David Packard, the man who brought computing power to the masses, made an empire and a fortune selling smart machines. He built the first one an oscillator with William Hewlett in the late 1930s, in the garage behind his and Lucile Packard’s rented house in Palo Alto. Thus, Hewlett-Packard was born in 1939. Officially, so was Silicon Valley. The Packards’ garage is listed on the National Register of Historic Places as the birthplace of the U.S. tech industry. Their foundation also had humble beginnings.
Starting with $100,000 of the Packards’ own money in 1964, the nonprofit was small in scale but radical in mission for the time, supporting reproductive rights, early childhood education, and the environment. David Packard died in 1996, and the foundation inherited roughly $4 billion of HP shares. In 1999 it became a two-stock portfolio when HP spun off its measurement and components businesses to form Agilent Technologies.
The dot-com bust proved why it’s a terrible idea to have a ten-figure portfolio invested in just two companies.
The philanthropy’s trustees decided to cash out of HP and computers, putting their faith in human intellect. In 2007 the David and Lucile Packard Foundation hired its first chief investment officer, John Moehling, and gave him license to diversify. Moehling then hired Kimberly Sargent, who earned an MBA from Stanford University’s Graduate School of Business after working for Yale University’s endowment. Together they built a nonprofit portfolio that is admired by peers and reputed to be a strong performer, though Packard, like many foundations, does not disclose investment returns.
Moehling plans to retire at the end of the year, and Sargent will succeed him as CIO.
She belongs to a cadre — some jokingly call it a mafia — of young leaders at elite U.S. nonprofits who learned from the godfather of endowment investing, David Swensen, the CIO at Yale University’s endowment. In addition to professional roots in New Haven, Connecticut, these second-generation Swensenites have largely rejected the biggest institutional trend since the Yale model popularized private assets: quantitative investing.
“Everyone hates black-box quant,” remarks one investor. “But a lot of people have quasi-black-box quant in their portfolios. I think they are being intellectually dishonest and performance chasers.”
Sargent is not one of those investors. It may be that the only black boxes contributing to Packard’s portfolio came filled with office supplies and stamped with the initials HP. Sargent spoke to Institutional Investor’s Alpha’s Leanna Orr about man versus machine in financial markets, and why she’s betting $7.2 billion on man.
Alpha: What does the term “quant investing” mean to you?
Kimberly Sargent: You’d probably get different answers from different folks, but I’d say it is any strategy that attempts to take real-time human judgment out of the investment process, replacing it with a model that makes decisions based on preordained rules.
There’s a reason this whole issue of the magazine is about quant investing: It’s the hot topic du jour. Some see it as a trend, 2017’s portable alpha. Others argue that what constitutes investment skill has forever changed: Building a great portfolio will mean building a great algorithm to do it for you. Where do you fall in this debate? Are we in the midst of a fad, a revolution, or both?
There’s no doubt that quantitative strategies are on the rise and having an increasing influence on market behavior and asset prices. A recent study I saw showed that fully 60 percent of the U.S. market is now held by quant strategies (including passive funds, which are arguably one type of quant investing). And given the growing role machines are playing in all aspects of our lives, I have a hard time believing quant investing is just a passing fad. However, I don’t think it means there is no place for human judgment in investing. On the contrary, it may be that the more machines are dominating short-term price movements, the more valuable and influential human judgment can be over a long-term horizon; especially if quant strategies end up generating new kinds of inefficiencies in the market. I’m actually optimistic about what the rise of quant investing might mean for patient, long-term investors who can stomach some interim volatility.
What portion of Packard’s portfolio would fall under your definition of quant investing?
None of our portfolio is invested in active pure quant strategies, though many of our partners make use of data and quantitative tools in their processes. Passive strategies are about 4 percent of our portfolio, if you count those as quant.
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