Nate Chesley, what does MITIMCo look for in investment managers?

Here you can enjoy the transcript of a conversation between Nate Chesley of MITIMCo and Rob Vinall. It gives you insights into what MITIMCo is looking for in young investment managers.

This transcript is part of a series of transcripts of the talks at the RV Capital Meeting 2020. Before the RV Capital meeting takes place again in March 2022 we want to make these great and relevant conversations also available in form of a transcript.

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Nate and Rob have discussed the following topics:

A message by MITIMCo

Welcome

[00:00:04] Robert Vinall: Welcome back. What I’ve learned from yesterday is if I keep talking normally at some point people start to get quiet. We won’t do the shushing. Thank you for everybody for coming back and for the participation yesterday.

[00:00:25] Nate Chesley: Can everybody hear us okay? We’re going to get started so if everyone could just take the volume down. Thank you.

[00:00:32] Robert Vinall: Can everybody hear me okay? It’s very silent, that might mean no one heard me. Okay great, thanks to everyone for coming back. It was great fun yesterday, really looking forward to the session this morning. We’ve got a fireside chat coming up with Nate in a few moments, after that, a second fireside chat with Andreas, who’s a private investment manager, and then finishing up with the panel discussion with some great panelists, later on.

Introducing Nate Chesley

[00:01:00] Robert Vinall: But Nate, what a privilege to be interviewing you for a change, I think we met, probably about seven or eight years ago when I was towards the start of my career as an investment manager, I think you were probably towards the start of your career at MITIMCo, working at the endowment there. So I guess our journeys have moved in parallel and I think normally you’re the one questioning me. If anyone would care to go back into the archives of our fireside chat, a few years back when Nate interviewed me. So this is the first time I get to interview you, so that’s a really great privilege.

So, you’ve obviously been working at, I think you mentioned, for about 10 years at MIT. And I’ve known you for a large portion of that time. And what’s really struck me about you is your thoughtfulness, which is not unusual in this industry, but also your kindness. You’re one of the kindest people I’ve ever come across. And I actually spoke to one of your colleagues. A few years ago, he was tasked in the process of hiring you, going through all of the character references for you. And he told me they were completely off the charts. He’d never heard such positive feedback. So what I’d like to do today is go into a little bit into your character, where you come from, who is Nate and how did you kind of choose to work in endowment and of all the endowments in the world, MIT. So, that’s where I hope the conversation is going to head towards. But let’s start with who Nate is prior to working and working in MITIMCo and that kind of stuff. Tell us a little bit about yourself.

[00:02:35] Nate Chesley: That is an extremely humbling start. Thank you for the kind remarks. It’s a great pleasure to be here. There are a lot of familiar faces in the audience, so thank you for bearing my personal story for the next 45 minutes or so. And, Rob, thank you for bringing everyone together. This is a really special event that brings, as you say, a lot of really thoughtful people into the room in an absolutely stunningly beautiful place, and so we all owe you a round of applause for bringing this together. So as a starting point, how far back you want me to go?

Nate Chesley’s activities before entering the investing world

[00:03:15] Robert Vinall: So, maybe some of your activities, what you studied and what your kind of interests were before kind of entering the working world.

[00:03:20] Nate Chesley: Sure. So, I think the hub of it all, is I was raised in a very loving family, a very modest background. Investing was not the dinner table conversation in my home. We didn’t read the Wall Street Journal stock returns on Sunday morning.So, I came into investing later in life, around the university. I have always had part-time jobs, really since I was 14 years old, so I had a smattering of jobs. I was a camp counselor, I was a ski instructor, I worked at a sandwich shop, I was an economics tutor, and I think that that sort of early on, showed a little bit of intellectual curiosity and wanting to try a lot of different things.

[00:04:02] Robert Vinall: It probably also exposed you to people from all kinds of walks of life.

[00:04:05] Nate Chesley: I think, it taught me early on how to talk to strangers, you know, at age 15 and having to deal with customers and meeting lots of different people in the tutoring room at university, you just have to be able to build rapport with people very quickly. And I think in this business, sitting in a seat where we’re investing our capital to outside investment managers, you have to have that capacity to sort of “warm the bath”, as one of our investment partners says. So early on, that was part of the experiences that were formative.

[00:04:35] Robert Vinall: So what did you study then?

[00:04:38] Nate Chesley: So I studied economics and finance at university. After leaving, I joined a firm called Cambridge Associates, which is an investment consultancy to pensions, family offices, endowments, and foundations. And I actually started in more of an operations role,  accounting for private funds, and we built the performance benchmarks for the private equity industry. And I knew very early that that was not the right role for me in the right path.

[00:05:04] Robert Vinall: So how did you end up in the firm? Was it kind of like they were doing the rounds in university and that seemed like, what kind of led you to take the job?

[00:05:14] Nate Chesley: There wasn’t a particular moment that I said, “this is the place, these are the people.” That came later and when we get to the MIT story I think that’s, very central. Sort of a young man, finding a great opportunity and saying, “I don’t quite know what the next five years hold but this is a wonderful firm and a wonderful opportunity and a place where you can build a brand and get a little bit closer to institutional investing.”

[00:05:40] Robert Vinall: So what didn’t you like about Cambridge Associates?

[00:05:44] Nate Chesley: I think it’s an extraordinary firm. It was more the role than the organization. So I was much more focused on digging through financial statements of private equity partnerships and it was sort of the texture of the work wasn’t right for me. I was sort of sitting at a desk, head down versus engaging and interacting with people. But I can remember a distinct moment where –it was actually on a company ski trip, so that’s another recurring theme –where we talked about, people talked about their various futures and it became very clear to me and seeing the Cambridge ecosystem that being able to invest for the benefit of a foundation or an endowment, where you can invest for impact and all the profits that you’re generating are being reinvested in a place that has an extraordinary impact. That clicked very quickly, six or nine months into the experience. I then went on to graduate school, worked at a public pension fund in Utah, and around probably the fall of 2009, in a stroke of wonderful luck was put in touch with the MIT endowment, interviewed over a course of three months.

Nate’s stroke of luck ending up at MITIMCo

[00:06:50] Robert Vinall: How did that come about? Tell us how. What was the stroke of luck that created that contact for you?

[00:06:54] Nate Chesley: Having grown up in the Northeast, I’m Boston born and bred, my girlfriend at the time, now my wife, came out to Utah with me, we did quite a bit of skiing again, the theme.

[00:07:03] Robert Vinall: Skiing is definitely a recurring theme.

[00:07:07] Nate Chesley: It just sort of felt like time to move back to family and roots. And if we’re going to start a family, that would be the place. And so I just went up to my network and said hey, I planned to be back in Boston in the not too distant future, and a good friend, Tim Nguyen, who was at the University of Connecticut Foundation at the time, said  “you must meet Seth Alexander at MIT, period.” Seth is the CIO or the president of MITIMCo. I’ll talk more about him, in terms of a lot of different things. But I put my name in the hat, was extremely lucky to have received some interest from them and interviewed over the course of three months, and joined in May of 2010.

Discussing what type of organization MITIMCo was, when Nate joined in 2010

[00:07:43] Robert Vinall: What type of organization was MITIMCo when you joined the endowment?

[00:07:48] Nate Chesley: So MIT has had a formal investment operation, dating back really into the, I want to say the sort of  mid-1970s, even further back. MIT is 150 plus-year-old organization. The capital is permanent. MIT can take an extremely long view of its investments. And so that’s I think always been core to the way they invest. But the office became more formalized in the mid-2000s and then Seth Alexander joined from Yale in 2006, having worked at the Yale endowment for 10 years. And at the time I joined, the team was building. There was a group of people there but the philosophy was becoming more crystallized around the way Seth likes to invest. We had the desire to add more bandwidth to the team to cover more of the globe in terms of finding great investment opportunities, so when I joined, the team was really churning and growing and so I joined alongside a crop of really, really bright people. I feel extremely fortunate to have started when I did. Many of you have probably met my colleagues like Joel and Matt and Ryan and Nav who’s here.

MIT is 150 plus-year-old organization. The capital is permanent. MIT can take an extremely long view of its investments.

And so, the contours of how we work are very team-based but autonomous. So we almost operate more like a venture partnership, versus a more traditional vertically hierarchical organized firm. And the idea is, to find the best athletes in the best opportunities globally, and deploy MIT’s capital to those partners with the view of having 10 year plus relationships that are measured in decades, not years. And so, to your question when I was starting, that was sort of the mandate right from the outset. It was not “okay, you’re going to apprentice for two years and then we’ll decide whether or not you’re promoted into a new role.” It was, “here’s how we operate with our travel agent, go out and find great ideas.” And that was just extraordinary for me.

The contours of how we work are very team-based but autonomous. So we almost operate more like a venture partnership, versus a more traditional vertically hierarchical organized firm. And the idea is, to find the best athletes in the best opportunities globally, and deploy MIT’s capital to those partners with the view of having 10 year plus relationships.

MITIMCo’s key features of their investments

[00:10:00] Robert Vinall: So it sounds like you were hired around the time Seth was sort of coming on or short shortly afterwards where there was a lot of change happening. He was putting people in who were his kinds of guys investing his type of way. Maybe you can kind of describe some of the key features of how, back then, he wanted to set the endowment up and in particular how he would choose investments. And then I’m going to ask afterwards, maybe how things have evolved and changed since then.

[00:10:27] Nate Chesley: I think in 2010, the effort was really looking at the asset base and saying, there’s a lot of room for improvement to create more tension in the portfolio and to upgrade the roster. The capital markets felt a lot different in 2010 than they do today, in the sense of having come out of the global financial crisis. And so it really was a mandate to go out and source and find the best talent.

[00:10:55] Robert Vinall: Irrespective of geography, asset class, were there any kind of preferences in terms of what type of investments?

[00:11:00] Nate Chesley: I think at the core, there’s an investment philosophy around who are we, in terms of what sort of risk and reward we think are within our circle of competence and what can we underwrite. And so it’s very clear to us that what aligns with our interest is fundamental investing. And so people who look at the world bottom up and feel that they can underwrite microeconomic situations. Whether it’s a C+ building that can be converted to an A+ and sold at a lower cap rate, or whether it’s someone who looks at great businesses globally, we’re trying to focus on assets that we can understand. And so that’s been very constant through time.

I think the changes that have been made, are we’ve evolved beyond a more conventional asset allocation framework where we say, here’s the international equity bucket and the Japan bucket, and the private equity bucket. And let’s fill those up to target allocations.  Instead, let’s just find what we think is the best, and have a risk framework where if we wake up one morning and 10% of the portfolio is in Turkey, for example, we may be overconfident in our bottom-up, estimate. And so that really started to crystallize around 2012, 2013, with a lot of communication with our board of directors in terms of what this means and why it might be different than other endowment pools.

And so, in concert with that, if you have a team that’s structured around a particular asset class so if I’m a credit person and my job is to go out and find credit, I’m gonna bring you the best thing I see from my vertical. That may not compete with what a colleague of mine that might be seeking equities in India for example. And so, to match the asset allocation framework, we took away the asset class silos (which was were previously public markets, private markets, and real estate), and everybody dropped their titles and took on the generalist title. And I think that really energized the group to say, we can now invest it in a way that more purely reflects the way we allocate capital.

David Swensen and behaving unconventionally

[00:12:58] Robert Vinall: That’s one of the things I’ve appreciated from my contacts with MIT is Seth, who’s obviously a pupil of David Swensen, probably the most famous endowment CEO there’s been. And Swensen was of course famous for sort of being unconventional, and at the time investing in hedge funds which endowments didn’t do. And my sense for a lot of endowments that copy Swensen is they kind of have a big hedge fund allocation. But that wasn’t Swensen’s message. His message was to be unconventional, right?

[00:13:25] Nate Chesley: That’s absolutely right. I think if you want unconventional returns, you have to behave unconventionally. And so for us, I think it was moving away from the asset class focus towards the generalist focus. And I think being a bit aggressive about defining our circle of competence and committing to not going to go outside of it.  I think there’s a lot of very strong marketing forces in this business that bring you the latest and greatest idea on portfolio construction or long volatility strategies and I think it was very clear as a group, this is what we think we’re good at, and let’s stick to it.

Discovering Nate’s personal journey

[00:13:55] Robert Vinall: So going back to your story. You arrived in 2010. Did it kind of click immediately this is the way to do things or was there a personal journey for you with certain milestones and building conviction, this is how to do things?

[00:14:12] Nate Chesley: So I spoke with an endowment CIO, the other day on a reference, and she asked me, “when did you start to really get it? Were you the type of person that was reading the Buffett letters in middle school?” The answer’s no. And I think, not long after starting the interview process with MIT, I asked Seth if he had any book recommendations. So I was probably 24, 25 at the time. And he said yeah, absolutely. And so within minutes I had an email list with Common Stocks, Common Profits, The Intelligent Investor, Quality of Earnings, which is an interesting one, and a handful of other books, likeJason Zeeig’s book on behavioral finance, Your Money and Your Brain. So I started reading this sort of value investing canon as I was preparing to join, and that’s when the light bulb went on.

[00:15:08] Robert Vinall: That so often that either the light bulb goes on, or it doesn’t. There’s no amount of reading you can do if the light doesn’t go on.

[00:15:12] Nate Chesley: Absolutely. And then to immerse yourself with a group of people who all think the same way, and have come to these insights around the same time, and the texture of the conversation is through that shared investing lexicon; it was very absorbing and consuming.

[00:15:32] Robert Vinall: I know many of your colleagues and I can imagine, I mean like you said you all kind of started at the same sort of time, have similar sort of ways of thinking about the world, I can imagine it was an intellectual journey which you all went on together but also helped each other on.

[00:15:45] Nate Chesley: Absolutely. And I think of our work, if you were to walk through our office, it’s a bit library-like. There’s a lot of reading, we get into debates in the hallway but there’s not a lot of people standing and shouting into phones. It’s a lot of contemplative work, a lot of writing and reading. And it’s just an extraordinary environment to be in. You come in in the morning with your coffee and someone pops their head in your office and asks “have you read this long-form piece on a strategic theory about such and such yet?” We’re a learning organization and I think it’s really powerful to be in that environment for young investors, and I think it informs how we invest in the type of people we want to underwrite and then partner with.

We’re a learning organization and I think it’s really powerful to be in that environment for young investors, and I think it informs how we invest in the type of people we want to underwrite and then partner with.

Notable experiences over the last 10 years

[00:16:25] Robert Vinall: Were there any, and maybe this isn’t the case but were there any kind of either very negative or very positive experiences over the last 10 or so years which really changed your mind about something or kind of firmed you up in your beliefs about the way you want to allocate capital?

[00:16:40] Nate Chesley: Yeah, I’d actually go back a bit further. I worked, as I said, at a pension fund in more of an analyst role but allocating capital to managers, starting in, ‘06-07. And so we were constructing a hedge fund portfolio into ’08-09, and so I learned some very powerful and visceral lessons about leverage and asset-liability mismatches and these hedge funds that had quarterly liquidity and had gone way out on the illiquidity spectrum in their portfolios to reach for returns and saw some pretty spectacular failures. So that was very powerful and I think coming into MIT with a few battle scars and having worked through a few hedge fund liquidations was really helpful.

We were constructing a hedge fund portfolio into ’08-09, and so I learned some very powerful and visceral lessons about leverage and asset-liability mismatches and these hedge funds that had quarterly liquidity and had gone way out on the illiquidity spectrum in their portfolios to reach for returns and saw some pretty spectacular failures. So that was very powerful and I think coming into MIT with a few battle scars and having worked through a few hedge fund liquidations was really helpful.

[00:17:28] Robert Vinall: What an amazing experience as a bystander.

[00:17:31] Nate Chesley: Yes, yes. I think the footnote on that is, all of the equity capital that was used to fund the hedge fund portfolio with the pension was like a beta of one – full equity risk – and so that went into a hedge fund portfolio that saved probably billions of dollars despite some blow-ups. So that was an amazing learning experience. In terms of MIT, the culture of just saying, “get into the field and do the work, meet whoever you want to meet” was very powerful. To just have this broad canvas of meeting great people, many of whom are in this room today; it was meeting you in 2012. That framework, I think was really impactful. But in terms of very specific milestones that I think inform how I invest today, it feels much more like a gradual path and a few step function moments where you say, well okay, this makes sense, everything is much clearer now.

Debating an emotional intelligence approach when choosing investments

[00:18:34] Robert Vinall: I want to return to your personality. So everybody that knows you will say you have emotional intelligence, which is really off the charts. And that’s not something that’s necessarily associated with the finance stuff and maybe you can talk about where and how that sort of impacted you as an investor and maybe how that’s differentiated the way you choose investments from perhaps someone who takes a more kind of strictly financial or economic type approach.

[00:19:04] Nate Chesley: I think my approach works in the context of a team. I think it’s very helpful to have empathy and to connect with people and to have a better initial filter for someone’s integrity. And I think my experiences have led me to that style, where I can connect with people. But I also think that can lead you to make mistakes and so it’s great to have colleagues who are maybe a little more focused on the objectiveness of the assets themselves and they’re less skewed by personality type. But I think it’s relevant because ultimately, we’re forming resilient relationships with our partners and so we allocate initial capital after some diligence and there may be opportunities to build the position over time. But ultimately, the relationships will be most valuable in the most difficult times, like volatile capital markets where there’s an opportunity to deploy additional funds at good prices. Or to make a very difficult sell decision because the assets that have been marked down are actually worth much lower prices, and those are difficult conversations to have.

And I think also, as investors that build businesses and run partnerships they face difficult challenges in personal, in growing their business and starting to run another vehicle or various things that happen throughout the course of a firm’s existence, and we want them to trust us and to come to us as a sounding board to say “hey we’re thinking about this path, you all have seen this many, many times. We trust your input.” We’re very much trying to position MIT as partners that can be trusted sounding boards, not as typical “clients.”

As investors that build businesses and run partnerships they face difficult challenges in personal, in growing their business and starting to run another vehicle or various things that happen throughout the course of a firm’s existence, and we want them to trust us and to come to us as a sounding board to say “hey we’re thinking about this path, you all have seen this many, many times. We trust your input.” We’re very much trying to position MIT as partners that can be trusted sounding boards, not as typical “clients.”

Discovering integrity in people: combining the brain and the heart

[00:20:56] Robert Vinall: Something you said in there which I’d like to maybe go a little bit deeper on. And you talked about finding or discovering integrity in people, and it sounded like your path to do that was one more through emotion and connecting, as opposed to the brain which is a subject which is dear to my heart. Maybe you can talk a little bit more about that.

[00:21:20] Nate Chesley: I think it’s a combination of the brain and the heart, to be fair. I just think I enjoy learning more about people and learning more about their passions and what makes them tick and what their motivations are, and ultimately what we’re looking for are people that are exceptional at what they do – for a variety of reasons, which is a longer conversation – and people who are going to be excellent stewards of MIT’s capital. So we have to know that we’re building a relationship with this person or group of people who, in the worst of times, is going to act in the best interests of MIT.

Using economic rationality when making important decisions while being empathetic

[00:21:54] Robert Vinall: So how would you respond, I think there was a question yesterday, which went a little bit in that direction but to someone saying, Nate, this is a disaster. You need to be 100% rational in judging these things. If you start letting emotions interfere in any way you’re going to get hoodwinked by the wrong person or whatever. To what extent do you think that approach could, any approach is going to lead to mistakes every now and again, but what makes you think that approach could be potentially superior to a much more of a kind of economic sort of rational type approach?

[00:22:24] Nate Chesley: I do think that economic rationality permeates my decision-making. So I don’t want to say that I’m purely driven by listening to some empathetic, reasoning, I think it’s a combination of both. I think when you’re perhaps too hyper-focused on rationality, you may miss the nuance of what someone’s going through and whether it’s a bad period of performance or something they’re going through in their business. You may need to be a lot more patient versus becoming immediately very commercial in a situation.

But that’s not to say that I don’t personally make decisions with a commercial orientation because ultimately, our job is to grow MIT’s assets so that we can support the spending and the purchasing power in real terms over time. I very much have to be thinking through the economic lens when I’m making decisions as well. And if anything, one of the things I have to focus on is making sure I can temper empathy and balanced commerciality at the same time which can be a difficult tension. And I’m not sure if I’m answering your question.

[00:23:38] Robert Vinall: No, it’s fantastic.

MITIMCo’s way of assessing young, emerging managers

[00:23:40] Robert Vinall: So fast-forwarding to today, there’s a lot of younger managers in the room, emerging managers, and they would probably love to hear how you think about assessing younger managers and I know that you would probably want to be a little bit careful in your response because you don’t want people just to copy one for one what you’re looking for. But I know your model firsthand and irrespective of whether someone gets an investment from MIT, I think they should be set up to attract people like MIT. So maybe you can talk a little bit about the kind of characteristics and qualities you look for, especially in the sort of less developed manager.

[00:24:22] Nate Chesley: Sure. We’re very, very happy to be with people early on in their evolution as investors. We also make investments with people that have long track records and a lot of experience in more mature businesses, so we invest across the spectrum. I think with younger people, we’re looking for, and it doesn’t have to be young generation, it’s not about age.

[00:24:47] Robert Vinall: I consider myself a young person just to make it clear.

[00:24:49] Nate Chesley: Me too!

I think we’re looking for clarity of vision. What are you really aspiring to do with the pool of capital that you’re tasked with managing? And that doesn’t mean some hyper-focused pinpointed, dogmatic, only-small companies in the UK with a market cap of less than 300 million that are in these x,y or z sectors. It’s not about the narrowness of the universe definition, per see.

It’s clarity and what you’re seeking to spend your time on.

It’s clarity and what you’re seeking to spend your time on. What businesses are you drawn to when you construct a portfolio? What is the sort of texture of the portfolio you’re trying to build and along with what dimensions of risk and upside? And we’re trying to spend a lot of time on personal motivation as well. Why are you in the investment business? What motivates you to get out of bed every day and read that tenth new 10k of the week? I also think we’re trying to find people that have some connectivity to our mission and who understand that making a billion dollars for MIT is just an extraordinary thing in terms of contribution to society. Part of the motivation, I think, is that people need to understand their fiduciary duty to MIT.

[00:26:15] Robert Vinall: That there’s a purpose.

We spend a lot of time on how people think and how they form judgments. And I think that’s really the thread that connects all of the work that we do. We’re evaluating how you think about a company, a management team, how that fits in the context of a portfolio. What is the threshold for quality in your mind what is the threshold of what you’re willing to pay? And there’s no right answer to any of that. It’s a mosaic of experience and insights.

[00:26:17] Nate Chesley: Exactly right. We spend a lot of time on how people think and how they form judgments. And I think that’s really the thread that connects all of the work that we do. We’re evaluating how you think about a company, a management team, how that fits in the context of a portfolio. What is the threshold for quality in your mind what is the threshold of what you’re willing to pay? And there’s no right answer to any of that. It’s a mosaic of experience and insights. And so, you’ve had the experience of sitting with us, and others in the room as well. It’s really about understanding decision-making and the durability of that decision-making through time. And I think that comes down to how you process information, how you analyze information, and your behavior as well. What is this person’s temperament, how are they going to behave if they’re down 30%, 40%? If a stock’s down 50? And we can set up these a priori views of what we think to be true. And then we monitor them through time as to whether or not the hypotheses we’ve constructed are correct.

It’s really about understanding decision-making and the durability of that decision-making through time. And I think that comes down to how you process information, how you analyze information, and your behavior as well.

[00:27:28] Robert Vinall: And it’s amazing as listening to your answer there, it seemed, seemed like 80 or 90% of the characteristics you’re looking for are one’s kind of character and temperament, as opposed to kind of raw mental processing power.

[00:27:43] Nate Chesley: I think raw mental processing power is definitely an input. Again, across the team, if you were to have Matt sitting here or if Nav we’re sitting here, you’d probably get a different weighting of the ingredients, right? Like, I make a sourdough bread, and maybe Nav doesn’t eat sourdough bread but he makes sort of the beautiful whole wheat bread that I had for breakfast at the hotel this morning; so same ingredients but different weightings. And so others may be more hyper-focused on the way somebody calculates a particular retention metric on his business and I appreciate that, but I may be more clued in on other things. I think that working on teams of two or three or four people on investments allows us to make better decisions as a group because I’m going to hear something and someone may hear something else. And I think, while we don’t make decisions by committee, where we’re able to work in sort of powerful small groups to make great decisions.

[00:28:42] Robert Vinall: It really is a great team and I can definitely vouch for that. You all really seem to all complement each other. Maybe a question to finish up with and then we’ll take some Q&A from the audience here.

Nate’s forecasts on MITIMCO’s development over the next 10 years

[00:28:54] Robert Vinall: How do you see the endowment at MIT developing over the next sort of 10 years? Do you think it’s perfectly set up now; are there things you’d like to change? How would you like to develop endowment or yourself personally? What’s your kind of 10-year plan?

[00:27:43] Nate Chesley: That’s an excellent question. I think I would paraphrase the way you answered a question yesterday about the most difficult challenges and just this concept that performance is in the past. If we’ve done well and we’ve done well as a team, and we’ve made some good decisions, that guarantees nothing about the next 10 years. I think we’ve built a durable portfolio that will serve us well. But we need to always be front-footed and think about, where are the risks in the market that we don’t understand? Where are the opportunities that are most compelling? Is the team organized in a way that’s most productive?

I think our challenge is we manage a lot of capital. We have over $25 billion today between the endowment assets and the pension assets as well, that we manage. It’s hard to move the needle on a pool of capital that’s that large, so we have to think very critically and creatively about how scale impacts how we invest.

Areas of the capital market where MITIMCo is underrepresented

[00:30:08] Robert Vinall: Are there any areas of the capital markets where you think you are underrepresented at the moment, maybe some more kind of unconventional areas?

[00:30:15] Nate Chesley: Nothing really springs to mind. And you also asked about personal goals over the next 10 years. We talked about this over dinner last night. I think health and wellness are like core to MIT or MIT culture and the team’s culture. You need to be well-rested and energized to do great work and to think clearly. So I think that burning the candle at both ends – we travel a lot, we sleep on airplanes a lot – but having some semblance of work-life balance as a team is going to make us better investors because we’re going to make better judgments. So understanding what that means as you get 10 years older and your family life changes and the team changes. I think that’s important. And I think the efficiency of decision making, for me. And actually, this tension of empathy and being more clear-eyed and economically rational is a tension that I think about and I think about some of the pitfalls of that.

[00:31:15] Robert Vinall: Great. What a wonderful note to end on.

[00:31:17] Nate Chesley: Thank you.

[00:31:18] Robert Vinall: Great. Okay, so we’ve got about 15 minutes. So we’re going to take questions from the audience again like yesterday. James has very kindly offered to be our Nate for this morning, and he’s going to curate any questions that come in over the internet so if anyone’s watching on YouTube, feel free to post a question there and James will pick the best ones. Okay, who wants to kick-off?

What are the future returns on the equity market?

[00:31:52] Audience Question: Thank you for coming. My question is regarding the future returns you expect in the equity portfolio, maybe your opinion and if there’s an MIT opinion regarding the portfolio because, as you said the last 10 years will not be like the next 10 years.

[00:32:10] Nate Chesley: The short answer is I have no idea what the returns to the equity market over the next 10 years will be. What I do know is that from our asset pool we spend 5% a year to fund the university’s operations. And that’s fully 1/3, of the operating budget of MIT. So, at a minimum, we need to earn 5% to do that, to keep the lights on and to sponsor scholarships and cancer research and clean technology and all these things. And then on top of that we have to earn inflation to standstill in real terms. So we have an absolute return bogey of somewhere between 7 and 8% Depending on your definition of inflation in MIT’s context.

So, we have to maintain an equity orientation during those sorts of returns, both in the public markets and in the private markets. I don’t know where the equity markets will perform but we’re constructing a portfolio with that ambitious hurdle in mind. Sort of a non-answer but that’s how we think about it. If anybody knows what the equity market will do over the next 10 years, please feel free to raise your hands. Oh, he knows. Thanks Matt.

Looking at key characteristics that have enabled MITIMCo to find the right manager talent

[00:33:32] Audience Question: Thank you. Sorry to disappoint you all; Matt Brown from the Oppenheimer family office. So I’d be interested to hear about what you think the key characteristics of MIT are that have really enabled you to be successful in really finding and backing the right manager talent.

[00:33:55] Nate Chesley: I think it’s a tone from the top to energize people to believe that it’s possible to just find the best. There’s no room to settle. The task is, go out and source and find great people. And I think a lot of our peers, who are wonderful investors, have the same mandate. And so maybe that’s not distinct but I think that energizes the group, to just believe it’s possible. I think it’s the quality of the people and the fact that the people have been together for as long as they have. I think the average tenure on the team today is probably approaching eight years. And so having shared language and shared experience and shared pattern recognition, makes a big improvement in our ability to source and triage.

This point earlier about of clarity of what’s a fit for us, and knowing what we shouldn’t be spending time on is just as important as knowing what we should be spending time on. I think we are the beneficiaries of scale economics in the type of investing that we do: having a large capital base allows us to have a large team, and to have a lot of global reach. And I think we all benefit from the MIT brand, again MIT as an institution, is an extraordinary, well-renowned place globally. And so we can be in Singapore, or India, or Sao Paulo, and people know of MIT. That’s a big, big tailwind for us. And they may not know about our endowment or me or a colleague, but they know about MIT and it’s strategic global importance and solving problems and I think that’s a big help.

[00:35:45] Robert Vinall: While the microphone is moving around one point I’d also add to that is I think MIT really views itself as a service provider to the managers as opposed to the managers being a service provider to MIT. You provide an enormous amount of support in terms of infrastructure, especially to the emerging managers who might not have it. So I think that’s also an advantage.

[00:36:05] Nate Chesley: That’s a great point. The core global investment team is 14 people. We have a phenomenal operations group that is about 30 people, that does tech, accounting, finance, data. And then we have a 25 person real estate team that focuses just on real estate development in and around, Kendall Square in the MIT campus, and that’s basically a vertically integrated real estate management shop, and they are unbelievable at what they do. The operations group is there to allow our partners to focus on investing, not have to deal with trading glitches or other things in the LPA that might otherwise take them a lot of time and lawyer fees to fix. We can bring that to internal counsel and come back with a quick answer. Thanks for mentioning.

How to foster having unconventional ideas

[00:36:50] Audience Question: Nate, one of the success factors has been being unconventional. So I would be interested, is there a way how you can foster having unconventional ideas and promoting finding new ideas how to invest, also on the allocation side too.

[00:37:15] Nate Chesley: To be honest, I don’t think anything we’re going to do is going to be enormously and wildly unconventional. If you think about the institutional path that a lot of organizations take,it’s really having the fortitude to be able to look beyond that particular well-worn path, and so I think a lot of it is courage to just be different, and to appreciate that if you’re different, some years you look brilliant and other years you may look very unwise, because the fruits of whatever decision you made have not provided themselves yet.

I think it’s a bit of courage, a bit of creativity. It’s the people in the room feeling empowered to think differently and not anchoring to convention. But I don’t think there’s a secret sauce, per se. I think it’s more of a cultural value to accept unconventional decisions and to live with their consequences on both sides.

I think it’s a bit of courage, a bit of creativity. It’s the people in the room feeling empowered to think differently and not anchoring to convention. But I don’t think there’s a secret sauce, per se. I think it’s more of a cultural value to accept unconventional decisions and to live with their consequences on both sides.

Maintaining a long-term orientation with a manager during difficult times

[00:38:25] Audience Question: Nate, can you talk about the tension between maintaining a long-term orientation with a manager and seeing him [or her] through those difficult times, but also sort of compare that to the fact that the endowment does need a relatively consistent, 7-8% nominal return per year.

[00:38:45] Nate Chesley: I think all of our partners are investing with a three plus year time horizon in most cases. I suppose someone who’s shorting stocks is taking a shorter view, and maybe more catalyst driven, just because of the asymmetry of shorting. But we have to force ourselves to be patient when evaluating performance and appreciating that a stock purchase decision or the purchase of a private company or a real estate asset, will take three to five years to reach its underwriting conclusion. What we do as a team, is we try and develop hypotheses around those particular assets or underwriting frameworks, so that when there is poor performance, we have the tools to diagnose it. For example, Rob thought Facebook was going to produce this much in earnings and have this sort of operating margin and we’re three years in and the operating margin is half of his expectation and the growth is very different. What should we glean from that information?

Not that we’re ever going to be able to underwrite companies as well as our partners, but we’re developing  points on the map in terms of how things should be playing out over time. And I think performance is ultimately an aggregation of a series of those decisions. So we should be able to have a good finger on the pulse of what’s working and what’s not working, and whether that’s consistent with our expectations. I’m curious if you guys think about it differently, but we can save that for the panel.

[00:40:08] Robert Vinall: I’ll chime in there as well. Obviously I speak to a lot of endowments who want to underwrite me as a manager, and I can’t emphasize how important it is to go down to the stock level to be able to at least form an opinion on the underwriting process of individual stock ideas, otherwise it’s on much too superficial level, the conversation.

The role of incentives

[00:40:35] Audience Question: Hi Nate, I’m just wondering, how do you incentivize your managers or your partners to pick the best managers for your funds?

[00:40:46] Nate Chesley: Sorry. To clarify: How do I incentivize partners in the sense of the people we’re allocating capital to, or how am I and how are my colleagues incentivized?  It’s over a longer time horizon than a year. It’s not an eat-what-you-kill culture where Nate has a P&L or Nav has a P&L, we view it through the lens of impact. And that might be impact to our assets; it might be impact to being a great colleague. So there’s lots of different ways.

I don’t want to delve too much detail onto the way the compensation structure has been built, but I think that from first principles, it’s about lengthening the time horizon and appreciating that it may take a couple of years for something to really come to fruition and for the impact to emerge. And I think there’s also, a sense, are people contributors to a shared culture, which is a hard thing to evaluate quantitatively. But I think you know when someone is bringing a culture down and when someone is bolstering a culture up. And so I think we have a sensitivity to that because the way we invest only works if the culture is durable and if everybody’s rowing in the same direction.

Examining the common mistakes young investment managers make

[00:42:16] Audience Question: Thank you so much for sharing your story here today, Nate. My question is around young investment managers as you’re looking to underwrite them, and you back them. Typically in your experience in backing young managers, what do you see as sort of common mistakes that they make and how do you re-underwrite those mistakes when they happen, and how do you think about that?

[00:42:40] Nate Chesley: That’s a great question. I think there’s a handful. I think one, and Dan Abrahams spoke about this last year much, much more eloquently than I can, is they start with too high of a cost base and then have to become a marketing machine, not an investing machine. And that’s a real vicious spiral where you have too many people, you’re now a manager of people not someone who’s really focused. If the assets don’t come in you feel too much pressure because you have this big burn rate, then you have to focus more and more time on marketing to fill the hole, performance ultimately suffers.

So, I think people that start with a very lean and focused cost base is a huge advantage. Now that works in some places and not others. If you’re buying a 10 or 12 stock portfolio, you can have a very lean cost basis. If you want to be a long short fund, it’s a different construct. If you want to build a private equity business that’s a much higher day-one cost structure, all else equal and so that’s one area. I think the other area we see is people don’t take the time and effort to clearly articulate their vision on day one. And so when they start to go out to raise capital, they start to evolve their focus in their vision to fit what might be attractive to sources of capital and they sort of weave their way to a message that, is more attractive to more people, but ultimately diluted relative to what they really want to do. So I think that’s another common mistake that we see people make. There’s a lot more we can maybe talk offline.

I think the other area we see is people don’t take the time and effort to clearly articulate their vision on day one. And so when they start to go out to raise capital, they start to evolve their focus in their vision to fit what might be attractive to sources of capital and they sort of weave their way to a message that, is more attractive to more people, but ultimately diluted relative to what they really want to do.

What are the demographics of MITIMCo’s portfolio?

[00:44:28] Audience Question: Hi Nate. I would like to understand better what the demographics of your portfolio of emerging investment managers are? So, how many emerging investment managers do you have now your portfolio? How many of them would you like to underwrite in the next let’s say three years? How does capital typically flow to these emerging markets, are you starting out strong and then smoothly or starting with a little and then investing significantly more? I would like to understand this. 

[00:45:00] Nate Chesley: It varies and I think the details and the nuance to answer that question might be, maybe a little bit too close to the fold. We don’t ever start the year with a budget of saying “we want to hire this many people” or “we want to deploy this many dollars.” It’s much, much more opportunistic and there could be a year where we do very little and there could be a year where we do a lot, because things just hit all at one time. There have been circumstances where we’ve met someone over the course of three years, until they’re ready to really launch off on their own. So, it’s highly idiosyncratic.

Advice for people rethinking their careers

[00:45:42] Robert Vinall: So maybe I’ll finish up with the last question. So I guess a lot of the people here today are probably rethinking their careers, hoping to start a fund, probably more on a kind of a stock picking track I would guess. Maybe you can finish up by saying a few words on working in an endowment and taking one step removed, from stock picking more picking managers.

[00:46:02] Nate Chesley: Sure. I suppose that a stock picker who invests capital on behalf of MIT and other remarkable universities and foundations could feel the same sense of satisfaction that I do, but I think it’s very different when you’re kind of walking the halls and on campus and seeing, day to day, how the dollars are being redeployed into solving extraordinary problems that matter globally, or that give first generation students the opportunity to attend a place like MIT. So if you really want to be closer to the impact, I think being in this seat is wonderful.

We spend an enormous amount of time learning about companies and meeting the best investors in the world, reading their letters, having coffee in far corners of the of the globe with truly remarkable thinkers, brilliant investment minds but also extremely high integrity people that have lived interesting lives.

And I don’t think you give up a whole lot because we spend an enormous amount of time learning about companies and meeting the best investors in the world, reading their letters, having coffee in far corners of the of the globe with truly remarkable thinkers, brilliant investment minds but also extremely high integrity people that have lived interesting lives and they have just great stories. And so being a part of that ecosystem is just a wonderful way to spend time. And I want to finish where you started with kindness. Again, I’m super flattered by that comment. I think kindness extremely underrated in the world and perhaps becoming more underrated through time. I think kindness is a really simple thing and can be deployed at much more scale.

[00:47:30] Robert Vinall: What a wonderful note to end on.

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