Nestor Santiago was appointed chief investment officer and vice president at Howard Hughes Medical Institute, Chevy Chase, Md., in February 2000, where he is completing a restructuring of the $12.5 billion endowment (Pensions & Investments, March 5). Before that, he headed the investment office at the International Monetary Fund, Washington, and oversaw a three-year restructuring. Prior to joining IMF, Mr. Santiago was director of the pension department at the World Bank, Washington. He earned his MBA from Harvard University in 1973, graduating with high distinction, and his undergraduate degree in engineering from the University of the Philippines in 1970, where he graduated magna cum laude.
P&I: Are you modeling your restructuring of the Hughes endowment on the restructuring you did at the IMF, where you emphasized global investment themes?
Mr. Santiago: No, the approach is different here. We have to look at the needs of the institute. Our problem (at Hughes) is we're like a university in terms of budgetary needs, but we're 100% dependent on the endowment to support our costs, while a university is only 25% dependent. (The institute can't do fund raising as universities can). So because there is a mismatch between the revenue stream and the cost structure, we had to design an investment policy that will allow the endowment to grow over time, but still provide enough stability if there is a downturn in the stock market.
What we did here reflects global themes, but less so than at IMF. Hughes has much more invested in U.S. equities than IMF did and that is more appropriate.
P&I: How did you approach the makeover?
Mr. Santiago: The new portfolio has two components: one is bets, which include globally diversified public equities, private equity and opportunistic strategies; the other is hedges, made up of U.S. Treasuries, TIPS (Treasury inflation-protected securities) and absolute-return strategies. What's in the middle? Credit and real estate, which we're moving away from, although we can still invest in opportunistic real estate.
P&I: What was your thinking here?
Mr. Santiago: We have eliminated corporates and mortgages. When there is a problem with the equity market, as we've been seeing, credit does poorly, because there tends to be a flight to quality. I'd rather use pure hedges to provide the liquidity that can fund our long-term needs. If we can be sure of the quality of our hedges in difficult circumstances, then we can take longer-term risks on the equity side.
In the early `90s, after the collapse of Drexel (Burnham Lambert), there were good opportunities in real estate. But the problems have been normalized, and it's time to lighten up in real estate. It's neither a hedge nor a bet now. If we have a hard landing, real estate would be adversely affected.
P&I: How important are hedge funds in the new structure?
Mr. Santiago: We call them absolute-return strategies and have raised the allocation to 10% from 6%. They fall into the hedge component of the portfolio. We could expand on those, because they're not correlated to the equity market. We're looking for alpha, not beta there. When we consider them, we want to know: Are the returns due to a long bias? What's the market correlation? How robust is the process producing alpha? We're interested in strategies such as long-short, market neutral, merger arbitrage, but we're not doing macro strategies.
P&I: Where does globalization fit into the equation?
Mr. Santiago: Between globalization, and deregulation and restructuring overseas, we'll be seeing more Darwinian situations, and only the fittest (companies) will survive. As a result, we're focusing more on researched-based products for our equity portfolios both here and abroad. In these, analysts rather than portfolio managers choose between the winners and the losers.
We're working out partnerships with some of our external managers, so that our analysts have access to their analysts to discuss industry themes and developments in terms of how they will affect the companies, which will guide us in our investment choices. We're becoming increasingly research driven.
The process of globalization is non-linear and discontinuous. We have economic systems prone to crises . . . like the Mexican crisis in the early '90s or the Asian crisis in the mid-'90s, which do affect U.S. markets.
But the resulting chaos creates opportunities, and we're always looking out for those. The Mexican crisis provided a good opportunity to invest in emerging market debt. The Drexel downfall led us (I was at the World Bank then) to invest in high yield, which paid off.
Hughes isn't in high yield now, and we're thinking it might make sense to skip it and go right into U.S. distressed debt. We're trying to determine the best time to get into distressed.
P&I: What will you focus on once the restructuring is finished?
Mr. Santiago: My basic job has been to develop the framework for the new policy. Within that I like to delegate to individual mangers (at Hughes), which I've been doing, but I'm very involved in the hiring process (of external investment managers).
I travel a lot to meet managers and to get market information. Probably a quarter to a third of my time is spent traveling, which I would reduce if I could. But I also believe it's important that I see for myself what's happening in Europe or Japan and other markets around the world. I spend a lot of time reading, too, mainly financial publications and sell-side reports. They're very useful, as I look for developments that I can piece together and use as investment themes.
P&I: Did you plan to go into finance?
Mr. Santiago: No. I was born in the Philippines and came to the United States at 21 to do graduate work at Harvard. I was going to return to the Philippines and work for the government. But Mr. Marcos had declared martial law and it was an unfortunate time to return. I decided to join the World Bank instead.
P&I: What is your biggest challenge?
Mr. Santiago: Dealing with the markets is both the hardest and best part of my job. If I read them properly I can come up with the right predictions. I would hate to be on the sell side where you have to do that every day. Here I have the advantage of looking at the market with an extended time horizon of three to five years.
