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 its a terrible idea to
have a ten-figure portfolio invested in just two companies.
The philanthropys 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 Universitys Graduate School of Business
after working for Yale Universitys 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 Universitys 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 Packards portfolio came
filled with office supplies and stamped with the initials HP.
Sargent spoke to Institutional Investors
Alphas Leanna Orr about man versus machine in
financial markets, and why shes betting $7.2 billion on
Alpha: What does the term quant
investing mean to you?
Kimberly Sargent: Youd probably get different answers
from different folks, but Id 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.
Theres a reason this whole issue of the
magazine is about quant investing: Its the hot topic du
jour. Some see it as a trend, 2017s 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
Theres 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 dont 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. Im 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 Packards 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
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