Mark Yusko, CEO and CIO of billion-dollar investment fund Morgan Creek Capital Management, says “you have to be willing to accept change. You have to be willing to start with a beginner’s or child’s mind and imagine what is possible,” when Opto asked him how, as an investor, he’s able to capitalise upon innovation.
Innovation is the hallmark of his investment practice and one that he embraces as the foundation of his investment outlook. His current focus is on cryptocurrencies, which have the capacity to cause untold disruption and, as Yusko believes, create unbridled wealth on a previously unimaginable scale.
For Yusko, wealth creation is about getting ahead of the crowd and putting trust in an idea before others will consider it. It is, for him, the cornerstone of being a successful investor and part of a successful approach to getting in early on innovation.
It is Yusko’s understanding of the power of change and the relentless nature of growth that drives his investment focus on innovative and ground breaking technologies or ideas. To Yusko, there are only two states in the natural world: growth and death. Understandably, he prefers the former.
Yusko spent a great deal of his youth in the seventies in Seattle, Washington. The state is home to some of the world’s biggest and most recognisable tech brands. Yusko jokes that most of his friends don’t have to work anymore because they got involved with a little company called Microsoft.
It was not long, however, before his parents packed him up while he was attending high school and moved him to the East coast. Not long after, he moved to Houston, Texas during his senior year. The upheaval was fortuitous in some ways though, as it taught Yusko how to socialise, how to meet new people and fit in, as well as, crucially, how to be flexible and adapt.
He would then move to South Bend, Indiana, to study at the University of Notre Dame. Initial aspirations of becoming an architect fell apart when Yusko realised the career he’d chosen to pursue was too subjective. It was in sciences that he found his vocation after stumbling into a pre-medicine course in biology and chemistry.
But again, Yusko had a realisation that maybe he was on the wrong track as he didn’t feel his calling was to be a doctor. He felt that the potential outcomes in this field were somewhat limited. “The only jobs you can get with a pre-med degree if you don’t go to med school are basically as a pharmaceutical sales rep, or as a consultant. I was not 6’4” and handsome. I was not going to be a pharmaceutical sales rep.”
He decided that he would go back to school — specifically, business school at the University of Chicago. After finishing his studies and formalising his investment education by attaining an MBA in accounting and finance, Yusko entered the world of work.
“I took the first job that was offered and went to work for an insurance company,” he recalls. “I’d say my life is a series of happy accidents,” Yusko says, as he got lucky as the person responsible for investments at the firm where he worked retired, leaving him in charge.
“I took the first job that was offered and went to work for an insurance company. I’d say my life is a series of happy accidents”
After a stint at this insurance firm, he then moved on to a quant long-only equity management firm called Disciplined Investment Advisors, which was run by two professors at Northwestern University and was, Yusko explains, one of the first of its kind run by university professors.
It’s here that he was exposed to the discipline of quant value investing. He realised that — as much as he loved working in a small team — he wanted to return to his alma mater. “I got the call,” Yusko states. He likens the experience to when American college football coach Lou Holtz, who had a lifetime contract at Minnesota, moved to University of Notre Dame. “Notre Dame called and so he went — I kind of had the same thing,” he jokes.
So, Yusko headed back to Notre Dame to work with its investment team at the university, where he would come to learn some of the most important lessons of his investing career.
While working in the investment office at Notre Dame, Yusko recalls how he and his team were fortunate to have developed good relationships with some individuals at Stanford University. “We would hang out with them on Sand Hill Road [in Silicon Valley] and they would introduce us to all the great venture capitalists,” he says, adding that this led to his team allocating some capital in what a small company at the time called Google [GOOGL]. “That changed our portfolio forever,” he reflects. “We put in $500,000 and that turned into $200m. There should be a quad at Notre Dame called the Google quad.”
It was his time spent investing for the university that gave rise to one of Yusko’s most significant moments of clarity. He realised that the path of science he had taken at the start of University was now permeating his career, which led to personal discoveries about how best to invest.
“As you build anything on top of previous innovation or discoveries, it gets better not linearly, but exponentially. This is the part that most people just can’t process and the reason the average person doesn’t invest enough in technology and innovation is that we all think linearly; we think in linear steps”
“When I was first in the business, I was obsessing over ‘should we own Ford [F] or General Motors [GM]?’. The reality is that didn’t matter. What you should do is realise that personal computers were going to be a big thing. That the internet was going to be a big thing or some biotech innovation was going to be a big thing, because that’s where the big returns are made.”
This is due to, what Yusko explains as, the compounding nature of innovation. “As you build anything on top of previous innovation or discoveries, it gets better not linearly, but exponentially. This is the part that most people just can’t process and the reason the average person doesn’t invest enough in technology and innovation is that we all think linearly; we think in linear steps,” he says.
Yusko’s relationship to the academic world also extends to his physical proximity to it. Even today, he lives within the Chapel Hill Research Triangle, an area that exposes him to some of the greatest minds at the University of North Carolina at Chapel Hill, Duke University and North Carolina State University.
“There’s probably something to be said about that,” Yusko considers. “If you think about university endowments as being some of the best investors and having the best track records.” For a long time, Yusko has been one of the foremost proponents of the investing approach, which was first formalised and perfected by Yale’s legendary chief investment officer, David Swensen, alongside his colleague Dean Takahashi. Swensen had sadly died following a long battle with cancer the week before Opto’s interview with Yusko.
The model that Swensen popularised and which he came to embody was one that Yusko, a scientist-turned-investor, also embodies. Swensen carried the torch for the model from his role as investment director at the University of Notre Dame to North Carolina, where he founded and was CIO of the University of North Carolina Management Company, the endowment investment office for the institution.
A 2020 article from Forbes states that over the past circa 70 years to 2017, endowments managed to achieve a return of 6.6% with a 0.54 Sharpe ratio — used to show performance of an investment compared to a risk-free alternative after adjustments for risk.
“Compared to broad asset classes and a generic institutional portfolio of 60% equities and 40% bonds (60/40 portfolio), endowments have done well, averaging a 1.00% return advantage with a much higher Sharpe ratio,” Randy Brown, CIO of Sun Life and head of Insurance Asset Management at SLC Management, wrote in Forbes in November. “While the endowment leaders have done much better, even the laggards have matched or beaten the 60/40 portfolio, with lower risk,” Brown added.
Yusko says that’ its probably no coincidence that these teams are embedded in the university community. “They run into professors and they’re around innovation in all kinds of areas. It’s the same thing with Silicon Valley or Route 128 in Boston. If you’re around innovative, creative people, you’re going to get exposed to big opportunities.”
“They run into professors and they’re around innovation in all kinds of areas. It’s the same thing with Silicon Valley or Route 128 in Boston. If you’re around innovative, creative people, you’re going to get exposed to big opportunities”
Chapel Hill is the home of Morgan Creek Capital Management, the investment firm that Yusko set up in 2004. The firm manages circa $2bn in discretionary and non-discretionary assets. It has a strong grounding in the endowment model that has “a focus on asset allocation and top-down portfolio construction,” which he thinks dwarfs the impact of security selection.
“The endowment model of investing was really about forming hypotheses, gathering data, testing hypotheses, reforming hypotheses, and about being tightly tied to the scientific community and innovation community,”
No ‘I’ in innovation
Yusko deals, very successfully, in innovation, but what does it all mean? “To me, innovation is about the creation of new knowledge. So, you’re innovating in a field or you’re innovating in an area of application of science, or the application of technology.”
In many circumstances, however, innovation is born out of necessity. There are places one can track innovation other than the hallowed halls of the Ivy Leagues, or in the corridors of Stanford.
As Yusko considers, drug dealers will likely try to avoid using bank accounts or traditional computing networks. Such individuals may turn to something like a pager, or Bitcoin.
“We can all pass judgment on whether that’s a good thing or a bad thing, but the reality is that those people are forced to [turn to] innovative [solutions],” Yusko says.
“We can all pass judgment on whether that’s a good thing or a bad thing, but the reality is that those people are forced to [turn to] innovative [solutions]”
Practically speaking and in terms of his investment approach, Yusko admits he blurs the line between innovation and entrepreneurship.
“I talk about ‘big E entrepreneurs’ and ‘little e entrepreneurs’. A ‘big E entrepreneur’ or a ‘big I innovator’ would create something new, something completely new.”
He points to the Defense Advanced Research Projects Agency’s (DARPA) invention the internet, and to Marc Andreessen creating the web browser, or Tim Berners-Lee’s first web page. Those individuals, he says, were ‘big I innovators’.
“But then to me,” Yusko explains, “there’s also the ‘little e entrepreneur’ or the ‘little i innovator’ who takes something new and applies it to something old and makes it better.” This, although something he suggests is regarded less highly, can often be very lucrative. The simple explanation is that you’re not having to reinvent the wheel.
“You’re taking advantage of the incumbent technology or incumbent innovation and you’re getting that flywheel effect, that compounding effect, non-linear growth, that network effect.”
“You’re taking advantage of the incumbent technology or incumbent innovation and you’re getting that flywheel effect, that compounding effect, non-linear growth, that network effect”
One such example has been the rise of connectivity. “There are 10 billion mobile phones that are all connected across this ubiquitous mobile net and… it totally transformed information exchange, commerce, relationships — everything that you can imagine just got completely transformed,” he considers. This has facilitated another great change, for we are on the precipice of the next iteration. This Yusko calls the trust net — an era in which the middle person is no longer required.
“Every new technology starts at the fringe and that is axiomatic because the fringe is barred from mainstream activity,” Yusko considers. And like the drug dealer with the pager, Bitcoin was previously considered as the preserve of illicit dealings. It was thought to be a tool through which people could transact on the dark web, away from the purview of authorities. However, its recent adoption by big institutions, not to mention the rash of investor interest in recent years, shows Bitcoin’s reputation has changed. It’s now considered, at least by some, to be the next great generator of wealth.
Decentralised finance (see DeFi: the new kid on the block, p.19–21) is something that Yusko believes will generate untold wealth in coming years. “Any innovation in a process, or a segment, can be meaningful,” Yusko says. “And the one where I’m spending all my time now is in the blockchain technology and crypto world.”
“Any innovation in a process, or a segment, can be meaningful. And the one where I’m spending all my time now is in the blockchain technology and crypto world”
This space is, after all, building on all of the work that has come before it from the developments within the world of computing.
It’s the next iteration in the decades-old evolution of computing power that will see humanity continue further into the digital age. Yusko explains that in the old days, those lending money relied on a single ledger. “I wrote down the amount and you had to trust me that I wrote down the right amount.” This gradually evolved into dual-entry accounting, wherein two ledgers are used to record the amount borrowed from both the perspectives of the lender and the borrower. “But”, Yusko asks, “what if one of us writes down a different amount? Who’s going to be the arbiter? The answer was simple: banks.
“The banks have had a pretty good 700-year run being the arbiter of truth and it’s their word over ours. That’s all well and good, except we have to trust them. Well, now we have the technology to say, ‘I don’t have to trust a human or an organisation’. Now, we can trust code.”
This is not a new idea. Think of every time you need directions. You open Google Maps, Yusko explains. Likewise, rarely do we just trust a single person’s restaurant recommendation anymore; we check aggregated online reviews.
But still, many at the top of the investment world remain cautious on cryptocurrencies. Jamie Dimon, CEO of JPMorgan Chase and an outspoken critic of the cryptocurrency technology, told The Wall Street Journal CEO Council in early May, that, despite the bank offering products to its clients, that he’s “not a Bitcoin supporter”.
This does not perturb Yusko. “The fact that people like Dimon were railing against Bitcoin meant that it was a really, really good idea, because he’s a really smart guy in a really powerful position at a really big organisation,” Yusko says. “The vehemence of his vitriol toward the asset meant that it was a serious threat.”
“The fact that people like Dimon were railing against Bitcoin meant that it was a really, really good idea, because he’s a really smart guy in a really powerful position at a really big organisation,” Yusko says. “The vehemence of his vitriol toward the asset meant that it was a serious threat”
As Yusko says, a huge amount of wealth is generated from investing in something you believe in before others even understand it, if that thing goes on to become wildly successful. “I don’t fancy myself a technology seer. I don’t think I have any special talent for identifying the next big thing,” he says. “But I think I’ve got a decent nose for when somebody shows me something and is excited about it I can get excited about it as well.”
But there is a tension that comes with accepting something unknown, if not an abject terror at trusting in something completely new and alien. There is a reason the Luddites sabotaged the textile machinery that would eventually become their undoing — their fear and distrust of the technological innovation was not unfounded. However, often this objection can be a better sign to an investor willing to push boundaries than a warning. “I’ve learned that the greater the opposition to an idea and the higher the quality of the opposition, the better the idea.”
This article was originally published in our Opto Magazine. You can purchase your copy via our Opto Shop.