Mark Newcomb is the managing director of public markets at Washington University in St. Louis’ Investment Management Company, where he is responsible for public market investments. Prior to this, Newcomb was an investment manager focusing on public markets at the University of Texas Investment Management Company (UTIMCO). He has also served as an analyst and portfolio manager for TIAA-CREF’s $2.5 billion high yield group, worked in the equity research department at Bear Stearns and the FAS group at Ernst & Young. Newcomb earned a bachelor’s degree in finance from Texas Christian University and an MBA from the Kenan-Flagler School of Business at UNC Chapel Hill. He is a Chartered Financial Analyst.
Mr. Newcomb was recently named on Trusted Insight’s ranked list of Top 30 LPs Investing In Credit. He graciously spoke with Trusted Insight on July 12, 2016. The following interview has been edited for clarity.
Trusted Insight: How did you first get into the world of institutional investing and credit?
Mark Newcomb: Prior to working in investment banking, I actually started my career as a credit analyst with a bank in Dallas called Guaranty Bank, so that was my first introduction into credit. I was providing banking loans and services, understanding balance sheets and credit quality and underwriting credit risks. From there, I moved to Ernst & Young and then Bear Stearns.
Trusted Insight: Does working for an endowment differ substantially than banking?
Mark Newcomb: The work I do now is different than work as a banker or my time at TIAA-CREF because I look at more assets than just credits. I get to do a lot more relative value or risk-adjusted return type of decisions between credits and equities, rates and commodities and real assets. That is very unique versus, say TIAA-CREF where I was high yield bond analyst and portfolio manager, or as a banker doing credit underwriting for various types of borrowers.
Trusted Insight: So you're more generalized than you were in your previous positions?
Mark Newcomb: More generalized, absolutely.
Trusted Insight: You mentioned that you now cover both credit and equity. How do those asset classes combine together?
Mark Newcomb: We think equities are going to be a better, stable and compounding type of investment for us because of how we’re built and structured as an endowment. Credit provides opportunities more cyclically. There are going to be some great opportunities to have credit, and then there will be some opportunities where equities offer a better risk-adjusted return. We will look at the relative value type of trade off. what we want is an equity-like return or experience for our capital -- our capital costs that much.
Trusted Insight: Do you agree that credit offers good opportunities for returns? And if so, where do you think those opportunities lie?
Mark Newcomb: I think we're in the same zip code, although I think we are a few neighborhoods away. We think credit will be a great opportunity in the near future. Today, we don't think credit is necessarily anything extraordinary. There is a lot of central bank policy and unusual manipulation of the cost of capital, which means anything with yield is a little bit expensive today. However, we think that because of the nature of the cycle in various economies, credit will be very interesting to us in the near future. We think you'll see those in certain pockets, such as maybe the energy space or certain countries -- whether that’s particular Asian economies or even in parts of Europe.
Trusted Insight: How is credit currently affected by illiquidity?
Mark Newcomb: We don't observe a lot of illiquidity in credit. I think we see the opposite. We see a lot of chase for yield, so we see a lot of capital chasing credits right now. It doesn't really relate to the underlying fundamentals, so we find a lot of credit market to be expensive. In general, fixed income is less liquid than it was five years ago. That's a structural change, so there might be a premium that will always be there due to the structure of fixed income markets which include credits, but it's not cyclical.
Today, we don't think credit is necessarily anything extraordinary... However, we think that because of the nature of the cycle in various economies, credit will be very interesting to us in the near future.
Trusted Insight: You mentioned the energy market as an area with future potential, can you expand on what opportunities you look to identify within that market?
Mark Newcomb: We think there will be some opportunities in 12 months or the near future, where potentially good companies will need financing and it's not available. Institutional investors like ourselves can come in and provide that capital at an appropriate cost. Right now, what we're observing is that good companies who don't necessarily need financing are doing okay, and those that are not so healthy and aren’t good businesses do need financing. From a credit perspective, it's a wholesale market that we still want to stay away from.
Trusted Insight: How you're looking to reposition your equities portfolio going forward?
Mark Newcomb: Like credit and most assets out there right now, we find equities are not on the whole for sale. Within equities, we like to find companies that are going to be of high quality, stable compounders of our capital that's invested within that company. There are many businesses out there that fall into that category globally. We think about our pond as being global, and we are only out trying to find a select number of those that we know will be durable during any kind of business cycle rollover in different parts of the world.
We think that, now more than ever, is when you want to be invested in very high-quality, well-run businesses that are not straining for capital in any way. It actually has a little bit of a tie-in to credit; we think credit that is very cheap for the borrower and arguably expensive for the provider will change. As part of that, you don't want to own companies that are very capital-intensive or low-quality where they're going to need capital in the future. In turn, what we prefer is to own companies that are very high quality that don't need capital. Those types of companies are great compounders of their own capital and the initial capital that has been provided by people like us.
Trusted Insight: What do you look for when you're trying to identify the companies and managers you consider to be a good investment?
Mark Newcomb: I can try to explain it very simply, but it's so hard to do! We look at industry dynamics, competitive positioning within an industry, how innovative the company is, the quality of management and capital allocation decisions. Any piece of that can really push a company over the edge or make them of the highest quality. It could be multiple facets of the things I mentioned. Unfortunately, there's no simple playbook. Every area is very independent.
Trusted Insight: How do you work with other portfolio managers in your team across the public and private markets space?
Mark Newcomb: There certainly can be -- and often times are – opportunities for us to work with our private counterparts in both equities and credits. It just requires a lot of communication. Our private team has a lot of skill sets that they are applying daily, which we aren't applying as often, and sometimes they're very useful. It's helpful to share information on opportunities. It's episode dependent, but we do work together quite a bit.
Trusted Insight: What is the team culture and structure like at Washington University?
Mark Newcomb: The team here is a good size and is growing. We've defined ourselves by liquidity. My area is dealing with more in liquid, public things - liquid credits, liquid equities, liquid rates and currencies. Then we have an illiquid, privates group, and a third group that deals with funny, funky, absolute-return type of investments that can cut across publics and privates.
In the endowment we're quite unconstrained with how we invest. We just have a very high constraining hurdle which focuses our attention in certain areas, but with the unconstrained ability to deploy the capital. We often find that our best investment opportunities are unique and require collaboration. It may fall in one area to underwrite and invest, but might require several different points of reference or skill from other areas, so we're growing in our collaboration.
Recently, we've even gone so far as to set up an office environment to better enable that. We've just moved into a very open office space, because we recognize how important collaboration is. Working in buckets or individualized portfolios is not going to achieve our goal in the prospective future.
Trusted Insight: Your illiquid/liquid split sounds a bit different than the traditional 70:30 endowment model. How do you think the endowment model is developing?
Mark Newcomb: I believe it's moving more like our lens. Endowments are getting a lot more creative in the kinds of investments that are out there in order to deliver on their promised goals to their university. To be certain, we still do take a look at how much equity and risk-on or risk-off investments we have, and we do measure it in the traditional sense, like you indicated with the 70:30 or 80:20 percentages, but the investment world has evolved so much that just finding simple ideas that you can bucket into those is challenging. Investments just don't fall into that, so you're looking at other kinds of ways to understand, categorize and manage. Those might be in the form of liquidity or illiquidity, different geographies or what you have.
I think endowments, in general, are moving towards that more unconstrained, creative way that they can better deploy capital. It's like a process improvement mentality that endowments are starting to get really acute with, because it's going to be a lot more difficult environment for the next ten years than the last ten.
Trusted Insight: You mentioned different geographies as well. Are there different areas that you think potentially could help in that way? Say, in emerging markets?
Mark Newcomb: We invest in all the markets, including emerging markets. We've done that for a very long time and have a very healthy allocation to it. The frozen ground around emerging markets is maybe starting to thaw a little bit, but it's early. We do things strategically though, and emerging markets are very important to achieve our goal.
Again, for us we try to think about in constraints, which could be just certain kinds of products or assets. It could be geographies or even industries that are emerging that are going to be innovative. Whether it's alternative energy, or the Internet of Things -- that was a great space to invest in more recently. We're trying to look at them in different kinds of ways and not just think about it as these traditional equities, fixed income, currencies and commodities, and really try to explore different themes.
Trusted Insight: Is there any particular way that you try to keep abreast of some of the newer trends and discover what might be a good long-term investment?
Mark Newcomb: It's a process that requires a team of people. It requires a lot of intellectual curiosity and really working with our network of partners that can help us identify opportunities. We might see a topic popping up again and again that's something of interest to some of the smartest minds out there. That might give us a clue or signal that we ought to research that ourselves and determine how convicted we are in placing capital behind it. That’s just an example, they come from all over. It's our job to ensure that we stay curious and maybe dissatisfied with the current status quo, knowing that things are going to change.
Trusted Insight: If you could give one piece of career advice to someone looking to transition from investment banking world to institutional investing, what would it be?
Mark Newcomb: Embrace what you don't know. Being uncomfortable is a great place to start to understand what you don't know and that will drive your curiosity to learn and innovate and grow as an investor.
To learn more about credit investing, view the full list of Top 30 LPs Investing In Credit.