“Edgar has been a critical member of the investment team since he joined USC almost seven years ago. He manages the endowment’s absolute return and US equity investment programs. In this capacity, he develops program strategy and implementation plans including hiring and monitoring investment managers. He approaches his responsibilities in a diligent and thoughtful manner. And he always makes the time to work with our student interns and mentor our junior analysts.”
— Lisa Mazzocco, CIO, USC
Edgar Smith is a hedge fund and US equity expert at the University of Southern California, where, as managing director, he’s involved in all aspects of the manager evaluation process for prospective and existing investments. An alumnus of Yale University and Columbia Business School, his career arc has spanned more than 20 years across a number of different institutions including JP Morgan, Paamco, and Lasair Capital. Through his time at the university, he has been an integral member of the team that has been built over the last seven years.
CIO: What makes 2019 an interesting investing climate? How are you handling it?
Smith: Every year is an interesting investing climate and 2019 is no different. There are so many different economic, trade, and market outcomes that are possible today that it makes it really difficult to focus in on any one risk. Ensuring the portfolio is not overly exposed to certain factors or macro risks is important. This means really understanding the risks we have in each of our funds. Making sure we have flexibility going forward can be a real advantage in the right environments as it allows us to play offense when others are playing defense.
CIO: After this year, what are the largest opportunities and the largest threats you see on the horizon?
Smith: There are always plenty of threats in the market with one of the largest being the ongoing trade and geopolitical issues we see globally. This is something that may threaten what has generally been a good economic backdrop for the last 10 years. The interconnectedness of companies today makes these global issues more impactful than ever. The continued inflow of capital to certain asset classes and industries is another threat. It has increased risks and lowered forward return expectations in many areas. This is something we really see in certain “hot” areas.
Although emerging markets have been volatile more recently, going forward they are just too big of an opportunity to ignore across both public and private markets. It’s not going to be a straight line, so you will see ups and downs, but there will be opportunities to generate excess returns.
CIO: How did you arrive at your current position? Why did you choose this part of the financial services industry?
Smith: I started my career at JPMorgan working in the sales and trading side. It was my introduction to markets and a great way to see how it all worked. Although I enjoyed my time at JPMorgan I decided to attend Columbia Business School as a chance to add to my analytical skill set and transition to the buy side, which I ended up doing by moving to the hedge fund of fund world.
Eventually, I wanted to transition to the Endowment world so I could have a more direct impact to an organization and also focus more broadly across asset classes which I believe is the right way to think about investing. Working at an Endowment also allows you to think longer-term which can be a tremendous investment edge. In addition, it has been great working with students again. It’s easy to become cynical in this industry, but when you see students get excited after a meeting or after an investment discussion it is tremendously re-energizing.
CIO: What was the most important strategic allocation of your career?
Smith: Strategic allocation cannot be decided in a vacuum and needs to be aligned with the organization’s goals and risk tolerance. Each organization is different so a strategic allocation’s “success” should be judged differently.
Longer-term, the focus should be about the type of long-term manager partnerships you make, not necessarily big market calls. I learned early in my career to focus my efforts on firms that are aligned with you as an LP and performance-focused (not looking to build an asset management business). This factor has been more important than almost any other factor in predicting success across asset classes.
CIO: Tips for money managers who want to work with you? Especially what not to do.
Smith: We want to be a partner with our GPs not just a source of capital. The best and longest relationships have been partnerships where there has been substantial two-way dialogue. That type of relationship starts before we invest. The more honest and transparent a manager is with us, the easier time we have committing capital to them and the more we understand the short-term fluctuations that can happen in a strategy. That means managers shouldn’t hide negatives during our due diligence process. I also have a big issue with any funds showing gross returns in their materials unless they are willing to offer us those returns as well.
CIO: Biggest goof a money manager has made with you?
Smith: There have been many interesting stories over the years including having a first time manager meeting in a garage with a dog scratching on the door (did not invest) or one where we were given the wrong address so we went to a manager’s home and the nanny had to direct us to their real office (did invest).
I would also advise managers not to walk through each page of a pitchbook. We do our homework beforehand so having to walk through every page is not an efficient use of time for either side. It also leads to a less-fruitful discussion. The most productive meetings tend to be ones where a pitchbook is rarely used and we talk more directly about process, risk management, and the development of the firm. Each side learns more about each other.
CIO: Who in the financial world would you like to have lunch with and why?
Smith: I consider myself very lucky that in my roles I have been able to meet many people over the years that I have great respect for, and have taught me a tremendous amount about investing. It is too difficult to choose just one, so being a former history major, I’ll go back to the past and choose to have lunch with Benjamin Graham. I would love to get his thoughts on the investing landscape today—passive investing, private equity, venture capital and the rise of quantitative trading. He has been such a big influence for so many investors today and his updated thinking on the current financial landscape would be fascinating.
CIO: What are the changes you’d like to see the institutional investing community make in 10 years?
Smith: The main change I would like to see in the institutional investing community is more diversity in the industry across socio-economic backgrounds, gender, and ethnicity. I have been fortunate to work with a diverse group of people in my career, and have found that diversity in a team makes it much stronger. The differences in backgrounds creates more deep and nuanced discussions regarding issues and the final answer tends to be much better than those groups where there isn’t as much diversity.
Better alignment of fees across all asset classes would be a great change as well. GPs should be paid on alpha generated over time and there should be a fair split of that alpha between the LP and GP.
CIO: What are your hobbies not correlated to work?
Smith: My two young kids keep me busy and then some. In addition to family, over the last few years, I have become a very active runner. It’s been a great stress reliever and also a great time to think about investing since it’s hard to find one or two hours of time to just be alone with your thoughts. A few of us from our team have also run in a long-distance relay race with our team aptly named “Margin of Safety.”
Poker is another hobby I have. It’s not technically correlated to work but it has taught me a lot about being a long-term investor. There is a huge learning curve and you are constantly reevaluating your decision-making when playing. You can make a lot of right decisions but still end up with poor short-term outcomes, just like investing. But over the long-term, having the right process will eventually work out well.
