Institutional Investor is proud to recognize leaders within the allocator community for their outstanding contributions to portfolio development at the second annual AlphaEdge Recognition Dinner. Prior to the event, we sat down with Preet Chawla, CFA, recognized in the category of Next Generation Recognitions.
Preet has traversed the investment management industry, working across Fund of Funds, a consulting firm and two foundations. After he received his BS/BA in Applied Mathematics and Economics at UC Davis, he spent four years as an analyst, first at UBP Asset Management in New York, then at Attalus Capital in Philadelphia. After getting his MBA from Duke University’s Fuqua School of Business, he focused on alternative investments for a year at Canterbury Consulting, where he led hedge fund research. Preet then joined the Institute for Advanced Study, helping manage the endowment as part of a three-person team for the next two and a half years.
He then joined Benchmark Plus, a Seattle-based asset manager focused on portable alpha strategies, where he focused on hedge fund manager selection. In June 2021, he joined Carnegie Corporation of New York’s $4 billion foundation where he further diversified his investing range, spanning hedge funds, private credit and venture investments.
The following has been edited for length and clarity.
What is the biggest challenge facing the industry today?
Many institutions have underperformed in their public equity book over the past decade or more. Markets have become very competitive and efficient over time, and most endowment and foundation portfolios have ACWI as their benchmark but are titled toward small cap and international stocks which have substantially underperformed U.S. large caps. The resulting 10+-year underperformance has raised lots of questions from boards. I’ve seen people respond in various ways, from switching managers and strategies to going entirely passive.
I think we have to consider where allocators can add value picking public equity managers. My view is that alpha can be found in more inefficient areas of the market, in sectors such as biotech, or in specific geographies like India, where allocators can identify managers with competitive advantages. The most challenging asset class for alpha generation has been large cap US long-only and long/short, a fact that is a well-known by now, yet far too many allocators still attempt to pick managers in this area.
The challenge is also that one can’t completely avoid having large cap exposure either. What we’ve done at Carnegie is split our public equity book into two-thirds concentrated equity managers that are long-only or long/short stock pickers investing in inefficient markets, and one-third “index plus” strategies, also known as portable alpha. Portable alpha combines uncorrelated and market-neutral alpha strategies and passive index exposure. We believe this combination sets us up well to meaningfully outperform over the medium- and long-term with a good balance between small caps and large caps, and domestic and international exposures.
What part of the portfolio are you most excited about?
Theme-wise, I’m very excited about India: It’s not a two-year story; it’s a 15- to 20-year compounding story. I’m optimistic about the county’s digital and physical infrastructure buildout and the economy’s 7%+ growth rate that will last a couple of decades. Nominally, I expect 12% to 13% earnings growth and currency depreciation of 1% to 2%. Even being an index investor, you’ll probably earn 10% to 11% per year, and if you can add value through manager selection, I think you can compound in the public markets in the mid-teens, and a bit higher in the private markets.
People often look for opportunistic dislocations that last a couple of years that earn a high rate of return, and that’s great, but it’s hard to find areas that are going to compound for a long period of time. I believe India is one of those thematic opportunities. However, on the risk side, as good of an opportunity as India is, it is an emerging market with a fair number of risks, so we can’t size it at 20% of the portfolio, and at Carnegie, we are looking at a modest allocation of 4% to 5% or so.
Who were your mentors, and what made you get into the allocator role?
My former CIO, Mark Baumgartner, has been an important mentor in my life. Mark emphasized the need to be different, and that really resonated with me; he always encouraged creativity. As a result, our portfolio at IAS looked very different from our peers. I also learned a lot from Mark on how to build a high-performing team, having them get along and motivating them to perform. Getting a lot of smart but opinionated people to work together isn’t the easiest thing, but Mark was able to pull that off well. He also taught me the value of incentives – getting talented people to be hungry, stay hungry, and reward them appropriately, both extrinsically and intrinsically. Under Mark, I was able to learn these important soft skills, in addition to the rigor on the portfolio and risk management side that he is known for.
I got this job because of Mark. I worked for him at the IAS and left after two and a half years to pursue a great opportunity at a portable alpha fund in Seattle. Unfortunately, the pandemic hit shortly thereafter, and I wanted move back to New York, and fortunately, Mark hired me for a second time.
I’ve been in the allocator role since 2008 and have had the opportunity to work at various institutions from fund of funds to foundations. I prefer being at a foundation not only because the work is associated with a mission, but also because of the longer-term investing mindset that this job allows for.
If you were not an allocator, what would you be doing today?
I think you have to have a great deal of interest in what you’re doing, i.e. passion, but also be reasonably good at it, i.e., have some talent.
The most natural thing for me would be to be a psychologist. I love human behavior, and I love helping people. That job combines those two traits, and that would be a serious career consideration if I wasn’t doing this job.
What is the one thing the industry should improve on?
There is a fair bit of groupthink whereby many LPs seek comfort in or follow well-established and successful LPs into an investment. The reasons for this vary from governance to mental comfort, knowing that if something goes wrong, you were in with other smart people. I believe this may not be the best approach: E&F’s less than $10 billion in size have an advantage that a $50 billion institution doesn’t; when you’re $50 billion, you are potentially cut out of higher alpha capacity constrained strategies in inefficient areas, or even if you do get in, it’s a small piece of your allocation.
Most of the larger places have to write a $200 million+ check, and yet it may only be a 0.5% allocation, so there is a structural advantage in managing a smaller pool of capital, and following a peer substantially larger in size isn’t always a great idea: I think this point is underappreciated in our industry.
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