Chapter 1: What is the main topic discussed in this episode?
So Tim, you're the CIO of Texas Tech's endowment. And out of the hundreds and hundreds of conversations that I have with Allocator, you're the only one really taking a deep dive on office space today. Why are you so bullish on office space?
Right. I think if you pull the curtain back and look at office space in general, it's an abysmal story. And that's the headlines you see everywhere. Our job as investors is to dig beneath that headline and see if there really is opportunity. Are we hitting the turning point?
Chapter 2: Why is the CIO bullish on office space despite negative headlines?
When we think about office now, the vast majority of office, especially second tier cities, et cetera, we don't want to touch. But we think that there's a unique opportunity to buy at the discount to replacement costs. In some cases, a meaningful discount. Trophy assets in growing areas. We specifically like certain areas of the Dallas market and the Plano market.
We think there's a lot of opportunity there to pick up high-end trophy assets with a population that's growing in that area. And you'll see people migrate from these, call it class B or A minus buildings to these trophy assets. There's a lot of opportunity there.
Is that just a rule in asset management in general where some of the best trades are one or sometimes two levels below the headline? So the headline says, do not touch this asset. And then when you dig down, that's where the health is made.
I would say that's almost a quintessential rule of investing, right? If we can talk about real estate, we can talk about private equity, private credit, just about any asset class you're thinking about. The pain part of that asset class is usually talked about pretty quickly. Like last week, it was software and AIs wiping out all the software companies, right?
That's kind of the canary in the coal mine for an investor to go look at his portfolio, specifically private credit in this case, and decide whether we have the right exposures with the managers and talk to them. Like, do you have exposure to software companies, specifically application type companies, right? Enterprise is probably going to be fine.
The application companies are in serious, serious hurt with AI coming. So we think it's a perfect opportunity to dig down to that next level, have discussions with our managers and try to find out how they're repositioning that portfolio.
If you go upstream of being able to make these trades, it's really a governance question. It's a question of whether your IC empowers you to make that trade in office space that everybody's saying, stay away from it, but you see the alpha there.
Absolutely. I've been doing this for almost 30 years, and I've worked in a number of different places, and I can tell you that governance is the hidden thing that nobody really talks too much about.
and it can radically impact your ability to manage your portfolio successfully depending on how tight that governance is at texas tech we have the government's authority to make those trades we don't go to an investment committee for approval our committee is myself and my investment team So we're able to quickly do a co-investment if one comes across our plate that we really like.
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Chapter 3: What governance structures help the Texas Tech endowment make investment decisions?
That's where we get it from. It's not like anybody in my office is doing really internal trading, right? It's all through managers. So that partnership is everything. So a perfect example of that was when we were in Europe, we were really trying to focus on small, niche, secondary managers that we could find over there, and we found one. And it was a spin out from another company.
And we sat down and talked with them about how would you go about building a secondary strategy? And we partnered with them. I think we're the first institutional capital really to partner with these guys. For that, we get a piece of GP economics out of them. And we also have co-investment rights. And we negotiated rights in the future funds for capacity.
This is a perfect example of like talking to managers and getting out on the road and finding ideas that really work for you and can add value. I would say the other piece of that is every one of my senior guys on the team, they talk to all of our managers minimum once a quarter.
And some of the managers they're talking to once a month or once every two weeks to pay on how much, how much dialogue they have with that individual manager that flows through to the entire team about ideas and what they're seeing in the market. It flows through at our pipeline meetings, and it also flows through at our strategy meetings that we have. And those are every two weeks.
So they're pretty constant updating on what the managers are seeing. Think of it as just a funnel of knowledge, right, is how we think about it.
Scott Wilson at St. Louis WashU is famous for this. He would meet with his manager and he would actually ask a very simple question, which is, what is your biggest position and are you at your concentration limit? And for those that were at their concentration limit, he would ask to co-invest more.
So the idea was that if you have a concentration limit of 20 and you're 20%, you're actually underweighted. You still have to manage your portfolio and sometimes you have constraints as a manager. So he would look to literally co-invest into the manager's best ideas. He saw the signal that their best managers were actually underweight in their best ideas.
haven't gone through and done that per se i think when we think about co-investing which is really what we're talking about here we really are looking for asymmetry in the co-investment you know five years ago we did a lot of co-investments and we've really slowed it up and we slowed it up for two reasons when we went back and looked at it when we were doing lots of co-investments and we did that because we thought we could one lower fees
And two, improve our returns because these were great ideas for managers, right? It had to be from a manager that was in our book that we trusted that was already putting it in their portfolio, right? So that was our way of like keeping the guardrails on and allowing a small team to still be able to do co-investments. is what we found is that we still did too many.
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Chapter 4: How does manager selection impact the endowment's alpha generation?
I don't have to try to figure out, do I want to be in triple C's in high yield? Do I need to be in double B's? Where do I need to be? We're not trying to figure that out. We're outsourcing that. And that's how we think about being dynamic in the portfolio. And we think it's better than building a tactical overlay.
Again, if you go one layer up, Why does it matter that you're spending all this energy being tactical in your portfolio? Well, there's opportunity cost to that.
And that opportunity cost is spending more time with your managers, finding the best opportunities and generating alpha where you could actually generate alpha to the manager relationships versus being the best hedge fund manager in the world. It's very difficult to outperform 0.72 of Ballyasney, which essentially is on the other side of any tactical move.
I'd rather have my guys spend their time on finding the next really good manager in a strategy that we think has a lot of opportunity than thinking about how to shift it around. Like our manager lineups are pretty stable. The portfolio has been built up for a while. It's working. There might be one or two managers that come and go each year, but it's not very many.
I don't want to put words in your mouth, but it seems like you tolerate a lot of spikiness within specific domains of your portfolio because you're able to construct your portfolio in such a way that smooths out the returns. Is that kind of your approach to it? And is that a philosophy that you adhere to?
We try to think about the portfolio very holistically. Each sub-asset class has a focus on consistency. There are different managers in there. Some are higher vol, some are lower vol. There's usually a mix in each asset class. And I think then what we try to do is then model that sub-asset class and say, okay, how consistently will this structure work? beat whatever that benchmark is.
If it's unstable value, it's the Bloomberg global aggregate. So if Mike builds a public hedge fund portfolio on credit, how well does that do? And let's compare that also against our hedge fund book that's in that space. Where do we see the most consistency and how do we build those together? Should I be putting more in the hedge fund? Should we put more into credit?
If in credit, which manager adds the best downside protection and improves the risk adjusted return? That's kind of the Holy grail of how to structure those things together. It's very hard to do because managers change over time, right? So you've got to constantly keep looking at this and seeing if there's a signal in the noise that says this manager is taking more and more risk.
And you've got to kind of follow that on a monthly basis and really look at that to see if there's changes going on. And that's where the dialogue with the managers comes in as well.
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