Letitia Johnson - Concentrated and Long-Term at Amherst College (EP.382)

27:03A really interesting example of this is a lot of people look at a large venture growth allocation within privates and are like, man, you should diversify your private allocation. And I think that's one way to look at it. Or I could make sure I'm getting diversification across the total portfolio in another way without moving away from what I see as a real power alley in the portfolio. Yeah. So concentration is a key feature of the approach, especially on the manager side. But the approach in and of itself is not saying, oh, you should now go out and build a really, really high venture capital allocation within your portfolio.

27:37The approach is more play to your strengths and have the flexibility across the entire portfolio to make sure you have some amazing relationships and are meeting the high real return goals for the portfolio. When you look at the history of who these managers were coming in, and then you may have some biases or some places that you want to fill out to balance out some of the power alleys. How do you think about what the risk structure of this portfolio should look like after these organic manager selections take hold of the portfolio? That's a great question. Okay. There is, of course, risk at the individual manager level that generally I think of it as having to do with the risk that your conviction in a manager might fade over time.

28:24And that we obviously spend a tremendous amount of time on. That's one of the main motions, figuring out, do we really like this manager? I mentioned before, can we have a 10-year thesis on the manager? Can the conviction grow over time? There are all sorts of elements of the diligence process, mostly around the quality of the people and using our network to assess the quality of the people and the firm that they are trying to build to get us comfortable with the manager risk piece. So that's one thing. The second thing, especially for our portfolio, is liquidity. We spend a lot of time on liquidity.

28:55And the important thing there is understanding the shape of your liability profile and the shape of the asset profile that can support that. We focus on uncalled capital, spending on the liability side, and then cash, risk, and liquidity on the public side. So the source of funds and the uses of funds. What this approach explicitly does is it ignores private NAV. Our unfunded, just as an example today, is 12 % to support a 50 % NAV. It's extremely low. We have a very mature private portfolio. We're not trying to grow our private portfolio. We're just trying to continue to invest with our great managers.

29:40So I'm curious, if you go back a couple of years, this modeling of how you're going to size commitments to privates that isn't dependent on NAV, what does that look like compared to the alternative? Most private commitment modeling, there is a cell in which you input your private target. That's very, very typical. It really should matter what the rest of my portfolio looks like. So that's goal number one. Goal number two is build me a model where I don't feel better when my private portfolio is cut in half. I want to feel bad when that happens. And also the flip side of that, where we don't get punished when our private portfolio doubles.

30:27And then the other important piece is I need my private portfolio to produce its proportionate amount of cash. So we source spending every year. If I have half the portfolio coming in our privates, it had better produce half of my cash needs. So those were the key tenets. I have no control over private marks. The one thing that I do have control over is my commitment amounts. And oh, by the way, that's what gets me into trouble in times of crisis. The private NAV doesn't get me into trouble in times of crisis. It doesn't matter. The time that it matters is when it flows through to spending. But for Amherst, that is extremely lagged.

31:01That takes years to flow through to spending. We're going to take a quick break in the action to tell you about SRS Aquium. Want to make sure your M &A processes aren't stuck in the past? Partner with a company that's been defining the future of dealmaking for nearly two decades instead. When it comes to M &A innovation, SRS Aquium has reshaped the way that deals get done, streamlining processes for maximum efficiency and minimum headaches. Professional shareholder representation, online M &A payments, digital stockholder solicitation, SRS Aquium pioneered each and continues to set the bar for game-changing innovation.

31:46So leave the days of disjointed deal management behind and define your future with SRSAquium, the smartest way to run a deal. Learn more at srsaquium.com. That's S-R-S-A-C-Q-U-I-O-M.com. And now, back to the show. How do you adjust when before a couple years ago, So the amount of cash you're generating for the private portfolio could have been pretty meaningful. And then that's effectively dried up. So that's the thing. There's always the risk that it will dry up. And that's why you run the stress test on the portfolio. That's why we hold four to five percent of our portfolios in cash. That's a really important feature.

32:31But through this entire time period, our portfolio has been cash flow positive. And I think that's a function of incredibly high quality managers that have continued to push capital back to us. I mention all of this because the key risk in all of these endowment portfolios, no matter what your investment framework is, is getting through periods of extreme stress. There are other risks, of course, but that is a key one. So we spend a tremendous amount of time stressing the portfolio and figuring out what we would do in those situations. You need stuff in the portfolio that you can use as sources of funds during that period of time.

33:03What you don't hear me saying is I need to make sure to protect the downside in terms of a mark to market on the value of the portfolio. That matters to some degree, but it matters a lot less than cash flow that I can get to meet my cash needs during stress. In a nice way, those two things do line up. But I think it's important to acknowledge that the way that many of these endowments are invested, the private portfolios themselves aren't mark to market. There's a lot of noise in terms of the actual mark on these portfolios that would cause you to make some weird decisions around asset allocation if that's the way you're mostly managing the portfolio, like this notion of beta basically becomes completely useless when you have privates.

33:44It's not helpful. So that's not the way we do it. We think about manager quality. We think about liquidity and managing through a crisis. And then the final piece, which I haven't mentioned yet, is we do position level look through across the entire portfolio. We know how much we have in the portfolio by stage of investment in terms of early stage companies all the way through to Publix, geographic sector. There are all sorts of ways you can cut the portfolio and look at it. I would say in terms of the loop back to decision making, obviously, we don't have full control over the look through. That's mostly a result of the decisions that we've made with the managers and then what the managers are doing themselves.

34:21What I will say is that it really helps us develop a deep understanding of the portfolio and how it behaves over time. The look-through exposures change, but for a portfolio like ours, it actually doesn't change that much. It's extremely helpful when it comes to comparing managers to managers. Just as an example, we'll spend time understanding how all of our different managers across public equities, growth equity, buyouts, some of our absolute return or more distress-oriented managers, how they're thinking about payments companies. We'll do that project. We can see those companies in our look through exposure.

34:59We know what manager they're coming from. Oh, this is very interesting. We have Visa, MasterCard, Stripe, and whatever. Let's talk to all of our managers about how they think about these things. It helps us develop a deeper understanding of how our managers think. It helps us develop a deeper understanding of how the portfolio is going to behave. And we can much better do this cross-evaluation of where should we be putting incremental capital and how do we compare our managers. Over time, when you have low turnover and you're allowing the managers to compound, you can imagine position sizes getting bigger, the types of positions those managers have being a little bit momentum driven.

35:35And I'm curious how you think about the way the composition of the portfolio changes when you're structuring it this way. Yes, it is definitely the case that, especially on that early journey, as a manager does well, they get bigger. and in the public markets context, you hear that and you think that sounds very momentum-y, which is what you just said, Ted. I think that's a fair analogy, but it's not quite the way I think about it. If you start overall with this concept that you want to have a fairly concentrated portfolio and you want conviction to play a role in position sizing, It is very hard to get to conviction immediately in a manager.

36:20You get to know people better over time. The conviction builds over time. They get more experience over time. It is also a very nice natural offset to what we know in investing, which is the fact that things get harder as you get larger. So wouldn't it be nice if we had a process where we could offset that to some degree by gaining conviction over time? I think it's fair to say that there will be times when we're riding momentum waves. Venture is incredibly cyclical. There are going to be times when our venture NAV really spikes and we just had that and then it's going to come back down. I am in absolutely no position to trade our venture NAV.

36:59No one is. So that's not what I'm going to do. I'm going to be a through cycle investor and support terrific managers over time. I also want to be partnered with people where this idea of mean reversion and performance is not a thing. We definitely do rely on our managers to help us understand whether or not their portfolios should be trimmed or added to. The other thing is we have to source money from the portfolio. So that is a way that we try to be counter cyclical in the way that we source funds. How do you think about the flexibility of pursuing an attractive investment opportunity that may not be present in your portfolio?

37:39That's hard. Our approach is not quite that. A nirvana for us is when our current portfolio produces our next portfolio. So we have amazing managers spinning out or our managers are calling us and saying, you better talk to this person. I know them from when I was just starting out in this business and I think they're amazing. You should invest with them. So we spend a lot of time developing those relationships so that we can get that call. A corollary to that is we try to be as smart as our portfolio. This all works extremely well if we have a really high quality portfolio that produces a really high quality portfolio and that gives us ideas on where to invest.

38:20What that means is the pressure is on to keep the portfolio as high quality as possible and to try and make sure within the parameters that we have set, which is super long term partnerships with amazing people that are trying to build amazing firms. we want to have as much difference as we can so that we see a lot of interesting things. An important result of that is that you tend to invest with generalists because we do not know what the market is going to look like in 10 years. We need these people to be building investment processes and have diverse enough interests that they can thrive across a number of different market environments.

38:57So we have a lot of generalists in the portfolio. We also specifically have several partners that are completely agnostic with respect to sector security asset type. So these are sort of our absolute return managers. And we see a lot of interesting things pop up into their portfolio. So I think the short answer to your question is, hopefully we see really interesting things in our portfolio. If we don't and we hear enough going on that this is an interesting space to be, we will take a look. Doing very niche-y things is generally not something that we're doing. We're trying to get those interesting kinds of investments through more generalist broad managers because we want to keep the manager concentration so high.

39:37You mentioned the importance of competition for capital. I'm really curious, how do you assess the relative merits of two things that aren't the same in terms of maybe their risk profile, therefore their return profile? One way to think about it is what is our ultimate goal here? AMRA's 10, 20, and 30-year return has been about 10 % compound annualized over that period of time. I will be thrilled if we can do that. So there are a bunch of things in the investment world that we can't do as a result of that goal. And we also know that the preponderance of the portfolio has to be invested in stuff that returns at least that, if not higher.

40:16We're going to be wrong on some things. Also, we have to hold some cash because of the way the portfolio is structured. We have to hold some more defensive stuff to get through a crisis, as I talked about before in the stress test modeling. It's not like I'm saying, do I want to invest in stocks or bonds? Because mostly I want to invest in stocks. The portfolio has a relatively stable balance between stuff that's there for relatively defensive purposes and the stuff that is playing offense. A lot of the conversation comes into competition for capital within illiquids because we are basically at the max that we can be in terms of unfunded capital.

40:55So there's a lot of discussion around, should I invest incrementally more money in this venture manager, this growth manager, a buyout manager? bringing defense in or lower returning assets into the private portfolio is basically impossible for us because the return threshold is so high because the relationships are so good. So you can get a sense for it. There's a competition for illiquid capital. And then on the liquid side, we're really trying to get as much difference in as we can while not lowering the threshold on returns. When you manage a portfolio this way, what does it take in terms of your governance and your Investment Committee to pursue an approach that doesn't have the same type of vocabulary or guardrails that people are accustomed to?

41:41Well, the committee has been amazing. And I will say it has been a journey that we have absolutely been on together. So it didn't happen immediately. I do think that this is an approach that was largely happening already. There is an element here where having a history of success doing this is extremely important and Amherst has that. So that's amazing. And having a committee that works together with the investment team and builds conviction alongside us. And in some cases, I have committee members that had conviction around this approach way before I did. So they have helped me. They're amazingly supportive and it's terrific.

42:17I make the joke that when I was at Cambridge, I loved my committees, but I would go to committee needles and feel like I had to strap on the body armor to go into battle. And now the committee is like a board of advisors. And I feel like we're all very, very focused on the best solution for Amherst and they are extremely supportive in how we're going about doing that. If you go back, say two years ago, the last time you had a new manager enter the portfolio, I'm curious what the path was like in that research process from the idea through your diligence and then entering the portfolio. This will not always be the case, but the last two have been what I would say are building out difference in the portfolio.

43:00So I mentioned that the shape of the portfolio informs the pipeline. Just as an example, we did a bunch of work on private credit a year and change ago, just didn't get there, but we wanted to pressure test that part of the portfolio. In the meantime, we've been doing a lot of work on trying to find relatively liquid managers that bring difference to the portfolio, but also produce a high return, which is very hard to find. So we've been looking and we found one. So that's just an example of we were on the hunt for something like that, because as just articulated, we have a fairly lumpy portfolio, especially in the risk profile of our private portfolio.

43:42So we need to make sure that we can get difference into the bubble portfolio to the extent that we can find it without lowering the return threshold. I think we are going to perpetually be on the hunt for that, but we're thrilled with the manager that we found there. And it's been a terrific underwriting process, and we're thrilled to be investing there. Another more recent ad has been a buyout. So we have some buyout managers, but it's a small part of the portfolio. We have some great partners there, but adding one or two more, I think, makes a ton of sense. And we found one that we're really excited to partner with.

44:13That won't always be the new things that get in. One of the very natural things that happens in a portfolio like this is you have a lot of capital with managers that you trust a lot, have long relationships with, but go through succession issues. So we need to make sure, especially for parts of the portfolio where we have these power alleys, we want to continue to actively invest in those. I think of it as an asset and we want to make sure we keep that alive. Some of our managers might not make the succession jump. We want to make sure we have people waiting in the wings to the extent that they don't.

44:45So that won't be adding something that's very different to the portfolio, but it will be adding something that we value a lot. So alongside the changes that can come from success and then succession that maybe doesn't work, to go back to the original analogy, I'd love to ask you about trimming the weeds. And so what about those mistakes that's in the portfolio? What's an example of something that didn't work out? So first of all, I will say I started five years ago. And maybe this is just a really good example of the long-term nature of the way that we do things. I've exited nothing that we have put in.

45:21It's way too early to do that, in my opinion. Something very dramatic would have had to happen and nothing, thankfully, knock on what very dramatic has happened. The full exits of things, sometimes it's very, very obvious. There's one of the co-portfolio managers can leave. Major organizational changes are very obvious triggers. One thing that is not an obvious trigger for us is not doing well. So, of course, there are things that we have put in the portfolio that haven't done well. That's the nature of this business. But we take this idea of long-term partnership incredibly seriously. And whenever we underwrite anything, the 10-year thesis is no joke.

46:04we are going through and making sure as part of that underwriting, if and when, and it's not if, it's when, when the manager does badly, how are we going to be comfortable? And what setup do we have to have to make sure we can support the manager through that period? So for sure, we've just had a really interesting market environment. We have some managers that didn't do well through that environment, and we're very supportive of them, and we're seeing how that goes. If you say, I'm going to be a great partner to somebody, that means you are a great partner through, I mean, this is so corny, but it's through thick and through thin.

46:37I mean, the whole point is to support them as they're trying to figure out what's going wrong. It takes time to fully acknowledge that something is going wrong. Then it takes time to diagnose it. Then it takes time to figure out what you're going to do to fix it. And then it takes time to actually fix it. The whole thing takes time. That's fine. That's what it is. One of the more interesting parts about our portfolio, when you look at managers that have done really well over long periods of time, some of the best performing ones are ones that had absolutely awful periods because those awful periods catalyzed an incredible renewal of the organization.

47:18And if you can stick with managers through that, it's so extremely powerful because first of all, access, of course, in our world is very, very hard. Having a reputation for sticking with somebody and sticking with a manager that will probably have access issues long term, it can be very powerful. Second of all, you see them go through a period of stress. You get to know them deeply. Your conviction in them builds. And then you're there for this whole other life, the compounding of the capital, the compounding of the relationship. It's an amazing journey to be on with them. Of course, not everyone is going to make it, but our experience has been it is well worth sticking around.

47:55The other thing I will say on this is I am definitely a real believer in the importance of that initial decision and the quality of the people that you are partnering with cannot be overstated. Our job in terms of looking from the outside in is so hard. It's very hard to know what is going on. As long as I've made the right decision on who to partner with, they are the ones who are going to tell me I trust them to tell me what's happening and to make it right. And if I haven't made that right decision on the initials who I'm partnering with, that's not on me. But if you set it up right in that way, it's this beautiful thing.

48:29You're on this journey with them together. How do you make the assessment that allows you to get conviction that you've gotten the people right? This is a great example of it is when you go through a tough period. Of course, there's the relationship with you. How are they managing their team through this period? When you go through that kind of a time, you learn a lot by observing how a manager evolves their business, their team, and of course, their investment approach over time. What are the things that you like to see when a manager is going through a tough time? It goes back to what I was just saying.

49:01It's like the stages of grief. From the outside looking in, we really have no idea. And sometimes it looks obvious, but it's not. Nothing is actually going wrong. This is just the market sending us false signals. That's it many times. We want to have very productive and engaged partnerships with these managers, but every manager is different in terms of the way they engage with LPs. And we take a flexible view there. We will meet managers where they are in terms of their preference on that. What you don't hear me saying is they have to call me monthly or they come and see me every quarter or whatever.

49:34There's nothing like that. It's more like I want to hear that you're acknowledging that there is something going on. You are letting us know at some point that this is what's happening and you are dealing with and being thoughtful about that. The other thing that I think it is important to note here is the ability for managers to actually just do what they think is right based on their wealth of knowledge and experience and all of the work that they have done is incredibly important. And that is so much about partnership and the LP base giving them the freedom to do that. And that's as much about me as it is about them.

50:18They need to have the ability to reflect, evolve, and problem solve. That's important. And then we need to have the patience and support and the ability to give them the space to do that. What are some of the biggest challenges with managing the endowment the way you do? One thing I would say is that the ability to cross compare is hard. It's something that we're learning about every day. And I would say that the main thing that we work on there is just, it gets much easier the better you know what it is you own and your managers. So it's very hard to compare two things that you don't know very well that are very different.

50:58It's a lot easier to compare two things that you know extremely well that are very different. So that's one thing, the ability to compare. And then the second thing, which is just to take it much higher level, is one of the fundamental challenges of just investing in general, which is figuring out if you're doing a good job. When you have a more traditional policy portfolio framework, there's a very clear benchmark for that. There are frameworks for doing performance attribution and things like that. For us, our benchmarks are much longer term than that, and they're the 70-30 and the peer median, which I actually think are very good benchmarks, and it's what our board and committee cares about, and it's what I care about.

51:40But we don't look like those at all from day to day. There's just such a long feedback loop between the decisions we make and when they bear fruit, and then secondly, when those actually translate into how we do versus our objectives. How do you work with your team when there's such low turnover of ideas? There's a low turnover of ideas, but we do spend a lot of time talking to new managers. It's interesting because I was trying to think about how much time do we spend with current managers versus prospective managers the other day just as a sourcing exercise. And it's actually somewhat hard to differentiate between the two because any time I sit down with a manager and I'm talking to them about some space or an asset or industry or whatever it is, you're learning about your current managers because they invest there as well.

52:32But I do think it is fair to say, though, that for this approach, it's not a sourcing-oriented approach, 100%, obviously, because we just don't do that much. It's more of a keep the bar incredibly high and very occasionally something will clear that bar. I'd love to ask with these long, deep relationships with these great managers, what are some important investment lessons you've learned from some of the managers in your portfolio? I learn so many small lessons from my managers every single day, and they're mostly around how to build high-performing investment organizations. Because we have a wide variety of different strategies in the portfolio.

53:16And one of the most fun parts is being able to see how an organizational design or the way that you think about paying and promoting people translate or doesn't translate from one organization to the next. There are so many different ways to set it up extremely well. So I feel like I'm just learning all the time from my managers on how one process or one investment philosophy does or does not pour it onto different things. I will also say one of the really fun parts about this job is that you are constantly in learning mode from your managers on things that are relevant to us specifically in terms of how we do our job.

53:53What are some specific examples of those? One thing that we talk about a lot, and this is more relevant on the public portfolio than the private portfolio generally, but it actually can be somewhat relevant to venture. But we tend to have more team oriented firms on the public side. One of the things we're constantly in learning mode on and thinking about is the dynamic between having teams that are more team oriented versus teams that are more what you kill oriented, what works and doesn't work in both of those frameworks. And it's interesting because it matters in a number of small and big ways.

54:27So if you're going to have a more team oriented framework, you need to make sure, obviously, that you pay people in an appropriate way that encourages teamwork over individual decision making and individual performance. but you have to make sure that you have a setup that adequately protects from the whole free rider risk you also need to make sure you are hiring the right people and getting rid of the people that don't fit within that you know so there are all these really interesting things like if that's what you want to do you need to make sure that the entire thing fits on the flip side if you have a eat what you kill framework you also need to make sure that the whole thing fits there the other really interesting thing to think about is team departures in that context matter in a different way.

55:16Also, interestingly, spin outs from those are more or less interesting. There are all of these really interesting things that I feel like managers aren't explicitly saying this to us. We can just observe it and we learn it from them over time. The other really interesting one, and this is somewhat related to the team stuff, but we think a lot about how close investment decisions are to the work itself. So the extreme of this, of course, is the analyst that is a portfolio manager. And that's great because there's basically no leakage between the work and the decision. So that's good. The challenge is that there's much less coverage.

55:54You're going to have a five or 10 stock portfolio. And in those situations, there's stuff comes in with the firm risk. So we learn a lot from our managers that have structured that well, and you can learn a lot from managers that haven't structured that well. To the extent that you have decision-making that is farther away from the work, you need to make sure that you pay people in the right way, you need to incent people in the right way, and you need to make sure you have a culture of communication that gets the appropriate work to the appropriate person so that they can make the right decision.

56:23These are just two examples of the sorts of things that we learn, but we learn that in space across the portfolio all the time. As you look at your portfolio today, over the next couple of years, where are you excited to be leaning in? What we are trying to do is invest with a collection of great people, and then some of them will do really well. I think there are some really interesting pockets of the world. I am excited for the opportunity set for our more flexible capital managers. I think this is a very interesting time for that because the world is changing, and it does feel like that could be a great opportunity for them, and some of them have done very well recently.

57:00So we're excited for that. I think biotech is a really interesting place to be investing in the public markets right now. But generally, what I'm really excited to watch is to see which of our managers are really going to capitalize in the next two years. I'm also really excited to hopefully continue to get some next generation managers into the portfolio. Well, I can't let you go without asking a couple of closing questions. What is your favorite hobby or activity outside of work and family? I have already talked about traveling and reading novels, which is what I do all the time. I love fly fishing.

57:33That's something I don't do it very often when I get to do it. It is absolutely amazing. My husband and I do it together and I'm basically obsessed. And it's an amazing way to get outside into unbelievably beautiful nature and have a mission, which is catching the fish. And by the way, it's catch and release for the animal lovers out there. That's something I love to do. What's one fact that most people don't know about you? So this is random, but when I was a kid, I was somewhat ambidextrous and my parents nudged me to be right-handed, but they didn't notice that I was brushing my teeth left-handed.

58:07So I still brush my teeth left-handed. What's your biggest pet peeve? My biggest pet peeve is I really like it when people are direct. Don't beat around the bush. So when people beat around the bush, I got into it. Which two people have had the biggest influence on your professional life? Okay, so my entire committee has been unbelievably amazing and supportive. And we've had committee members come and go since I started and that includes everyone. But two of my committee members that have been extremely influential and just a huge piece of what we've been able to build in Amherst so far are Simon Krinsky, my investment committee chair, who is the best investment committee chair of all time.

58:51and Ben Gomez, who is president of Pilot House, a family office here in Boston. And they have been both extremely supportive and the committee just in general has given me amazing bandwidth and space to try and figure out a great solution for Amherst, build this team and this process. And they've been extremely influential in terms of the solution that we arrived at. They've just helped me a tremendous amount in this journey. What makes for the best investment committee chair of all time? Simon has just been extremely helpful in terms of day-to-day tactics, team management, thinking about overall portfolio strategy, just helpful in a wide variety of ways.

59:29But I would say the number one thing is I'm sure that the committee spent time assessing me behind closed doors, and I'm sure they still do. But I never felt that. I always felt very supported. And I can't tell you how important that is for a new CIO. So feeling like the committee has your back and that you have the runway to actually figure out what you want to do is incredibly helpful. And again, is analogous to what we were just talking about with managers. This is the entire investment world. You need to feel like as long as you are highly motivated, smart, doing all of the hard work and have generally a good idea of what to do, the ability to just do it is incredibly important and remarkably rare.

1:00:12What's the best advice you've ever received? I think the best advice I've ever received is, you've got this. Just do it. It's going to be okay. All right, Letitia, last one. What life lesson have you learned that you wish you knew a lot earlier in life? The more pivotal points of my career have been things that have felt incredibly stretched and behind, in a sense, including when I went to Yale or when I started at Cambridge or starting at Amherst. The thing that I would want to just whisper in my ear is that feeling of being behind is you growing. You can stress out a little bit less about that.

1:00:47It's okay. Well, Tisha, thanks so much for sharing this journey at Amherst. Thank you, Ted. This has been a lot of fun. Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.