Amherst College Endowment CIO Letitia Johnson
An International Eye In today’s tangled global financial markets, Amherst College Chief Investment Officer (CIO) Letitia Johnson brings an international sensibility. Born in Singapore, her family shortly afterward moved to London.
There she stayed until the age of 7 when, yet again, her family relocated to a new location: Japan. Letitia Johnson attended the American School in Japan, located in suburban Tokyo, before coming to the United States when she was 14. Following the trend of many other school’s wealth management teams, the Amherst College Investment Office recently relocated to Boston from its former spot in Amherst, MA. There is no doubt Johnson has a strong understanding of Boston’s financial industry. All of Johnson’s experience in finance has taken place in Boston, though she has occasionally engaged in extensive travel for past jobs. While talking to Johnson, the topic of the Amherst liberal arts curriculum came up.
Johnson expressed strong support for the study of the liberal arts, arguing that studying a wide variety of subjects develops balanced thinking and reasoning skills. She urges all young students to first determine what their absolute must haves are, and then use that as a starting point to narrow down what career paths they might be interested in. After all, how can one know their most specific goals if they have not even resolved what their primary desires are? Even the path Johnson took wasn’t exactly what she first predicted. In fact, Johnson didn’t find her career in institutional investing until after her time at Yale Business School. There introduced to the world of endowment management, she hasn't looked back since.
Below is the interview with Letitia Johnson, edited for clarity.
What is the Amherst Investment Office? The Amherst Investment Office is a team of people that reports to an investment committee of the board and to the Amherst Chief Financial Officer Kevin Weinman. Our primary responsibility is to manage Amherst College’s endowment. Our job includes reporting transactions and making sure cash goes to the right investments when we alter our portfolio. The Amherst Investment Office invests for the long run. We must ensure that we are investing our funds to meet school objectives over a long time period and growing our endowment in real terms. Typically, the endowment supports roughly 50 to 60 percent of the College’s budget. Over time, it has outgrown other income streams. Ultimately, we aim to take 4-5% out of the endowment every year without digging into its principal so that it can continue to grow. The Investment Office is responsible for managing the endowment, but this doesn’t mean we pick stocks on our own. Instead, much of what we do involves choosing third party fund managers. We put a lot of thought into who the partners who will manage the money for us are. Currently, we are working with less than 40 managers. We even have a manager who we have been collaborating with for 20 years. We strive to pick a manager earlier in their career so that we can expand and evolve with them. This aligns with the Office’s very long-term outlook.
What is your process for picking managers? A lot of it comes down to scrutinizing the people running the funds. We invest in people. Strategies can change over time, but hopefully the people we entrust our money to don’t. Do they have a cohesive strategy that makes sense and can endure in terms of adding value? The quality of the manager trumps everything, including the strategy. We won’t pick a mediocre manager just because he’s in the right space and using a hot strategy—we stick with only A+ managers. I like managers who can write down and express the thesis of what they are doing—something stressed in an Amherst education. Skilled managers should be able to articulate what they are seeking to achieve. We do think about portfolio balance. It’s important that we understand the mix of managers we have and what strategies they use. We’ll routinely check up on how our managers are doing, see if there is anything we need to worry about. Our team also performs a top-down sector and asset exposure analysis. That way, if things become too imbalanced, we can step in and make changes.
What is your investing philosophy (value investing, growth investing, etc)? How do you build a portfolio? We don’t require our managers to have one single investing philosophy, we prefer to have a mix—though we do have views of which types of investing might be better suited to certain areas of the market. Our system emphasizes flexibility. Therefore, we don’t have asset allocation targets per se. Instead, we have ranges. A too rigid process can undo what managers do best. When we find good managers, we put some trust in them and regularly communicate with them.
Treasury rates have been rising recently, with the Fed slightly cutting back on measures in fear of inflation. Any downsides? How are you adjusting to this? The rates question is this endless debate in the investing field.
We in the Investment Office are not in the business of trying to figure out what’s going to happen and guess the Federal Reserve’s moves. We should not—and do not—make investment decisions on this basis. If rates spike, markets are likely to tend downward. We can also consider what parts of our portfolio might be more impacted. For example, typically, tech could fall considerably because it’s a long duration asset and is generally growth-oriented.
How do you deal with inflation? Investors have spent a lot of time on the inflation question. Inflation is related to Fed rates, and unanticipated inflation can be quite harmful for bonds and stocks. We look back at the stagflation of the 1970s as a historical example and see how we could have protected against it. Unfortunately, protecting against inflation is extremely costly and highly unreliable. Trying to defend against inflation through assets such as commodities and real estate can also be unreliable. Not to mention these asset classes can themselves be volatile and costly to hold relative to alternatives.
What we’ve learned is that it’s better to concentrate on ensuring we can meet annual obligations and maintain good liquidity, through crisis planning. Today, we avoid holding long bonds. Other than that, we think about maintaining liquidity reserves and investing the rest in a balanced way. Ultimately, equities serve as a pretty good inflation hedge. Inflation should eventually be reflected in earnings. It’s worth mentioning, though, that some equities have better inflationary sensitivity, like those with pricing power. We would want a manager that cared about things like that. Our portfolio is very equity heavy.
How effective is gold as an inflation hedge? Gold is not the reliable inflation hedge some people make it out to be. The truth is, there’s no good way to value it. How do you trade something you can’t value? How do you know when to hold, sell, or buy more? In that sense, it’s kind of like bitcoin (though we do like crypto generally!). It’s very hard to invest in gold well. The only ones who seem to get it right are families who stockpile it and forget about it. Amherst College doesn’t need a store of value. It needs to make a set of balanced investments that grow over time, and gold isn’t right for this purpose.
Who picks the assets in the Investment Office? Dawn Bates (Manager of Investment Operations) and Heather Heath (Operations Analyst) are in charge of running operations for our office.
Every morning, the whole team meets together to talk about what’s on the docket for the day, debrief on the day prior, and so on. On the investment side of our office are Shane Levy (Investment Officer), Yunfei Liu (Investment Analyst), Adam McPherson (Investment Analyst), and myself, Letitia Johnson (Chief Investment Officer). Together, we all spend a lot of time evaluating managers and finding new ones. In the Investment Office, we do comb over individual stocks. However, this isn’t to say that we select individual stocks to invest in. We find it’s helpful to have a good understanding of what our managers like. That way, we can better understand how they are developing and seeing the market change over time. For example, we had a period in which the team did a lot of talking about automobiles—electric vehicles, manufacturing, dealerships, tech in autos, etc. This happened very organically, through talking to managers. We would speak to a number of our different managers about car dealerships, and then make connections and evaluations ourselves based on what they said.
By focusing our discussion on one specific line of business, we got a lot smarter on the whole space and were able to better engage with our managers. I don’t particularly like the traditional asset allocation framework, and prefer to think in terms of ecosystems. For example, using the label hedge fund isn’t particularly helpful. Instead, I would rather consider ecosystems like healthcare. This would include everything from early stage biotech venture capital to Big Pharma. As you would imagine, a whole range of overlapping companies, capital systems, and managers would fit into this ecosystem. Ecosystems are a holistic category. Adam and his team spend a lot of time on the biotech ecosystem. Yunfei and his team spend a lot of time on the China ecosystem. Other ecosystems might include tech and value. (The interview, conducted on Zoom on March 19, 2021, has been edited for length and clarity.)