The investor: Q&A with Xing Chen
The vice president and chief investment officer of the LICR Fund talks about finance to leading scientific research.
What is the LICR Fund?
Daniel Ludwig donated substantially all of his net worth to cancer research. He gifted his international businesses to support the Ludwig Institute. The assets of those businesses over time were sold and the proceeds placed under the control of the Fund to be reinvested in a more liquid and broadly diversified spectrum of assets. The Fund’s sole purpose is to support the Ludwig Institute, and it currently supplies approximately 60% of the Institute’s total annual operating budget. Separately, Mr. Ludwig gave his US-based business interests to support cancer research at six US Ludwig Centers. The six Ludwig Centers and the Ludwig Institute together comprise Ludwig Cancer Research.
What are the key objectives in managing the Fund?
Bottom line, we don’t chase short-term performance; we invest with a long-term view. Our team’s goal is to provide sustainable spending for the Institute while maintaining the Fund’s purchasing power for future generations of scientists. In order to accomplish this, we need to generate a high enough return after taking into account inflation to take care of annual Institute operating commitments while also preserving the real value of the Fund.
How has the Ludwig Fund performed over the past five years?
The Fund has delivered top quartile investment performance among our endowment and foundation peers over the past decade. This return profile has allowed us to fully support the Institute’s operations while rebuilding the Fund’s purchasing power after the setbacks of 2008.
Very impressive. Can you share your management secrets?
Insistence on high quality and excellence is critical. I never put things on autopilot. I’m constantly and continuously engaged with what’s happening with asset managers, their portfolios, the markets, politics, social trends, demographics, absolutely everything I can possibly process in order to have as broad a perspective as possible. When I go to sleep each night, I look forward to getting up in the morning and doing it all again.
What risk controls and measures do you have in place?
The world in many ways is fundamentally riskier than it was 10 or 20 years ago. There are lots of stresses and imbalances in the global economy creating an unusual level of uncertainty. So we have fairly normal return expectations but abnormally high concern about fundamental risks. For that reason the Fund is configured with a value bias to protect our capital in market downturns.
In constructing the overall investment portfolio, we focus on risk-adjusted returns, not nominal returns. In that way we understand the volatility associated with our expected stream of returns. The Fund’s portfolio incorporates a range of asset classes and strategies. Within those various asset classes and strategies, the individual asset manager portfolios are further broadly diversified with respect to exposure to issuers, industry sectors, regional markets and investment instruments.
We’re overseen by a board of directors that determines investment policy and objectives and defines guidelines for the allocation of assets. As a further safeguard, Ludwig’s assets have always resided with third-party custodians or administrators instead of with the individual asset managers. This precludes a Madoff-type situation from arising within the portfolio.
How do you evaluate and monitor an investment, and what decisions do you make along the way to stick with it or
Predicting exactly when the market may spike or fall is virtually impossible. History has proven time and time again that
very few investors are nimble enough to both “get out” and “get back in” at the right times.
Ludwig is a long-term investor with a focus on the fundamental value of investments. We’re not trigger-happy traders and do not chase returns. The deployment of capital to a particular asset manager involves a rigorous due-diligence process. Our objective is to distinguish repeatable outperformance from luck. We conduct extensive investigations of a candidate firm, its investment professionals (are they an experienced and stable team?), its investment process (is it disciplined and sound?) and the whole operation (legal, accounting and so on). We speak with institutions who are already investing with the firm. Because our goal is to have the highest quality portfolio possible, we apply the highest standards in our search process. It’s better to spend the time and effort up front instead of making changes later.
We’re not slaves to benchmarks because otherwise we might forgo potentially huge opportunities outside those limits. We monitor investments daily and conduct portfolio reviews quarterly. During those reviews, we discuss the full range of issues related to managers and their investments with our eye on the long term.
Are there any special challenges in managing the Fund as compared with university endowments?
Like a university endowment, we have a long-term investment time horizon. University endowments, however, enjoy structural advantages over institutions such as ours, such as significant cash inflows from legacies, donations, extensive alumni networks and low and flexible spending rates.
These factors have allowed Ivy League schools to assume more risk and leverage in their portfolios than our Fund is comfortable with. As a result, they have historically delivered some of the highest returns among institutional investors. But the 2008 financial crisis exposed stress fractures in this high risk−high leverage model and, as a result, many schools suffered heavy losses. Nonetheless, the ability and willingness to take on higher risk and leverage is still a hallmark of the Ivy endowments.
Ludwig’s current situation is very different from that of the Ivy League schools. We have substantially fewer resources, and we depend far more on our endowment for annual operating expenses, which are 60% of the budget versus 30% or so for the Ivies. Owing to the mission and character of the Institute, reducing spending levels in response to any market downturn is neither desirable nor practical. This requires that we insulate the Institute and Fund as much as possible with the assumption of a string of poor returns.
What lessons did you learn from the 2008 financial crisis?
2008 was truly a shock point. I think there were a couple of important lessons that we learned from the meltdown.
Focus on the big picture and identify risks early in the game. Pay attention to the valuation and liquidity of the portfolio. Have a disciplined process that avoids chasing an overvalued market and maintain ample liquidity to avoid forced, panicked selling at the bottom. This positions the portfolio to be able to take advantage of strategic opportunities that will unfold as markets recover.
The bottom line is to remain calm and never let market volatility or emotion take over.
What makes Ludwig a special place to work?
I see our role as one of the pillars in the fight against cancer. The Fund’s mission is to help and support our scientists and move the fight against cancer forward. Like our researchers, we’re obsessed with numbers. Worldwide, 12.7 million people learn they have cancer and 7.6 million people die from the disease. Every year. And every dollar we make helps contribute to bringing those numbers down. We’re proud to be part of an organization that constantly challenges itself to achieve Daniel Ludwig’s mission. Collectively we can turn the tide. Ludwig has transformed the landscape of the disease over the past 40 years and has had a tangible effect on the fight against cancer. We like to think we’re part of that equation.