“Zach came back to the world of institutional investing in 2021, when he joined Carnegie after several years helping AQR clients with their portfolio needs. A former member of the Ford Foundation’s risk management team under Mark Baumgartner, Zach has been instrumental in developing a rigorous portfolio management approach at Carnegie. He has instituted new strategies like diversified beta and an overlay program that have added significant value to the portfolio. By leading the portfolio management team in creating internal systems to monitor the portfolio on a more accurate level, Zach shows the planning and leadership capabilities necessary to perform as a CIO. His investment judgment is characterized by his focus on avoiding ‘unintentional bets,’ a concept he nurtured while at AQR. The idea that allocators should focus on well-compensated bets, like manager skill in a niche sector, instead of poorly compensated bets, like a large geographic tilt, has been an influential piece of Carnegie’s strategy and would be an important concept for the industry at large to embrace.”
—Jon-Michael Consalvo, CIO, Carnegie Corporation of New York
The CHIEF INVESTMENT OFFICER Editorial Team shared a dozen questions with all our NextGen nominees and asked them each to pick six to answer. Their answers informed our decision to include them as a NextGen. Below are the answers from Zachary Mees.
CIO: What investing decision have you made for your organization that you’re most proud of?
Mees: Carnegie Corporation’s legacy is one of high achievement. That’s true for both the professionals managing the endowment and the foundation’s grantmaking focus on education, democracy and world peace. So, after joining the team in 2021, the prospect of developing processes and realigning the asset allocation for an evolving, uncertain and rapidly changing environment was daunting to say the least. But over the last few years, the team has done extensive work building a portfolio framework that I believe improves the probability of our organization’s success.
The journey thus far has included several asset allocation studies, in-depth liquidity analyses, the development of new tools and systems to evaluate risk, expansion of risk management capabilities, introduction of less conventional strategies to enhance diversification impact and an update to our governance policies. We settled on a framework that views investments through dual lenses of risk (equity and diversifiers) and liquidity (public and private), instead of traditional asset class bucketing. It’s still too early to know if our new approach will live up to the Carnegie legacy, but I’m proud of the work we’ve done, and I think we’ve got as good a shot as anyone with a similar mission.
CIO: What is the best way to bring more diversity to the financial industry?
Mees: The benefits of diversity accrue when people from different backgrounds bring their own unique experiences and skills to a team pursuing a common goal. To further improve and thus increase the odds of a team’s success, the industry needs to let go of commonly accepted notions when it comes to sourcing talent. That means removing biased hiring practices that tend to lean toward your typical candidate only from a perceived prestigious university, as one example. Instead, we should seek out the top performers from our fantastic state school system, prioritize those with well-rounded experiences and seek hungry and hardworking multi-cultural and international talent. That might require slightly more work for hiring managers, but I believe the gains from increasing diversity of thought and generating creative ideas and solutions to investment problems will far outweigh the cost of sifting through a few dozen more resumes.
CIO: What asset classes offer the best options for avoiding or mitigating drawdown risk in an institutional portfolio?
Mees: The biggest drawdown risk in most institutional portfolios comes from equity markets. Yet, because of high return targets and constraints, investors can’t really avoid equities. But contrary to the last decade, there’s no rule that says equity markets have to completely recover from drawdowns within a year. For that reason, investors should dedicate a meaningful portion of their risk allocation to diversifiers. The definition of diversifiers can vary widely; at Carnegie, it means any investment with a positive expected excess return whose fundamental return driver has low to no correlation to equities. On the traditional side, that means nominal and inflation-linked bonds and select commodities. Alternative diversifiers can include several market-neutral hedge fund strategies: long/short equity, global macro, relative value, trend following and multi-PM platforms. Within less liquid markets, real estate, natural resources and infrastructure can all be diversifying in certain environments, but there’s also room for esoteric investments like reinsurance, litigation finance and royalties, which should be even less correlated. It’s hard to predict in advance what environment leads to the next big crash, so the best way to mitigate the impact is to allocate risk to all these options in the most capital efficient manner.
CIO: What should be an investment trend, but isn’t (yet)?
Mees: Active risk management strategies. That broadly includes any structure that allows investors to mitigate unintended or lowly compensated risks relative to their benchmark, while simultaneously isolating the high conviction risk provided by active managers. Any investor who has felt the frustration of underperforming not because managers didn’t outperform within their universe, but because the complexion of their portfolio was too different from the benchmark from the start, understands the value of active risk management. In the last decade, that pain was commonly felt by investors with an overweight to emerging markets where active managers have a better chance of outperforming, but any alpha was subsumed by emerging- lagging developed-markets significantly. More recently, lack of exposure to U.S. large cap, particularly the Magnificent 7, has been a motivating factor for this budding trend to take hold.
These strategies come in many shapes and sizes today. Managers that offer portable alpha, active extension or relaxed constraint strategies are pairing their best ideas in a market-neutral environment with a broad market benchmark, minimizing exposure gaps for investors. Investors can also achieve this internally by implementing an overlay designed to complement aggregate manager exposures with derivatives which correct any major deviations from the benchmark.
CIO: Who in asset management (a person, not a firm) has most influenced your growth as an institutional asset manager?
Mees: I’m going to cheat and give two answers to this one, as both of my former bosses have had a meaningful impact on me. The first is Mark Baumgartner, with whom I was fortunate to have worked with twice: early in my career on the asset allocation team at the Ford Foundation and again when he built out the team we have in place at Carnegie Corporation today. The second is Michael Mendelson of AQR, with whom I spent almost eight years between my allocator roles working on risk parity and other multi-asset strategies. Mark opened my eyes to the asset management industry, empowering me to challenge convention and seek out the truth. Michael taught me that in both investing and life, we strive to make everything matter, but nothing matters too much; finding that balance is key. They both have sharp analytic minds, uncanny attention to detail and are highly effective communicators. I’m grateful to have spent the better part of the last two decades with these giants, and I trust their lessons will serve me well in the decades to come.
CIO: What new skills do you think allocators need to be leaders in the field in the coming decade?
Mees: It’s good to see the investor community waking up to the benefits of using leveraged strategies to improve portfolios. Observable examples include the growth of multi-strategy hedge funds, the resurgence of portable alpha and the use of SMA platforms to enhance the capital efficiency of active manager exposures. The responsible use of leverage allows investors to monetize the benefits of diversification, further mitigating the greatest risk factor in most portfolios—equities. But the key word here is responsible; the benefits of leverage come with risk that must be thoughtfully managed. Allocators need to build their skill in understanding and underwriting best practices of managing the risk of leverage. The consequences of mistakes with leverage in institutional portfolios are dire, both for the investor suffering excessive losses and for the future of these strategies as useful elements of the portfolio. There’s risk of one bad apple spoiling the bunch, and it’s the responsibility of the allocator to know what risks to look out for when underwriting. One way to bolster that skillset is for the community to hire more professionals with experience managing leverage and derivatives.
