How I Invest with David Weisburd - E176: Beyond Harvard: The Financial Crisis Endowments are Facing

Episode Date: June 18, 2025

John Trammell has been on the front lines of institutional investing for decades. He’s managed capital for some of the largest families and organizations in the world—from family offices to the Episcopal Church—and in this episode, he explains the seismic shifts happening in the world of endowment and foundation investing. We talk about secondaries, collateralized fund obligations (CFOs), the future of Bitcoin in institutional portfolios, and why concentration—not diversification—created most of the great fortunes. This is one of the deepest conversations I’ve had on how the smartest long-term investors are thinking today.

Harvard, Yale, and other top endowments are reportedly selling billions of dollars with a B in secondaries. Why do you think this is happening? It kind of goes like this, David. They were getting federal grants at some level, whether it was 50 million or 400 million or whatever. And so they built entire industries at the universities around these grants. And so whether it was a hospital or a research lab or anything else else and they've got buildings and people who are working in these departments. So when you

suddenly have the prospect of that money being turned off they can't just shut the buildings down and let all the people go. So the university administration turns to the endowment and says hey we don't need ten million dollars a month we might need $30 million a month. And the endowment says, well, we can't do that. We're not built to suddenly increase the amount of liquidity that we have. So we have to sell something.

Easy to sell equities, but that's where they've made a lot of their money in the last few years. So they turn to private equity where they may have investments in private or venture that they don't like very much anyway and so they're trying to unload that in the secondaries market and secondaries have also raised a lot of money secondary funds and so it's sort of a great time for them to accomplish several goals at the same time. Double-click on that. The smarter secondaries are probably saying

to universities, look, we'll take some of the DREC that you want to get rid of in your portfolio, but we also want this piece over here or this piece over here where we can't get access to that fund and we'd like to have it. So I think there's a lot of negotiation going on. It seems like there's a perfect storm. So the direct impact today is on the federal grants.

You also mentioned that international students paying the higher tuition rates. There's also this looming tax change for universities. Is that playing an effect today or is it just those? The taxes are up in the air. We don't know, but the likelihood is that especially for the largest universities, that the tax rate is going to go up. So they have to do planning for that because again, that's another little slice of liquidity that they have to come up and plan for.

So it's a real push for the universities to do all of this work at the same time as remaining active investors. And is there a game theory to why the larger institutions are trying to preempt the sale of these assets before this tax rate is increased or is it just that they have these fundraising needs? That they have these funding needs today? Yeah, I don't, I don't think David that there David, that there's a gaming part to it. I think there's a couple of different things. On your previous podcasts, particularly the one with John Bowman, which I thought was

amazing, there's a lot of different discussions about liquidity. Is liquidity a good thing? Is it a bad thing? Does it save us from ourselves? I don't think or I'll pay a premium to get access to those funds and then let's agree to a price on the whole package. I believe those kinds of negotiations are going on. There's one other thing that I don't want to forget to bring up in here about the secondaries market. I've not seen this for sure, but I have heard the discussions.

So if I'm a university endowment and I've got very sophisticated investors and a team around me to do this, then I don't want to take a risk on the political milieu that you have to sort of think about when you're doing these things and the publicity that could come about as a result. So it's not earns for the university. There's a lot of things to think about and a lot of non-investment related issues, but US taxes don't apply to them. And so it's very odd for universities to have to think about these kinds of things, but they're, again, they are trying to maximize their returns as any rational sort of investment

vehicle and its management would, but they have a lot of things to think through right now. I got to sit down with Bill Ackman a couple of years ago during the whole Harvard issue with the president. One of the things that he told me that was very surprising is the corporate governance at Harvard Corporation not only is basically irreplaceable, impossible to fire the board, but also the amount of votes to petition

to even get somebody on the lower level kind of advisory board has doubled in the last decade. And ironically, the reason it's doubled is because of that issue they set. Students wanted to change the investment mandate to not invest into energy after that issue, they decided to double it so that they would have more control.

The problem with that is that giving to university alumni contribution is a voluntary activity. So just like with any governance alumni need to know that their money is going towards something that they believe in, something that they have control over because it is a marketplace of giving. You could give to children's hospital, you could give towards many great organizations. So I think the universities need to find a way to balance that kind of governance and

the freedom to invest into the things that they believe are best for endowment with making sure that alumni are happy and want to voluntarily contribute. That's exactly right. And very well said, David. And the larger the donor, Bill Ackerman in case, the larger the donor, the more control or the more input that they want to have to how the investments are done. I've joked for years that it's much easier to change the terminology and the language that you're using in a portfolio than it ever is to change the investment policy guidelines.

So I also think there's a great deal of time spent thinking about how things will fit into the portfolio so as not to break the mold of the investment policy guidelines. Because if you open that up, like you said, and it could take years to actually change the investment policy guidelines or the governance documents for a board that

you might lose that battle and over the course of the battle things could change too. There are really good reasons not to go down that road to try and change the investment policy guidelines but just to change the text the terminology that we all use for various investments going in like ES ESG, and I really kind of hate the three letter acronyms that we all use in the investment world, but ESG is basically gone. No one talks about ESG anymore. If anything, the language has changed.

So you say sustainability. And the goals, many of the goals have changed. Energy, which five years ago, everyone was trying to throw out of their portfolio or hide or not talk about, has now morphed into power transmission or energy transition, is how they talk about it so that you can try and work some more rational and less emotional bits back into the portfolio. So language is important. Language is very important and especially in contexts where it is the least common denominator where a freshman student can march against investment mandate versus a very sophisticated

investment committee, it becomes even more important in those cases. Yeah. I think that's right. I mean, it sort of got swept under the carpet by a bunch of other things, but a couple of years ago, there was a lot of a storm and drong at Yale because David Swinson was investing in an East Coast natural gas pipeline and actually wanted to continue the pipeline down to where it beyond Boston to where it was more useful coming down the East Coast. And there's still a lot of talk about the pipeline itself as whether it's a good

thing or not, but Yale's money was definitely invested in that pipeline. And there were a lot of students that were upset about it. So it's a real life. It's a part of reality that you have to deal with these different influence groups, as well as trying to be a good investor. You mentioned David Swenson, arguably the greatest endowment investor of all time. He popularized this endowment model. You believe the Swenson type of investment today is dead.

Why is that? Ah, dead is a very strong word. I don't think it's dead. I think that David Swenson was one of the greatest investors of the last generation. And there are always new ideas, new investors. We don't know who's going to be the champion yet of sort of the next generation of investors, but I'm sure there are several out there. And so I think it's not as much death unless death is a part of evolution. I think the very simple models of 60-40 or so much in private credit, all of the silos

that we were all taught to think about and the kind of diversification and risk and liquidity that we were all taught growing up and the great three letter modern portfolio theory and strategic asset allocation, NPT, SAA has suddenly become TPA. I think it's important to know that we are always trying to evolve and find better ways of doing things. And we also have tools that weren't available 20 and 30 years ago. I mean, all kinds of tools to use in terms of risk.

And so I think going back to David Swenson in the Yale Endowment Model, I think it was a time where there was a need for that kind of evolution. I think it took in a lot of alternative assets, hedge funds and global and less and more illiquid investments. I think that was all a great part of the journey of investing.

I think we've all been through that now and there are new, you know, I spoke to you about a new idea that I hear from a lot of younger endowment and foundation investors about how every dollar in the portfolio has to compete with every other dollar. That it doesn't matter what silo it's in, is that you have to think about it. Is this dollar, you know, what does this dollar spending? Accompany what does this unit of spending accomplish for me in the portfolio? Does it raise my risk? Does it lower my risk does it increase my liquidity? Does it lower my liquidity all within a return of what's the expected return and then diversification almost comes out of that naturally?

the expected return. And then diversification almost comes out of that naturally, because when you think it could cross like a spectrum of investing and think about it in that way. And part of the problem here too is that they're trying to solve for assets that have become blends between public and private. And so it's more difficult to think about it in terms of silos, because silos could lead you to a kind of diversification that looks good on paper and kills you when the market is down. So I really think of it as an evolution and I think that David Swinson was a huge pillar of that evolution, but I think we've moved on from that endowment model. It's interesting you mentioned diversification.

You mentioned the three-factor model. I had Ken French in business school who created the model with Eugene Fama who won the Nobel Prize. We had an entire class about the declining value of over diversification. After you get a certain amount of assets, it has such a marginal benefit that you're much better off seeking alpha than further diversification. So after you get a certain amount of assets, it has such a marginal benefit that you're much better off seeking alpha than further diversification. The other aspect, which was really interesting and really blew my mind, was I talked to Jackson Craig at HIG Capital, which is a distressed investor. And one of the ways that they look at diversification is through

event-driven versus traditional sectors like geography. I'll give you a good example. You could have three different companies in Columbus, Ohio. You could have an oil rig. You could have a travel agency and you could have a chip semiconductor. You would be perfectly diversified, even though all of them were in Columbus, Ohio. And yet you could have companies in completely different industries and completely different geographies that are all driven based are based some kind

of derivative, like cost of oil, price of gold, price of commodities. And they, you could be significantly not diversified even though one company is in California, one is in New York, and one is in Missouri. You feel like you're diversified, but once there's an event, you quickly see that you actually were not diversified. So there's not only too much diversification, but there's also not enough diversification and that people don't critically think about whether they are diversified.

It's a great line of discussion and there's entire groups of investors all over the world who are sitting around trying to solve for this problem all the time. I love the analogy of Columbus because the risk there, even if you think you're perfectly diversified and it's a new risk that people have to think about, is climate change. So let's say a hurricane

comes through and floods everything in Columbus, Ohio, your diversification just went out the window because you didn't think about having your diversification in one location and climate change could certainly impact that. So there are so many aspects to diversification. And let me do full stop here for a second and have fun with the conversation that we're having. The only great money that I've made myself in portfolios is through concentration. Is that I so believed in a single investment that I put an over amount on any risk scale into that asset.

And I forget who it was. Maybe it was with Jeremy Hare. You had a discussion about venture capital and why certain venture capitalists work is because they invest before there's an industry. They invest in a dream. Before there's even a space. All the money is made before it's named Fintech, before it's named crypto. Exactly, exactly.

And so I think there's an element where you have to be willing to take some risk and maybe shift the portfolio to a more concentrated version at some points in time and when you have the belief. But it's very, very difficult for big endowments and where people count on the money like pension plans and that kind of thing to think that way. Because the risk is that if you're wrong, you just lost, you just impaired a significant chunk of your

capital and cannot pay out what you were supposed to or needed to. And that's an outcome that you can't suffer through. So then you have to start thinking about, okay, if I don't wanna have just one, be invested in one thing, what do I do to still get my sort of income goals that I have to start with the goal? All right, here's what I need to do. I need to hand out 5% or 6% a year on my portfolio and how do I set myself up to do that with as little volatility

because that scares people that I can get away with. And how do I do that within a lowered risk category so if any single investment I have fails, that I still can do what I'm supposed to do. And I think that guideline between concentration and diversification and what factors affect my diversification and how I think through both geography and asset classes and everything else is part of that every dollar competing with every other dollar in the portfolio. So you're absolutely right and it's not an easy thing to solve for but that's what many smart investors are trying to do all the time is to think that through you just have to think about it in terms of where am I going to get the returns? What

what do I have to think about to have the smallest amount of volatility, the smallest amount of risk or an inappropriate amount of risk to get to my goal and each of us have a little bit different goal in mind and a different risk appetite. So, ever wanted to explore the world of online trading, but haven't dared try. The futures market is more active now than ever. And plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments,

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There's a very traditional stress test of what if interest rates go up, which there are lots of people who are working on that today, what kind of or political test, what if the United States becomes a less attractive place to invest. Many endowments that I know and talk to are currently thinking about moving a little bit more money to Europe or moving a little bit more money to Japan and just having less reliance on returns in the US because the risk has gone up. So I think and there are all kinds of I don't want to go down this path maybe right now but there are all kinds of quant methods. In fact your Fama models and factor models there are all kinds of quant methods. In fact, your FAMMA models and factor models,

there are all kinds of quant ways of running your portfolio through risk models to see what the correlations are like under distress. And we have some pretty good past events to sort of look at to make those models a little sharper. The real problem is, is that if there's some sort of calamity or let's say another pandemic, it's very hard to find things that are truly diversified when everyone wants to sell anything that they have. I think part of I think part of the rally in Bitcoin in the last several months is that as US public equity assets have become less popular and gold has gone up as much as it has, is that Bitcoin

has been the choice of, I'm not at all surprised that Bitcoin has gone up as much as it has. I think it oversees the investments of an endowment or a public pension plan. Anything that's not personal, where you bear the responsibility for taking care of others. I think having that prepared mind is a really important part of being at the table. John, this has been a masterclass in investing. How should people follow you? I think best if they want to reach out on LinkedIn is a good place to start. And then I'm happy to talk to people or meet them.

I'm, you know, one of Jeremy Hare's concepts about being a super connector. I'm not a super connector, but I think it's important to talk to people across many different industries. It's part of that prepared mind a bit that we were just talking about. I think you have to have the ability to meet and talk with lots of people to keep yourself educated. Thanks for jumping on the podcast and look forward to sitting down in real life soon. David, this has been fun. Look forward to it. Thanks for listening to my conversation. If you enjoyed this episode, please share with sitting down in real life soon.