“Joe is an outstanding investor who continues to grow and excel as an allocator across global credit markets and absolute return strategies more broadly. He exhibits a persistent intellectual curiosity and a willingness to evaluate new strategies across a wide range of asset classes in both public and private markets. The asset classes that he covers often have complex structures and risk attributes; Joe is skilled at evaluating and articulating these multifaceted topics. His strong analytical skills have been crucial in optimizing risk adjusted returns within our portable alpha framework. Joe is an excellent colleague and team player as well as a skilled mentor to his younger analyst. The further development of these talents will only strengthen his leadership potential.”
—Susan Manske, vice president and CIO, MacArthur Foundation
Before joining the MacArthur Foundation, Joe Rumph considered leaving behind the asset allocator side of the business altogether for hedge funds. After spending five years at the Kresge Foundation, including as an associate director of investments, he decided to get his master’s degree at the University of Chicago’s Booth School of Business, where he also took a summer internship at a long-short equity hedge fund in the city. The internship was a great experience, he said, but it helped him decide to stay as an asset owner.
“It showed me I like being an allocator,” Rumph said. “You have a bigger breadth of the investment landscape and the investment universe and that was just much more interesting to me.”
The manager of absolute return and fixed income at MacArthur has created a fourth portfolio that houses “special situation” bets. In other words, it holds five- or six-year investments that are too illiquid to go into his hedge fund portfolio or too short of a duration to get mixed in with his 10-year investments. In the portfolio is his collateralized loan obligations (CLO) investments, which paid off especially handsomely during last year’s market dislocation.
He’s also investing in carbon credits in California, a strategy Rumph spent a year researching, a due diligence process that involved consulting some of the climate change experts at the foundation that is also sustainable and is uncorrelated to other asset classes. Not to mention, should the demand for carbon credits ever exceed the supply, the price of the asset will pop.
Another strategy he’s investing in is systematic credit investments, an area of quant investing that is not so crowded as quant equity investments. It’s a nascent category that Rumph imagines will ramp up in the next couple years. For Rumph, focusing on a couple strategies at the MacArthur Foundation, while also having the flexibility to pursue some off-the-run strategies, helps the investor satisfy his curiosity.
“It’s just fun to be able to be able to look at different things,” Rumph said.
CIO: How would you deal with rising inflation and interest rates?
Rumph: It has been so long since we have had a true inflationary period that many market participants, myself included, have not gone through this experience in their careers. Nominal bonds will be directly hurt by an increase in rates, and while equities typically perform reasonably well early in an inflationary cycle when the impact on earnings growth dominates the impact on the discount rate, they perform poorly as inflation continues to rise and growth eventually slows. This leaves us primarily with real assets such as real estate and precious metals to serve as an inflation hedge. A particularly brave investor may opt to allocate to a deflationary cryptocurrency like Bitcoin, but with the size adjusted appropriately for the underlying volatility.
CIO: What is the best way to bring more diversity to the financial industry?
Rumph: We all bear the responsibility of increasing diversity in the financial industry. As allocators, our role is not always well known as a possible career path to undergrads or even MBAs. Our industry needs to do a better job of reaching out to campus career services departments to both educate students about what we do and to actively recruit a diverse set of candidates. We also need to strongly encourage our investment managers to self-reflect on the current level of diversity in their organizations and the specific goals and plans they have for improvement. Though a traditional investment management career path is more well known to students, managers still need to increase their outreach to diverse candidates and help train the next generation of portfolio managers and chief investment officers. Diversity, in both background and thinking, is good for the industry and for returns.
CIO: Is cryptocurrency a flash in the pan, or an asset of lasting value?
Rumph: I believe some cryptocurrencies will be assets of lasting value, but the specific role they will have in financial markets has yet to be determined. On the surface, Bitcoin has many of the markings of a more efficient store of value than traditional assets—limited supply, easy transferability, and decentralized. As we have seen in recent weeks, however, the price of Bitcoin, and the broader cryptocurrency universe, can still exhibit tremendous volatility from actions as simple as a few tweets. An asset that can lose nearly half of its value this quickly cannot yet be called a true store of value. Other cryptocurrencies and their related financial market applications, particularly those associated with decentralized finance, have strong potential, but it is much too early to tell how much momentum they will eventually build and sustain.
CIO: How will the pandemic have changed the economic/financial world?
Rumph: From a workplace perspective, we have all learned to adapt to working remotely, both effectively and efficiently. While there certainly have been some hurdles to overcome, I think most have found this to actually be easier than initially anticipated. I do think we will soon return to some level of normalcy in office settings, but the lessons we have learned over the past 15 months will be integrated into a new, more flexible, reality. On the margin, this probably means less travel and more videoconferencing, at least with regard to getting updates on current investments. We will also need to be aware of the potential for new variants or viruses that could necessitate a return to a remote work environment.
From an economic perspective, I’m concerned with the amount of stimulus that has been injected into the financial system, and the impact it may have on inflation levels. We have already begun to see an uptick in CPI [the Consumer Price Index] and PCE [the personal consumption expenditure], and I tend to believe that it is not entirely transitory. The Federal Reserve has indicated a distinct willingness to lag the economy and allow an increase in inflationary pressures in order to return to long-term averages. Just how long of a lag, and at what level of inflation the Federal Reserve feels it will need to tighten, will be a very delicate decision.
CIO: What place does blockchain have in tomorrow’s financial scene?
Rumph: There are some practical applications of blockchain technology which potentially could serve as a superior solution to current methods. Tokenization of securities can help reduce time and risk associated with settlement. Moving real estate and automobile titles to a blockchain has the potential to be an immediate increase in security and efficiency. When my wife and I bought our car a few years ago, the title had to be mailed to us, and, unfortunately, our mail carrier delivered it to the wrong address. We were lucky enough to have an honest neighbor slide it under our front door, but the fact that we are still mailing paper copies of these titles seems outdated at best.
CIO: What asset class or investment troubles you most right now—and why?
Rumph: Fixed income, broadly. Even though we have a strong fundamental backdrop that is supportive to businesses and that should lead to fewer defaults, credit spreads are very tight and covenants are loose. This means that recoveries in the event of a default are likely to be lower than historical averages. Add to that the potential for higher than expected inflation and a corresponding increase in interest rates from current low levels, and you’re left with a negatively convex risk return profile for both the credit and duration components of fixed income.
CIO: What investing decision have you made that you’re most proud of?
Rumph: We made an investment in California Carbon Allowances in the California Cap-and-Trade program in early 2020. I had absolutely no knowledge of carbon markets when I took the initial meeting with the manager, and we spent a year researching the space before gaining the conviction necessary for investment. It was one of the most unique diligence processes in my career and included speaking with lawyers about the structure of the program and brokers who were familiar with how the credits trade and the depth of the market. We also spoke at length with MacArthur’s climate change team to get their views not only of the California Cap-and-Trade program and its ability to withstand potential political pressure, but also their opinion of third-party participants in the market. After recovering from a temporary dislocation to carbon markets in March of last year, the investment is performing as underwritten and has a very attractive risk return profile.
CIO: What should be an investment trend, but isn’t (yet)?
Rumph: Carbon credits. We are starting to see a few funds emerge, but it is still a very nascent space, not just from the existence of tradable markets but also from the perspective of governments implementing formal programs. If we are going to solve the problem of climate change, we need to properly incentivize companies to emit less carbon. Expanding carbon markets into the universe of potential investments assists with liquidity and price discovery and increases the pressure on companies to make the capital investments required to reduce their emissions.
CIO: Who is the manager you don’t currently work with whose brain you’d most like to pick for an hour?
Rumph: Paul Tudor Jones [of Tudor Investment Corporation]. As one of the early directional macro traders, I’d love to walk through his investment process and better understand what he looks at and thinks about when making allocation decisions. One of the aspects that initially drew me to investing is the interconnectedness of different asset classes. Movements in interest rates, currencies, credit spreads, and equities all have a direct impact on one another and create a feedback loop. Some of my favorite meetings involve discussing with managers their logical thought patterns when any one of these underlying conditions change, and how they implement this new information into their portfolios.
