At the end of the first quarter, MIT Investment Management Company, the investment team that manages the university endowment for the Massachusetts Institute of Technology, wrote a letter reflecting on their past 15 years of investing. Many of the themes of the letter were not new, as far as endowment updates go. MITIMCo’s performance over this period has been solid: The endowment has returned 11.7% over the past 15 years, placing it in the top 1% of performers in the Cambridge Associates endowment universe. As MIT has grown, so too has the endowment, which now stands at $27 billion. Most interesting, however, is the letter’s examination of endowment allocation strategy.
MITIMCo President Seth Alexander joined in 2006, after working under legendary endowment investor David Swensen at Yale. The Swensen model of absolute return investing has become a guiding framework for endowment investing, and Alexander brought firsthand knowledge of it to MITIMCo. Much of his approach still reflects what he learned at Yale—MITIMCo has a go anywhere, all-weather approach that focuses on creating long-term durable absolute returns, but with a few updates for the current market . MITIMCo says in its investment brochure that it invests most of its assets with external managers, although the number of managers varies based on market opportunity.
In the letter, Alexander notes that maintaining an edge in investing is difficult, especially given how quickly others crowd into opportunities and erode alpha. As a result, MITIMCo has opted to look for asset managers off the beaten path to avoid the groupthink and crowding that other endowments often get caught up in.
Alexander explains it this way: “Historically, we sought out established firms with long track records of success. Such firms were easier to diligence, quick to get internal approval and much less likely to result in disastrous return outcomes. Unfortunately, these firms were also harder to develop relationships with,” he writes. “As an experiment, we began to target smaller, more off-the-run managers such as brand-new firms, firms started by people who did not have ’traditional’ backgrounds, firms delving into new arenas, firms with unusual organizational and fund structures and any other type of firm that did not match the typical institutional playbook.”
Over the past five years, MITIMCo has been the first institutional investor or among the first institutional investors in more than 50% of its new relationships. In many ways, this decision is a return to Swensen’s first principles. At Yale, Swensen was able to differentiate early on by seeding firms that have since grown into the large blue chip asset managers Alexander is exiting in an effort to find the new vanguards. Doing this well requires a willingness to take risks, which sets MITIMCo apart within the endowment space.
“There is a tendency to treat the Swensen model as a cookbook,” explains Mike Smith, partner and CIO at Global Endowment Management, an outsourced CIO office based in Charlotte, North Carolina, that works with endowments and foundations. “Swensen’s interest in alternatives has been adopted by endowments broadly. But the approach has been to put together a passive core and then shake in some hedge funds, shake in private equity, shake in some venture. But if you are merely copying the allocation mix without considering the underlying approach, it’s not going to work as well.”
MITIMCo’s approach to finding unique asset managers is based on the investment team’s flat, generalist structure. In a recent podcast interview with FCLT Global, Alexander said that MITIMCo avoids any type of top-down asset allocation framework. Instead, they focus on how individual managers fit in with the endowment’s broad investment goals. “We have some top-down risk controls in place to ensure the portfolio remains diversified,” he said. “Our whole thesis is to find the ‘Warren Buffett’ of a given area.”
The goal, Alexander says, is to identify asset managers—regardless of asset class—that have the type of talent that will generate returns on a long-term basis and a business model that supports building partnerships with allocators like MITIMCo.
MITIMCo isn’t the only endowment to rely on a generalist investment team model. More endowments have come to rely on this model because it speeds decision making and can be a more efficient way to run an investment team with limited resources. And, as Alexander writes, this model seems to be uniquely well-suited to the current market environment. Disruption is everywhere, even within asset management. Going forward, successful manager selection is likely to include not only a flatter investment team but also a willingness to work with asset managers that take a more generalist view when it comes to running their strategies.
“There has been a big shift within endowments away from public markets to private ones,” says Texas Hemmaplardh, partner and not-for-profit commercial leader at global consultancy Mercer. “But now we’re starting to see that line get a little more blurry. On the private equity side, we’re seeing more early-stage managers stick with a company and maintain a stake even after it goes public. On the hedge fund side, where most of the positions have been in listed companies, we’re seeing more of those managers invest in privately held companies. So from an allocation perspective, endowments have had to really step back and think through what that means in terms of portfolio construction.”
MITIMCo has had to adjust its understanding of late-stage venture in response to these blurring lines. The team has a history of co-investing alongside its venture managers, but often avoided late-stage because “we believed that late-stage venture capital co-investments generally were poor risk/reward because these rounds of fundraising often were priced by investors hoping for a quick gain in the IPO process, and such transactions were likely to be pro-cyclical investments made at market peaks in the largest and least attractive of fund investments,” Alexander writes. But the market has shifted. Companies are staying private for longer and the road to exit isn’t as cyclical as it has been.
“By focusing too much on the historic base rate and not enough on the opportunity set in front of us, we missed opportunities to earn compelling returns for MIT in companies such as Airbnb, JD.com and Stripe,” Alexander admits. Going forward, MITIMCo and other endowments will likely have to rely less on historical assumptions about certain asset classes to keep pace with how capital markets are adapting to disruption.
Going off the beaten path to find managers and adapting to disruption aren’t the only ways the endowment model is responding to change. Flexible investment remits and emerging manager programs are also places where endowments are taking the opportunity to realign portfolios to mission-driven goals.
“It can be hard to make big shifts quickly in endowment portfolios because of their size,” explains Mercer’s Hemmaplardh. “However, we are seeing more thought go into emerging manager programs and other areas where endowments can make faster incremental changes. There is a bigger emphasis on ESG goals here.”
In January, Stanford Management Company, the investment arm of Stanford’s endowment, announced that it would be adding a diversity, equity and inclusion lens to its emerging manager program. The Stanford Board of Trustees has approved an allocation of university reserve funds for a new program to invest in diverse asset managers. The fund will invest in up to 10 diverse-led investment firms based in the U.S. “We will be looking for talented diverse-led partners whom we expect to deliver exceptional long-term performance,” said Managing Director of Special Programs Greg Milani in a statement on the fund. “We hope that over time these firms will develop into partners for many institutional investors.”
MITIMCo is aligning a portion of its portfolio to ESG goals as well. In the letter, Alexander says that MITIMCo has created long-term targets for a net-zero carbon portfolio. In 2021, the endowment joined Climate Action 100+, an investor-led engagement initiative that puts pressure on the world’s largest corporate emitters to lower emissions and improve sustainability. MITIMCo has faced pressure from student groups to divest its most resource-intensive holdings, but it has opted to engage with management teams on improvement efforts instead. Harvard and Brown are also part of CA100+.
The endowment is also engaged in a process to offset carbon emissions from MIT’s Volpe real estate development near its Cambridge, Massachusetts campus.
GEM’s Smith says that these initiatives are likely to continue around the edges of endowment portfolios as allocators determine the best ways to manage a more volatile market environment while working toward mission-driven goals. “Endowments have very long time horizons, and they have, in some senses, the luxury of not having to focus too closely on short-term economic trends,” he says. “That said, we are entering a new economy and a new market regime simultaneously. So I think we’re going to see a lot more work around the edges to determine how best to invest through those changes.”
Given the discussion starting below, is it worth adding a sentence here or in the intro paragraph about their ratio of internal vs external management?