Transcript: Scott Malpass – The Fighting Irish’s Twelfth Man ......Investor’s Endowment...

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Transcript: Scott Malpass – The Fighting Irish’s Twelfth Man (EP.25) Published Date: September 18, 2017 Length: 1 hr 20 min Web page: capitalallocatorspodcast.com/malpass

Scott Malpass is the esteemed Vice President and CIO of Notre Dame University, where he oversees the school’s $12 billion endowment. Scott earned his B.A. and M.B.A. degrees at Notre Dame, and returned to South Bend at the ripe age of 26 following a brief stint on Wall Street. His track record for almost 30 years, as defined by both performance and impact, place him indisputably in rare company at the very top of the field.

Our conversation is a full-blown master class on endowment management, including the benefits of a long tenured team, asset allocation frameworks, passive management, preparing for dislocations, the state of venture capital, sourcing, monitoring and exiting managers, incremental process improvements, professional and personal development, and education and alignment across constituencies. It’s hard not to be in awe of Scott’s combination of humility, experience, and success.

Topics: Endowment Management, Asset Allocation, Investment Managers Edited by: Marcelino Pantoja

mailto:[email protected]

Capital Allocators Podcast EP.25 Scott Malpass

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Ted Seides: Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can keep up to date by visiting: http://capitalallocatorspodcast.com

My guest on today's show is Scott Malpass, the esteemed Vice President and Chief Investment Officer of Notre Dame, where he oversees the University's $12 Billion endowment. Scott earned his BA and MBA degrees at Notre Dame and returned to South Bend at the ripe age of 26 following a brief stint on Wall Street. His track record for almost 30 years, as defined by both performance and impact, place him indisputably in rare company at the very top of the field.

Among his many accolades, Scott received Institutional Investor’s Endowment Manager of the Year Award, NACUBO’s Rodney H. Adams Award, and CIO Magazine’s Lifetime Achievement Award. He's taught students at Notre Dame since 1995, and among other directorships and advisory councils, he serves on the boards of the Vatican Bank, Vanguard and TIFF, and previously served on the Investment Advisory Committee for Major League Baseball.

In 2014, Scott became part of the founding group for Catholic Investment Services, Inc, a non-profit that offers top tier investment solutions to Catholic organizations nationally.

Our conversation is a full blown master class on endowment management, including the benefits of a long tenured team, asset allocation frameworks, passive management, preparing for dislocations, the state of venture capital, sourcing, monitoring and exiting managers, incremental process improvements, professional and personal development, and education and alignment across constituencies. It's hard not to be in awe of Scott's combination of humility, experience, and success.

I'm quite sure you'll enjoy this show. If you do this week in honor of Scott's work, take a break during your day and sing your alma maters fight song at the top of your lungs. If anyone around you asks us what you're doing, tell them you're following instructions you heard for health and happiness on the Capital Allocators Podcast. Thanks for spreading the word. Please enjoy my conversation with Scott Malpass.

Ted: 00:03:22 Scott.


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Scott: 00:03:23 Good morning.

Ted: 00:03:24 Good morning. Thanks so much for taking the time to do this. I'm really excited. Why don't we start with you just talking about how you got here in the first place as a 26-year-old.

Scott: 00:03:35 Now, first of all, thanks for coming to Notre Dame and I'm glad you got in and had a tour last night, see our beautiful campus.

Ted: 00:03:41 Yeah, first day of classes too.

Scott: 00:03:43 The first day of classes is…

Ted: 00:03:44 Is pretty, pretty exciting.

Scott: 00:03:45 …a lot of energy out there. Very exciting. And it's part of the reason you come work at a University, you know, is because of the students and the energy. In our case the Catholic mission is certainly a big draw, but, but I, uh, I'm a Notre Dame graduate. Undergrad I was actually a science major, thought I wanted to be a doctor, so I started out pre-med. I love science. I think the, the, the patterns and frameworks and, and kind of analytical aspect of that I, I was always attracted to. But as I got toward my senior year, I really wasn't sure I was going to do with that and I ended up going to business school, fell in love with the markets, worked with the Irving Trust company in New York City, which, uh, is, you know, is taken over by the Bank of New York many, many years ago, but a great place to learn and they had this little investment consulting group that worked with their custodial clients on asset allocation and managers search.

And I had this fabulous gentleman, Ralph Knisely, who was my boss, and he took me all over the country to meet with these pension funds and talk about asset allocation. I just, I just found it very intellectually stimulating. Very interesting. I honestly didn't know anything about venture capital or private equity or emerging markets. I was 23, 24 years old and was fascinated by all of that. Irving was the custodian for the Notre Dame endowment, so I knew the CIO at Notre Dame, Father Richard Zang, who I also knew from campus. He had been the Rector of the Graduate Dorm and ultimately he was starting to try to expand the office and hired me as his assistant in August of 1988. He decided to move on to another assignment in the Order nine months later, so in April of ’89 I became CIO at age 26.

Ted: 00:05:19 Wow.


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Scott: 00:05:20 Which obviously will probably never happen again. [Chuckles] I'm not even sure how it happened, but. But Bob Wilmouth who was chairman of our Investment Committee, one of the great men that I've ever met, great business mind, huge, tremendous leader, motivator. He said, kiddo, we're going to do this together, and he just started delegating things to me and let me run with it, but he was always there for me to give me confidence and make sure we had the resources and the budget to do this right. We sort of had this tremendous alignment of what we wanted to do and it just evolved and I was able to build the operation over almost 30 years now.

It was really just really wanting to be back at Notre Dame and help with the endowment and then Bob Wilmouth really helping me get this, get this started, just a couple of us with a kind of a vision and just day-to-day just slugging it out. But I'm, I'm so glad I came back. I thought I'd come back for a couple years and then, you know, go back to Wall Street and here I am, you know, 30 years later.

Ted: 00:06:15 Yeah, I can see how this would not be an easy place to leave. I mean, it is, it is special. It is special.

Scott: 00:06:21 Thank you.

Ted: 00:06:22 One of things that I'm really curious to talk to you about is your team and really the people involved. And, across the board, if you talk about the people, there's your team and the staff, there's the Investment Committee, there's the Investment Committee chairs and managers, and there's just an unusual amount of duration across the board.

Scott: 00:06:44 Well, keep in mind, Ted, we're a place where we've only had three presidents since 1952. The average tenure of college presidents is four years, so we've had three since 1952. The legendary Father Hesburgh who just passed away a couple of years ago, Father Malloy now, Father Jenkins. We've only had two chairs in the Investment Committee since 1978 and I'm the CIO for 30 years, so it's a place that draws people in to the mission and they stay and they really committed.

So I've been able to assemble a great team that feels the same way. All of the core Investment Team are Notre Dame alumni. Honestly I don't, I don't know if they'd want to do this anywhere else. I think they're doing this for Notre Dame. They might work at a family office or something. They will not go work another endowment. They just, they aren't. Unlike sort of the Yale model, which is tremendous in putting out CIOs all over the


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country. But it's a different philosophy than we have in that regard. They want to be here and they want to be committed to Notre Dame. So yes, I have eight directors. Three of them were over 20 years. The rest were over 10, 15, some are just younger. They're just a 10 but, it's a very close knit team, shares a lot of the same values, sees the bigger picture and what their work accomplishes for students and faculty.

I always talk about financial aid. I think, I think, when I think about what we've done for financial aid and growing those resources so students can afford a Notre Dame education and every day we see the tangible signs of that. We see them in the office as interns, we see them walking around campus, and we know a lot of those young people can't be here if it weren't for our work and that's very motivating. And I'm sure it's motivating with my peers at other schools who do the same thing.

Ted: 00:08:27 So, I just want to poke on a challenge with that, which is when you have a team with that type of passion and commitment, somewhere along the way in your 30 years I imagine you would have had someone that you hired into the team who didn't work out for some reason, or maybe they shared that passion and commitment but they ended up not having the degree of competency that you would've liked. How do you handle those situations when it's such a family type culture?

Scott: 00:08:54 You know it’s actually gone fine. I mean, you're right. Well you want some turnover over time. I absolutely agree with that and not everybody wants to be in the same position for their entire career. And the culture is not to make them feel guilty or bad in some way because they want to do something else. We don't, we don't have that. I've, I tell all my people, if you want to be a CIO, I'm a hundred percent behind you. Let me know and I'll help you and that's happened with a couple of people and they've done really well and others it hasn't. So the culture is not, boy, if you don't stay here, you're disloyal or you're a bad person. The culture is we'll help you do whatever you want to achieve in life. It just happens that most of them just want to be here.

Ted: 00:09:34 And then also on your Investment Committee, if this is right, I thought I read that the members of the Investment Committee are non-rotating.

Scott: 00:09:41 The chair of the Investment Committee is the only chair that has not rotated. Typically a chair will rotate, you know, every four to six years. It could be longer, but that would be more typical. Maybe eight years would be the outside, but the board chairs


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have decided that this, this kind of continuity has actually been very helpful and we've been lucky. We've been very fortunate to have had great chairs of the Investment Committee. Bob Wilmouth and now Jay Jordan who’s a private equity legend and Jay's been chair since ’95 and that has been a huge luxury for me and my team. The dialogue, you know, we sort of know what we're saying to each other and we can tell by the tone, kind of what we mean. This continuity and the philosophy, Jay offers great advice and counsel, I know what he's thinking about things. He knows what I'm thinking. There's no trying to dance around issues, we’re very direct cause where there's a friendship and there's a familiarity there which I think creates just very efficient dialogue. So I compliment the chairs of our board for allowing that to happen because it's very unusual and probably most people would say it's probably not the best governance practice, but actually it really has worked for us.

Ted: 00:10:47 But the committee itself does rotate?

Scott: 00:10:49 You know that most of our committee members are also on other committees of the board so they can, they can be assigned to the Investment Committee. They could also be assigned to other committees and typically they, they are, so they're on two or three committees. There's some rotation, but typically if we get someone with really good asset management or capital markets experience, we want to keep them on the Investment Committee and we've had a tremendous group of Trustees on our committee with the 30 years I've been here from all areas of the capital markets, private equity, real estate venture. Very fortunate.

Ted: 00:11:18 Can you share an example of how having that continuity and kind of institutional knowledge over the years has either translated into a good or better investment decision or something that you imagine might have gone a little bit differently if you didn't have the same type of consistency.

Scott: 00:11:37 Absolutely. So the number one example I can think of would be going through the global financial crisis where everybody's sort of rethinking everything, right? Liquidity, strategy, philosophy. Where do we go from here? We didn't know where the bottom was and you're tested, right, and you're thinking, OK, how far down is this going to go before we do something different?

We never wavered, of course. I mean we, we believe in our program and, you know, there was not one single voice that felt we should be doing anything differently than what we're doing. We stayed the course, we rebalanced as we could. That was


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difficult because the liquidity, so you're a little more cautious there, but we came out of that very well. I think we were the only endowment in the top 20 major endowment that did not cut endowment spending. We actually didn't cut. We had a flat year and then up again, so that was very unusual.

So just, just that we're on the same page, we had a long-term approach and philosophy. We weren’t going to change that. It was a very difficult time, but we stayed with it and you know we went a little over $7 Billion pre-crisis to high fives and now we're at 12. So by not panicking and staying the course, so having, having a group that's been together a long time really helped work through that.

I did another example. We bought our first single asset in real estate, hundred percent ownership, direct asset about 10 years ago and a member of our committee was aware that I was wanting to do some of that. Not, not a lot, but some. Chicago in particular. It's great training for your real estate team to actually have a building, working on budgets and deal with the property manager. It's great training and he was aware that we wanted to do something and being a real estate developer himself, he became aware of a property in Chicago, the old Santa Fe Building, the Railway Exchange Building, which we ended up buying in ’06 and own to this day. It's more than doubled in value. It's went from 70 percent occupied to 95. We now have a whole new plan for the building. I don't think that would have happened had this person not known what we were doing and had interest in helping us find the right property to start that.

Ted: 00:13:41 Did it work in terms of the intellectual transfer of your team being responsible for building, building their knowledge base to make better partnerships in real estate?

Scott: 00:13:46 Yes, completely. We are so much savvier real estate investors than we were prior to that. No question, you know, dealing with property management and all the details of a, of a building. And, and even now as we interview kind of restaurant operators, we're putting in a real nice high-end restaurant in the building. Just dealing that, you know, it has been fascinating. And uh, I try not to get to, you know, spend too much time with those kinds of details because I want to stay a little, a little higher cause there's so much going on, but I learned a lot from that myself. So I love sitting in those meetings with my team and being involved as much as I can.

Ted: 00:14:20 And how do you think about that sort of time allocation? In, is that time best spent getting deeper or would your team be


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better just doing what they do and looking for the next kind of entrepreneur to back?

Scott: 00:14:33 I think it's a balance for sure, Ted. And then we talk about that. I In our size look, we're not going to have 10 of those in our portfolio and Chicago is a great market for us, so we wouldn't probably do that anywhere else or it would be very limited because it's so close to us. We can get in there an hour and 20 minutes and come in and out, it's fairly easy. So you have to pick your spots, but it's a balance and, and we've, look, we've had opportunities to do other things we've passed on in that regard. You know, it was a unique asset, but I'll tell you if I could find another one like that, I would do it. But it is always a balance and we talk about how we allocate our time in that regard.

Ted: 00:15:07 Let me take a quick step back and address the broader question of your core investment beliefs that drive into how you've structured the portfolio.

Scott: 00:15:18 You know, it's evolved a lot from the beginning cause remember I was pretty young and I'll never forget, uh, just a quick story. When I went out to meet with the Capital Guardian Trust Company was one of our managers in 1988 and at that time we had a fairly plain vanilla portfolio. So they did a lot of our U.S. Equities and they, as you know, they had a really good record back in the seventies and eighties and did a great job. But I was talking with Dick Barker who is president of Capital at the time. He was in the San Francisco office, he wanted to live up in the Bay Area. And I said, Dick, you know, I'm up here and I, I'm hearing about more venture capital activities of large endowment funds, and we had a couple of very small allocations to Boston-based managers at the time. I had actually not met yet because I was just new. But I said, I understand most of the core folks are out here. Is there anybody you think I should meet with? And he said, well my gosh, we, we helped fund Don Valentine and, and you got to meet Don. And he called on and I was, went down there the next day and that's, that's how it started. Now we’re, you know, one of the largest investors with Sequoia in the country and it's been a fabulous friendship and partnership. But that's literally how it started. And I didn't know anything about Silicon Valley and what was going on other than there's a lot of tech companies, but boy did I get immersed in it the next few years. And it was a lot of fun to do as well. So you know, just, just the opportunity to start meeting some really smart, savvy people across all asset classes.

Ted: 00:16:41 And that was kind of how you started it? It’s just…


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Scott: 00:16:43 Yeah…

Ted: 00:16:44 …meet this person, see what they have to say, meet the next person.

Scott: 00:16:45 …blocking and tackling. I was, I was at a point, you know, when you're younger like that, you know, I was meeting and I would meet almost anybody. I took meetings I would never take today.

Ted: 00:16:53 [Chuckling]

Scott: 00:16:55 I'm sure you did the same thing, you know.

Ted: 00:16:56 It’s happened, from time to time.

Scott: 00:16:58 And it was just that I learned, I'd tell my younger staff, you know, you should do some of that. Then I went to a lot of conferences and seminars and things that, again, I wouldn't do as much today because I don't think I get this much value today, but I did a lot of that then. Not speaking, just sitting and listening and I, I think you had to be open minded as you're still forming your philosophy and getting a sense of what quality looks like and skill and the patterns of success. You know, I think meeting a lot of people the bad pattern stand out too.

Ted: 00:17:26 That's true. What today drives the core beliefs that overlie the portfolio?

Scott: 00:17:32 Well, we never called it the endowment model back when I started. That came from the press later. I'm sure my peers who have been around would say the same thing. We felt that being a spending institution and needing high real returns, we had to be inn equities, but we wanted to diversify because we didn't want the risk of a single category. Pretty basic portfolio theory, to be honest. The twist was that the big endowments were really savvy at developing long-term relationships with the top people, getting them early, getting good alignment with them and then staying with them for a longer period of time and growing with them. I think that the large endowment funds have done a really good job of that. Unlike a lot of other kinds of investors, some have now caught up. It's a lot more competitive today, right?

But I'll give, I'll give a lot of credit to Jim Bailey at Cambridge because Jim assembled a group of endowments in the seventies to talk about these issues and that from those meetings came the endowment model. Now the bigger endowments were able


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to execute it faster because they, they would just have the resources, so the Harvard, Yale, Princeton. But then, you know, the thing about Notre Dame or Northwestern and others as they started growing, they were doing the same things, but it was really the philosophy that Jim and his colleagues sort of put out really did help move this along, this thinking.

So, generally we follow that basic approach and we're just looking for skill wherever we can find it. We, so much more competitive, we're doing, we're trying to get into with groups even earlier and help shape some of the terms and the alignment and capacity rights and just various things like that. We do more co-investing in real estate and private equity than we've ever done, you know, so you know, just more things to have control. It allow us to really amplify and expand, with our best partners, our exposures, things like that.

Ted: 00:19:26 And you take a asset allocation framework approach? Are you more, as you're talking about, it's more let's find best of breed managers. Obviously they own certain assets and that'll roll up. How top-down is it, how bottom-up is it?

Scott: 00:19:39 Yeah, so when we first, when I was first evolving in our program, we really needed to set some asset allocation targets. I needed to get the board comfortable with, OK, we're going to do this much in private equity, we're going to do this much in venture. So I think I thought it was important at the time to have a pretty good structure in place. That was a clear asset allocation plan and then within that we were just looking for the best people and so I think that that, that evolved, then it did become honestly very bottoms up as we as we matured and grew in size, you know, we've had dramatic growth. Like I said, I was, it was $400 Million when I started. Now we’re, our pool is over $12 Billion. So, so as we evolved and matured, it became much more about, about the skill and fit with our program. I will say we've come back a little bit, when you think about some of the market changes, the changes in market structure, the, the movement to passive. I think portfolio construction techniques, at least in the public side, have sort of come back and I think you need to think about those a little more.

Ted: 00:20:40 Yeah, let's dive in there a little bit. How do you think about it? Right? So let's just, let's take a subset, a U.S. Equity portfolio or a Developed Market, International Equity portfolio. What had your book looked like and how do you think about this sort of the power of a passive index?


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Scott: 00:20:59 Yeah, so when I first started, we spent a lot of time looking for skill but we were very conscious of styles. You might remember it was sort of large and small and mid-cap growth and value and blends and then was micro-cap and then you had mini-cap and I think some of these firms kind of went crazy with this stuff, got silly. But there's merit to factor now. I mean it's undisputed that the factors are really important in determining stock price, stock price performance, stock market performance of individual companies.

So paying attention, that I think is important, I mean you can have long periods where certain styles are out of favor, no matter how skilled the manager is. That's just a fact. We've seen that. Value has been really under pressure. We've seen that before by the way. Uh, we saw that in the nineties, but it's really severe right now for a lot of different reasons, including just that some of the real growth areas like technology are just really much bigger than they used to be. And the banks are smaller, you know, so I mean there's been a lot of shifts in the sectors.

Ted: 00:21:56 There is a fundamental change that these very large-cap companies are still growing like crazy and getting market share and that’s at the expense of increasingly value…

Scott: 00:22:03 Yeah, I mean if you, if you look at the top five market cap companies in the S&P today versus 20 years ago, it was just, I mean, it's completely different, right? It's, it's all technology. So that's the big difference. But I do think it's important to pay attention to the kinds of exposures you have in the portfolio and make sure that your structure reflects some boundaries. We’re not willing to have 10 years where values out of favor and we've got 90 percent value managers. We just can't. We have too much to do here. I mean, sure, you say it's perpetual, but it's, it's, it's perpetual in many ways, but it's also we had to spend every year and we're ambitious and I can't take a 10-year period where I have all these managers underperform because their styles out of favor. That's not a satisfactory. So, so I think having some boundaries there and understanding that is really important.

Ted: 00:22:48 And do you have views of what factors you'd like to tilt to?

Scott: 00:22:54 We do. We tend to stay fairly simplistic. I don't think getting too cute there is helpful. You really can't time most of them anyways. But I think having the right balance is important. Knowing what you have, having some balance. Making sure the big factors you know, are, are you're very aware of, you know…


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Ted: 00:23:12 Growth, value…

Scott: 00:23:13 …growth, value, large, small. You could throw in other things, but I think those are the big ones. Kind of back to where we were a bit, you know, 20, 30 years ago.

Ted: 00:23:20 That’s kind of, and how much of the endowment is invested in just public equities?

Scott: 00:23:24 So our public equity bucket, which includes long-short equity is about 40 percent.

Ted: 00:23:30 So it's pretty important.

Scott: 00:23:31 But long-short is about 10 percent, so a quarter of that. So it's, we have plenty of long equities.

Ted: 00:23:36 Active managements had a really tough slog over the last seven or eight years. Indexing, we know where the trend is going in terms of fund flows. You have quant and big data coming in. Do you ever sit back and say, huh, like the fundamental managers that we love and understand, that comprised the core of our portfolio married with whatever factor balances we have, might not cut it.

Scott: 00:24:01 There is a lot of structural change going on in markets and I think you just have to understand it and embrace it. Computers, computer driven models, quant firms, passive. Uh, Millennials for example, they want to go online, they want to do index, low cost products, most ESG focused, generally, and they're not going to spend the time doing the research that we used to do on a company. They want a quick, efficient and they want to move on to other projects. So, so for example, a Vanguard where we pioneered passive investing, we're, you know, uh, well over $4 Trillion now. We, we’re bringing in $300 Billion a year. I don't see that subsiding anytime soon.

Ted: 00:24:41 It doesn’t feel it, yeah.

Scott: 00:24:42 You know, 30 million families investing with us in their various investment accounts and retirement accounts. I think it's a very good thing for the public because most people have no idea how allocate their money. I think these target date funds where you have the slide path, I think it's fantastic. I think about our own faculty and our programs here and they can invest in those funds that match their retirement age. You don’t have to worry about it. They have to spend a lot of time on it, they don't want


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to. They're doing research, they're teaching. I think some of these innovations have been incredibly helpful for the broad retail public and retirement funding.

I think Vanguard's played a great role with that and I get asked a lot, well you, you don't do a lot of passive. You're on all these esoteric, you know, active strategies, high active risk, you’re not benchmark oriented, how does that square with your belief in passive? I say it's completely consistent. I said if I didn't have a team like I have here scouring the world, doing a 800 meetings a year, looking for the best talent, I would index most of it. If I were running a state fund at $150 Billion I would index most of it, but I've got a much smaller fund than that and I've got a full team here and we can do this, but most people can't. And I would argue there might only be 50 or 60 investors in the world who really can do this model well. I don't think there's a lot. I think most people should be using more these other techniques.

Ted: 00:26:01 Yeah, yeah. Do you have a view in your head of the U.S. market? S&P 500 is something like 30, maybe a third, 33, 34 percent is indexed to. Do you have, there’s this debate, Charley Ellis’s “yeah we can get to 90%.” Do you have any view from the seat of what’s a healthy amount?

Scott: 00:26:17 Well, I don't believe that because there's been a lot of flows in the past so that all these stocks were overvalued. They're structurally overvalued and, and people are gonna lose money because they're buying at a high. I don't believe in that general narrative to be honest. I think you've got broad indices with a lot of companies and sure when there's, when there's market corrections, they're going to go down with the market, but because you haven't had as much friction and trading and fees, you've already way ahead. The rebound is going to be correlated directly, you know, with your allocations.

So, I mean the data is very clear and um, most, most people should, should do passive and they should be low cost because it's the trading and turnover and fees that really undermine most retail portfolios and I'm glad institutions are doing more of this.

Like I said, we do, we'll do some passive ETFs temporarily. We're looking at exposures or transitioning some managers or we might have a theme we want to put in place that's opportunistic for a shorter period. We've done some of that and will continue to do that and I and I actually think as the fund grows, we'll probably do more of it and I'm not against that at all. I would, I


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embraced that. I'm looking long term and how I can get the right exposures and make sure that that I'm not missing out on something because I'm being obstinate about I can't find an active manager that does that. I'm going to use all those tools.

Ted: 00:27:36 So when you think about anything opportunistic or tactical, it has to be relative to some baseline, right? If 30 percent stocks, do you want to move it to 40 percent long-only? Or emerging markets? I remember way, way back when you had a much larger allocation to emerging markets than your peers.

Scott: 00:27:57 Right, early on we did. That’s right.

Ted: 00:27:59 What are the things today in the markets, or the last couple of years or looking forward, that you think might be more interesting areas to be exploring in terms of those tilts?

Scott: 00:28:07 Well, I will tell you that we've been spending a lot of, a lot of the last couple of years thinking about some of these longer term portfolio construction ideas. I think just, you know, obviously the market has been good the last couple of years. Volatility has been low and it's been a time where you could sit back and think more about some of the longer term construction and we've been doing a lot of that and especially given our size now. Look, we were up, we were opportunistic when the energy collapsed. There was some things we did there. Those are relatively easy, right? Because it's clear that there's an opportunity and you just have to be positioned to take advantage of it and have liquidity and I think all the big endowments and foundations that are pretty well set up for that. I know whenever we've, I’ve been through what? Four distress cycles? The next time there's a distress cycle, I'm sure we'll hit that really well again, you know?

Ted: 00:28:56 It just seems the, the time windows just seem to compress a lot more cause capital just fills the gap.

Scott: 00:28:59 It's true. So you have to be ready and we've, we're, look, we're, we're talking with managers now that we won't use until the next collapse, but when, when that happens, we'll be ready, they'll be ready and we'll be able to put a lot of capital to work. So we're, we're, we're anticipating things maybe more than in the past even. We've always had good liquidity because we have fundraising and we have good inflow. You know, we're fortunate, right, as an investor, you sort of get great cash flow. We are in the middle of a campaign now and, and so, you know, uh, of course everybody's in a campaign, right? All the time. But,


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but it's, it's, it's a great structural advantage for the big endowments, you know, in terms of rebalancing and all of that.

So we're, we're always looking, you know, I think about emerging markets. I think about a, what a weaker dollar could mean. Europe, there's parts, aspects of Europe that look very interesting. We do a lot of, in private equity we've always done more of that middle market and lower middle market. In Europe that's a very attractive space right now because the banks are struggling so much.

Ted: 00:29:58 Tricky, it seems like it’s been tricky to find the right partners.

Scott: 00:30:00 There’s, there's not as many as we'd like because I think we'd like to put more capital, but we have found a few and, and, and so that's an area we've put a lot of time into. We actually did a two-year pilot with our London operation we just completed and we've had, we had some staff in London over the last couple years. Really thinking about deepening our networks, uh, extending our brand, learning about other opportunities if we want to do more direct kinds of investing, having people on the ground would be, you know, an advantage. It was also a great development opportunity for some of our team, but it was always a pilot. We, our board is great about letting us experiment with things like that. And I said, look, I like to do this, but I don't want to make a hundred percent commitment yet cause I'm not sure we were gonna want to do it.

Ted: 00:30:42 In terms of having an office on the ground?

Scott: 00:30:43 Having an office there. So luckily we have a tremendous academic program in London. We have a 150 kids a semester there. We have a gateway program, we have our own building. We were able to just plug into one of the offices, you know.

Ted: 00:30:55 Were they, these are existing people on your team then?

Scott: 00:30:57 Existing people in our team. So we had, we had two, two folks, uh, two of my directors did it for a year and then two others did it a second year and then we had some rotation, some of the analysts and associates.

Ted: 00:31:07 And what was the outcome of that?

Scott: 00:31:09 You know, it was fascinating. I would do it again. It was incredibly a creative to our work. Our mapping out of the money management community in Europe. Our understanding


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of the European Union and the institutions. Of course Brexit happened while we were there. That was interesting. We certainly didn't expect that, but just being on the ground there really helped us think through that as it occurred. But, you know, we, we made a lot of new friends and we're there all the time. We were going all the time before that and will continue to. But being on the ground somewhere does give you a chance to deepen relationships and spend more time with people you don't when you're coming in for a week. Despite all that, we decided that unless you're really like, if you're a big pension fund, doing a lot of direct private equity, you know, probably be on the ground, we don't, we don't need to be right now. We feel that we, we, we sorta got a good feel for what's there and we'll be able to keep up with it just through our normal course of travel. So we're taking a pause from that, but we can always restart it. Or we can do another geography, we could do it somewhere else.

Ted: 00:32:08 You can do an Asia, Singapore or something. I always wonder about that when you have such a familial feeling culture here. You know, the flip side of having people and getting the new network on the ground is they’re not here.

Scott: 00:32:21 Right. I think that was difficult. I think we determined over the two years that, although we, I'm glad we did the experiment, that having them back here and being part of the day-to-day dialogue, same time zone was more an advantage for us than having anybody over there on the ground.

Ted: 00:32:37 Yeah, yeah, it’s not surprising. It's a tough, those are tough tradeoffs especially, I'm sure when you started, I remember back at my early years it wasn't a global investing business. You can do that trip to London once a year and that would be just fine.

Scott: 00:32:51 That’s right.

Ted: 00:32:52 There might be an alum there that helps you out.

Scott: 00:32:53 And there weren’t really many people worth talking to. You know, part of doing London, London became such a gateway for the world. You know, everybody's in London, right? And I mean I remember when I was, I went over for four months when we started this on my own. I would live there for four months. I was surprised how many of our Chinese partners were coming through London or various things. I was, I met them more in London that four or five months than I did going to China. I mean, it's just incredible. So we'll see how that evolves with


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Brexit. You know, some people are pretty negative about what's going to happen in, in, in London because of Brexit. I have no idea, we'll see how the, how it shakes out but, but there's going to be change. That, that happened sort of late in our time there. So that wasn't a big part of our thing.

Ted: 00:33:34 So you went over yourself for four months. What did that do to your team here?

Scott: 00:33:38 Well, they were coming through, rotating through as doing their normal course of work. So I saw everybody, you know, throughout that period. I came back a couple of times. I had board meetings, I had to be back so I say four months, but I honestly I was probably there like two months total to be honest. So it was pretty short.

Ted: 00:33:55 Right. That makes sense. Talk to us about some of the things that you're looking at and opportunities. I'm really curious of your take on the pricing in the venture capital markets today and what, you know, that's a business that clearly for the endowments and other institutions, it's been super important to be with the right partners and be there for the long-term and it does feel like there's this self-fulfilling prophecy that when you're Sequoia and you have great returns, you seem to get the better deals, which allows you to get great returns. The entrepreneurs want to work with you. What do you do with anything differently when you're not sure it feels like there's a lot of capital flooding into these companies across that ecosystem?

Scott: 00:34:32 Well, because I have a 30-year tenure, I've seen some of this behavior before and so I'm always skeptical of, of some of these, you know, periods, late cycle where there's, you know, a lot of froth and overpaying and so forth. You know, I think the data shows that 80 plus percent, maybe 90 percent of Unicorns don't make it, so I don't get too high and fired up.

Ted: 00:34:57 Is it really that many?

Scott: 00:34:58 It’s a high percentage.

Ted: 00:34:59 Is that because in 2000, 2002, that's when, that’s probably the only period of time where you had a lot of Unicorns, right?

Scott: 00:35:05 Well, until now. Yeah. So it's a high number. It's at least 80 percent. And so, you know, people, people say, well, gosh, you know, there's so much fragmentation now and in the venture


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community and there's so many people raising money, there's so many more players. That's true. Money, capitals coming from a wider array of sources, search funds, little angel networks, no question about it.

But if you really look at what are the companies that really become big and sustainable every cycle, there's only two or three really. The Googles, you know, the Facebooks. There's only a couple and those tend to be funded by the same people. So yeah, more capital, wider range of sources of capital, you know. But, still it's a small group doing the big transformational companies.

Look, we, we’re very conservative in our valuations. We, we, we report what our managers give us on our valuations. They're very conservative. They take huge discounts. They’re 20, 30, 40 percent depending on the company. If anything, you could argue that we've understated the values. So if you look at history, they've been understated honestly, but that's OK. We'll get the value out of it when it's appropriate and when it happens, when there's a liquidity event will get uh, what we, uh, what our ownership and we'll go from there. So yeah, there's been, there's been down rounds this time in many venture holdings that's, they were probably ahead of themselves and they probably should be some down rounds.

Ted: 00:36:30 What do you think about the implications of all of this capital at those sort of different stages of private markets? Where you know now you're reading more about how the number of public companies has been cut in half and a lot of that is because, I remember back when, the venture company wasn't often cashflow positive when it went public.

Scott: 00:36:51 That’s right, right. Yes, so I think there's 4,000 less public companies today than there were 20 years ago…

Ted: 00:36:56 That’s incredible.

Scott: 00:36:57 … or something like that. It's incredible. Who would have thought that, you know, 10 years ago that that would happen? I don't see that changing. I, you know, unless there's some regulatory change or some other issue that if structural change that would have caused people to think differently. There's just so much capital. Why would you want to be public? You can get financing, you know, I mean Uber who's had their share of, of, you know, public relations challenges lately, but they could go get as much capital as they wanted and so can a lot of other companies, you know. So I don't see that changing any time


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soon. So it's a very, again, those are one of the structural changes I was alluding to that are, has made our job very different than what it was before.

Ted: 00:37:40 Investors always talk about the issue of short term-ism, particularly in, in the public markets, and I've just been stewing on this notion a little bit of that behavior is forced to be better in the private markets. Do you give your money to a venture capitalist, he has it for 10 years...

Scott: 00:37:54 Yes.

Ted: 00:37:55 …they make whatever decisions they make about the companies, but because of the illiquidity. Um, do you see that as you look through the venture capitals to their portfolio companies that businessmen are making better decisions at all because they're still private?

Scott: 00:38:10 Yes. The answer's yes, but I do worry about short term-ism in general as an investor. I think that is one of the biggest threats to high returns over the next 10, 20 years. I think the financial media, social media, I worry about the next generation of, of people overseeing these kinds of funds, having a very different time horizon. Then, then the folks who, for example in my committee who oversaw it the last 30 years who really thought long-term. I'm not too worried about it at Notre Dame because I think we have that in our culture, but I'm seeing changes in other places, not necessarily the big endowments, but I get calls from all kinds of investors, you know, looking for advice and some are the way they framed questions shows me that they're thinking very short-term, quarterly, annual results.

Even this annual beauty contest of the big endowments that Bloomberg and some of the financial media, just they love to get those numbers as soon as they can. I don't, I don't really think about the one year numbers very much. I've got a long-term strategy and you have to have snapshots periodically. You have to compare it, I get all that, but a lot of that's noise in terms of earning the kind of returns long-term that we want. I really worry about short-termism. Warren Buffet is so great about cautioning people about that, you know, and he always talked about the stuff. He always talks about the stock market as being the transfer, the transfer of money from the active to the patient, and that's so true. And so one of things I keep preaching to my team is we've got to make long-term decisions and we've got to keep our eye on the ball. It's hard though. The world's pressures are very short-term today. Culturally, markets, it's very difficult.


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Ted: 00:39:52 Let’s dive a little bit into the manager selection process, is such an important part of what drives the returns. How do you go about sourcing these managers?

Scott: 00:40:00 Yeah, so a lot of ways. I mean we, we, we certainly get a lot of ideas from our current partners. No question they’re the smartest people in the markets we know or we wouldn't be with them. Right? So they're really good. We're always asking them for ideas. They tend to know other smart people in their space, especially as they evolve. So a lot of ideas from our managers. We also, there's just a lot of friends of Notre Dame that, that we've met over the years, alumni and non-alumni, parents of kids, just different folks that we come into contact with. And I have a discipline why I sort of have a call list and my staff does too, my senior staff does too, and we just touched base with certain people periodically and say, you know, what are you seeing, what should we be looking at, you know, uh, is there anybody out there you think is of interest.

And so we'll, we'll, we'll just try to follow up on that. And you know, a lot of the time there's nothing particularly new, but every now and then there's something very interesting. And you get one or two ideas a year from that, it's great. So you, we've, we've, I think, I think you do have to be more entrepreneurial. Use the tools you have available. The public sources are now a commodity and there's a lot of them. People forgot how to get on the phone and call people. I tell my students this, you guys, you got to get on the phone. Stop looking at that damn iPhone and get on, get on the phone and call someone. That's really where you’re going to get ideas. I preached this so much in my class and I think they get it. I think they start to get it, you know, and I see it in their behaviors. They start their careers. You're going to get ideas from smart, experienced people who've been around not from looking online. Online can affirm things. You're going to develop some of the thesis that could give you research. Put the framework around it but, but the best ideas, I haven't gotten one on good idea from the Internet in my career.

Ted: 00:41:43 So once you met these people, how much time do you spend with someone before you know if you want to make a decision?

Scott: 00:41:50 It varies a lot. I mean sometimes you get, you get because they're so well known and they're so experienced, it's easy to check them out or somebody in our network knows them well. It can be fairly efficient. It can be quick. We've had some, we met some family office groups in Europe for example, that were raising some funds and they were taking outside money and


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that was relatively quick because they were very well known people with a long track record and it was really the first time they're going outside. So there wasn't really an opportunity before, but this was the, those were easy.

Sometimes, sometimes it takes, you know, many, many meetings. Maybe they're younger than the life cycle. You're still getting to know them, they're still getting to know themselves and their philosophy, you know this from your work. So you're looking for them to articulate a thesis that you can kind of hang your hat on. And sometimes it's hard for them to do that in a way that gets you excited, but you, but you think they're good. So you, we want to stay with them, give them a chance, you know, so you keep coming back, uh, and, and some of those workout and some don't.

But we, we talked to a lot, you know, the, the, the Notre Dame family in general. We've talked to a lot of people. Of my peers, you know, I'm not afraid to go call another CIO if I hear they might be looking at the same thing and we'll share due diligence and confirm, you know, I think people are doing that more today, to be honest, than they used to. I don't think that was a lot of that done when I was early on. That wasn't as common.

Ted: 00:43:10 Sometimes I hear the opposite. I was talking to Jim Dunn last week and he was sort of saying that because of certain, certain organizations have CIO peer driven compensation…

Scott: 00:43:24 Right, right.

Ted: 00:43:25 …and as a result of that, they're less inclined to want to share ideas.

Scott: 00:43:27 So I think that's a mistake. We do not have that. We never had it and our board will, will I don’t think they’ll ever do that. That, that we don't, honestly at the end of the day, we don't really care that much what other people are doing. We've got our own risk tolerance, our own mission. We're going to do what we needed to do for Notre Dame. Over time we think that's going to generate superior returns and we're going to be at the high end of our peer group, but I think you'd would just get obsessed with that and it's a distraction. So I maybe they're just taking my calls more because I'd been around 30 years, but I find it easier today to share it…

Ted: 00:44:00 Oh, with other…


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Scott: 00:44:02 …to share ideas than I did 10 years ago.

Ted: 00:44:04 And then what have you learned, when it comes to make at that point where you're making a decision, what have you learned about your own behavioral tendencies and those are the people you've worked with for a long time? You know, do people like the gut instinct decision with backfill research…?

Scott: 00:44:18 That’s a good question. You know, when I first started it was easy for me to see the really, really good ones. They stood out and of course the bad ones are clear. The middle area when you're younger was harder to discern, right? That middle, 80 percent or whatever. We've certainly gotten better at figuring that out, you know, and making faster assessments of that group and either moving on or keeping it on a watch list or whatever.

I like, you know people sell you you’re all Notre Dame Grads, so you, you, you know, you're all thinking the same way about everything and that, that's just not true. We, yes, we are all Notre Dame Grads, but I have so many different personalities and the ways of thinking about things and they bring very different perspectives on these manager selection issues. So you had to have some common narrative and yet some common criteria that you really have to hang your hat on and we have that, but we're also willing to, uh, you know, willing to weigh different factors differently. At times based on the asset class or the lifecycle of the manager, you know, and how mature they are.

There's very, there's a lot of variables, you know this, I mean it's just, there's a lot of variables. It's not an exact science. It's probably half and half. It's hard. It's very hard to predict who's going to really excel from here and who isn't. Some, sometimes it's extremely difficult and sometimes you make mistakes, but if you don't do anything you're, you know, you got to do something.

Ted: 00:45:39 So what do you think, as you've learned over the years, have been some of the mistakes that you made that you now feel like were actionable and have corrected and try not to make again?

Scott: 00:45:50 Yeah, we, so most of the time when people don't, don't become successful, they, they ended up getting away from some of their own core beliefs. You know, they ended up raising too much money. I think in private equity, some of the early buyout funds that were small, they said, oh, we'll never, we'll never raise that


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kind of money. Or even some large multi-strat hedge funds will never be that big. Well, you know what they're like 10 times that now, you know, and, and their returns show that. So at some point we sort of get off the train, you know and say, well, it's nothing we did. You're the one who decided to do that. So don't be mad at us…

Ted: 00:46:26 Right, right.

Scott: 00:46:27 …because that was the decision you made, we’re moving on. And obviously we always try to part in a very professional, friendly way and I think we've done a good job of that. But, but at some point size is very challenging for most strategies. There's some that it's OK. Bonds, maybe large cap equity, you know, there's some, it's OK, but, but for most, most, most of our strategies it's not OK. And then I'd say greed can come in and sometimes the terms, the alignment ends up moving in different direction from what it originally was and that's also related to size, you know, and that changes the relationship.

So there's a few things like that. And then there’s people, there are people, stuff happens in their lives…

Ted: 00:47:07 Yeah, absolutely.

Scott: 00:47:08 …and they become less focused and they're not paying attention. I've seen that many times and there's nothing you can do to get them back. So you've got to, you've got to move on. You know, it's hard because when I tell my younger staff, you know, we worked so hard to build relationships and get to know people. And then when there's a separation it's difficult. But we have to, we have to think of our client, if you will, our students and faculty at the university. Then it makes it a lot easier knowing that we're doing the right thing for them.

Ted: 00:47:36 I always felt like such a subtle thing that you've had so much conviction in a particular person, the manager, and OK, they're now not operating at the hundred percent capacity that you wish. Is it 90, 80, 70, and is that still better than you know, if they now have more perspective and balance in their life, can they still generate the same or better returns? Is the noise around that, you know, it's, it's so tough.

Scott: 00:48:01 It’s very tough. Some can generate working 90 percent or 85 percent. They're still better than most of the people in their space. So you stay with him, but some can't and that's just a judgment you make. And we were dealing with that now with


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some of our hedge funds. We've had long time partners, some of the best people ever in the business that clearly not putting the time that they used to. They’re great people and that's their decision, you know. At 80 percent are they still better than most? Yeah, but at 50? No. Or 60? No. There's just can't be. It's too competitive.

Ted: 00:48:32 Yeah.

Scott: 00:48:33 So, you know, you make those judgments.

Ted: 00:48:35 And do you tend to learn that following a softening in returns?

Scott: 00:48:39 We've tried to get better at anticipating that by, by, by just asking the right questions, you know. I mean, how are you spending your time? You know, what are your hobbies? What do you like to do? Yeah, it's hard. Ultimately you make judgments about, about their activities and focus. Should we try to anticipate and then move on while things are still good, but that's just…

Ted: 00:49:01 Super hard to do.

Scott: 00:49:02 …the timing of that is very hard. We are doing, we are doing that better than we used to. Used to be a little more after the fact we'd see it and then I’m sorry, well, we're moving on, but we, I think, I think my team has gotten better at anticipating some of that.

Ted: 00:49:12 Yeah, I think it's so important because I used to always get concerned about that almost as a form of performance chasing that yes, the performance has come off, now you think you've identified why and you think it'll continue. Well maybe it will, maybe it won't, but you know you're coming out after they were just in a soft patch.

Scott: 00:49:28 No, exactly. So that's a lot of the skill we try to bring right to our work is trying to figure that out. It just takes a lot of dialogue, but it's still hard.

Ted: 00:49:36 What are the creative ways that you've tried to evolve your monitoring process with the managers that are in your portfolio over the years?

Scott: 00:49:44 So we have a lot, we have a lot more analytical tools, you know, the Tableaus, the different software things that we use. We purchased some outside things. We’re definitely, you know,


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confirming our various exposures in much more sophisticated ways and our risk, you know, too in much more sophisticated ways than we have in the past. That's relatively easy given that we're still mostly have outside partners and uh, I think we have a good handle on all that on a look through basis. I was always definitely more qualitative. I, I would look at people, get to know people and I could tell if they were good or not. Over time I became, I was, I confirmed that more with analytical tools in my own development, but I've seen my team do the same thing. Some of them came more on the quant side or we're more comfortable with that to begin with and they had to develop the qualitative side of their repertoire. So you get, you come at it both ways, but I really like where we are now in terms of that balance. I think we've got a really good balance that we have all the information we need and all the quantitative assessment but, but ultimately come down a lot of judgment about people.

Ted: 00:50:51 And have you found that there have been instances either at a manager level or portfolio level where the aggregation of that data informed you of something that you clearly wouldn't have known about?

Scott: 00:51:02 Yeah, I, yes. I mean definitely there, there's a factor concentrations, you know, that maybe we’re more extreme than we would've thought. Growth or value or whatever the factor is, uh, yeah. And uh, you know, currency exposures, you know, tend to move around, you know, some of our managers hedge, some don't, you know, we, we're not overriding that centrally at this point. We used to have a little more of a program there when we were more liquid in all of our exposures, but that's evolved. So yeah, you need more of these tools today too in a global world. I mean, look, we weren’t, most people weren’t investing in China when we started, right?

Ted: 00:51:39 Right, sure.

Scott: 00:51:40 Now you've got exposure to the emerging markets currencies that I think 13 or 14 percent of our currency exposures are emerging markets now, you know. No, no one currency is over-weighted. There nothing’s bigger than five, six percent so it's not a real concern to me, but at least I know that because if, if I had 13 or 14 in the single currency, I might try to hedge some of that, but I don't feel a need to at five percent. So all of that does factor into…

Ted: 00:52:05 Yeah, that makes a lot of sense.

Scott: 00:52:06 …portfolio decisions.


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Ted: 00:52:07 I was wondering if you could just, not needing to name names, but wax poetic about one of the managers in your portfolio in a way that maybe people would understand how special they are to you in terms of their fit in your portfolio.

Scott: 00:52:25 Well, we have a lot. There's a lot of good ones in some great collaborations over the years. Uh, one of the things that I've really enjoyed is seeing operating executives who are real specialists in a certain industry, and senior, go off and, and raise, decided to go into more of the private equity space and use their expertise to really partner with companies in those, in their field. But then they know all the talent, they know all the CEOs, they know how it all fits together and we're seeing more of that.

But collaborating with us on the structure of the fund, the alignment of terms, the size, that's fun for us because we know they're good, we know they're really good, but they've not done that kind of investing before. And so just that the fact that they call on us for ideas on how to structure the fund, what kind of terms should we have, how many LPs, what kind of LPs, all of that. I mean, you know, all of us had been through this kind of thing, but I'm seeing more of that and I really enjoy that. I, it's, it's fun to sit down with some really smart people who they don't really know our business that well. We certainly don't know theirs, but to come together to do something really special is really fulfilling.

Ted: 00:53:36 Yeah, that’s fantastic.

Scott: 00:53:37 So we, we, we're seeing more of that in different sectors, whether it's consumer goods, healthcare, energy, you know, definitely seeing more opportunities to partner with people in those ways and that that wasn't the case before. They show up with a pitch book and a fund that was take it or leave it. There was no collaboration. It was like, you know, you want in, you know, you don't kind of thing.

Ted: 00:53:57 And do you think they're finding you as one of a very small, I mean, you can imagine, it's a couple of universities that whose names, and that's just a result of having been in this seat?

Scott: 00:54:06 Exactly, no, no. Again it would be a handful of investors and I'm sure there are others that are doing the same thing where they just, there's a, there's a, there's a tenure there, there's a staff there that's been around, they see, they've seen a lot of models of this. I think about my private equity team, some on the private equity side, Mike Donovan, you know, and his team, Tim


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Dolezal and Brian Wrona and those guys, they see so many patterns of success and failure and, you know, a GP loves the idea of hearing about that, especially if they didn't come from the asset management business, which, which can be an advantage, right? They know their sector, you know, they know the people. So I, it, we love that.

Ted: 00:54:46 There is a degree to which as I'm sitting here listening to you, it's just, it almost feels like in a, in a different context when you're talking to Warren Buffett, that you've been here so long and have done so many things right that you're in a position that you can do things. Call it a, I don't know if I'd say on the fringe, but the next interesting thing that not that many people could do or take the time to do, it's not part of the core. So what would happen if you were tasked with, uh, let's say a $1 Billion pool of cash to put to work today? Maybe have a little staff but not the kind of staff you have. How would you think about it, even at a high level of structuring that similarly or probably quite differently from what you do here?

Scott: 00:55:31 So outside of Notre Dame? Just I’m helping…

Ted: 00:55:33 Yeah, yeah.

Scott: 00:55:34 …somebody else, they've got a billion dollars?

Ted: 00:55:35 Yeah, I mean, and let's assume, let's assume it's not a perpetual institution, but it's a long-term pool of capital with some liquidity needs. You have a pool of capital that would love to make…

Scott: 00:55:46 Billion dollars cash, what are you gonna do?

Ted: 00:55:47 …six to ten percent.

Scott: 00:55:49 Yeah, so right now today we're, given where we are in the cycle, I would be very cautious. I'd be very liquid. I would, I would keep a higher percentage of cash than we would have now that we do because we have a full array of managers. I would layer into strategies as they became available that I thought were attractive. You know, I wouldn't rush to put it to work, you know, I'd get some basic things in place, might even use some passive or some style-passive indices.

So like that to just effect some exposures, but I would stay more liquid to start as, as private equity opportunities became available that I thought were high level, I'd start getting


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involved, but then that they'll take years. People ask me, I want to start a private equity program, how long is it gonna take to get it mature. It's a decade, maybe more, but it's probably at least that, right? So I would be patient and cautious. I wouldn't day one, just put it in everything, you know, have some master plan and then just put it all in these various managers and asset classes. I would be very, very measured and putting that to work. Especially where we are in the cycle.

Ted: 00:56:50 Yeah, I think that’s a big part of it.

Scott: 00:56:51 Now, if this is, this is, you know, early ’09, after a big drop, probably start to be a little more aggressive.

Ted: 00:56:56 Couple of little sort of more subtle topics. One, you touched on kind of internal management which may or may not be tied to co-investing. You talked about the real estate example early on, you mentioned co-investing. I know there are some other institution similar to yours that say, nope, that changes the nature of the relationship with the GP. We're not going to participate in that. How have you thought about the benefits and drawbacks of doing more direct investment in-house?

Scott: 00:57:22 Well, first of all, we're going to pick our spots. We were only going to do it where there's a real edge to doing it and it only enhances our relationships. We're not gonna do anything that's going to diminish or undermine key relationships. It's just, that's not, that's, that would be a huge negative overall. So we wouldn't, we wouldn't even consider that.

But look, we have a long-serving team with a lot of experience and knowledge. We have great partners. We should be able to use that in ways that others can't, that don't have those advantages. We have permanent capital, we have a great institution. It's not going anywhere. You know, we have a great board. We have alignment with our governance structure. So there, there should be advantages we have. We're sort of the ultimate long-term investor in many ways, right? And with tremendous advantages and I think it'd be unfortunate if we didn't try to drive performance by taking advantage of more of that.

So using our team and our history and expertise and relationships, doing more directs, doing more co-investing, maybe having a bit of an in-house, even public portfolio based on various approaches I think could be interesting and lower fee and I mean there's some advantages there. But, but it's all about, I don't get hung up, some people get, oh we're going to


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do this, then we're going to do half the fund and then we're going to get really carried away.

I don't think like that. I'd rather be a little more incremental in some of that, test it out, get comfortable and then build on that. Sometimes we discard them. That we've, there's been times where we went a direction very modestly and then the markets changed, if something happened, we said, no, we're not, we're not doing that anymore.

I remember a good example. At one point it was very fashionable to want to buy a part of the GP or want to have an ownership stake or buy some of the cash flow of a hedge fund. We did one of those and it's been fine. It's worked out. There's still a partner. It's been fine, but ultimately I decided not to do that because I didn't, I wanted to be thought of as independent in the market. I didn't want to feel, I didn't want other partners to feel I was somehow beholden to that firm in some way or there's some conflict, you know, and I wanted, I wanted the relationship to be based purely on performance, not, not fee revenue. So we did one, we decided not to do it again. Could we look at it in a different way at some point? Sure. But right now we don't feel that's part of our strategy. So that's an example. We sort of went down that road, oh let's try that and maybe we'll like it and we will do more of that and we decided not to do it.

Ted: 00:59:43 What's the biggest current subject of debate in the office about an investment topic?

Scott: 00:59:48 Yeah. So all the geopolitical stuff of course is massive and of course we can't control any of that. So yeah, we talk about it, you know, what we do in a crisis, what would we do if the market was down 20, 30 percent, you know, the sort of those sort of scenarios. I think all major investors think about that, but that's a day-to-day. Who knows? It's hard to predict, you know, you're going to at least you have a sense of what you do, but there's not much else to talk about.

I think we're focused more on, OK, how can we drive our edge, what is our edge and how can we drive it. You know, thinking about maybe we have too many managers, maybe we should have more concentration, maybe we have more conviction, probably an area we probably could've, could do better at, you know, bigger allocations to a fewer number of firms. You know, uh, the big endowments tend to have a lot of partners because they do so much private investing. But I think we're probably at the higher end of that. So that's something we talk about. More


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control activities, you know, like I've been talking about, more ways to control the alignment and maybe it's people younger in their life cycle.

Ted: 01:00:50 And just to pick on the first one, so is the debate about concentration, that's an easy concept for everyone to say, yeah, we should be more concentrated. Does the debate come in because you love your group of managers?

Scott: 01:01:01 Yes, yes.

Ted: 01:01:02 So implementing that means we have to choose one son over the other, one daughter over the other daughter.

Scott: 01:01:05 Yes, some of that, some of that. And then, look, to me, even though I went from managing $400 Million to $12 Billion, to me, you know, $20 Million is a lot of money. So yeah, I still got the old thinking, you know. So, so maybe, maybe I should've done 50 but we did 30, you know. I look it at almost any private fund, how much can we afford to lose? I know that's probably too conservative, to be honest, because we do such a great job of getting the right people, but I do think of that. So we, we probably could be a little more aggressive there, but I've been saying this for 10 years and it hasn't happened. [Chuckles]

Ted: 01:01:43 Not yet, not yet. Well, you know, one of the things that you've talked about it at times is doing an annual offsite meeting to review what you've learned. I was wondering if you could share what some of those lessons have been.

Scott: 01:01:56 I'll tell you, uh, I have such a great team that thinks a lot beyond the numbers. Maybe because it's more like a family office. So we do, we do a couple of things. One, we do a very extensive investment retreat. We actually just do that on campus because we're just going to be sitting in a room, we might as well do it here. It's pretty, pretty beautiful place. So let's just focus. So we do three days every year. We just intensely review our portfolio and structures, think about other ideas. But then we do an offsite which is a little more leadership, self-development.

We do pick three or four key topics and have our younger staff do a presentation on, OK, what's the effect of Amazon on retail? Renewable energy and how's that evolved? Artificial intelligence? You know, we might do a deep dive on some topic and let, and it's a great opportunity for the younger team too, to have that opportunity to present for an hour and a half on something.


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But a lot of the other time is, is sort of team building, self-development. I'd bring in speakers. You know, you want, you want to help motivate people and keep them excited, help them evolve. We all need to evolve, right? If you, if you, if you don't think you need to evolve, you're already dead. You might as well hang it up because we have to evolve. I think I've done a pretty good job evolving myself in terms of there were certain things that I wouldn't have considered years ago that I, I find that are very attractive today in terms of the kinds of managers and, and approaches. The things we read to keep up with markets are very different today. How you get information is very different. Your work patterns are different. You have to embrace those things. Keeps some of the core bedrock things that you know are important, but then being willing to evolve so it's a chance for us to talk about all that as a team to make sure that we are on our game and just staying ahead of the pack, you know.

So a lot of conversation, you know, just sitting and talking about this stuff. But I like the, I like to take the whole person into account and as high lead in my team and make sure that they're being nourished in a lot of ways. That's very motivating to them. That's why they stay and that's why they’re enriched in their work and they feel it's important. They feel appreciated. They are allowed to, hey, if there's a certain skill or tool or a conference or something they need to do for them, we do it. I'm pretty open to that because I think if you have a team that feels that they're being allowed to grow and evolve and supported in that as human beings, which we are. Whether it could be their faith life, could be a lot of things, I think that's important. And so we, we were pretty good at that, I think, because we’re aware of it and we talk about it. That may be a little different than some funds, you know, some other institutions.

Ted: 01:04:31 What concerns you most about the markets and the environment today going forward for the next 10 years?

Scott: 01:04:36 Yeah, I mean, the amount of leverage still in the world that from bad behavior in the past does feel to me like it puts a bit of a cap on potential economic growth, uh, in the world, you know. That just, there's just so much debt out there and uh, that that's certainly bothers me. You know, you know, 60/40 the last 10 years was, was probably five, five and a half percent and it feels to me like the next 10 years could be that or worse, hopefully not. But, so let, let's say, let's say that a 60/40 does five, five and a half percent again, and inflation is two to three. How am I going to get five to six percent real return, you know, in the kind of returns where we're used to? It's a challenge. I think that's a


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real challenge. I think institutions were spoiled in the eighties and nineties with the kind of returns and the, the real returns and, and uh…

Ted: 01:05:31 Or even in the 2000s, I mean…

Scott: 01:05:33 …yeah, yeah. And so I just, I just to develop scenarios that are a lot more severe than what they're doing and how that impacts the cost structure and fundraising plans, all of that. I really do compliment our finance team at Notre Dame and our executive vice president and our Finance Committee of the board is tremendous. So they're there on top of those issues and they take input well from me on where I think interest rates are going or what scenarios they should be running in market returns for the budget. Very collaborative, which I don't think is always the case, you know, in big institutions.

So I feel Notre Dame is in good shape that way, but there's just so many unknowns. There's just a lot of unknowns. I worry about trying to make a five to six percent real return in a very low return slow growth world. That's why we're going to have to be, you know, we're going to have to use our edge and I talked about in ways maybe more, more important ways in the past. It's just harder. It's going to be, these jobs are much harder today I think. I think there are a lot harder. There's so many variables to consider and competition. I mean, I look at, gosh, I think there were 5,000 kids after the CFA in 1988 and now there's 200,000 a year. I mean, you, you look at the shifts in the market and the amount of talent that's coming to financial services.

Even the distribution of endowment returns used to be very wide. You've seen this. Now it's so tight. You know, it's like, it's just, it's an amazing shift in competition in the industry and, you know, a lot of pension funds, foundations, family offices have gotten sophisticated. You know, those were easy competitors to beat, you know, years ago. It's a lot, people, you know, people are more aware of what it takes to be successful and that's a good thing. That's a good thing.

Ted: 01:07:20 It’s a good thing, generally.

Scott: 01:07:21 Yeah.

Ted: 01:07:22 It makes it harder to give you…

Scott: 01:07:23 It’s hard to stand out.


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Ted: 01:07:24 …the confidence that you can deliver.

Scott: 01:07:26 But that's why we work so hard to think about these other things we can do, but if it's just a few basis points extra year in each of these, it'll add up, you know. As long as you have that time horizon, that alignment with your managers and your board, and the proper governance, as long as that's all in place and they're, they understand that these things take decades, it will be fine. The moment you, that breaks down, then you've undermined the fund.

Ted: 01:07:50 So I want to close and move towards a couple of closing questions with, with something that I've thought a lot about. This is clearly a mission-driven organization and very personal to you in running it. How often when you're going through a tough moment, does that sort of come into your head? There's a, is it every day?

Scott: 01:08:10 It's every day. It's every day. Yeah, I wake up every day thinking about that my work today is going to be important to this place. You know, one way or the other, it's going to. What I do today is going to be built on in the future and other things, so whether it's a student I see or a faculty member, just that being open, you know, hearing their perspective, they want to talk about social responsibility, which we have a long-standing social responsibility policy as a Catholic school. It's very rigorous and they, it's nice of them to come in and want to understand that, but then they have their own perspective on that. But just being available and, and you know, look, we're busy, right? I travel a lot and got a lot of meetings with managers, making time for that. But every one of those is important because that, we're a university and they need to understand, you know, how that all fits in.

So just knowing that and taking those meetings in those half hour conversations, you'd have to have that perspective. If you're not thinking that way, you won't take those. And I have a lot of peers who don't do any of that. They just won't. And maybe that works at their institution. I don't think it really works here and I think it makes my job easier if I do that. And then I've got, I've got emissaries all over campus who, who know the facts and then they can tell their dormmates or their department colleagues. Oh, I talked to Scott, here's what they do here, you know, we will get them in to speak to us. You know, there's a trust factor and I think that's really important there that I think we've developed.


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But you got to keep doing it because these students turn over every year. You get a new group in. I've got freshman already setting up meetings, wanting to hear about, you know, our various policies.

Ted: 01:09:50 Yeah. Oh boy.

Scott: 01:09:51 I'm going to, I'm actually going to go speak. Um, I try to every year, but it's not sometimes every other year just do a broad talk to the student body, whoever wants to come. But it has to be a student because I think it's important they have that opportunity and they can ask questions.

Ted: 01:10:05 That’s fantastic.

Scott: 01:10:06 So I try to be available, you know. You don't always agree on everything, but that's OK.

Ted: 01:10:11 So I want to turn to some closing questions, but before I do, I have a selfish question for you, which is, I know that you're on the advisory board for Major League Baseball…

Scott: 01:10:21 Well, they disbanded that.

Ted: 01:10:23 Oh, they did?

Scott: 01:10:24 Yeah. They start, so Dave, Dave Swensen was on that…

Ted: 01:10:25 He was, yeah.

Scott: 01:10:26 …a few others and the owners wanted a group they could use to bounce ideas off of and get a structure going. That happened and then they hired a full time advisor.

Ted: 01:10:35 Oh, ok.

Scott: 01:10:36 So I think, I think that they're in a much better place. So they, they actually disbanded that. So, but it was fun.

Ted: 01:10:41 Oh, that’s right. Yeah, you know, I'm a huge baseball fan…

Scott: 01:10:44 No, that’s fantastic.

Ted: 01:10:45 …so that would be a fun thing. All right. So a couple of closing questions. What is your favorite thing to do? That is a complete waste of time?


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Scott: 01:10:51 Oh my God. That's not one I thought of. A favorite thing to do that’s complete waste of time. I might have to think about that. What have other people said? [Chuckles]

Ted: 01:11:02 There's a range of responses.

Scott: 01:11:05 I don't think there's, I mean, I can't think of anything. I have a lot of favorite things to do, but I don't consider them…

Ted: 01:11:11 Yeah, I know, that’s fine.

Scott: 01:11:12 …a complete waste of time. [Laughter]

Ted: 01:11:13 All right. Let's move on. What, what was your favorite sports moment, either as a participant or a fan? I have a feeling of where it might go…[Laughter]

Scott: 01:11:18 Well, yeah. No. Well, there's been a lot. I'd have to say the championship season in 1988 was my first year back working. And the buildup, the, you know, the Miami Hurricanes were sort of the king of college football in the eighties and the way that we beat them here in 1988 when I think is one of the great college football game in history and Lou Holtz versus Jimmy Johnson and it was every player on the starting on both sides was drafting in the NFL, you know, that was a hell of a college football game. And we were fortunate to come out on top and win the title then. That was probably the best sports moment if I had to pick one.

Ted: 01:11:58 That’s great. What phrase did your mother or father repeat to you over and over again that most stuck with you?

Scott: 01:12:06 You know, they were, they were, they were really good at getting us to a sense of work ethic. I don’t know if it was a phrase, it was more of a philosophy that, you know, we had summer jobs, we all, I had a paper route, I worked in a plant, a hundred and 20 degrees in the, when you do that, you want to go to school. So they were very good about making sure we had a work ethic that we had to provide for ourselves, that we always worked and it was great. We met a lot of great people, and you had your own money, and I remember I bought a bike, you know, at 12 years old and just that sense of self accountability, and always supportive. But I don't know it was a phrase, but it definitely a philosophy…

Ted: 01:12:48 Yeah, yeah.


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Scott: 01:12:49 …of you got to work, you know, take care of yourself.

Ted: 01:12:53 What are you most proud of?

Scott: 01:12:54 I'm most proud of the way Notre Dame’s advanced over the last 30 years I've been here. The team I've brought in, you know, I look at the some tremendous facilities that are opening this fall and I looked at, I looked at a little map our facilities people showed me. Almost half of the campus has been built in the last 30 years in terms of square footage. Some amazing world-class facilities and programs. So it's just, I'm just very proud to see Notre Dame, my school doing so well academically. Having a real presence in the global dialogue, on important issues.

Our kids having an amazing student experiences. My gosh, I think, I think we had seven international programs when I was here. We have 45 programs in 25 countries. I mean it's incredible. Two thirds of our kids spend time overseas while they’re here. Languages, you know, everything but, but the team I've worked with is so superb, such great people, watching them evolve, my team in the investment office, watching them go through life and, and get married and have kids and all of that has just been so rewarding.

And, and you know, I'll say to work with the great leadership, you know, Father Hesburgh and I are very close. He always thought the endowment was so important. He said, you know, he would, every time we hit a billion dollars he would call me for dinner. He said we’ve got to celebrate. And I remember when he started with $7 Million in 1952, so a billion to him was like unheard of and there was two, then was three, but I had dinner with him and Father Joyce, his executive vice president when he was alive. But then Ted for many years and even, even after the crisis we'd already celebrated one milestone. Then we came back, he goes, well, we'll celebrate it again and he just, he just loved that.

And I, I have to say that was very motivating, the importance of the endowment to the life of the University because I know when he became president in 1952, they asked him how he was going to make Notre Dame a great University. And he said, well, one of the things is if you look at the best schools today, they have the biggest endowment funds. So we've really got to grow our financial resources. And it was something he just, just really pounding the drum on for 50 years. And then the leadership since then, it's just tremendous, you know. But Ted for the endowment, Ted was in my early days too, be a younger person and, uh, just the motivation that the legendary Father Hesburgh


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brought to me. We thought he was a rock star. He chaired the Civil Rights Commission. He, he, he could pick up the phone and talk to any President, the Pope, he can talk to anybody, you know, and get stuff done. That was, he was extraordinary. That was, uh, that was pretty heady stuff for a younger guy, you know.

Ted: 01:15:26 What do you fear most?

Scott: 01:15:28 Well, I, I fear that, that we have such bad leadership in the world today. It's hard for me to point to really great examples of leadership at any level. I think Pope Francis provides that, uh, in the, in the Catholic world, in the, in the, in the faith-based world and a national and international way. But, there's some CEOs that are tremendous leaders, but boy, it's really hard to look around the world today and, and, uh, it find really great examples of leadership. I worry about and why, why aren't more of our best talents going into real leadership positions in our government? You know, feels like we've, we, we, we just need to develop a culture again where those things are really important. There were generations that thought that that was the highest calling. I don't see that today.

I, I talked to young people. Yes, some of them want to be in politics, but most of them don't. They find the discourse just, they don’t want any part of that and that worries me because we need them. We need them to change the world. We need them to show leadership. So I worry a lot about that to be honest.

Ted: 01:16:30 Think this will ever come to anything? I think you're going to be here for a long time, but what profession other than investing might you want to attempt?

Scott: 01:16:39 Well, I, I thought I might be a football coach at one point, you know, years ago before I started here. I might coach, teaching, coach high school football, maybe go on to college or something, probably too late for that. I serve on the board of the Vatican Bank. Think you might know was appointed by Pope Francis to that last year. I'm working with them on some transformational things in their asset management, which we're hoping to get done. I find that extremely attractive and fulfilling.

We started this separate company, a not-for-profit called Catholic Investment Services with Jack Brennan from Vanguard, who's also chair of our board. We're trying to build that with a great staff there. Um, my team is involved in helping get managers to be part of the program. But I think when you think


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about 4,000 Catholic charities in the U.S., about a $150 Billion aggregate dollars, most of it not particularly well managed, and this is a problem across all faiths, you know, I just felt there's something I could do to help with that. So I would very much like to continue to help them. And maybe 10 years from now I'll help them even full time, you know, or do something to really move that ahead.

Ted: 01:17:44 What do you know now that you wish you knew 10 years ago?

Scott: 01:17:48 Well, a lot of things. [Chuckles]

Ted: 01:17:50 You can put the financial markets aside.

Scott: 01:17:52 Well, I know how to roll my wrists through the strikes zone of my golf swing better than I did 10 years ago. I’m a better putter. Uh, you know, human nature, you know, you as you get older, you, you think more astute about human nature and in building relationships and maintaining relationships and, and, uh, just the importance of that and having deep relationships with people and your family and, and uh, is really fulfilling, you know, so I, I think as you get older you just become, you know, more appreciative of all those things. But uh, that's why I think more about, there's a lot, most things. [Chuckles]

Ted: 01:18:36 All right, last question. It is a, it is your waning days. You are much older than you are today. You are down at the grotto thinking about and looking back on your life, what advice would you give yourself today?

Scott: 01:18:50 I am starting to tell my students this, just, you know, we all want to be successful, we all want to do good things in life, but make sure you enjoy the journey too. I mean, I, I look at our kids today and they're so driven. They're talented, they're smart, they've been blessed with a lot of advantages, but sometimes I worry they're not enjoying the ride because they're just, they've got to achieve. We've got to get that job, I gotta get that A, then we've got to get that internship. Then we gotta get that job or I'm going to let my parents down, you know, and I'm not speaking about every kid, but I do see because they are high achieving young people and they are talented, I just, I just hope that they, you know, they value relationships that they can enjoy the ride and it's not about getting that next job.

They're gonna get that job. No problem. They’re the top one percent of the people in the world of talent and ability, you know, and, and, and so there's no problem whether you’re Yale


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or Princeton or Notre Dame, where you're Stanford, you know, you're going to get that job. So just making sure you really appreciate the journey fully and take care of what's important. You know, I think that's, that's something I would, I would want to make sure that I would tell myself even younger. I think I have to a point, I've been here 30 years. It's not that hard to be at Notre Dame, but, but it's you know, you, there's things you would do maybe a little differently.

Ted: 01:20:09 Scott, thank you so much for the time, the thoughts, the lessons.

Scott: 01:20:13 Thank you, Ted.

Ted: 01:20:14 Really, really enjoyed it.

Scott: 01:20:15 Really enjoy your, your, your shows and nice knowing you in the last 20 years or so.

Ted: 01:20:19 Thanks.

Scott: 01:20:20 Thank you.

Ted: Thanks for listening to this episode. I hope you found a nugget or two to take away and apply in your investing and your life. If you've liked what you've heard, please write review on iTunes or Google Play to help others find out about the show. Have a good one and see you next time.

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Transcript: Scott Malpass – The Fighting Irish’s Twelfth Man ......Investor’s Endowment...

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