Dave Morehead

Transcript

Derek Smith:
Hello and welcome to Baylor Connections, a conversation series with the people shaping our future. Each week we go in depth with Baylor leaders, professors, and more, discussing important topics in higher education, research, and student life. I'm Derek Smith, and today we are talking endowment. Baylor University's Office of Investments manages the university's $2 billion endowment, which reached an all-time high in 2023, as it continues to support the affordability and quality of a Baylor education through scholarships, professorships, and other university activities.
This year, Baylor's endowment was highlighted in two Wall Street Journal stories, on CNBC, and Institutional Investor, sharing how the university's endowment returns are beating Ivy League institutions, and examining how Baylor's culture makes this possible. We're visiting today with Dave Morehead. Dave serves as Baylor's chief investment officer. In this role, he leads a team of investment professionals, comprised of five other team members, all Baylor graduates, in stewarding the endowment and helping Baylor prepare for the present and what's ahead. And Dave, this is a topic I think a lot of people have heard a little about, but not many of us know a lot about, so excited to dive in with you today. Thanks for joining us.

Dave Morehead:
Sure, Derek. Happy to be here.

Derek Smith:
Let me start with a question about questions. You're talking to someone you just meet or getting to know someone, and you tell them what you do. Are there common questions that they ask you?

Dave Morehead:
Yeah. So, that's generally what we all get asked. What do we do? And the general perception from the person who's asking the questions is that we're in development. So, most people think that we're on the phone calling people, asking for donations, and that is not at all what we do. Development, obviously, everybody understands what they do. It's super important to the university, and they're basically the outreach from the university to potential donors. If and when a donor makes a contribution to the university, and if they earmark it for the endowment, then those monies end up flowing to us, and we are simply an investment office. We're taking those monies and trying to invest them globally, stocks, bonds, equities, private equity, et cetera, and make that money bigger. And then every year, we turn around and give 5% of that value back to the university, that's used for scholarships, paying professors, programs, et cetera, whatever the administration decides to do with it.

Derek Smith:
So, to give a better picture of what that looks like, if we were to eavesdrop in one of your meetings or snoop around the office on a given day, what are some of the things we would find you and your colleagues talking about or doing or looking up on your computer to manage all that?

Dave Morehead:
It varies from day to day. So, we also get this question from students. So, we have an internship program, several of us teach classes at Hankamer, and so we do get this question from students, and that is, what do you guys do on a daily basis? And the answer to that is actually very difficult, because we're doing something different every day. So generally, broadly speaking, what we're trying to do is... We don't invest these dollars ourselves. So, we go out and try to find the best asset managers globally. We have managers in London and Tokyo and Singapore and Brazil and Israel, et cetera, as well as the US, and we are allocating different amounts of dollars to them, and they then are investing that money on our behalf and trying to make it bigger.
But that's broadly what we're trying to do. If there is a natural disaster in Houston or in Florida or on the West Coast, then we are immediately dropping everything and trying to figure out, in those investment portfolios where we've allocated dollars, do we have any exposure to the property, the apartments, the hotels that we own in South Florida? Are they underwater? And we're talking with managers and trying to figure that out. Or it could be the case that there was particular news in the financial press about a company that we own getting bought. So then we're talking with managers, trying to figure out how much money that accrues to us, that's going to come back to us, et cetera.
So on any given day, we could be discussing or investigating anything under the Sun, like if there's geopolitical issues, with the Russia-Ukraine conflict. We actually owned some companies, in this case it was debt of companies that were in Ukraine, [inaudible 00:04:59] emerging market distress portfolio. And so then we had to talk with the manager and figure out what our exposure was. Did we have any problems there? We didn't, we've actually made a lot of money on that very position. But it really could be anything under the Sun. So, no day is the same, every day is different for us.

Derek Smith:
So even just to clarify, you're working with professionals around the world. You're not sitting there day trading. This isn't like the stock exchange.

Dave Morehead:
No, it's not. And the other thing that people don't really realize... Most people understand stocks, and CNBC, et cetera. And so, most people think that everything that we're doing is stock related. And that's actually not the case. So, we have significant private equity holdings. And our portfolio, the Baylor portfolio, is way, way more diverse than even the S&P 500 Index. The S&P 500 Index in stock-land owns 500 of the biggest companies in the U.S. But we own equities, stocks, in Europe, in the UK, in Asia, in Latin America. But even beyond the stock universe, we own helium, we own consumer product companies that haven't even become public yet, we own makeup lines, we own... It is literally the case, and that's not just true for Baylor, but it's for, say, all university endowments are way, way more diverse than even big stock market indices.

Derek Smith:
Well, as you do all this, you're doing very well. The Wall Street Journal, CNBC [inaudible 00:06:46] mentioned Institutional Investor, are highlighting us for beating the big boys in a lot of cases. So, I'm going to ask you this broadly first, because then we can unpack it as the show goes on. Why is that? Why are our endowment returns so successful? I assume in part it's because you and your team are so great, right?

Dave Morehead:
Yeah, we would assume that some of that is due to our efforts. I would say that there's a little bit of a philosophical approach that helps us. So, if we back up, our job is to create more dollars for the university. We're trying to create more dollars so that students can go to school. We're trying to create more dollars to benefit professors and fund their research. We're trying to create more dollars to support and encourage the programs that the university offers to its students, et cetera. Those are critical aspects of what makes Baylor Baylor.
And so, from that perspective, we can't take huge amounts of risk. So, in an individual stock portfolio, say a retirement account or something like that, you could put all of your money in one name. So, let's just use Tesla. It's been up a lot over the last five years. You could have put all of your money in Tesla and become a millionaire several times over. Legally, we're actually not allowed to do that. If we did that, we would go to jail. And the reason for that is because basically, what we do is a social good. The country, the state has decided that people going to college is a good thing. And so, when people give money to the university for an endowed account, there are legal strictures on that to both manage the risk that we're taking and make sure that all of that money doesn't get spent, like, today.
And so, our job when it comes to investing is to maintain and sustain that level of income to the university in perpetuity. So, there are different philosophies when it comes to doing this. There are some people... I like to use the baseball analogy a lot. We are effectively like the general manager on a baseball team. So, we are hiring a third baseman, a second baseman, a shortstop, a left fielder, et cetera, to manage the money for us. But the people that we hire, we don't want them all to be swinging for the fences every time they're up to bat. Some of them would hit home runs, but a lot of them would strike out, and we would lose a lot of games because we had a lot of strikeouts. So, our approach is more of one where we're trying to hit consistent singles and doubles, every time up to the plate, with every batter. And if you do that, if a baseball team does that, they tend to win a lot of games. They tend to end up at the end of the season hoisting a trophy.
And so, philosophically, that's what we're trying to do. We are not trying to swing for the fences. Sometimes we get big returns, but that's not because we were swinging for the fences. We're trying to be very consistent and make contact with the ball all the time. We're trying to strike out as little as possible. And effectively, then, we think that we will win more games and be hoisting a trophy at the end of the day. And we're not doing it for trophies. The goal is not necessarily to beat all of the Ivy Leagues. We use that as a comparative tool, because they're really, really good at this game. But the goal is effectively to create more money for Baylor, and then indirectly more money for students, faculty, programs, et cetera.

Derek Smith:
Let me ask you real quick to step back just a little bit as we talk about these terms. I know there's always a lot of confusion for most of us around the endowment. Could you give us a little endowment 101 what it is, what it isn't, and really what it is for versus what it's not for? Because the university has a lot of acute financial needs that can pop up. So, how does that all play together?

Dave Morehead:
Yeah. So, it is confusing, and it is an amorphous term. And like I said before, a lot of people think that we're calling people, asking for money. That's not what we're doing. An endowment account is set up to benefit students today and in the future, and by law, that has to happen equally. So, there's this concept of intergenerational equity that's required by law. Each state sets its own rules, but basically they've all adopted the same language. And so, what that is taken to mean is that, if I gave Baylor $100 for a scholarship, Baylor could use $5 every year to fund scholarships for students that were coming through the doors, et cetera. That $100 would come to us, the Office of Investments, and we would invest it and try to make it bigger.
So, say 20 years from now, $100 has been paid out over the last 20 years to students. That $100 has also grown to be $200 or $300. And because we're spending 5%, then 20 years from now, if it was $200, then we would be spending $10 a year for student scholarships, et cetera. And so, obviously there's inflation, but the goal of the law... Again, we're not the ones setting this. So, the state sets this. The goal of the law is that the $10 that we're paying the student in the future has the same benefit for the $5 that we're paying the student today. That's the objective.
And the reason that the law sets this up, and it doesn't exist just for universities, it also exists for hospital endowments, et cetera, is because somebody could come in, if there wasn't a law, and say, "Oh my gosh, there's like $2 billion here. Well, let's go build a bunch of buildings." A bunch of buildings get built, but then 50 years from now when those buildings need to be refurbished or torn down or redone or whatever, there's no money to do that. So really, what an endowment is is a restricted savings account, if you will. So, it's sort of like what we all do in trying to save for retirement. If you save more money, then in the future you can do more things. You could go on more trips. If you save less money, then you can go on fewer trips.
So, what we're trying to do is we're trying to create the best returns possible every single year, so that we pay out some money to students, faculty, programs, but the corpus, the big amount, grows more than we pay out, and so the next year we can pay even more out. So, you had started by saying that at the end of last year, the endowment was $2 billion, and that's true. Over the last 12 months, the endowment has paid out about 80 to $85 million to students, faculty, programs. In addition, the regents had determined to liquidate a particular account that was given for the benefit of athletics, and that's another $30 million, and that was used to help fund the construction of Foster Pavilion.
So, over the last year, we started with $2 billion, over the last 12 months, we have spent $110 million from the endowment, and currently the endowment is valued at more than $2.1 billion.

Derek Smith:
Wow.

Dave Morehead:
So, over the course of the year, we have overcome the $100 million that was spent, and now we have $100 million more than we started. So, that means that next year, instead of us paying the school the 80 to $85 million, we'll probably be paying the school... And I'm not in Treasury, I haven't done the calculations yet, but my guess is that we'll be paying the school 90 to $95 million, something like that. And that's kind of the goal. So, gifts to the endowment actually end up accruing far more value over time than if I just gave a single investment today.

Derek Smith:
This is Baylor Connections. We are visiting with Dave Morehead, Baylor's chief investment officer. So, you've painted a picture for us of what the endowment is, and a little bit about in the background of how you all manage that and how you steward that. So, let's talk about why it's been so successful, even a little bit more now, because you've got some big publications coming in, either really good or really bad when they're looking at you, right?

Dave Morehead:
Of course.

Derek Smith:
In some cases [inaudible 00:16:10] are really good when they're highlighting what we're doing. So, what attracted their attention in the first place?

Dave Morehead:
Yeah. I think one of the things that we do particularly well as a group is looking at risk first. A lot of times in this industry, I think that people get wowed about returns. That's the first thing that they look at. We tend to look at risk first. And because we're cognizant of... I had scholarship money when I was going to school, as did everyone else in our office, and if that wasn't there, then I wouldn't have been going to... So, we understand how important this is, and we were beneficiaries of this 10, 20, 30 years ago. And so, risk is really the first thing that comes to mind, to answer the question.
And there are some risks that we simply won't take. Like there could be big returns associated with this, but we're not really sure how it's going to turn out. And if we're not sure, then we're not going to do that. And it could be the case that every other school in the country does it, and we honestly don't care. We are not a follow the crowd, just lemmings over the cliff edge, type of office. So, we think about risk and we determine first what risks we want to take and which ones we don't want to take. And if we don't want to take it, then we don't go down that path. We don't feel like we have to be invested in everything at all times. There are some investment offices, some groups, some endowment and foundation funds that do feel that way, and they are kind of arrayed across the universe of investments, rain or shine, market up or down, and that's how they want to do things. That is not how we do things here.

Derek Smith:
So, when you look at how that's paid off, and when the Wall Street Journal's looking at how that's paid off for you, what are they interested in, particularly as you think about your peers in the investing world, and just even people interested in seeing this university grow, what are the metrics inside there that they're interested in?

Dave Morehead:
Right. So, the thing that I think captures the attention is the comparison to the Ivy Leagues. So, the Ivy Leagues are all in the Northeast, of course, and in the Northeast, because all of those schools tend to be very wealthy, their endowments are multiples of what Baylor's is, everyone in those schools knows exactly how their endowment is doing. It is akin to football in the State of Texas. So, when endowment returns are posted in the fall of every year, each of those schools issues a press release. They talk about the size of their endowment, what their return was, and then the school newspapers write articles about how Harvard's return did versus Yale, or how Yale did versus MIT, which is another well thought of school that's kind of in the same mix there. Duke gets brought into that, Notre Dame gets brought into that. All of those schools have endowments that are six to $50 billion. Harvard's the largest.
And so, in the Northeast, there is very much this aspect of bragging rights, which in Texas it's football games, or when we get to basketball season, it's like who went the furthest in the NCAA tournament? But in the Northeast, and amongst the coastal schools in the West and private schools in general, endowment returns is something that everyone pays attention to. So, I think that's really what captured the interest of the Wall Street Journal and some of these other publications.

Derek Smith:
So, we're doing well there. And obviously I want to go back to, again, a little bit of that question of [inaudible 00:20:25] culture is part of what they talked about. I know you've described the approach and the amount of risk you're willing to take, but is that in capturing culture? Does that capture culture when we talk about it or is there more to that?

Dave Morehead:
There's obviously a lot that's involved in culture, and we spend a lot of time on that. I think basically, our office isn't any different than any other office that exists at Baylor. I would say that Baylor in general has very good culture. The thing that we're doing, we're trying to do with excellence and integrity. But we had somebody in our office that had surgery, like a couple of weeks ago, and so everyone's piling in and making sure that her stuff got taken care of while she was recovering from surgery. We had somebody else in the office, their husband had surgery like two days ago. So, it's very much... Our office, just like the rest of Baylor, it's very much a family first, but it's also excellence at the highest level.
And I think... It's a good question. I actually haven't thought about it, but we have a lot of Baylor alums in our office, and that's purposeful. And so, I think that that broader Baylor culture continues to sit and benefit us and what we're doing and how we're doing it. We're basically trying to take... We're a small office. We have five on the investment team, so we're not adding a lot of people frequently. But when we do, we're going to the business school, and again, we teach classes, we have an intern program, and we're trying to pick off the best of the best that Baylor has to offer. And then we're all working together in trying to do the best that we can. So, culture for sure plays a part. Philosophy in how you invest certainly plays a part. Looking at risk and not taking unnecessary risks certainly plays a part. I think all of that comes together with the returns that we're seeing and that we expect to see going forward.

Derek Smith:
I'm curious, obviously y'all take pride in... You're providing. You're providing for the present day and the future of the university and that's serious business. How competitive are you all? I'm just curious, because you want to win, and we're not just winning in terms of these returns, but even... I don't know, maybe it's that idea of Baylor grads or Wheaton grads like yourself coming together and beating the Ivy League guys and women there too.

Dave Morehead:
Yeah. We are very competitive. And you have to be in this industry. The asset management investing space is, I would argue, far more competitive than football. We talk about, in football games, there's Monday morning quarterbacking. That happens literally every single day with us. So in general, when the market's going up, people will come to us and say, "It doesn't seem that hard." We're always kind of like, "The water's warm. Come on in." Everything that we do can be scrutinized every single day. You should have done that. Oh, did you not know today is the employment release? Did you not know that the employment number was going to be higher than what everyone expected? We thought that, but of course we don't know that. But literally, every single day we can be questioned. So, not just every week, every day, week, month, year, and it never ends.
So it can be, at times, a wearying thing. And this is also not a nine to five job. So, when I roll out of bed in the morning, I'm on my phone figuring out what overseas markets are, where they're at, what happened overnight, if there's some geopolitical event occurring in Asia, like was the case, I don't know, three or four years ago with the pandemic. I was up at 2:00 or 3:00 in the morning every night, taking stock of what was going on there. I've been on multiple vacations where a family... You guys go to breakfast, I have to go sort this out, write this up, trade things, et cetera. So, my phone is a little bit the bane of my wife's existence. I'm on it at 6:00 in the morning and I'm on it at 10:00 at night, tracking and seeing what's going on. It is truly the space where you're competing against the smartest people in the world every day.

Derek Smith:
Visiting with Dave Morehead, and Dave, as we wind down here on the program... So, the returns are good, the endowment's growing. You painted that picture again of present versus future. So, for listeners, so they can maybe even enjoy looking at this with you, maybe numbers next time they come out, when you think about the future of Baylor, you mentioned some big goals, to get this to $20 billion at some point, what are you excited about when you think about where this is going and what it can provide for the institution if we think 5, 10, 20 years from now?

Dave Morehead:
Yeah. And that's really how we think. So, you had suggested something like, earlier in the program, about day... That's so not what we do. We're thinking two, three, five, ten years out. I was talking with some of our investment committee members over the last couple of days, and we have investments in the ground that I think are going to pay off big like ten years from now, and we have investments in the ground that are currently paying off pretty substantially over the next one to three years.
So, I was telling them, now I'm looking for investments that are going to pay off well for the university in the four to seven-year window. And we're making plans already for what we need to do to have great returns in the 10 to 15-year window. So, this is an extraordinarily strategic approach, and what you have to do to win over time, but I couldn't be more excited.
I forget exactly what it's called, but Baylor's introduced this program where, if students come, and their family income is less than $50,000, and they get accepted to Baylor, then tuition is paid for by Baylor. What gets me out of bed in the morning is thinking that, if we do a good job, then Baylor can raise that to $75,000, or Baylor can raise that to $100,000. And that just means a whole bunch of students who previously wouldn't have been able to come to Baylor, then they can. Yeah. We're like ultra-competitive, many of us played sports in high school and into college. I don't now, but this is sort of our competition, and our way to help Baylor. It's behind the scenes. Again, the faculty are the ones that drive the school. The administration is the one... I don't know how to lead a university. That's not my givenness. My givenness is in investing.
And so I'm trying to use that as best I can, for Baylor, for the Lord, so that more of what does happen at Baylor can happen in the future. And that's up to the administration, that's up to the faculty. I'm not in charge of that. I don't want to be in charge of that. I'm just trying to use my gifts as best I can. And we do really think about that student who wouldn't be able to go to Baylor, but if we do a really good job, they might be able to.

Derek Smith:
Well, it's exciting to see that all coming together, and the way that's growing, and to tie it into some tangible things, too. Again, I know you've described conversations you've had with people, it could be very intangible, but you've helped make it tangible today. And who knows? Maybe our fans will start celebrating around the water cooler, or the proverbial water cooler as well, or on the message boards, when we keep eating the big boys at this.

Dave Morehead:
Well, we aim to keep putting up good results. So far, like I said, our returns, fiscal year to date, have been quite good, so we look forward to being able to announce those later in this fall.

Derek Smith:
Well, that's wonderful. Dave, thanks so much for taking the time to join us, and share what you do, and for all the great work you and your team are doing.

Dave Morehead:
Thanks, Derek. Happy to be here.

Derek Smith:
Dave Morehead, Baylor's chief investment officer. Our guest today here on Baylor Connections. I'm Derek Smith. A reminder, you can hear this and other programs online at baylor.edu/connections, and you can subscribe to the program on iTunes. Thanks for joining us here on Baylor Connections.