Baylor CIO on investing: why cash velocity beats profit

This article summarizes an episode of 20VC with Harry Stebbings’s video series featuring David Morehead, chief investment officer at Baylor University.

David Morehead, chief investment officer at Baylor University / Photo credit: 20VC with Harry Stebbings

A large investment return can harm an organization if it traps money for too long. David Morehead, chief investment officer at Baylor University, argues that investors must focus on how fast money moves rather than paper profits to fund current needs.

To achieve this, investors should set time limits for performance, establish clear rules for fund managers, and create a plan for deploying cash during market downturns.

Time horizons dictate true investment value

To ensure funds are available for these current needs, Baylor focuses on strict time horizons. Because Baylor spends roughly 5% of its fund each year, quick liquidity is valued so profits can support the school and be reinvested.

Morehead notes that “Students can’t pay their tuition with returns.” To accelerate capital velocity, Baylor enforces time-based rules for evaluating private investments:

• Timeline pairings: Every investment return must include an estimated timeframe to clarify when cash comes back.
• Comparative growth: Different strategies are judged by total dollars grown over the same period.
• Opportunity costs: Long-term holds are rejected if the financial gain falls short of what shifting funds into new opportunities could earn.
• Strict ratios: A 5x gain over 30 years is considered horrible, while a 5x gain in five months is amazing.

Strict role discipline prevents portfolio overlap

This insistence on timing extends to role discipline, with Baylor plans long-term investments first and using manager selection to control the overall fund:

• Set the budget first. Private investment maximums are planned so public market crashes do not force fire sales.
• Define specific jobs. Each manager receives custom instructions and defined roles before their individual performance is judged.
• Reject standard funds. Single-investor accounts are favored when pooled funds create overlap or miss required categories.
• Size commitments deliberately. Dollar amounts are scaled to ensure future sales have a meaningful impact on the underlying company.

When managers stray from their assigned roles, an attractive return can still leave the university with the wrong mix of financial risks. Morehead warns that fund managers who drift into the same investments act like baseball players covering the same base. This overlap creates dangerous blind spots and justifies firing the managers involved.

Cash reserves fuel mechanistic market purchases

By keeping managers confined to assigned roles, Baylor can hold cash reserves to deploy when panic pushes down the prices of strong businesses.

Morehead establishes a buying plan before fear takes over, noting that “We’re never drawing a line in the sand and saying, ‘Down 20%, I’m all in.’ Down 20%, maybe I’m 20% in. Down 30%, I’m another 20% in. Down 40%, I’m another 20% in.”

Baylor relies on rules for navigating stressed markets without bias:

• Allow cash to build up when current options fail to beat the value of holding reserves.
• Treat market falls of up to 10% as normal activity for a long-term fund.
• Set aside cash reserves to deploy for each additional 10% drop in the market.
• Consult with financial managers during stressful periods to reevaluate the strongest companies before investing.