to sustain one’s competitive advantages. Having a culture of continuous improvement is critical to maintaining and expanding the edge of our team and institution. Just like our cancer researchers who are passionately pursuing life-changing science, the investment team at LICR is engaging in relentless pursuit of excellence in endowment investing.
Trusted Insight: What is the organization's thoughts on diversity and inclusion? What are your efforts in that focus?
Xing Chen: Ludwig Cancer Research is one of the most diverse organizations in the world. Cancer has no national boundaries and our Institute’s scope is global. We have branches and centers all around the world. Our employees came from all walks of life, cultures, and regions. We believe diversity and inclusion is performance imperative. Firms employing individuals with varied backgrounds will have a competitive advantage in understanding the nuances of ever-expanding investible opportunities. A more inclusive investment team will enrich the depth and quality of the investment process. We support initiatives that empower women and minority professionals in the investment industry pipeline. We also examine our own biases and actively try to mitigate them. The resulting portfolio reflects the Institute’s global diversity with a majority of the investments outside of the U.S.
Trusted Insight: With more than two decades of experience successfully managing Ludwig’s portfolio, what are your favorite type of managers?
Xing Chen: You could divide managers into all sorts of categories. Let me approach it from a different angle and talk about personal characteristics. At the end of the day, our job is about assessing people. In order to achieve superior investment performance, we need to identify extraordinary talents. My favorite managers tend to be self-motivated, competitively driven by performance, not money. To them, satisfaction comes from outstanding performance and self-improvement. The motivation is internally oriented as they mostly compete against themselves. To some degree, this attitude extends to our investment office. We have intentionally kept a low profile. I am taking this interview as part of our Institute’s 50th-anniversary celebration.
Trusted Insight: Could you share some investment insights for superior performance?
Xing Chen: When we interview potential investment managers (GPs), we always ask them what’s your edge and what makes them unique. In fact, Institutional investors (LPs) should probably know our own natural advantages and disadvantages so we could focus our efforts on areas that offer a far higher probability of success. We should not only focus on doing things that we might have an edge or natural advantage but also avoid doing things that we have no clear advantage and are outside our circle of competence. We should give up activities that we probably could do well but are not best aligned with our edge as an institution or investment professionals.
For LICR, it means not do direct investing, market timing, quant or macro, etc., but do a lower mid-market buyout, biotech, and Asia. If you have a large pool of assets, then investigating/researching small boutique managers who have tight capacity constraints might not be the best use of your time. For us, with a roughly $2 billion endowment, the effort to engage with small/ambitious startups, ideally with strict capacity constraints, has been well worth our time. The investment returns from these small AUM managers would still be quite meaningful to us. There is often a true sense of partnership that you won’t get with large AUM managers. And I also find the resulting intellectual stimulation from the process of identifying these passionate managers quite satisfying.
View our full catalog of interviews here.
The full list of 2020's All-Star Chief Investment Officers can be found here.
