In this episode, we explore how the Ivy League endowment model can inform smarter investing for oil and gas professionals. We discuss how these massive funds balance long-term growth with liquidity and why even “permanent capital” requires flexibility. Listeners will see the blind spots of the largest pools of institutional capital and learn why no one invests to optimize for total return.

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Welcome to Financial Planning for Oil and Gas Professionals, hosted by certified financial planners Justin Brownlee and Jared Machen of Brownlee Wealth Management, the only podcast dedicated to those of you in the oil and gas profession to help you optimize investments, lower future taxes, and grow your wealth.

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Welcome back to another episode of FP Financial Planning for Oil and Gas Professionals.

This week on the podcast, we're going to talk about what can oil and gas investors learn from how Ivy Leagues allocate institutional assets.

And for this conversation, we're going to talk about really like endowments.

Right.

And I think endowments and everyday investors, on the surface they're so different, but I don't think they're as different as we think.

So, Justin, I feel like a good place to kind of start this conversation.

Oh, forgot about the surprise segment.

That's a better place to start this conversation.

So, Justin, I think it's your turn to ask me a question.

I have no idea what's coming.

Okay, this question is a little bit out of left field, but it is a really interesting financial question that does not come around often, but it can be a big deal.

So Jared, right now you only have a son, so kind of traditionally or historically, this may not necessarily apply to you, but you could have a daughter or you could end up paying for this.

Anyway, I want you to pretend that you have a, I don't know, 24 year old kid, 27 year old kid, whatever age you are paying for a wedding.

How much are you willing to spend on a wedding?

As a parent, my first answer is $50,000, inflation adjusted.

Okay, I love that gut answer.

Unpack that a little more.

Yeah, I mean, I'm trying to remember what budget was for our wedding.

I think it was like 20ish, 25.

And it seems like there's been a lot of inflation between now and then.

And I think my wedding was one of the best days of my life.

Early on I'm very calculated and like as we were spending for the wedding, I was like, this is insane.

This is absurd.

And then you get there and the only other time that many people you love are in the room, you will not be here for that.

Right.

Like that is a one of one event.

Yep.

And I've lived in five different states.

I had people from so many different walks of life and to see all of them in a room, for me it was like a profound experience.

I cannot put a number on it, but.

Right.

Like I can.

So I feel like $50,000 could get me a pretty good wedding for my kid in the future, inflation adjusted.

But I love that.

That's what I'm going to go with.

Very cool.

Awesome.

Well, let's talk about Ivy League endowments.

And Justin, I would love for you to just talk about kind of like the idea of an endowment, the structure of an endowment.

Thinking about why endowments exist and how they should think about investing and how that may or may not be different than oil and gas professionals, it's helpful.

To first just paint the context and some simple definitions.

So an endowment, a very large pool of money that is managed by a university, some of which is allocated just for the university's future needs, future growth.

Some of it may have very specific purposes or ties to it.

And then some of it may be more general.

The university needs, I'm assuming, hundreds of different things that fall under their annual budget, probably thousands.

An endowment is kind of this enormous pool of money tied to a university that just helps with everything that a university needs to operate.

I think one of the things, too, and it's kind of like a misnomer, but it's like a, a pool of capital for future spending.

Institutional asset managers love to use the idea of permanent capital, right?

Where like their, their time horizon, this, this money is going to exist for ever.

Right.

And so they can be patient investors and kind of do all that.

I feel like a good poster child for kind of decomposing some of the ideas we're talking about here.

And the article that was a catalyst was about Yale.

And I think, like, you have to.

You can't talk about institutional, what we'll call the Ivy League model of investing without mentioning Yale.

David Swensen is the goat of endowment investing.

Yale's results are remarkable.

Just to put some context to it.

That's insane.

It's unbelievable.

And we will unpack some of this.

But he, he became very well known for what a lot of investors would call an obscure allocation.

Very different portfolio than, you know, the typical family who's maybe retired or even still working.

Those returns are incredible.

And you hear 13% annualized.

And a lot of times our brains are kind of wired to think, okay, 13% is a little bit better than the historical return on stocks, which is 10 to 11% or so.

But Jared, 35 years, the difference between 13 and a half percent and 10.5% is billions of dollars in this example.

That's right.

That's exactly right.

And I'm sure that the endowment grew to that amount and like some of that was new pledges, right?

That wasn't all just investment returns, but still just remarkable track record.

But I want to talk about the more recent performance, right?

Because like you were touching on this as we were preparing even for a pool of what we would call permanent capital, which we may or may not actually agree with that idea.

Nobody invests just to optimize return.

I want to read this quote because it really, it really paints the picture of like solving for like risk adjusted returns and really trying to manage distribution flexibility.

So this is from their most recent annual report.

Yale's long term track record remains strong.

And then over the last 20 years, the endowment returned 10.3% and they exceeded the median return of other endowments by 3% per year.

So Yale exceeds the typical 70, 30 stock and bond portfolio by 3.8% over both the past 10 and 20 years.

So a couple call outs that are remarkable to me.

The first thing that was fascinating is they were, they referred to their track record as strong, right?

They would have gotten smoked by the S and P. Think about how many hundreds of employees they have to allocate investment assets, right?

Like literally like over the last 10 years, you could have just stuck it in the S and P and done better than this.

I mean, it's amazing because yes, on the surface you look at what they've done and I love their statement that their long term track record remains strong.

I would say it's strong to quite strong.

Still, to your point, the s and P500 has torched it.

But what does that mean?

And does that mean they did a bad job?

No, it doesn't.

Not at all.

Now, Jared, I also think it's just interesting.

I want to highlight something you said because when you say it you sound absurd.

Like I realize that we are an ria, so we are an investment advisory firm professionally managing money.

So the question is, what's your primary goal as an investor?

And you made the comment that you're primary goal really can't be highest return possible, which again, that sounds a little bit absurd, isn't Your number one goal to make the most amount of money possible.

But really the goal ties into a second primary objective, which I would argue every investor, whether it's an institution or a family, the ability to pay out income is often a higher priority than just highest return possible.

An endowment does not necessarily always have a requirement of you must pay out this amount per year.

But if we just look at most endowments across every college, you're often going to see 4% a year, maybe 5% a year as the level of distributions that that endowment is paying out.

University of Texas, Texas A and M. Outside of Yale and Harvard, those are two of the biggest endowments in the world.

Texas and Texas A and M. Even though they have endless amounts of money, well, they still have to pay for things.

So even these astronomically sized endowments, they don't get to invest solely with this idea of I'm just going to go make the most amount of money possible.

That's exactly right.

And it's like it's the importance of playing your game.

Long term stocks are superior to bonds, right?

Like why would anybody own bonds?

It's simple, because there's no pool of capital that is actually perpetual.

So stocks are long term better than bonds.

So why own any bonds?

Stocks underperform bonds if you have to be a net seller of equities during a market drawdown.

So it's when unrealized losses become realized losses that is the name of the game.

Stocks long term work, a lot of research and data shows that.

But what will get you in a jam is if you can't allow stocks to do the thing they do over the long term because of what's going on in the short term.

Jared, can I give a little bit of an extreme example to highlight this?

Love it.

Okay, so I want to pretend that you have an opportunity to invest in something that you, you know is going to 100x over the next 20 years if you have permanent capital, well, that's a no brainer.

Obviously you want to 100x your money and if you can do it in 20 years, that's a pretty wonderful deal.

But now let's take a look at this hypothetical year by year return.

What if the path to producing a 100x return is you lose 9% a year for 12 straight years and then you have a couple flat years and then the last five or six years this investment just goes absurd.

I mean it's just Nvidia on steroids and all of that return is really contained in a five or six year window.

At the end.

So one, an endowment really can't do that.

So an endowment has to pay out distributions on a periodic basis.

They are probably not going to be able to hold on if they put all of their money in that.

Now let's also think about a 65 year old retired couple.

Well, they obviously can't do that.

They are taking distributions from their portfolio.

So they don't have the lived experience of being able to put money in something for 20 years and weather the horrible storm that the first 14 years produced.

In my a little bit extreme hypothetical scenario, I want to take it a step further though.

We do have a lot of people that listen to us that are 35, 40, 45 and they're making a really significant income and they already have a really healthy amount of assets.

There are a large number of great investments that even someone who is still earning a high income and plans to earn a high income for another 20 years, they may not be able to weather that storm.

Because what if at year four and then again at year seven and then again at 11 and 14 and 16, there's capital calls?

Yeah, capital cost, that's such an important thing, right?

Because it changes the liquidity profile.

Right.

You commit to a fund, but the capital is not deployed all on day one.

Right.

It's deployed over time.

So these institutions, like, they have to manage distributions for expenses of the endowment, but also manage cash for capital calls and ongoing committed but not funded liabilities.

From an investment management perspective, even if you have the golden goose investment scenario, you might not actually have the liquidity to add the capital when and where you need it.

And not to mention, that's a full time job.

If you actually were hypothetically going to build a diversified pool of private investments, okay, secondary pe, leverage buyout, little private credit, some venture cap, even some seed funding.

Right.

If you wanted to build out a diversified portfolio of that, you'd have to identify 10 different fund managers, you'd probably have to diversify across vintages and all that money would be deployed at different times.

So even if hypothetically you said, hey, I have the time horizon and I actually even have the liquidity, that is a full time job to manage the liquidity of that portfolio so that A, the cash is working, but B, it's also ready for whenever my liabilities come due.

What I want to do is I want to tie it back to your perfect point that you made earlier.

Stocks are superior to bonds.

Therefore the rational person would read that and they would put 100% of their money in stocks have nothing to bonds.

Now let's again tie back to some of these extreme examples or alternatives that you mentioned.

If you could know the return and if you knew the return of a particular investment was going to be wonderful, you would still need to allocate in a very thoughtful manner to make sure that if the sequence of returns was awful that you could weather that you would want to make sure that you have the liquidity and that you have the other areas of your portfolio positioned in such a way that you can capitalize on a huge long term investment that may have some really bumpy steps along the path.

But Justin, I'd argue that's 1.0, right?

Being able to weather the storm so I don't have to fire sell my assets 2.0 is like ideally I'm actually a net buyer.

At fire sale prices you need more liquidity than to just not have to sell to double down, right?

Hypothetically, if, if you own it and you have a high degree of conviction about it, it goes down 35%.

You don't only want to have to not sell.

You want to, you want to add to your position.

Well, well said.

I want to talk about this Jason Zweig article.

And this was really the crux of what led us to talk about this.

There's an article we'll link to by Jason Zweig and it basically calls out some of these endowments for not liability asset matching, right.

Where they're like ensuring sufficient liquidity in the portfolio for recurring distributions.

The article is fascinating, but this is the operative quote that I really want to just sit on.

So Yale, which started the whole craze for alternative assets decades ago, has reportedly been seeking to sell several billions in private equity funds for more than a year.

The Wall Street Journal has reported that the funds are expected to sell for less than their stated value.

This spring, after months of effort, Harvard sold $1 billion in private equity funds at about a 7% discount to their stated value.

The Journal also reported the two most important academic institutions still have this issue of not being able to manage.

It's fascinating, right?

And like to be clear, the proof is in the pudding.

Yale has done an excellent job, but there is no institution that is actually permanent capital to where I don't have to plan for any distributions and manage my liquidity.

Right?

I also think it's just worth stating.

It's interesting that private equity and alternatives have just been a Very, very attractive, kind of a sexy investment for a while now.

And two things.

One, they don't always go up.

There are absolutely going to be, you know, alternative investments that perform in a negative manner.

But the second thing is, I think it's a really interesting conversation to begin to ask which investment actually has more volatility.

Do you know if something's going to be positive or negative?

That's, that's helpful.

Certainly if you're an investor that would be wonderful to know.

But a follow up question is what's the volatility going to be?

Even if it is a positive investment in the stock market, we know exactly what the volatility is.

Prices are marked to market every single day or just constantly while the market is open.

But if you're in a private equity fund, how are you even going to know if.

Well, we're down 44% over the past six months.

Yeah, I mean that was like fascinating this sentence.

Harvard sold $1 billion in private equity funds at about a 7% discount to their stated value.

So is it actually worth a billion dollars?

It's like if I have a house and I list it for a million bucks and I accept an offer at 930k because I had to fire sell the house, I had to move, I was in a rush, I needed the cash.

Is my house actually in a million dollar house?

Like they went to market with these private equity funds at their stated value and they didn't get any offers.

So their stated value is overstated.

Let's say even allocating to these private assets was a positive contributor to the excess return.

If I have to sell assets at a discount because of my liquidity problems, that's a recipe for underperformance.

But it does kind of touch on this important thing you're talking about Justin, of like if privates aren't mark to market, like what is their actual value?

And in this scenario it's a great example of like if you run a private investment portfolio, a lot of things are valued based on a theoretical construct which is what do you think I could sell this for in the market if I sold it today?

Which is purely theoretical.

So you can't rely too heavily on those.

It's just very different.

So ge, General Electric, the stock, a lot of our listeners may know this but over the past decade it's been on quite a ride.

Stock goes way down but it's, you know, climbed back up and it's way higher today than it was eight years ago.

But Jared, we had visibility into the entire roller coaster.

We literally saw every single day that the market was open.

We saw exactly what the price of GE is.

And you're just not going to see that in a private real estate deal, a private equity deal.

And here's the thing, that's not a bad thing.

I could argue it's a really good thing.

Investor behavior how healthy is it to not look at the value of your investments every day?

If you have a 20 year time horizon on an investment, you shouldn't be consumed with the price day in, day out.

Again, it's not a good thing.

It's not a bad thing.

It's just an interesting distinction on alternative investments relative to more traditional One of.

The things we can learn is manage your liquidity, right?

And like even institutions and the most profound investors and profound institutions struggle with this idea, right?

So like really like all of our listeners can afford to understand the message of make sure your investment portfolio matches your distribution framework, right?

Because one of the things that will blow up your financial plan is being a net seller of assets with positive long term returns at fire sale prices.

So I also want to talk about some of the things that endowments can teach us that are good things and that I like, really appreciate and admire about them.

But he.

To Warren Buffett.

To Warren Buffett, yeah.

He compiled a list from Swensen's book Pioneering Portfolio Management and kind of decomposed the core of the Yale model.

And his words are as follows.

So first is equity bias.

Sensible investors approach the market with a strong equity bias since accepting the risk of owning equities rewards long term investors with higher returns.

Already talked about that.

Totally agree.

Diversification.

Significant concentration in a single asset class poses extraordinary risk to portfolio assets.

Portfolio diversification provides investors with a free lunch since risk can be reduced without sacrificing expected return.

3.

Alignment of interest Nearly every aspect of fund management suffers from decisions made in self interest of agents at the expense of the best interests of principals.

By evaluating each participant involved in investment activities with a skeptical attitude, fiduciaries increase the likelihood of avoiding or mitigating the most serious principal agent conflicts.

And four, the search for inefficiency focus on asset classes with a wide dispersion between top and bottom performers and employ external Managers to exploit opportunities.

I don't think there's a single thing in here I disagree with.

What about you?

It's so good.

No, it's great.

So good.

But.

But that's the thing thinking about.

I agree philosophically, but the implementation of this is vastly different for our listeners.

Right.

And like a great example of this is like you know, four I think of search for inefficiency.

We've talked about this in a prior episode, but the dispersion of returns between us large managers much smaller than like micro cap emerging tech investing.

The smaller, the more nebulous the asset class, the wider the dispersion.

Right.

Like seed investing.

Right.

The range of outcomes is so much wider than just if I have to pick a large cap manager, the wrong conclusion would be search for inefficiency.

The one thing I would clarify there is if the return on time is positive.

If you think about Yale adding from this point going forward 1% in additional, like let's say next year they add 1% in additional performance.

By searching for this inefficiency, we're talking about $4 billion.

So I could literally hire thousands of people at a quarter million dollars a year for specific geographies and specific asset classes that are just really out there and esoteric where there might be way more opportunity than there are in like publicly traded public markets.

But that's a worthwhile endeavor and worth the return on time, assuming you have the liquidity.

Right.

Even if you go through all the work to find the good investments, but then you have to sell them at fire sale prices, all the work you did is undone.

So we talk about this a lot with our clients.

One we want to be very mindful of what does the global portfolio look like?

So we do believe that at a certain asset size it absolutely makes sense to introduce alternative investments to your portfolio.

And then your thought process and how you allocate across different investments should look a little bit different based on how efficient or inefficient that particular asset is.

So Jared, to your point, if you're looking at two or three different ETFs or mutual funds that all invest in US large cap stocks, well, they're probably going to be very similar and you should likely be a hawk with expense ratio.

Right.

But then if we go to the other end of the spectrum and we're now let's say you are allocating $12 million and some of it should be allocated to private real estate deals.

Well, the manager on the private real estate deal, the general partner that has a Huge, huge influence in the performance of that investment.

And so that decision should not be made like the US Large cap mutual fund or etf.

I mean, you should be mindful of the expense, certainly.

But no, you shouldn't be a hawk in the same way that you are with US Large cap where in the US Large cap space.

I mean, that's basically making the decision just go IVV or whatever in the alternative space that is different.

And that's what Ted is saying in this point.

Inefficiency matters, but for our investors, you don't just look for inefficiencies.

Another extreme example, and I'll be quick with this.

Let's say that you have about $7 million in assets and you happen to have a really high income year and you are looking for opportunities to lower your taxable income.

Well, Jared, you could become a professional real estate investor or have your spouse become a professional real estate investor.

You could buy a ton of real estate with leverage and then bonus depreciate it.

That could offset your earned income.

Right?

Do you have any interest in doing that?

No return on time.

Sounds miserable.

Sounds awful.

Yeah, I have no interest in doing that.

And go back to this example.

You already have $7 million.

If you thoughtfully allocate it long term and continue to have a reasonable income in the coming 20 years, you are likely going to have tens of millions of dollars.

You will likely have a taxable estate.

Do you really want to go become a professional real estate investor?

My answer is no.

Still no.

Again, that's the thing is like that's why it's important to say, hey, philosophically we agree with a lot of the framework that's implemented, but the scale at which is done needs to be noticed.

And I'll share this in the show notes.

Absolute return 23.5% Venture capital 23.5% Leverage buyout 17.5% Foreign equity 11.75% Real estate 9.5% Bonds and cash 7.5% Natural resources 4.5% Domestic equity 2.3% oh my gosh.

I have to say this, Jared.

No one listening to this podcast should mimic that allocation.

Yeah, this is hundreds and hundreds of people and millions and millions of dollars to create this portfolio.

And I do want to add on to that statement.

No one listening should mimic that allocation.

Say that in a great deal of humility.

Just cannot emphasize this enough.

Yale's endowment and obviously, their prior manager is just so much smarter than I am.

But still, with that disclaimer, do not.

Mimic that allocation, but also the pool of it.

Like, even if you said, hey, I'm going to make this allocation, the average deal you came across compared to the average deal they came across.

If I wanted to build a venture capital portfolio, probably not in the same universe.

Oh, that's good.

You're not getting access to deals before Yale's endowment is.

Right.

Such a good way to say it.

I can't.

I can't say.

I can't stress that enough.

But again, there's so many things we can learn from Yale.

Right.

But, like, I think, like, the biggest takeaways are, like, play your own game, manage your liquidity so that you don't have to sell things at a discount.

And then private investments can be good.

Access matters, managers matter, and liquidity matters.

That's such a good line.

Okay, so you just said you're probably not getting visibility on the deal before Yale's endowment does.

It reminds me, do you remember a couple of years ago when we were talking about just the historical data on active stock fund managers versus passive fund managers?

And for decades, Wall street has sold this strange idea that we're Wall Street.

We know how to invest in the market.

Know how to invest in the market.

So come pay us, because we know how to do this.

And if you pay in a financial advisor and they have a very, you know, active portfolio and they're promising outperformance, think about how absurd.

Like, when you really dive into that promise and you really unpack, get in the weeds of it.

Think about this idea that you have this random JP Morgan advisor in Cypress, Texas, who thinks that they found the secret.

Like, what a stupid idea.

It's.

It is definitely taking a flyer.

It's so laughable.

Oh, this guy in Plano, he found the secret.

He found.

Yeah.

And these.

All these shares trade millions crazy amounts of volume from a bunch of institutional investors about what they think the future price is.

My UBS guy in Plano, he figured it out.

Yeah.

So, I mean, here's the thing.

There are no permanent pools of capital.

Even these institutions need their money.

I would argue that's an awesome thing.

The endowment contributed.

I think.

I think I did the math.

It was $2 billion to the operating budget for Yale, which is also.

That's a whole nother aside.

That's $135,000 per student.

I love that you put this in your notes.

And, Jared, I've got to read It.

I've got to, I've got to emphasize this.

Why do they charge tuition?

No idea.

That's like, yeah, we're already running a little long.

But I feel like we could talk about that idea of like, you know, Scott Galloway talked about the idea of like elite institutions becoming luxury brands.

And I love that idea.

Just 10 second, real quick.

UCLA has like a 9% acceptance rate.

Is that a good thing or should a state university have a much higher acceptance rate?

Now, I am a little bit biased.

I went to Kansas State, which I believe has a 97% acceptance rate.

Maybe that's not a great thing, but in many ways it is a great thing because it means that they are fulfilling the role of a public state university.

That is a good thing.

Yeah, it is absolutely a good thing.

What is the point of money growing to infinity, especially when it can help today?

As you think about your portfolio construction in your own life, it's the same thing.

Balance, growing for the future and also making sure you have what you need for today, but also spend the money.

Yale doesn't have to spend the money.

And yet they are.

Right.

So there's a lot of things we can really learn from them in terms of portfolio construction.

But you know, hey, I agree on the philosophical ideas, but the implementation, it's different because the entities are different.

But a lot of the same frameworks exist.

Manage liquidity, keep costs low, make sure you're acting in a fiduciary, understand counterparty's incentives and really figure out where you want to take your bets in terms of outperformance.

Absolutely.

Well said.

Cool.

Well, I think that's a good place to wrap it up.

I feel like the next conversation about university endowments does need to chat about the fact of why do colleges like that charge tuition?

Because it's an interesting, you know, question.

Well, that's all we got for today.

Always love hearing from our listeners ideas for future episodes.

Like subscribe, share with a friend.

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If you have questions pertaining to your specific situation, please consult the appropriate qualified professional.