Investment Themes

Investment Process

Our investment process is comprised of four interrelated steps: asset allocation, manager selection, portfolio construction, and security selection. Morgan Creek focuses on the first three components and leaves security selection to our managers, each of whom were chosen through our investment process. Asset allocation focuses on establishing strategic targets and tactical ranges for each of the primary asset classes in the portfolio. The Morgan Creek process develops expected return forecasts for each asset class and then establishes recommended weightings for the appropriate risk tolerances on an ongoing basis.


Asset Allocation

Morgan Creek invests based on the Endowment Model approach, which relies on an intuitive asset allocation framework with natural diversification. This approach is much more forward-looking than traditional mean-variance analysis. It allows us to take a long-term focus on the markets, which we believe helps us avoid many of the short-term, tactically-oriented trading mistakes that many investors have made in the past. We begin by taking into account current market and asset class valuations and metrics, and then we construct forward-looking asset outlooks with a long-term focus. We establish targets for each asset class and sub-asset class, as well as ranges around these targets. In this way, investing is both highly tactical and also disciplined.

Global Equity

Equity markets across the globe have become more interconnected. Consequently, while in years past Morgan Creek has tracked domestic public equities separately from international developed market equities and emerging markets equities, today we consider them to be a single asset class. We see public equities as an important core element of a diversified investment portfolio. They allow investors to directly participate in the growth of economies, assets, and companies, while retaining a reasonable amount of liquidity. In addition, during range-bound markets Morgan Creek invests in long/short equity strategies to capture both the overpricing, as well as underpricing, of individual securities. As part of that approach, Morgan Creek considers sector specialists to have the ability to add greater value given their in-depth knowledge of industry dynamics.

Global Fixed Income

Domestic fixed income strategies have traditionally been the cornerstone of diversified portfolios because of their generally steady return and low risk profile relative to other investments. However, like public equities, global cash flows are increasingly seen as fungible, albeit with adjustment for credit and foreign exchange uncertainties. Therefore, we have included debt instruments from all types of issuers in this asset class. High yield and distressed debt allocations, which offer a higher yield than investment-grade fixed income securities are also included in this asset class. Morgan Creek advocates holding a portion of the portfolio in fixed income due to the attractive diversification qualities of high-grade debt securities.

Marketable Alternatives

This segment of investments seeks to generate moderate returns while exhibiting a relatively low level of volatility and correlation to traditional assets. Examples of such strategies include relative value arbitrage, event-driven trading, and distressed investing. These managers provide risk reduction in the context of a diversified portfolio, and tend to be defensive relative to directional strategies. In general, Morgan Creek shies away from macroeconomic strategies, but may add such funds from time to time to balance out other risks within the portfolio.

Real Assets

While the fixed income asset class can ameliorate the effects of deflation, real assets offer the ability to offset some of the effects of inflation on a portfolio. Real assets are hard assets, and differ from financial assets in their limited supply. Tasks like developing land or mining commodities are difficult and time consuming. The returns demanded by investors for engaging in these activities are subject to the cost of capital and demand for the hard assets. Over the long run we expect returns to be positive and reflect rising marginal costs for these supply-constrained assets as demographics inexorably increase their demand. Despite low capitalization rates, Morgan Creek continues to find pockets of attractively priced real estate. In addition, the global supply/demand imbalances in energy and natural resources lead us to conclude that this will be an attractive area for the foreseeable future.

Private Equity

While private equity is still equity, and is therefore governed by fundamentals similar to those present in public equity markets, we observe three key advantages for private vs. public equity. The first is the value-adding activities that are pursued by the general partners of private equity funds. An assortment of acquisitions, divestitures, cost cuts, recapitalizations, and revenue enhancement strategies go far beyond the third-party buy/sell analyses performed by public equity managers. Second, because Regulation FD has limited the flow of information within the public markets, it has also limited the ability of portfolio managers to monitor the activity of companies between quarterly reporting cycles. Private equity managers are not subject to such rules, and can monitor risk and adjust business plans proactively throughout the course of a quarter. Lastly, the pricing of private equity assets generally reflects a discount for the illiquidity of the asset. As such, an equal measure of growth will generally result in a premium return for investors. As a result, private equity assets have outperformed the public equity markets repeatedly throughout the years while adding a small measure of diversification. Particularly because the dispersion of private manager returns can be very large, access to the best managers and active selection are imperative. Within private equity, Morgan Creek generally finds smaller funds in the buyouts and growth capital space to be more attractive than larger funds with limited investment options.

Manager Sourcing, Due Diligence and Selection

Morgan Creek maintains proprietary information on thousands of current and prospective investment firms. We also utilize external sources to provide information on managers of interest. We do not rely on manager database products as we do not believe that these generic resources provide good and actionable information. Instead, we find that the most valuable insights come from our relationships with key players in the industry. With many of our senior investment team members having been active in alternative investing for over ten years, and coming from some of the most respected organizations in the industry, we believe that our network is invaluable. Many of our best managers have spun out of other organizations with which we have had longstanding relationships.