ALL INVESTORS want stellar returns, but
they’re "often unaware of the true underlying
risks," says Eric Upin. As CIO of Makena Capital Management,
the 51-year-old Chicago native still practices the multiasset,
endowment style of investing he pursued in the same role at
Stanford Management Co. Upin joined Menlo Park,
California–based Makena in 2009, four years after the
investment firm was founded by Michael McCaffery,
SMC’s former president and CEO, and two of
Upin’s SMC colleagues. Makena manages more than
$15 billion in assets from endowments, foundations, sovereign
wealth funds and family offices. Most clients invest in its
pooled endowment-style fund, which allocates to an array of
asset-class specialists and managers, but more recently the
firm has created separate funds with different liquidity and
risk profiles. Makena’s investors, which include
sovereign wealth funds Abu Dhabi Investment Authority,
Australia’s Future Fund and Government of
Singapore Investment Corp., according to public sources, are
looking for managers to help them navigate the complexities of
asset classes, geographies and regulatory jurisdictions. Upin
recently spoke with Editorial Director Loch Adamson about the
challenges of global endowment-style investing and the biggest
risks that lie ahead.
1 How do institutions approach global multiasset-class
It’s all about asset allocation, manager
selection and risk management. Global multiasset-class
investing is a team sport, whether you’re an
endowment, sovereign wealth fund or foundation. When
you’re investing around the world, trying to bring
professionals together to make judgments such as whether you
should be overweight or underweight Europe, real estate or
other asset classes, the more smart people you can bring into
the tent who do what you do — and who can help provide
opinions and spark ideas — the better.
2 How has your approach to diversification evolved over
We would argue that there are substantially more investable
asset classes and geographies to consider today than there were
20 or 25 years ago, so the level of complexity is much greater.
Just in terms of geographies, we now consider a much wider
range — and if you’re investing with a
20-year or as much as a 50-year time horizon, how do you
determine your China strategy, for example? What does it take
to develop a clinical, balanced perspective on investing in the
country? What asset classes do you use? Even if you manage to
figure that out, how do you approach India or Latin America? In
the past, emerging markets constituted perhaps 5 to 7 percent
of an institutional portfolio; granularity is now much more
important because these allocations can account for as much as
15 to 25 percent.
3 Have investable strategies proliferated too?
With financial innovation opening up more strategies and
substrategies, and with the proliferation of alternatives,
there is a wider universe of investable strategies and
exposures today. Investors have access to a range of different
parts of a company’s capital structure, and they
can look at different ways of accessing investment streams,
such as those from real estate, farmland and timber assets.
They have more choices available to them, but they also have to
think harder about how much they want to allocate to which
strategy and how best to access those investments. The
challenge is compounded for large institutions because many of
these strategies are fairly new; we don’t have 50
or 100 years of trading history and data on how some of these
types of investments perform. There isn’t a de
facto set of blueprints for how to set up your portfolio.
4 What risks are of the greatest concern to global
The No. 1 risk in the world that we see investors wrestling
with is the potential impact of central banks’
policy response as they’ve tried to combat the
deflationary forces of the financial crisis. We’ve
seen unprecedented quantitative easing, fiscal bailouts, direct
bond buying and zero percent interest rates. All of those
actions — even though they’ve been
undertaken for the greater economic good — may have
unintended consequences. We don’t yet know what
the side effects are going to be on the value and pricing of
assets. The biggest risk is that, as normal as everything looks
now, those policy responses may have created a mirage, or even
a set of mirages, that could dissipate quickly.
5 What is your view on inflation?
Here in the U.S. we’ve issued tremendous
amounts of debt over the past ten years — especially
since the financial crisis. That debt will ultimately have to
be reduced, ideally through growth but more likely gradually
through a combination of inflation, currency devaluation,
higher taxation and continued negative real interest rates.
We’re not sure which of those scenarios will
ultimately prevail, and the timing is uncertain.
6 Where do you see opportunities?
We like emerging markets. It’s a
consensus view, but it’s very investable.
We’re seeing rapid urbanization and rising living
standards. Most important, we’re seeing rising GDP
per capita in many of these markets. Those three elements
signal what could be the beginnings of consumption-oriented
economies that are less dependent on exports to developed
markets, which are growing much more slowly than they did in
the past. That evolution is investable if you have a long-term,
multidecade view, and we’re seeing opportunities
in industrial supply-chain logistics, infrastructure,
commercial real estate and housing, not to mention businesses
that will become part of the consumption economy in these
7 What are the key qualities of a good equity
In the end it’s really about owning businesses
with strong cash flows, dividends, pricing power and the human
skill to gain market share over competitors. These are
qualities of good businesses that can prosper even if the
economic environment is relatively low-growth. And stocks can
do very well in low-growth environments. These are some of the
reasons why we see a strong argument in favor of private
8 What other asset classes interest you?
We believe there is value in owning outstanding real estate
assets, which can collect rent and gain value over time,
particularly if they’re held for a very long time.
There can be particular value in identifying distressed,
dilapidated or poorly managed real estate projects that, with
human intervention, can become very high-quality real estate
assets and command higher rents and realize a significant
change in value. Finally, we also see value in owning
outstanding real assets in energy and commodities, including
farmland and timber.
9 Have your investors’ attitudes toward risk
Prior to the crisis I think there was a strong view among
sovereign wealth funds and endowments that they could handle a
bumpy ride and withstand short-term losses because they invest
for the long term. They measure their investment horizons in
multiple decades, typically 20 to 40 years. But after 2008 they
recognized that although they say they can handle anything,
actually going through one of those periods is pretty jarring.
The crisis tested the cohesiveness of many investment teams and
the strength of the governance between boards versus their
teams. I think there are limits to how much turbulence the
air-traveling public can tolerate, even if they talk tough on
10 What was the biggest surprise for sovereign wealth funds
in the wake of the crisis?
These organizations do have liabilities, even though
they’re investing for the long term. They are
accountable to current generations. They don’t
have the freedom to bury their money in the ground and then
unearth it 50 years later to see how it’s grown.
They have liquidity risks, liability risks. Those risks need to
be considered carefully and measured, because no one can assume
that these diverse asset classes are going to give you returns
exactly when you need them.