IAS CIO Mark Baumgartner on Investment Strategy

The Chief Investment Officer for the Institute described what differentiated his team from his peers at other endowment organizations.

To be extraordinary you must first be different. If you want to do something unique, if you want to do something amazing, if you want to do something away from the average, you’ve got to be different. The risk there is that you fail. Being different and failing is very difficult. Being difficult and succeeding is slightly less difficult, because even if you succeed, if you’re doing something different, you’re not well-liked, well-appreciated, or identified as a model by society. When you’re different, you’re either a failure or a maverick. The interesting thing about investing is that the results of whether you’re a failure or a maverick don’t arrive until five years after you’ve implemented your strategy. You have to be very patient, you have to be able to sustain being different, and have a very strong belief and the ability to take non-consensus views. It’s not easy. At the Institute, we’re completely unconstrained. We can invest in anything we want to invest in. There’s this belief that we can look for great investment opportunities anywhere in the world and in any kind of asset class and do anything we want as long as what we’re doing is in line with the objectives set up by the board. The objectives set up by the board are extremely difficult to achieve, and that represents a challenge.

Investing with Mark Baumgartner, CIO at the Institute for Advanced Study, Business Today Online Journal

Your investment strategy is heavily dependent on what your organization needs.

We’ve taken a position that we don’t want to be affected by recessions. We want to minimize any impacts that an economic recession might have on our asset values and our ability to spend because nothing changes for us — it’s not like we dial back the products that we’re producing and change our operating environment, so we want to be largely insulated from that. We’ve chosen a strategy that is challenging because it does not give us a lot of exposure to those economic fluctuations. Being exposed to economic fluctuations—it’s business risk and equity risk, and those typically provide high, long-term returns, so that’s the trade-off. You get a higher-than-average long-term return, but you have to suffer the variability in asset values, and sometimes that affects spending for institutions that aren’t adequately prepared. The way that you approach that is you really prepare for it—you have to think about what the impact would be, and you run scenarios, and you game it out, and you explore that with not just the investment team, but also operating staff at your institution, so they are aware of what the potential impact might be and prepare for it. And so we’re always worried about the future—that’s investing. We’re always worried about the future, and managing those risks is key. Not taking risks causes long-term pain in the form of not finding the returns and the growth that you need. Taking too much risk causes potential short-term pain, if you endure a deep drawdown that you can’t tolerate. So you’re essentially balancing those two tensions and obviously that tradeoff is one we’re trying to learn how to [be attuned to] as well. But by and large a recession is a risk, but it’s not the base case. If you look at where the media tends to focus, there’s a lot of worry. Is a 25% chance of recession high or low? It depends on your perspective. In my perspective, that’s a very high chance relative to the base case, but it’s not a large chance—it’s still only 1 in 4. So to answer your question, [a recession] is more likely than it has been in the past, but it’s not guaranteed by any means. Again, being cognizant of the risks, managing the risks appropriately—that is the key. The key is not to avoid risks, it’s to control them and manage them to the extent possible. That’s the art of investing.

By the way, Mark Baumgartner appeared twice on Capital Allocators.

Episode 77: Mark Baumgartner – Luck, Risk and Uncertainty at the Institute for Advanced Study

Episode 128: Mark Baumgartner – Allocating in a Crisis at IAS

Inside the Historical Studies-Social Science Library at the Institute for Advanced Study.
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Post by Marcelino Pantoja