Rakesh Dahiya is the Chief Investment Officer at the Southern Methodist University, where he is responsible for oversight of the $1.6 billion endowment, mineral interests, and planned giving assets. As a senior officer at SMU, Rakesh serves on the President’s Executive Council and works with leadership on matters related to endowment spending and the communication of endowment strategy and performance.
In this interview, he discussed the importance of SMU’s Investment Committee and the perspective they bring to the table; how the University was in a more defensive position during the market drawdown; and how the lack of venture exposure hindered their performance versus other peers.
Rakesh Dahiya was named on Trusted Insight's 2020 Top 30 Endowment Chief Investment Officers.
Trusted Insight: Can you share about Southern Methodist University and its investment office?
Rakesh Dahiya: We manage around $1.6 billion in a diversified, long investment horizon portfolio. I have a team of 8 people in the office, of which four are investment professionals, two are dedicated to middle and back office, and one person who manages our minerals program. I did not have experience with mineral assets prior to coming to SMU so that part has been a bit of learning experience for me. The team is largely split across asset classes although we're slowly migrating from specialist roles to a generalist model. I think a generalist model works better for a small team, especially one like ours. When you cross-train people on different asset classes, it leads to more productive conversations among team members and a more robust investment portfolio.
SMU’s Investment Committee is largely made up of members of the University Board of Trustees and a handful of external advisors. We also have a faculty representative and a student representative on the Committee, which is a great tradition at SMU and not a very common practice among university endowments. The Committee members are highly accomplished in their fields and some have backgrounds in private equity and hedge funds. The Committee members add significant value to our investment process and are very supportive of the investment staff. Most of the Committee members are SMU alumni with a great affinity toward their alma mater. The Committee members are heavily invested in the creation of a successful investment program to support the University.
Trusted Insight: How has your team dealt with the COVID-19 outbreak from a university perspective and then from an investment office perspective? Has it been fairly easy to adapt?
Rakesh Dahiya: The fallout from the Covid-19 outbreak happened so quickly. We certainly heard about the spread in China and thought it was going to be contained in the U.S. Next thing we know everyone was working remotely and university classes were shut down and everything moved online. SMU was in somewhat of a fortunate situation being on spring break during the week when most other universities were rushing to make a decision on sending students home or continue with in-person classes. The extra week was very helpful in allowing us to assess and react to the situation. Our Chief Information Officer and his team quickly built and executed a great plan. In a week, the team executed a plan to learn and teach online through Zoom classes and other methods.
From the Investments Office perspective, things have mostly gone smoothly. We've been working remotely for the last couple of months, although a few of us are now trickling back in the office. We still have regular weekly staff meetings via Zoom with staff members that still working remotely and those that are in the office. We are actively communicating with each other on a regular basis. We have been busy reaching out to our managers and getting portfolio updates, trying to understand the impact of Covid-19 on portfolio investments. Thankfully we came into the year in a rather defensive position which helped cushion the blow during the market draw-down in the first quarter. Certainly, we're going to be impacted like everyone else; however, having a defensive stance coming into the year has helped. We are also trying to evaluate opportunities that may come out of the downturn in the economy and capital markets.
Similar to the global financial crisis (GFC), highly levered credit strategies are experiencing forced liquidations and certain assets are now trading below intrinsic value. Just as it was true prior to the GFC, the use of leverage has been the greatest in credit markets and a result we're seeing some of the biggest dislocations in credit markets since the GFC. While some opportunities will dissipate quickly, others will take some time to play out and develop as economies and capital markets continue to deal with the fallout from the COVID-19. We're vigilant on both fronts - talking to our existing firms as well as looking at new opportunities.
Trusted Insight: It's really interesting to hear what different folks are looking at to try to take advantage of the situation. Has there been talks about rethinking or rebalancing your asset allocation and strategy?
Rakesh Dahiya: At a very high level, our strategic asset allocation has characteristics of a 70-30 portfolio. What I mean by that is 70% of the portfolio has risk and return characteristics of equities and 30% has risk and return characteristics of bonds. We also think about asset allocation in terms of exposure to economic risks. When you look at it from that perspective, about 80% of the risk in our portfolio is allocated to instruments that do well during a steady economic growth or a stable inflation environment. Another 10% is allocated to instruments that do well during an environment of an unanticipated rise in inflation. And finally, the remaining 10% is in instruments that provide liquidity, safety or protection in a deflationary environment. We have a minimum to modest amount of duration exposure in our liquidity bucket.
In terms of whether we took advantage of the changing landscape due to COVID-19 market sell-off, the short answer is no. Although we came into the year defensively positioned with a large allocation to defensive hedge funds which helped cushion the blow, the market drawdown and recovery has been so quick that we were really not able to pivot to playing offense quickly enough. Although we have good liquidity in our hedge fund portfolio, it still required a couple of months of notice periods to get cash out of hedge funds and reallocate to equities. It seems we may have missed the opportunity as equities have already rallied significantly since the bottoming in March. The current environment may play out over a longer timeframe and investors may still get opportunities to buy assets at more attractive prices down the road.
Trusted Insight: What are your efforts in venture capital and is that an attractive asset class to you and your organization? There are similar-sized peers that have nearly doubled their exposure in venture over the years.
Rakesh Dahiya: We generally have less exposure to private markets than other endowments our size. We like private markets and have developed a plan to patiently increase our allocation with the right GPs and assets over the next few years. Recently most of our focus has been in developing relationships with GPs in lower middle market buyout space. We are also making commitments to growth equity and VC for the first time in a number of years. Our historical returns lag our peers with endowments similar to our size. The main reason has been the difference in asset allocation, specifically our lack of any reason VC exposure.
I've been with the university now coming up on four years. Prior to my arrival, we had not committed to VC for nearly 10 years. The lack of VC exposure explains the majority of the variance in performance versus our peers. I think it's an important asset class. VC gives you exposure to assets that are not available in the public markets when you're thinking about early-stage technology or healthcare innovations. It is important to have exposure to that in a long investment horizon portfolio.
We have a very patient, methodical commitment pacing plan to avoid over-committing to certain vintages. We don't want to make the mistake that many other investors made prior to the global financial crisis when they overcommitted to the asset class, putting too much capital to work too quickly. We have a patient plan to execute over the next few years but I do think it's an important asset class. Our focus is in early-stage investments in seed, pre-seed and Series A. We think you get the biggest bang for buck investing in that space. We think that the later stage valuations are stretched and have started to create issues for investors, as you've seen problems with some recent IPOs or failed IPOs.
Trusted Insight: Does the endowment size allow you to be nimble and flexible with private investments?
Rakesh Dahiya: I'm allocating 20% of private equity which includes a 5% target to VC. When you think about a $1.6 billion fund, we're committing only about $15-20 million a year to VC firms. Our ability to access early-stage funds is much greater when you spread that out over just a few handful of funds per year.
Trusted Insight: What is unique to SMU that distinguishes it from institutional peers?
Rakesh Dahiya: Whenever someone asks me what it's like to work at SMU, I love answering that question because I smile from ear to ear. I've been an institutional investor for almost 25 years and have worked for a few different institutions. What separates SMU from other similar institutions is the leadership at the top. Our university has enjoyed a strong and stable leadership with President R. Gerald Turner at the helm for over 25 years. You don't see many university presidents stay in one place for that many years. I think it speaks to his excellent leadership. The stability at the top has been tremendously beneficial to the university and the President’s leadership qualities permeate throughout the university, including the rest of his senior leadership which I'm fortunate to be a part of. You see similar great qualities in the members the Board of Trustees and the Investment Committee at SMU.
I believe that true long term success at any institution requires stability and great leadership at the top and this is certainly true of institutional investment portfolios with long investment horizons. SMU has enjoyed strong stable leadership at the top for a very long time which explains the University’s success. I’m hopeful that similar qualities will explain SMU’s endowment portfolio success in the future. In my experience, the stability and strong leadership at the top at SMU is considerably different than at other institutions I’ve worked at previously. I would highlight that as being a great strength of SMU.
Trusted Insight: From your time as an institutional investor, what are the biggest lessons learned that you bring to the table as you're leading efforts at SMU?
Rakesh Dahiya: Absolutely, I've learned a lot. I love learning from others and I’ve benefited greatly from mentors at my previous stops. I learned a lot from my time at the University of Florida and Washington University. They're very different organizations in terms of the size, complexity of portfolios, as well as the size of the teams. The lessons are very different as well. The biggest lesson that I've learned is that we’re in a people business and how you treat people matters greatly to your success. As a leader, you have to create a culture of mutual respect, trust, and hard work. Frankly, it's not easy to do and you have to work hard to build your culture. I do think that it is somewhat easier at small organizations. It’s easier, I think, to shape and mold organizational culture with a smaller team that has less inherent conflicts.
I think the best way to create the qualities I mentioned in any organization is to lead by example. A leader has to exhibit those qualities in himself or herself. How to build a good culture, things to do and things to avoid, is something I've learned from my previous stops.
Trusted Insight: What areas are you and your team trying to better understand?
Rakesh Dahiya: My team and I understand very well what we need to do to execute on our strategic plan. Our day to day focus continues to be to execute details of that plan. We also keep an eye on near term opportunities. As I mentioned, credit markets potentially have some of those opportunities today and other opportunities will come up as we move forward. The thing that keeps me up at night ironically is something that I can't control, nor can anyone else. It's today’s macroeconomic environment and geopolitical risks. In the last few months, central bankers around the world, especially the Fed have provided unprecedented levels of stimulus which has supported markets and economies. Since no one in history has any experience with the policies central bankers of today are pursuing, I worry about future implications of these unorthodox policies.
The U.S. benefits tremendously from being the world's reserve currency and so far things are calm. I wonder if one day the trust in the Fed will be tested by the markets, and if that does happen, I worry it might lead to some very bad outcomes for economies and capital markets. This is one risk that I’m constantly trying to understand better.
View our full catalog of interviews here.
The full list of 2020 Top 30 Endowment Chief Investment Officers can be found here.
In this interview, he discussed the importance of SMU’s Investment Committee and the perspective they bring to the table; how the University was in a more defensive position during the market drawdown; and how the lack of venture exposure hindered their performance versus other peers.
Rakesh Dahiya was named on Trusted Insight's 2020 Top 30 Endowment Chief Investment Officers.
Trusted Insight: Can you share about Southern Methodist University and its investment office?
Rakesh Dahiya: We manage around $1.6 billion in a diversified, long investment horizon portfolio. I have a team of 8 people in the office, of which four are investment professionals, two are dedicated to middle and back office, and one person who manages our minerals program. I did not have experience with mineral assets prior to coming to SMU so that part has been a bit of learning experience for me. The team is largely split across asset classes although we're slowly migrating from specialist roles to a generalist model. I think a generalist model works better for a small team, especially one like ours. When you cross-train people on different asset classes, it leads to more productive conversations among team members and a more robust investment portfolio.
"We also have a faculty representative and a student representative on the Committee, which is a great tradition at SMU and not a very common practice among university endowments."
SMU’s Investment Committee is largely made up of members of the University Board of Trustees and a handful of external advisors. We also have a faculty representative and a student representative on the Committee, which is a great tradition at SMU and not a very common practice among university endowments. The Committee members are highly accomplished in their fields and some have backgrounds in private equity and hedge funds. The Committee members add significant value to our investment process and are very supportive of the investment staff. Most of the Committee members are SMU alumni with a great affinity toward their alma mater. The Committee members are heavily invested in the creation of a successful investment program to support the University.
Trusted Insight: How has your team dealt with the COVID-19 outbreak from a university perspective and then from an investment office perspective? Has it been fairly easy to adapt?
Rakesh Dahiya: The fallout from the Covid-19 outbreak happened so quickly. We certainly heard about the spread in China and thought it was going to be contained in the U.S. Next thing we know everyone was working remotely and university classes were shut down and everything moved online. SMU was in somewhat of a fortunate situation being on spring break during the week when most other universities were rushing to make a decision on sending students home or continue with in-person classes. The extra week was very helpful in allowing us to assess and react to the situation. Our Chief Information Officer and his team quickly built and executed a great plan. In a week, the team executed a plan to learn and teach online through Zoom classes and other methods.
"Thankfully, [SMU] came into the year in a rather defensive position which helped cushion the blow during the market draw-down in the first quarter."
From the Investments Office perspective, things have mostly gone smoothly. We've been working remotely for the last couple of months, although a few of us are now trickling back in the office. We still have regular weekly staff meetings via Zoom with staff members that still working remotely and those that are in the office. We are actively communicating with each other on a regular basis. We have been busy reaching out to our managers and getting portfolio updates, trying to understand the impact of Covid-19 on portfolio investments. Thankfully we came into the year in a rather defensive position which helped cushion the blow during the market draw-down in the first quarter. Certainly, we're going to be impacted like everyone else; however, having a defensive stance coming into the year has helped. We are also trying to evaluate opportunities that may come out of the downturn in the economy and capital markets.
Similar to the global financial crisis (GFC), highly levered credit strategies are experiencing forced liquidations and certain assets are now trading below intrinsic value. Just as it was true prior to the GFC, the use of leverage has been the greatest in credit markets and a result we're seeing some of the biggest dislocations in credit markets since the GFC. While some opportunities will dissipate quickly, others will take some time to play out and develop as economies and capital markets continue to deal with the fallout from the COVID-19. We're vigilant on both fronts - talking to our existing firms as well as looking at new opportunities.
Trusted Insight: It's really interesting to hear what different folks are looking at to try to take advantage of the situation. Has there been talks about rethinking or rebalancing your asset allocation and strategy?
Rakesh Dahiya: At a very high level, our strategic asset allocation has characteristics of a 70-30 portfolio. What I mean by that is 70% of the portfolio has risk and return characteristics of equities and 30% has risk and return characteristics of bonds. We also think about asset allocation in terms of exposure to economic risks. When you look at it from that perspective, about 80% of the risk in our portfolio is allocated to instruments that do well during a steady economic growth or a stable inflation environment. Another 10% is allocated to instruments that do well during an environment of an unanticipated rise in inflation. And finally, the remaining 10% is in instruments that provide liquidity, safety or protection in a deflationary environment. We have a minimum to modest amount of duration exposure in our liquidity bucket.
"The current environment may play out over a longer timeframe and investors may still get opportunities to buy assets at more attractive prices down the road."
In terms of whether we took advantage of the changing landscape due to COVID-19 market sell-off, the short answer is no. Although we came into the year defensively positioned with a large allocation to defensive hedge funds which helped cushion the blow, the market drawdown and recovery has been so quick that we were really not able to pivot to playing offense quickly enough. Although we have good liquidity in our hedge fund portfolio, it still required a couple of months of notice periods to get cash out of hedge funds and reallocate to equities. It seems we may have missed the opportunity as equities have already rallied significantly since the bottoming in March. The current environment may play out over a longer timeframe and investors may still get opportunities to buy assets at more attractive prices down the road.
Trusted Insight: What are your efforts in venture capital and is that an attractive asset class to you and your organization? There are similar-sized peers that have nearly doubled their exposure in venture over the years.
Rakesh Dahiya: We generally have less exposure to private markets than other endowments our size. We like private markets and have developed a plan to patiently increase our allocation with the right GPs and assets over the next few years. Recently most of our focus has been in developing relationships with GPs in lower middle market buyout space. We are also making commitments to growth equity and VC for the first time in a number of years. Our historical returns lag our peers with endowments similar to our size. The main reason has been the difference in asset allocation, specifically our lack of any reason VC exposure.
"Prior to my arrival, we had not committed to VC for nearly 10 years. The lack of VC exposure explains the majority of the variance in performance versus our peers."
I've been with the university now coming up on four years. Prior to my arrival, we had not committed to VC for nearly 10 years. The lack of VC exposure explains the majority of the variance in performance versus our peers. I think it's an important asset class. VC gives you exposure to assets that are not available in the public markets when you're thinking about early-stage technology or healthcare innovations. It is important to have exposure to that in a long investment horizon portfolio.
We have a very patient, methodical commitment pacing plan to avoid over-committing to certain vintages. We don't want to make the mistake that many other investors made prior to the global financial crisis when they overcommitted to the asset class, putting too much capital to work too quickly. We have a patient plan to execute over the next few years but I do think it's an important asset class. Our focus is in early-stage investments in seed, pre-seed and Series A. We think you get the biggest bang for buck investing in that space. We think that the later stage valuations are stretched and have started to create issues for investors, as you've seen problems with some recent IPOs or failed IPOs.
Trusted Insight: Does the endowment size allow you to be nimble and flexible with private investments?
Rakesh Dahiya: I'm allocating 20% of private equity which includes a 5% target to VC. When you think about a $1.6 billion fund, we're committing only about $15-20 million a year to VC firms. Our ability to access early-stage funds is much greater when you spread that out over just a few handful of funds per year.
Trusted Insight: What is unique to SMU that distinguishes it from institutional peers?
Rakesh Dahiya: Whenever someone asks me what it's like to work at SMU, I love answering that question because I smile from ear to ear. I've been an institutional investor for almost 25 years and have worked for a few different institutions. What separates SMU from other similar institutions is the leadership at the top. Our university has enjoyed a strong and stable leadership with President R. Gerald Turner at the helm for over 25 years. You don't see many university presidents stay in one place for that many years. I think it speaks to his excellent leadership. The stability at the top has been tremendously beneficial to the university and the President’s leadership qualities permeate throughout the university, including the rest of his senior leadership which I'm fortunate to be a part of. You see similar great qualities in the members the Board of Trustees and the Investment Committee at SMU.
I believe that true long term success at any institution requires stability and great leadership at the top and this is certainly true of institutional investment portfolios with long investment horizons. SMU has enjoyed strong stable leadership at the top for a very long time which explains the University’s success. I’m hopeful that similar qualities will explain SMU’s endowment portfolio success in the future. In my experience, the stability and strong leadership at the top at SMU is considerably different than at other institutions I’ve worked at previously. I would highlight that as being a great strength of SMU.
Trusted Insight: From your time as an institutional investor, what are the biggest lessons learned that you bring to the table as you're leading efforts at SMU?
Rakesh Dahiya: Absolutely, I've learned a lot. I love learning from others and I’ve benefited greatly from mentors at my previous stops. I learned a lot from my time at the University of Florida and Washington University. They're very different organizations in terms of the size, complexity of portfolios, as well as the size of the teams. The lessons are very different as well. The biggest lesson that I've learned is that we’re in a people business and how you treat people matters greatly to your success. As a leader, you have to create a culture of mutual respect, trust, and hard work. Frankly, it's not easy to do and you have to work hard to build your culture. I do think that it is somewhat easier at small organizations. It’s easier, I think, to shape and mold organizational culture with a smaller team that has less inherent conflicts.
I think the best way to create the qualities I mentioned in any organization is to lead by example. A leader has to exhibit those qualities in himself or herself. How to build a good culture, things to do and things to avoid, is something I've learned from my previous stops.
Trusted Insight: What areas are you and your team trying to better understand?
Rakesh Dahiya: My team and I understand very well what we need to do to execute on our strategic plan. Our day to day focus continues to be to execute details of that plan. We also keep an eye on near term opportunities. As I mentioned, credit markets potentially have some of those opportunities today and other opportunities will come up as we move forward. The thing that keeps me up at night ironically is something that I can't control, nor can anyone else. It's today’s macroeconomic environment and geopolitical risks. In the last few months, central bankers around the world, especially the Fed have provided unprecedented levels of stimulus which has supported markets and economies. Since no one in history has any experience with the policies central bankers of today are pursuing, I worry about future implications of these unorthodox policies.
The U.S. benefits tremendously from being the world's reserve currency and so far things are calm. I wonder if one day the trust in the Fed will be tested by the markets, and if that does happen, I worry it might lead to some very bad outcomes for economies and capital markets. This is one risk that I’m constantly trying to understand better.
View our full catalog of interviews here.
The full list of 2020 Top 30 Endowment Chief Investment Officers can be found here.