The Edge You May Be Overlooking
This article originally appeared in Institutional Investor on April 13, 2018.
When it comes to institutional investors, home field can be just as advantageous as it is to baseball players.
Last fall, my beloved New York Yankees came within one win of a surprise trip to the World Series. The Bronx Bombers fell behind 2-0 in the American League Championship Series, stormed back with three straight wins, and got stonewalled by the soon-to-be World Series champion Houston Astros’ pitching staff in the last two games.
Among the many story lines underpinning the dramatic seven-game set, one of the least told may be one of the most prescriptive in determining the outcome: The home team won every one of the seven games in the series. By holding the home-field advantage, the Astros played game seven in their friendly confines and brought home the American League Championship in the deciding game.
In the increasingly competitive world of capital allocation, some of the leading investors decidedly seek to seize upon their home-field advantage. Allocators search far and wide around the globe for opportunity, and yet some of their edge resides closest to home.
Like each of the thirty teams in Major League Baseball, each allocator has distinct characteristics that can create an elusive edge over the competition. Ellen Ellison took the helm at the University of Illinois five years ago and found herself in the heartland of America. The University has a long and storied history in agriculture, and the endowment regularly receives tracts of lands as gifts. She began talking to the most well-regarded experts in agribusiness, many of whom were loyal alumni of the university, seeking to maximize the value of the donated holdings and source new opportunities.
In a short period of time, Ellison dove deeply into the field, invested in attractive local opportunities, and leveraged the newfound expertise to source attractive opportunities as far abroad as Brazil and sub-Saharan Africa. She even reviewed a pitch to buy a single cow (and politely declined). The endowment’s allocation to agriculture today sits at a disproportionately high 12 percent and is growing, and the investments have earned outsize returns, measured every conceivable way.
The University of Virginia has long been a proponent of investing in hedge funds. Most CIOs would eschew the average hedge fund, and at the same time prefer their selected stable of managers to more traditional long-only managers. In his time as CIO before departing for Makena Capital Management earlier this year, Larry Kochard espoused the legacy and ties that many of the best long-short equity managers hold to UVa. While neighboring school University of North Carolina bestowed a degree on Julian Robertson, many of Robertson’s protégés graduated from Virginia. Recently retired star John Griffin and legend Paul Tudor Jones have long taught investing classes at the school. Tapping into this esteemed alumni network has proven fruitful for Virginia for decades.
There may be no better example of leveraging a home-field advantage than that executed by Scott Malpass, the CIO of Notre Dame, over his nearly thirty-year tenure at the helm. From early on, Malpass had the foresight to play the long game. Twenty-two years ago, Scott created AIM, an Applied Investment Management training ground at the University, which has educated 1,000 scholars in the art and science of investing. AIM students receive an unparalleled introduction to the investment world, with classroom training, hands-on experience managing money, and a leg-up in the market.
Under the more recently launched Malpass Scholars Program, a select few studying finance and investment management receive a scholarship, an internship at the Notre Dame Investment Office, and direct mentorship under Malpass and his team.
Take a moment and imagine the ecosystem of talent and loyalty Malpass has fostered over two decades of dedication to educating the leading investors of tomorrow. A number of Malpass’ first students have launched investment funds that received an allocation from the University — and you can bet some may have come on attractive terms. Many more AIM and Malpass Scholars permeate all levels of the industry today, and the flywheel Malpass created is only beginning. He points to this program as a likely source of future opportunities for the Notre Dame Investment team for the next decade and beyond.
No two home-field advantages are alike. Pension funds don’t receive farms as gifts, foundations rarely have a coterie of affiliated hedge fund managers, and almost no modern CIO will have the luxury of a three-decade run in their current post.
But we all have specific knowledge that can provide a nugget of competitive advantage. Whether individually, via our upbringing in the business and relationships; as a team, by the unique characteristics and functioning of the group; or as a governance and decision-making unit, it is incumbent on each investment leader to identify their home-field advantage and emphasize it to the greatest extent possible in the execution of their investment strategy. Getting an edge is hard enough without focusing on what we do best. It’s time to lean in to what uniquely differentiates us from the field.
As we enter the spring and the new baseball season begins, a new outfielder will roam the Yankee Stadium grass. In a big off-season splash, the Yankees acquired slugger Giancarlo Stanton from the Miami Marlins. Stanton won the home run crown and National League MVP last year, and pencil-sharpening sabermetrics wizards have proclaimed he will fare even better this year. You see, Yankee Stadium is a hitter-friendly park with a short porch in left field. That’s my kind of home-field advantage.