Following on from the last two posts…here’s how we think about this job and what are some predictors of success in this field… Capability with numbers Facility with puzzles Innate curiosity Willingness to pick up the phone Putting the pieces together Thinking about what comes next Considering the knock-on effects Tinkering with something new Interest in mystery genres These, and others, are traits or interests we look for in analyst candidates. We also like varied interests outside of work/class, along with some sort of service or volunteer experience. Willingness to say “I don’t know” is also a core characteristic we look for. Ego at any level is an immediate non-starter.

Following on from the last two posts…here’s how we think about this job and what are some predictors of success in this field… Capability with numbers Facility with puzzles Innate curiosity Willingness to pick up the phone Putting the pieces together Thinking about what comes next Considering the knock-on effects Tinkering with something new Interest in mystery genres These, and others, are traits or interests we look for in analyst candidates. We also like varied interests outside of work/class, along with some sort of service or volunteer experience. Willingness to say “I don’t know” is also a core characteristic we look for. Ego at any level is an immediate non-starter.

So, then students ask, “what do you do in a given day?” It’s a relevant question as college students are used to “doing” things within a structured schedule. But ours is a “thinking” job with broad reach…as the general manager, we’re not sitting around and watching “baseball games”. In fact, we pay little attention to the players on the field, trusting them to play their positions at All-Star levels. So what do we do? Strategy - consider new ways to make money for the endowment, investigate and then execute on such; consider new ways to structure the team (hitting singles/doubles consistently or swinging for home runs, etc.) Exposure - knowing what we own and where it is and deciding if we want to continue to own such; buy low/sell high decisions as it relates to sector, geography, mkt cap, specific strategies, etc depending on what markets are doing Markets - since we’re the general manager we need to keep track of what is going on in most all markets and sub-industries, so we read a lot and follow markets globally Events - basically anything that can impact markets, we follow; if there is state-on-state conflict (recent example), we’re game-playing likely responses and market impacts in real time (at night or on the weekend) to determine what/where we might need to invest/divest come morning; same is true if there’s a hurricane or a country specific financial crisis (this is not a 9 to 5 job) Players - we also have a constant stream of new players/strategies we’re considering/interviewing to see if we can upgrade our team Reporting - there’s a regular schedule of telling our owners/fans what is going on with the team Research - as new technologies such as blockchain, solid state batteries, autonomous driving, AI, and similar begin to emerge, we need to be up to speed on where we should be arraying our capital to take advantage of such; so again, a lot of reading Financials - on a daily basis we’re moving money between accounts/managers as we re-position and provide capital to managers we have contracts with This is a list of SOME of what we do…there is a lot more. But, in short, no day is the same. We’re both anticipatory and reactive to what is going on globally in an effort to drive returns for the university. We see the complete breadth of financial markets and are frequently making decisions about where the best risk-adjusted returns lie. People who like puzzles tend to do well in the allocator space.

Again for Baylor (or other) students…it occurred to me that some of you might not fully understand how the industry breaks down. Let’s use a baseball analogy… University - owns the baseball club, but only as a means to create excess revenue which is then used to fund a broader purpose or objective Investment Committee - the owners group of representatives that has to sign off on big/significant hiring/firing/strategy decisions by the general manager Allocators - the general manager that decides what players to hire/fire/trade and what strategy to employ to get the W (where endowment investment teams reside) Portfolio/Asset Managers - the players on the baseball field (with specialties in certain positions/strategies) Asset manager/3rd party marketers - asset manager “sports” agents (get paid if player makes it on the team) Prime broker/investment bank - asset manager financier (lends money/securities to asset manager so they can implement the strategy…and is paid with/by interest earned) Fees - contract with player/asset manager in return for performance on the field (general manager needs a significant number of players to play well in order to get the win) Return rankings - aka W/L record is akin to how we do vs other endowment peers (but without taking into account how we SHOULD have done…no ranking includes risk taken) Benefit of returns - creates more resources for the university so that it can achieve more of its stated objectives/mission It’s not a perfect analogy, but it works pretty well (particularly for on the field strategy) and makes the industry more accessible to those who aren’t in it (fans?).

I like this Peter Thiel quote… “This is why I think competition is always this very two edged thing.  When you compete ferociously, you will get better at that which you’re competing on but you will always narrow your focus to beating the people around you.  And it often comes at this very high price of losing sight of what is more important or perhaps more valuable.” In endowment land, the competition is definitively NOT between schools, but versus the internal team itself to increase the endowment’s dollar value. Students can’t pay for school with return percentages! Returns are just a means to get to a larger funding pool to enable more scholarships. That’s why challenging oneself, thinking outside the box, and ignoring the naysayers is so important!

 Institutional Investor Allocator’s Choice Awards   Congratulations to you and your team on being nominated in the Allocator with the Best Hedge Fund Portfolio category at the 2024 Allocators’ Choice Awards taking place September 12th at theMandarin Oriental in New York, NY.   “Baylor University, for its contrarian approach to investing. The endowment team likes small, concentrated positions and tries to select managers early in their life cycles. Baylor relies on CIO David Morehead for his hedge fund expertise, which included stints trading derivatives before arriving at the university.” Happy Baylor’s team is being recognized for their hard work! (It’s more than just me, of course.) In the five years ended 5/31/24, annualized category returns have been 13.6%; over the past 10 years, this category has generated 8.7% annualized returns. Also, our IC deserves immense credit for enabling such. Good governance for the win!

One of the tenets of portfolio management is diversification, not just in returns, but factors, markets, cash flow, etc.  Many of the coastal schools got out of energy markets 4-8 years ago, for political, non-investment reasons.  But right now, while private equity is not distributing and real estate is weak, energy companies are consolidating, providing distributions to those schools still involved in the space.  Diversification matters, in distribution experience, as well as in return generation.

Transparency within the workplace comes in many colors. It could be related to career progress, potential, compensation, and advancement. Or, it could reference knowledge, inclusion in strategy, go forward planning, and institutional goals. It could also relate to vulnerability, ownership of mistakes, and mentoring junior staff. When you have the right people, all of these are appropriate in developing trust, ownership, loyalty, and collaboration. We run a VERY open and transparent shop.

It seems clear that AI has captured the attention of investors (us too, by the way). But that also provides opportunity…if you look where others are not. Experientially, we’re finding LOTS of things to do outside of tech…energy, real estate, other hard assets, transportation…. If everyone in a museum is hunched over a single case/exhibit, walk away and see what else you can learn about.

With the close of June, the "endowment olympics" officially begins. Clearly, with the extraordinary performance of the market weighted equity indicies, the smaller endowments will take the podium this year (which is fantastic given it is these schools who are most at risk from the coming high school student demographic cliff)... 1-year ACWI net +19.4% US Agg + 2.6% 80/20 +16.0% 70/30 +14.4% 60/40 +12.7% Baylor +xx.x% (low double digits? it'll be another 2-3 months before larger endowments get 2Q private marks in from their managers) These are exceptionally strong numbers at the index level, which is fantastic for all students who receive scholarship aid (and faculty, research, programs, etc). Over a longer period of time, it looks like this... 5-year (approximate) ACWI net +10.8% US Agg - 0.4% 80/20 + 8.7% 70/30 + 7.7% 60/40 + 6.6% Baylor +12.0% (roughly; we don't have any private 2Q results in, but that is also less meaningful the longer the time frame is) Endowments are long-lived/perpetual assets, with the purpose being the funding (and stability to that funding) of the institution they serve. Such pools should not be assessed on a 1-year basis, but on longer look-backs, consistent with the objective of the capital pool. Internally, we assess ourselves over every time frame, as do all endowment officers. And, endowments generally have a much lower volatility level than the equity markets (because students don't want and shouldn't get $5,000 one year and $4,000 the next year). While university constituents take pride in strong endowment returns, it is also the case that each institution is different and, therefore, solving for a different "problem" that their institution faces. So comparisons should be taken externally as we CIOs do internally...with a grain of salt. We want ALL of our peer schools to do well, for all students who need financial aid are deserving, wherever they go to school. Onward all!

Here’s some other classwork, subject matter, that’s relevant to investing… Business Law - incorporation, bankruptcy, contracts, liens, torts; particularly necessary in credit/distressed Economics - this is easily the most important subject, outside of finance, for those interested in an investing career History - particularly as it relates to state on state behavior, reactions, diplomacy, and wars; natural disasters and impact; corporate/product history Marketing - for understanding human behavior, particularly as it relates to shifting demand curves; as we say in our office “marketing works” Math - covered in prior post Political Science - legislative and regulatory processes Psychology - again with a focus on human behavior, particularly as it relates to FOMO, loss avoidance, behavior of the masses, and emotional anchoring Sciences - specialty sectors like energy, biotech, quantum computing are better understood by experts in these respective fields Investing is a whole lot more involved than knowing a company and/or developing spreadsheets. Baylor students…take classes in these other fields to fill out your educational foundation in order to excel in this field.

For BU students/grads…sometimes I’m asked what math is required in investing. Here’s a brief summary… Accounting - not really math, but the language of finance, so really helps to know it (doesn’t mean you need a CPA…you don’t) Algebra - regular way, not trig; understanding non-linear growth functions helps in modeling Calculus - not because we are deriving things, but to better understand the 1st derivative is duration/delta and 2nd derivative is convexity; helps with FI/options Linear algebra - systems of equations; key to optimizing, portfolio construction, and risk management Statistics - relationships between securities and probabilities/expected values; mean, median, std dev, etc.; key in risk management Time value of money - discount rates, exponents, compounding…the core of finance/investing There are others, of course, but these are the basics. And if you are developing new distributions for an option model or developing a quant strategy, then yes, you need higher order math.