00:00Northwestern University among the institutions navigating the shifts in asset allocation with one of the nation's most valuable endowments topping $14 billion just last year.
00:08Joining us now is Amy Fawes, the Chief Investment Officer at Northwestern from Bloomberg's Women, Money and Paraven in the City of London.
00:15Amy, welcome to the program. It's great to get some time with you.
00:18Typically, we wouldn't begin a conversation with you by talking about cash, your cash allocation and liquidity needs.
00:23But I think we have to start there, Amy.
00:25What are your cash allocation looking like now?
00:27What does it look like and how's that changed compared to years gone by?
00:33Yeah, it's a little higher.
00:35We have about 7% of the portfolio in cash or very short-term treasuries.
00:40And that's higher than normal.
00:43And also the duration of the treasuries is shorter, reflecting a lot of the operating uncertainty that we want to be prepared for.
00:50Amy, when did that start?
00:51When did you start stockpiling or adding to your cash holdings?
00:55Was there a trigger that really prompted that shift?
01:00I think it's a combination of things.
01:03The operating, we started around December of last year.
01:07There was a moment where I was thinking about redeploying, and that would have been around Liberation Day.
01:14But I think the combination of operating uncertainty and at that time relatively fully valued markets,
01:20similar combination to at this moment where I think markets are pretty fairly valued and there's a lot of uncertainty in the economy
01:28and there's operating uncertainty at the university, it just makes sense to have a little bit more dry powder.
01:33And the risk of not being in the market seems less extreme.
01:37And, of course, it helps to have relatively high rates on short-term treasuries.
01:42So all three things are supportive, I think, of having a little bit more money in your back pocket.
01:47Amy, you talk about some of the moments where you flirted with getting back into the market.
01:53I wonder how much you were influenced by some of your peers at other universities
01:56who had huge allocations to private markets that they couldn't quickly liquidate when they needed some cash.
02:04If that sort of encouraged you to hold on to more liquidity as well,
02:07would that encourage you to stay away from some of that aspect in terms of redeployment?
02:11I think it's really important.
02:15Seth Klarman used to talk about the option value of cash.
02:18And, I mean, I think it's harder to measure.
02:21But it is very important to have enough liquidity to redeploy into opportunity.
02:27We do have a big private equity allocation and we've actually been growing it over time.
02:32But I think a barbell can be quite helpful in that you want to be opportunistic
02:37and then you also want the long-term benefits of extremely long-horizon investing,
02:42which I think private equity still represents.
02:45What does the rest of the year look like given the cuts of federal funding
02:48from the Trump administration to universities like Northwestern?
02:55We are looking hard at how to respond to a changing funding environment.
03:02I think there's, you know, many aspects to that.
03:05But from an investment standpoint, we do have to continue to work on generating high returns.
03:10We are 25 percent of the university's budget.
03:13I don't see that going down anytime soon.
03:16And so we are stuck in a hard place of wanting liquidity but also wanting high returns.
03:21So we are definitely barbelling in terms of how we respond in the investment.
03:27Federal grants remain frozen as well by the Trump administration.
03:30Is there active outreach between the university and U.S. officials?
03:39Yeah, I am probably not the best person to comment.
03:42I believe there is conversation.
03:46Amy, just to build on this barbelling, though, I think this is really interesting.
03:49How you balance the move into alternative strategies with the increased liquidity needs
03:53because of the operational environment.
03:55How are you and the team confronting this moment?
03:58Does it make it difficult to lean into those strategies?
04:01Or do you have to remove money from, say, your public market allocation to fund those needs?
04:08Yeah, I think you have to have margin.
04:10I think the important thing is to be really clear why you're giving up liquidity and where.
04:15And you have to believe you're going to get the higher returns.
04:18One thing that we have been doing is looking further down the market capitalization of private equity.
04:25As we see the probability of more money through retail and other products coming in at the high end of private equity,
04:32we think the better returns may be migrating down to middle and lower middle market private equity.
04:37So we just want to be sure that we're getting paid to give up liquidity
04:42because it is valuable both for rebalancing and for meeting the needs of the university.
04:48I think there are areas of the market, like large cap U.S. stocks, where it may be less important.
04:56You can probably use an ETF.
04:58And we've done a little bit more of that, where we believe you can use options or ETFs to put that exposure on.
05:04You don't need to lock up capital as much.
05:07Amy, you talked about getting to the lower end of the private equity sphere, lower and middle market companies.
05:14I'm just wondering if you still see private equity as a source of returns over, say, private credit,
05:20where there's been so much interest, so much money, the discussions around the golden age of income.
05:27Yeah, private credit is a very viable asset class.
05:31I think, you know, we have a 5% spend rate, so something with a 9%, 10%, 11% expected return is good.
05:38I think you have to think about returns not defaults, and we haven't really seen a default cycle.
05:43So, you know, I don't think you put all your eggs in the private equity, private credit basket.
05:49I do believe in ultimately earnings growth does drive returns over the long term.
05:55So what we want to invest in is companies that can generate good earnings growth and capital that will seek companies
06:03and make sure that the management teams are rewarded for investing in high ROIC projects.
06:09So I think there is real opportunity with smaller and middle-sized companies to generate earnings growth
06:16with the right capitalization, the right management, and the right investment partners.
06:19So we believe in both, and I think we are exposed to both.
06:26Right now, we're probably a little more focused on deploying new capital into middle-market private equity,
06:32but there's nothing negative about private credit.
06:35I think it's just the spreads are probably pretty fully priced right now.
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