Scott Wilson is the chief investment officer at Washington University Investment Management Company. Previously, he served as CIO at Grinnell College where he managed the investment strategy for Grinnell’s nearly $2 billion endowment.
In this interview, he discusses the significant changes in WashU's investment team and strategy; their decade long approach in getting more exposure to private equity and venture capital; and why they're investing in places where capital is scarce.
His previous experience also includes positions at Credit Suisse First Boston Equity Research in Chicago; Merrill Lynch Technology Equity Research Group in San Francisco; Bank of America Securities in London and Tokyo; and Barclays Capital Japan, where he served as head of the Asia Interest Rate Option Trading Desk.
Scott Wilson was named on Trusted Insight's 2019 Top 30 University Endowment Chief Investment Officers.
Trusted Insight: How will the WashU investment office continue evolving under your leadership?
Scott Wilson: Since I started, we have made some significant changes on the team and to the investment strategy to address some of WashU’s long-term performance challenges.
The first thing we did was shift around some of the key personnel and made a few outside hires. The biggest change was probably moving from a siloed investment team to a framework where everybody on the team is essentially a generalist. We believe that asset classes and individual investments should have to compete for capital. It is easier to do so when you have your top people looking at all asset classes and geographies – not just focused on one particular area of the portfolio. Going forward, we are using a one-team, one-portfolio approach and everybody will have some responsibility for all asset classes and geographies. We expect everyone on the senior team to be thoroughly involved with any investment that ultimately makes it into the portfolio.
Trusted Insight: Would you say that most institutions can benefit by having a more generalist team? Is that an advantage for your organization?
Scott Wilson: Smaller endowments are almost forced to use a generalist model because they have fewer resources and much smaller teams. They still have to cover all of the asset classes and geographies. To do so with a small team efficiently is difficult if the team is not made up of generalists. Otherwise, you likely need to hire an outside consultant to help build your portfolio. We do not use any consultants at WashU for the investment portfolio or operational diligence. At Grinnell, I do not know how we would have done anything different than a generalist approach with such a small investment team.
The siloed approach works for several of our peers and there can certainly be some benefits to specialization. At WashU, we are trying to put together a high conviction portfolio of only our very best ideas within each asset class. Because we are already diversified among asset classes and geographies, I do not want another layer of diversification within each asset class. This over-diversification tends to be a common outcome when a member of the investment team is only responsible for one particular asset class.
A simple example is a coin toss that has a 2 to 1 payout. This is a 50% expected return with independent outcomes, a great investment even if there is a 50% chance of losing your initial capital. We would love to have a basket of similar investments in our portfolio. An investment with similar characteristics to this coin flip example gets sized very differently if you are responsible for one small part of the portfolio or the entire portfolio. We found that under the siloed model, the portfolio was significantly over-diversified within each asset class and no particular investment really mattered much to the overall performance of the portfolio. This approach essentially created a tracking stock within each asset class, but with a much higher fee ratio.
We also found that there were several exposures that were missed entirely or unintentionally overlapped across asset classes or geographies. This was because both the public market and private market silo heads wanted exposures to certain sectors or geographies. We are trying to ensure a deliberate competition for capital across all asset classes and geographies based on our investable opportunity set. For example, we are not overly concerned that we have very little Indian private equity exposure if we are overweight Indian public equities. The entire senior team should be thinking about how each individual investment fits into our overall portfolio.
Trusted Insight: WashU is taking a decade long approach in getting more exposure to private equity and venture capital. What are the next steps in your program?
Scott Wilson: This was a process that started even before I landed at WashU. We have made a lot of progress on building our private allocation closer to our target exposures. The private portfolio is still immature and a lot of it is very early in the J-curve so we just need to reasonable with our performance expectations. Especially relative to our more established peers who have very well-constructed and mature private portfolios. Patience is not my greatest virtue.
We have already made a significant amount of progress putting capital to work in single-name investments, concentrating exposure with our highest conviction partners, and selling out of some non-strategic relationships. This process will still take several years to complete, but I am happy with what the team has been able to accomplish so far.
Trusted Insight: You have experience investing in global markets such as London and Japan, which gave you a wealth of experience. How have you helped amplify that global investing aspect at WashU?
Scott Wilson: Having worked in various capital markets across the world, I would say it gave me an inherent preference for finding local partners on the ground in local markets. Generally, we also probably have more global exposure, both in international developed and emerging markets, than the average endowment. We made a significant shift in the first 18 months, redeeming and reinvesting the bulk of our public markets exposure in international markets.
Trusted Insight: What were the biggest lessons learned during your seven years at Grinnell? How have those experiences influenced your current role?
Scott Wilson: I was very fortunate to start my endowment investing career at Grinnell. David Clay, the person who hired me, was the CIO there for over twenty years and at the college for nearly thirty years. He was a great investor and a great person. I still talk to him regularly and consider him a good friend. He had a very unique approach to managing the endowment, which he had developed with a long-line of great mentors. I had never been in a role where I had to allocate capital when I was not directly responsible for the investment and risk decisions. David taught me a lot about portfolio management, what a long time horizon really means, and why it is important to think about your portfolio at the individual investment level. He was also a strong believer that we did not have to invest in everything, only a find a few great long-term investments every year. I'm also grateful to some of the investment committee members at Grinnell who really supported our long-term strategy which produces, by design, some good and bad years.
We are taking this same long-term approach to portfolio construction at WashU. You can optimize a portfolio to perform over a short time horizon or a long time horizon, but not both. We tend to take the extremely long-term approach knowing it means we will have some good years and some less fortunate years. However, over a long period of time we expect to outperform. Fortunately, we have a really great board and governance structure that both support our long-term strategy.
At Grinnell, we had some tough years where we underperformed our peer group. However, over my entire time there, we were one of the best performing endowments.
Trusted Insight: What industry verticals or trends in today’s market are guiding how WashU makes investment decisions?
Scott Wilson: We get asked this question quite a bit. I would say we are probably more defined by what we are not doing. We are not chasing returns in large buyout funds or early-stage venture and growth funds. We are trying to be extremely selective in places where we think valuations have gotten out of control or there is too much capital chasing limited attractive investment opportunities. Basically, anything that has significantly outperformed over the last decade we are probably pretty cautious on investing in at this point.
We have spent a lot of time in Africa, parts of Asia outside China, South America, Eastern Europe and even Russia, which we believe offer some very interesting opportunities. We are going places where we think capital is scarce and you will get paid more appropriately for the level of risk that you are taking. We are also avoiding the firms and funds that have done extremely well, but have grown their asset bases even faster than their success would dictate. We are pretty skeptical that funds can generate similar levels of historical returns when they have grown their asset base to very large levels. They have probably grown beyond their original opportunity set. Being undisciplined about AUM is one of the primary reasons we have when redeeming capital. Fundraising disease is an unfortunate sickness within most asset classes.
Trusted Insight: How can institutional investors collaborate more with each other moving forward?
Scott Wilson: We collaborate with quite a few of our peers and we are fairly open about what we own or who our partners are within the portfolio. If one of our partners is going to take additional capital, we would rather introduce them to a similar, like-minded investor. Most of our investments tend to be capacity constrained so it is not necessarily a relevant discussion and if they are ultimately not going to be disciplined about their capital base then there is not a lot we can do to prevent that. We are also not naïve enough to think that other talented teams will not stumble across a lot of our best partners eventually whether we tell them or not. We generally know who looks at the world with a similar mindset and we are happy to share ideas and research.
Trusted Insight: Any final thoughts you would like to add?
Scott Wilson: I am thankful to have the opportunity to work for Washington University in St. Louis. I am fortunate to have a really great team across the entire investment office and fantastic colleagues at the University. The Board has also been extremely encouraging and supportive. I would encourage some of your younger audience to consider working for an endowment investment office if they ever get the chance; although just to be clear, we are not currently hiring. Endowments are really a great place to be because of their ability to take such a long-term view and opportunistically deploy capital in any asset class anywhere in the world, within reason. If that does not appeal to someone as an investor then I do not think anything will. Thank you for having me.
View our full catalog of interviews here.
The list of 2019 Top 30 University Endowment Chief Investment Officers can be found here.
In this interview, he discusses the significant changes in WashU's investment team and strategy; their decade long approach in getting more exposure to private equity and venture capital; and why they're investing in places where capital is scarce.
His previous experience also includes positions at Credit Suisse First Boston Equity Research in Chicago; Merrill Lynch Technology Equity Research Group in San Francisco; Bank of America Securities in London and Tokyo; and Barclays Capital Japan, where he served as head of the Asia Interest Rate Option Trading Desk.
Scott Wilson was named on Trusted Insight's 2019 Top 30 University Endowment Chief Investment Officers.
Trusted Insight: How will the WashU investment office continue evolving under your leadership?
Scott Wilson: Since I started, we have made some significant changes on the team and to the investment strategy to address some of WashU’s long-term performance challenges.
"Going forward, we are using a one-team, one-portfolio approach and everybody will have some responsibility for all asset classes and geographies."
The first thing we did was shift around some of the key personnel and made a few outside hires. The biggest change was probably moving from a siloed investment team to a framework where everybody on the team is essentially a generalist. We believe that asset classes and individual investments should have to compete for capital. It is easier to do so when you have your top people looking at all asset classes and geographies – not just focused on one particular area of the portfolio. Going forward, we are using a one-team, one-portfolio approach and everybody will have some responsibility for all asset classes and geographies. We expect everyone on the senior team to be thoroughly involved with any investment that ultimately makes it into the portfolio.
Trusted Insight: Would you say that most institutions can benefit by having a more generalist team? Is that an advantage for your organization?
Scott Wilson: Smaller endowments are almost forced to use a generalist model because they have fewer resources and much smaller teams. They still have to cover all of the asset classes and geographies. To do so with a small team efficiently is difficult if the team is not made up of generalists. Otherwise, you likely need to hire an outside consultant to help build your portfolio. We do not use any consultants at WashU for the investment portfolio or operational diligence. At Grinnell, I do not know how we would have done anything different than a generalist approach with such a small investment team.
The siloed approach works for several of our peers and there can certainly be some benefits to specialization. At WashU, we are trying to put together a high conviction portfolio of only our very best ideas within each asset class. Because we are already diversified among asset classes and geographies, I do not want another layer of diversification within each asset class. This over-diversification tends to be a common outcome when a member of the investment team is only responsible for one particular asset class.
"We are trying to ensure a deliberate competition for capital across all asset classes and geographies based on our investable opportunity set."
A simple example is a coin toss that has a 2 to 1 payout. This is a 50% expected return with independent outcomes, a great investment even if there is a 50% chance of losing your initial capital. We would love to have a basket of similar investments in our portfolio. An investment with similar characteristics to this coin flip example gets sized very differently if you are responsible for one small part of the portfolio or the entire portfolio. We found that under the siloed model, the portfolio was significantly over-diversified within each asset class and no particular investment really mattered much to the overall performance of the portfolio. This approach essentially created a tracking stock within each asset class, but with a much higher fee ratio.
We also found that there were several exposures that were missed entirely or unintentionally overlapped across asset classes or geographies. This was because both the public market and private market silo heads wanted exposures to certain sectors or geographies. We are trying to ensure a deliberate competition for capital across all asset classes and geographies based on our investable opportunity set. For example, we are not overly concerned that we have very little Indian private equity exposure if we are overweight Indian public equities. The entire senior team should be thinking about how each individual investment fits into our overall portfolio.
Trusted Insight: WashU is taking a decade long approach in getting more exposure to private equity and venture capital. What are the next steps in your program?
Scott Wilson: This was a process that started even before I landed at WashU. We have made a lot of progress on building our private allocation closer to our target exposures. The private portfolio is still immature and a lot of it is very early in the J-curve so we just need to reasonable with our performance expectations. Especially relative to our more established peers who have very well-constructed and mature private portfolios. Patience is not my greatest virtue.
We have already made a significant amount of progress putting capital to work in single-name investments, concentrating exposure with our highest conviction partners, and selling out of some non-strategic relationships. This process will still take several years to complete, but I am happy with what the team has been able to accomplish so far.
Trusted Insight: You have experience investing in global markets such as London and Japan, which gave you a wealth of experience. How have you helped amplify that global investing aspect at WashU?
Scott Wilson: Having worked in various capital markets across the world, I would say it gave me an inherent preference for finding local partners on the ground in local markets. Generally, we also probably have more global exposure, both in international developed and emerging markets, than the average endowment. We made a significant shift in the first 18 months, redeeming and reinvesting the bulk of our public markets exposure in international markets.
Trusted Insight: What were the biggest lessons learned during your seven years at Grinnell? How have those experiences influenced your current role?
Scott Wilson: I was very fortunate to start my endowment investing career at Grinnell. David Clay, the person who hired me, was the CIO there for over twenty years and at the college for nearly thirty years. He was a great investor and a great person. I still talk to him regularly and consider him a good friend. He had a very unique approach to managing the endowment, which he had developed with a long-line of great mentors. I had never been in a role where I had to allocate capital when I was not directly responsible for the investment and risk decisions. David taught me a lot about portfolio management, what a long time horizon really means, and why it is important to think about your portfolio at the individual investment level. He was also a strong believer that we did not have to invest in everything, only a find a few great long-term investments every year. I'm also grateful to some of the investment committee members at Grinnell who really supported our long-term strategy which produces, by design, some good and bad years.
"Endowments are really a great place to be because of their ability to take such a long-term view and opportunistically deploy capital in any asset class anywhere in the world, within reason."
We are taking this same long-term approach to portfolio construction at WashU. You can optimize a portfolio to perform over a short time horizon or a long time horizon, but not both. We tend to take the extremely long-term approach knowing it means we will have some good years and some less fortunate years. However, over a long period of time we expect to outperform. Fortunately, we have a really great board and governance structure that both support our long-term strategy.
At Grinnell, we had some tough years where we underperformed our peer group. However, over my entire time there, we were one of the best performing endowments.
Trusted Insight: What industry verticals or trends in today’s market are guiding how WashU makes investment decisions?
Scott Wilson: We get asked this question quite a bit. I would say we are probably more defined by what we are not doing. We are not chasing returns in large buyout funds or early-stage venture and growth funds. We are trying to be extremely selective in places where we think valuations have gotten out of control or there is too much capital chasing limited attractive investment opportunities. Basically, anything that has significantly outperformed over the last decade we are probably pretty cautious on investing in at this point.
"We are pretty skeptical that funds can generate similar levels of historical returns when they have grown their asset base to very large levels."
We have spent a lot of time in Africa, parts of Asia outside China, South America, Eastern Europe and even Russia, which we believe offer some very interesting opportunities. We are going places where we think capital is scarce and you will get paid more appropriately for the level of risk that you are taking. We are also avoiding the firms and funds that have done extremely well, but have grown their asset bases even faster than their success would dictate. We are pretty skeptical that funds can generate similar levels of historical returns when they have grown their asset base to very large levels. They have probably grown beyond their original opportunity set. Being undisciplined about AUM is one of the primary reasons we have when redeeming capital. Fundraising disease is an unfortunate sickness within most asset classes.
Trusted Insight: How can institutional investors collaborate more with each other moving forward?
Scott Wilson: We collaborate with quite a few of our peers and we are fairly open about what we own or who our partners are within the portfolio. If one of our partners is going to take additional capital, we would rather introduce them to a similar, like-minded investor. Most of our investments tend to be capacity constrained so it is not necessarily a relevant discussion and if they are ultimately not going to be disciplined about their capital base then there is not a lot we can do to prevent that. We are also not naïve enough to think that other talented teams will not stumble across a lot of our best partners eventually whether we tell them or not. We generally know who looks at the world with a similar mindset and we are happy to share ideas and research.
Trusted Insight: Any final thoughts you would like to add?
Scott Wilson: I am thankful to have the opportunity to work for Washington University in St. Louis. I am fortunate to have a really great team across the entire investment office and fantastic colleagues at the University. The Board has also been extremely encouraging and supportive. I would encourage some of your younger audience to consider working for an endowment investment office if they ever get the chance; although just to be clear, we are not currently hiring. Endowments are really a great place to be because of their ability to take such a long-term view and opportunistically deploy capital in any asset class anywhere in the world, within reason. If that does not appeal to someone as an investor then I do not think anything will. Thank you for having me.
View our full catalog of interviews here.
The list of 2019 Top 30 University Endowment Chief Investment Officers can be found here.