How I Invest with David Weisburd
E156: Inside the Mind of a $1.7B Endowment CIO w/Jim Bethea
Fri, 18 Apr 2025
Jim Bethea oversees $1.7 billion at the University of Iowa’s endowment—and he does it with a team of just five people. In this episode, we cover how Jim thinks about asset allocation, governance, manager selection, and why Iowa has decided to specialize in certain asset classes like lower middle market private equity. This conversation is full of nuance, clarity, and hard-earned lessons that every allocator, GP, and fund manager will benefit from. Jim pulls back the curtain on how small teams can still invest in niche, high-performing funds, how to manage investment committee dynamics, and why more isn't always better when it comes to diversification.
Chapter 1: What are the pros and cons of managing a $1.7 billion endowment with a small team?
What are the pros and cons of managing $1.7 billion?
The pros is that we're small enough that we can do small and interesting funds. So flexibility is the biggest pro that a small fund has. We're also generalists. So everyone has a view of all asset classes and it sets the team up to be specialists in any asset class if they want. want to go on from here. And it's also easier to transition to a CIO role.
From a con perspective, a small team, we have limited resources. So we can't always do everything that we would like just from a financial standpoint, but also investments too. It's a limited bandwidth that we have. And being a generalist is also a con. We can't get as deep as specialists can, but you're a mile wide and an inch deep rather than a mile deep and an inch wide. And
Chapter 2: How does the University of Iowa pick which investment opportunities to pursue?
One of the challenges that your endowment has and a lot of endowments have is picking its shots, picking which opportunities to even diligence, let alone invest to double click on and to diligence.
I think it starts with, is there an interest in it? And so you look and see, is this interesting? Do we think we have some edge to this or can we even understand it? There's a lot of really cool investments that you could do that you have no idea at the end of the day what those funds are doing.
And so if you can't understand what they're doing or explain them to somebody that maybe isn't an investment professional, maybe it's just a little bit too niche-y for what we want to do. And a really quick way to figure out if something's interesting or not is returns. If it doesn't hit the return threshold that we need, we're not going to spend any time there.
Essentially, if what you're saying is true, but it doesn't even hit our return threshold, it doesn't really matter.
Chapter 3: How do small teams gain expertise in new asset classes?
I'll use Farmland as an example because we're in Iowa. Farmland's great investment potentially. It's very diversifying, but single-digit IRRs just are not interesting to us.
As generalist investors, you have this interesting problem of you can invest in anything. How do you choose a new asset class to get up to speed to?
The first thing we'll do is the team will talk to each other and see who do we know that's in this asset class. And then we'll reach out to those folks and ask them, you know, what do you like about the asset class? What do you dislike about the asset class? Who's smart in the asset class from a GP community or maybe even other LPs?
And what's really good about the LP community is we're all trying to learn from each other. nobody's really gonna say like, hey, this is something really niche-y for us and we're not gonna talk to you about it. I think it's kind of the opposite.
If you express to somebody, we think you're an expert in this asset class, teach us, that kind of feeds into their ego and they really wanna help us get up to speed. And we've done that in some private credit spaces where people will tell us, hey, this is a great asset class. Here's why we invest in it.
And that might not be why we as an endowment would invest in a pension fund, invest differently than an endowment, even if we're investing in the same thing. Obviously, everybody wants returns, but stability of returns might be more interesting for a pension fund where we need to hit high returns. And maybe that stability isn't as important to us because you get stability elsewhere.
And also how they're investing. Maybe somebody is doing private credit, but they're doing it direct and that they're they're underwriting the credits, not not the fund, not a company. They're underwriting the company credit, not the fund credit. And so you're taking out that layer of fees and maybe that gets them to return that they want to. But we don't have the resources to do that same thing.
So we're not going to be able to invest the same way.
One of the interesting things that I've come across is this information bartering. So as you get more information on a specific space, that information itself that you've gotten from different parties becomes an asset. And now you could feed that information, those insights, back to other individuals in the asset class in return for more information. Do you think about things that way?
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Chapter 4: What role does information sharing and networking play among institutional investors?
And that leads to conversations not just about investments, but dealing with committees, dealing with budgeting, resources, things like that, staffing. The Big Ten CIOs get together It's more than just the Big Ten, but we get together so we can kind of have these idea trading sessions about, you know, this worked for me, this worked for you, and how can we build on that?
The interesting thing about endowments, while we all – And the Kubo says we all compete against each other and athletic, you know, conferences say we compete against each other there. But we really don't. The way that we solve a problem at Iowa is different than the way any other school solves the problem. We all have generally the same return targets.
You know, it's probably seven to nine percent. It's a big range, but that's generally where everybody is. But you've got individual other constraints like, you know, how much of the operating budget is that foundation? How much new gifts are you taking in? All these things are nuanced differences that greatly affect our ability to take risk.
But there's no great database that says, like, who are our peers? You know, our peers are similar size public schools. But that doesn't really tell me. that what they're doing is different. There's schools that are 30, 40% venture, and there's schools that are 30, 40% private credit. I don't think we could be either one of those.
And so that governance structure dictates a lot of how you invest, what your network is. There's a lot of variables other than your size or your athletic conference that really tell you how an allocator thinks about risk.
On the transactional nature, lack of transactional nature in relationships, one of the standards that we hold ourselves at Weisberg Capital to is we make sure that every phone call that we have with somebody, they are somehow better off, whether it's more insights, whether we make an introduction.
And that's how we know that the relationship is sustainable versus us just kind of pinging somebody to get some information just for ourselves.
That's a good way to think about it. If it's somebody's checking on a fund we're in and we're... you know, on that list of resources to talk to. We'll talk to them about, we invested in this fund for this specific reason.
You might invest in a different fund for a different, you know, if we're being a reference for a fund and we're doing a reference call, we're trying to, hey, this is an area that we're looking at. This is an area we think we're good. If you ever have any questions in this area, you know, feel free to reach out to us. And you're trading that information as well.
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Chapter 5: What are best practices for governance in endowment investment committees?
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I can't tell you that. It kind of depends on what you're meaning by manager selection. Right. You know, one end of the spectrum is we have to bring the manager the name and they're not meeting with the manager. We're bringing the name. And the other one is we as a committee want to meet with every manager and make the determination. We'll take staff's recommendation.
But we ultimately determine that we get hundreds of emails a week. We talk with hundreds of managers in a year and we have myself, I've met with thousands of managers over my 20 year career. And so you have this knowledge of what good and bad is, whereas maybe is a is a part time committee member. You don't, right? You have a subset of what that knowledge is.
You see the tip of the spear, like you see the best ideas that your staff is bringing to you, but you're not seeing the 99% of the ideas that don't even make it to that level. It's harder to discern good from bad if you take the top 5% of any asset class. Right. Like some of those are going to be you're going to like some of those better than the others, but they're all top five percent.
It's kind of like a very specific Lake Wobegon situation. And maybe you like one better than the other, but it doesn't mean the other one's bad. Right. We can look at the universe and then we bring a specific manager. You don't always want to have two or three managers doing the same thing. Right. You get closer to beta if you do that.
And so what I've seen sometimes when I was a consultant, what we would see is, you know, you always bring three managers to the finals. Right. And then what would sometimes happen is to get hired. They would ask us as a consultant, who do you like? And we'd say, we like manager A. And they'd say, we like manager B. Let's hire them both. You're closer to beta now.
And at some point, if you keep doing that and you slice it up enough, you're just beta. You're just expensive beta at that point. It's a little bit different in private markets because it's not a zero-sum game. But at the end of the day, if you think about VC, you end up hiring
you know, 100 VC managers, you're just closer to median and you're decreasing that outlier events effect on your portfolio. And so you got to kind of think about that portfolio construction a little bit when you select these managers. I've seen this with committees where, you know, they
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Chapter 6: Should investment committees be involved in manager selection decisions?
Staff's opinion matters more than the committee. You don't really need that committee, right? And so, like, they both need to be there, but they need to be of equal importance. If one is more equal than the other or more important than the other, then it's... not going to be good for one of those two. It's usually that the committee is more important than staff.
I don't know if there's ever, you know, maybe David Swenson at Yale, he was more important than his committee, but probably not because there's a lot of heavy hitters, I'm guessing, on the Yale Investment Committee.
So the committee members actually drive selection more than the staff?
When I was a consultant, I've seen that where it's the committee's decision. I've heard stories from other CIOs where it's, you know, we bring a manager in and its staff makes that decision and says, hire this manager. And they say, no, we're going to hire a different manager. And so that only lasts so long because eventually your staff's going to say, why are we doing this?
And they're going to go look for a job somewhere else. I talk with My peers are like, we're trying to figure those things out. And if somebody has a problem with that, we're, okay, here's how you might think about that. And here's how you might kind of drive that change.
One of the means in asset allocation is that the incentives are not quite right. You have CIOs with very high bases and sometimes no carry or no upside. And you also have committee members with similar constructs. Talk to me about the incentives when it comes to committee members and staff and how you would improve it if you could.
For the most part, many members, they're not getting paid, right? And so, you know, this is kind of a part-time job for them. And I'm on various boards and stuff, and I don't want anything to do with like the day-to-day management of it because I just don't know enough about it, right? So their incentives are more, let's make them feel good because they're probably donors. It kind of depends.
Like an endowment is different than a foundation like MacArthur, which probably isn't raising new money, right? And so those... there's different incentives that our committee might have to their committee. Make sure that they're happy because they're donors. We're going to ask them for money later on or now.
And for staff, you want to make sure that they're not taking crazy risk because of short-term incentives. And I would say that 99% of endowment staff that has some level of variable comp short term. It's one in three years. The main reason for that is because most people don't stick around for more than five or certainly not 10. Very few are tenured.
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Chapter 7: How do incentives affect behavior of committee members and investment staff?
But absolutely correct. I remember this when I was a consultant. We would show the traffic report of red light, green light, yellow. Who's not in compliance with the returns? Who's outperforming and who's okay? And it was always the red funds. The funds that are underperforming, that's who we want to spend a ton of time on. And Cliff has experienced this, right?
Going into 2021 when value was getting...
crushed um he was he was probably red light in almost every uh strategy that he had and probably every client that he had um and guess what happened if you redeemed from them in in december of 2021 a lot of those funds were up 20 and he just got a lifetime achievement award last year and like you don't get that for bad performance that's when you have to kind of look at that like is is this fun doing what we hired them to because there's cyclicality to anything um
Maybe not private equity because that's been cyclically positive for a lifetime. But any type of hedge fund strategy, any type of long only strategy, like it goes in and out of favor. And if you like a manager, if you think they're really good and they're out of favor, that's when you should be making those allocations. And you're absolutely right. Like when that manager is outperforming.
You need to have those conversations with them. Like, can we get, if it's a private fund, can you get a larger allocation? Citadel's closed, right? So you can't really get in to that flagship fund that they have. They're returning capital. And so you are fighting, like, hey, don't return as much capital. And so you're, hey, great job, pat him on the back, all that stuff.
Part of that is also essentially a failure of the CIO and staff to really educate the IC. This is the role of this asset. This is the role of that asset. These are the ups and downs. There's a famous case study, a pension fund that owned a diversifier for like a decade and it was losing a couple of percentage points.
And then the staff, the year that it actually hit, I think it would have returned something like 100x of capital. They decided to take off the trade because nobody really knew why they had this losing asset. So I think Education is a big part as well.
I've been thinking about what you were saying about this reversion to the mean where you're a consultant, you present three managers and they would choose two managers. The opposite of that is also very interesting. I spoke to Mel Williams. They have this forced ranking system. Their biggest competitor is actually more of their winners. They're like, we want more Founders Fund.
We want more Sequoia. I think there's not enough of that. It's like, how do we further push our advantage within our portfolio versus bringing in a new manager and some would say de-worsifying the portfolio instead of diversifying the portfolio. Thank you for listening. To join our community and to make sure you do not miss any future episodes, please click the follow button above to subscribe.
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Chapter 8: How should investment committees focus on top versus bottom performing funds?
I'm curious, you sit on other committees. Do you find that the size of the investment or the concentration in the portfolio is positively correlated with the fund's ultimate performance?
I never really thought about it that way. I think what you find, like I'm on small boards, right? So it's not like we're, you know, managing a billion dollars. I think what you find is they just defer, smaller committees, they just defer to whatever advisor is in the room. Like they generally don't have somebody with an investment background on the committee or on the board.
And so, hey, we've got this advisor here. for 20 years, we work with them, we just listen to them. And so it's difficult for my seat when I come in and I'm like, well, I don't really agree with everything they're saying. It's kind of like, you don't want to be that person that just disagrees, but you kind of take the conversation offline.
Like, help me understand why you're trying to invest in whatever it is and just kind of get that rationale. I think something like real assets is a great example where people invest in real assets because they think it's an inflation hedge. Like, okay, most of the time we're not in inflationary environments. So you invest in this asset,
Because at some point in the future, we might be in an inflationary environment. And that asset is supposed to form well. But what's it doing in the 80, 90, whatever percent of the time that we're not in an inflationary environment? We're just trying to diversify. What are you trying to diversify from? Equity risk, generally, because every endowment has predominant equity risk.
And what happens when... equities are down or credits are tight and all correlations go to one, right? Everything, all these diversifying assets can trade like equities. And so what are you really trying to get from that? I think, you know, trying to understand why people are doing things is really helpful. And maybe they're doing it just because they want to diversify.
And a lot of the studies about diversification are like, we're going to take a 60-40 portfolio, we're going to add 10% of some asset, and that asset shows diversifying qualities, right? Okay, but at 10%, right? And so now when you take that and, okay, we're going to make it 1%, we're going to make it 2%. maybe it's not as diversifying.
I'll have conversations like, okay, take this up to 10%, like, oh, that's too risky. It's like, well, the study that you're basing this whole thesis on diversification had it at 10%. You find with a lot of these things that are diversifying away from equities, everybody puts them in the portfolio too small a size for them to actually be diversifying, for them to do anything for returns.
When you do have maybe those inflationary time periods And you end up with the divorce certification that you mentioned. That's kind of where that comes from. It's like you just slice this pie up into a million pieces and you're beta.
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Chapter 9: What are the risks and benefits of portfolio concentration versus diversification?
And I know like there's the Princeton study that says manager selection doesn't matter. I will say that they chose like the three asset classes where manager selection matters the least, public equities, core bonds, and cash. I think you're going to win based on your underlying holdings of your cash position, right?
And so as you introduce these asset classes that have more dispersion, VC with the highest dispersion rate, manager selection absolutely matters. It absolutely matters what companies you own in those asset classes. But if you didn't believe that, then you would say we're going to get we're going to shoot for median return and we're going to shoot for median asset returns.
allocation and hope for the best. And I think what would happen if you did that is you would almost always underperform. Nobody's target is the median asset allocation. It's just the outcome, not the goal. And so if you did have that as your goal, the median asset allocation, you're probably going to underperform probably more often than not.
And so then you get into the manager selection piece of it. And it's just really, really hard to invest in some of these asset classes. If all you're trying to do is me, I don't think you should do anything alternative. If all you're trying to do is like, hey, that median return looks good because it's going to be a wild ride. And what's going to happen, kind of like what Cliff was talking about,
When you're underperforming, that's when you're going to be like, hey, well, it's not re-up in this, not just manager, but asset class anymore. And I think people that were kind of thinking about that maybe in venture because they were over-allocated, those folks are still investing, right? Maybe not as much.
I haven't heard anybody that's like, I'm completely turned the switch off on venture based on what happened or what's happening right now.
Some people did that in 2001 and then they did in 2008. And hopefully this time they've learned the lesson in this market cycle. They're definitely keeping or even adding to their winners.
What you're seeing is maybe that point, like they're adding to the winner. So they're looking at that. It's like, okay, you know, we had 30 venture managers. that we've added a bunch as late teens and early 20s, and maybe we don't think all of these funds are going to be top quartile. So you're not going to re-up with some. You're going to re-up with others.
You're going to ask them for more allocation, but you're really trying to figure out who those winners are. Now, there's not a ton of persistence in these asset classes, but you still kind of think that your ability to figure out the process and philosophy and the people that are involved, that's going to lead to the performance.
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Chapter 10: How effective is diversification across asset classes in achieving returns and managing risk?
If you think a public equity manager is going to outperform by 10 basis points, that's not a lot, right? And so now you're probably going to allocate tens or hundreds of millions of dollars to that manager. So that 10 basis point is a very good contribution to the portfolio, but there's going to be times when they're detracting by two or 300 basis points, right?
And so you don't have that in private equity where you can outperform by three, four, 500, a thousand basis points. And so maybe it's a smaller amount, but you can do that. And like your time commitment is basically the same, like Whether you underwrite a long-only fund and it's $500 million or you underwrite a VC fund and it's $50 million or $5 million,
it's harder to underwrite that VC fund, right?
I'm going to make a statement. I want you to correct me because it's oversimplified, which is you want to focus on a couple asset classes where you have alpha, where you could outperform by 300 to 1,000 basis points. And then everything else, the public equities, you want to potentially index and focus on fees. So give me more nuance on that.
What do you want to do in the asset classes that you don't have the edge?
The other thing you got to think about if you don't do beta, let's say you do active management. And if you do active management, you're still taking some type of overweight or underweight, right? Whether that's sector, whether that's market cap, or whether that's geographical region, you're taking that and somehow you want to be compensated for that.
So if I were to do that today, I would probably say, let's have some overlay strategy so we're getting rid of that. Like if I truly think this is manager selection, let's get rid of all these kind of regional market cap or whatever sector biases and just focus on their ability to pick stocks.
Um, when you, when you kind of flip it to the private side, you know, you're three to 3% is generally, Hey, we think we can outperform by 3%. Um, if we go in the private markets, but what I don't, I don't think people spend enough time thinking about, but what is the public market return going to be? Private credit's blown up today. So let's use that as kind of a scapegoat here.
Like private credit crushes, um, public credit on a PME basis. And the reason is it cheats, right? Like it's taking more credit risk than the public markets. And you can, you know, what's, what's your, what's your target kind of benchmark on that core or core plus. Right. And so like everybody knows you can beat the core. It's the easiest index to beat.
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