Endowments and Foundations CIO Corner: In Conversation with Kelsey Deshler
Kelsey Deshler, Chief Investment Officer of Carleton College since 2018, brings a varied background, from hedge funds to the General Motors pension and other institutional investors. Deshler discusses managing volatility, recruiting for diversity and where she sees promising investment opportunities.
Making the leap to a CIO requires being mindful of the community and stakeholders you're serving—ensuring they all feel comfortable and aware of your objectives and approach.
Q: There is a lot going on in the world right now. Tell us about navigating the volatility.
Deshler: At a high level, we try to look past it. The good news is, as an endowment, we’re long-term investors with a highly diversified, well-balanced portfolio—even within each asset class. For example, public equity is diversified by geography, market cap and factor. Overall, the total portfolio’s beta to equity markets is relatively low. When the markets are down 10%, we're typically down less than 4%, and of course we try to do better. We revisit our strategic asset allocation process every year, but it seldom shifts dramatically.
Q: What about tactical moves?
Deshler: Keeping in mind that we emphasize our long-term approach, we have been somewhat tactical in this recent period. Volatility has presented a lot of amazing opportunities in areas that have really broken down, like biotech, emerging markets and even just U.S. large-cap tech. We are also mindful of inflation and rates, so have been focusing at the same time on lower duration and uncorrelated strategies.
Q: Would you talk more specifically about what you’ve added?
Deshler: The team has been incredibly busy and productive this year. Specifically, we have materially rebalanced the equity portfolio, adding more to value-oriented investments, financials, emerging markets, and nibbling on growth/longer-duration equities that had fallen precipitously. Within hedge funds, we’ve added a long-short equity healthcare hedge fund and are looking to increase our positions in macro and market-neutral equity. We have also been very active in private equity and real assets, re-upping and initiating investments across a range of company and asset types (e.g. middle market, venture, real estate, energy/energy transition).
Q: How would you describe your investment philosophy?
Deshler: Supporting educational excellence across the liberal arts, at an incredible institution, long term, is the mission we keep with us on a daily basis. The endowment supports approximately 30% of Carleton’s operating budget and most of financial aid. The endowment was about USD 850 million when I arrived; now it’s over USD 1.2 billion.
Our intention is to create a well-balanced, diversified, all-weather portfolio. Being an endowment and given our return expectations, the portfolio inevitably has a growth bias, but we are mindful of tempering it with defensive and uncorrelated investments. In general, we're probably structured a bit more conservatively than our peers. We're shooting for at least a 7% nominal return, 5% real, which we've exceeded over long term, and we hope to do even better going forward.
Q: Would you discuss your allocations?
Deshler: Today the endowment’s public equity portfolio is 35%–40%; marketable alternatives are 20%; private equity, including venture, growth, buyouts and credit, is 20%–25%; real assets (e.g. real estate, energy/energy transition, and infrastructure) comprise approximately 10% and fixed income and cash round out the balance.
Q: What investment themes and new opportunities do you and your team find most compelling?
Deshler: As mentioned, as growth/long duration stocks that have fallen out of favor, we are doing more work here. Also, midcaps and small caps have become more interesting. And we can't ignore that commodities have been a good place to be, and have been considering increasing exposure to more public and private inflation-protective strategies.
Q: What do you see as the greatest portfolio risks in the coming six to 12 months?
Deshler: The most draconian—and maybe remote—scenario is stagflation, something the U.S. hasn’t seen in 50 years. We've worked on assessing how the inflationary ’70s and early-’80s affected investments and have prepared our committee and our board. The risk is probably greater than it was a year ago. We monitor the environment closely and are mindful of areas that would likely to get hit hardest.
Q: Are there any investing trends where you would call yourself a contrarian?
Deshler: Probably, within endowment and foundations, would be our allocations to uncorrelated hedge fund strategies. When I joined, the hedge fund portfolio was quite biased toward deep value-oriented strategies, such as distressed credit and special situation equities. These are interesting places to invest and we have maintained exposure, but we also added quant equity (investing based on quantitative algorithmic methods) and discretionary macro—two strategies that historically have been more embraced by the pension community. They have done well during this recent, volatile period.
Q: How have you been thinking about environmental, social and governance (ESG) issues in the portfolio?
Deshler: We employ ESG as part of our investment manager review process, addressing the components both during initial due diligence as well as on an annual basis with our current investment managers. Today, effectively every manager in our portfolio has a written ESG policy.
Q: How have you approached diversity, equity and inclusion?
Deshler: We’ve embraced it on my team. In the Midwest, the diverse talent pool isn’t as deep as in larger markets, so we have to try harder. A silver lining of COVID is that folks have felt like they can move to a non-major city (not New York, the Bay Area, etc.) and still have a great career. As a team, we’ll be 30% BIPOC as of this summer, and are currently 40% female.
Q: What are the top skills you’d say someone needs to be an effective CIO?
Deshler: Making the leap to a CIO requires being mindful of the community and stakeholders you're serving—ensuring they all feel comfortable and aware of your objectives and approach. I’m managing the portfolio, the team and the office but also working closely with Carleton’s board of trustees, the investment committee, as well as others at the college including senior staff, faculty and students. We’ve started posting a letter every year on our website so there's transparency into how we're investing and which investments/strategies are driving performance.
It’s also important to delegate responsibilities to everyone on the team, outside their day-to-day, for example, running our internship and other outreach programs.
Education: B.S., University of Minnesota, Business and French; M.S. NYU Stern School of Business, Finance
First job: Dairy Queen in Minnesota
Hobbies: Cooking, running and chasing a 2- and a 5-year-old
Currently reading: The Bond King, and Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic—and Prevented Economic Disaster by Nick Timiraos