David Morehead on Baylor's Endowment Strategy

Here is a piece of math that sounds wrong until you sit with it. A fund that turns one dollar into three, every six years, three times in a row, ends eighteen years later with twenty-seven dollars. A fund that turns one dollar into fifteen, but takes the full eighteen years to do it, ends with fifteen. The first manager looks, on paper, far less impressive. Investors brag about 15X. Nobody brags about 3X. And yet the faster-looking fund, repeated, beats the showier one by nearly double (16:21).

This is the math that runs David Morehead's world. Morehead is the chief investment officer of Baylor University's endowment, a pool of money currently worth about $2.6 billion (01:18) that exists to pay for scholarships, professorships, and the university's operating budget when tuition alone cannot. An endowment is not a hedge fund chasing a bonus pool. It is a permanent institution's savings account, expected to fund the school forever, which means Morehead's real client is not this year's return but every future entering class. That framing explains almost everything else he does.

It explains, for instance, why he keeps saying a word that venture capitalists rarely use: velocity. "What we're really after is the velocity of capital, not just returns on capital," he says (16:52). Velocity means how fast money comes back so it can be put to work again. A twelve-year venture fund that has stretched into an eighteen-year one, which Morehead notes is now common, might deliver a beautiful headline multiple. But it ties up capital for a decade and a half while other opportunities come and go. Morehead's office has a rule against discussing returns without also discussing time, because a 5X in five months, he points out, is spectacular, while a 5X in thirty years is terrible. Somewhere in a portfolio of endowments and venture funds, that same 5X shows up as either a triumph or a failure of imagination, and the only way to tell the difference is the clock.

Baylor keeps roughly 45% of the endowment in private investments, with a policy range of 35% to 55% depending on how public markets are behaving (11:30). The logic is defensive as much as offensive: private holdings are illiquid, so if public markets crash and shrink relative to the private side, an endowment can find itself owning more privates than it wants, with no easy way to sell. Morehead calls forced selling, after fraud, the second worst outcome an allocator can suffer. Everything about Baylor's private book, from its size to its sector mix, is built to avoid that trap.

Inside the private allocation, Baylor has been quietly shrinking its exposure to real assets, the land, infrastructure, and physical holdings that used to be a staple of endowment portfolios, and shifting toward venture capital, growth equity, and buyout funds. The reasoning is blunt. "The single reason that privates exist is to make money, period, end of story," Morehead says (13:18). If an asset class cannot compete on pure return, in a decade where enrollment pressures are squeezing tuition revenue, it does not belong in a locked-up, illiquid sleeve of the portfolio.

Why the Marks Matter More Than the Money

One of the more useful ideas in the conversation has nothing to do with allocation percentages and everything to do with psychology. Private funds set their own valuations, called marks, for the companies they hold, since there is no public market ticking every second. Morehead insists his managers keep those marks conservative rather than aggressive. His evidence: companies in Baylor's book tend to sell for 60% to 90% more than their last mark, compared with a market-wide norm closer to 30% to 50% (29:19), suggesting Baylor's numbers understate value rather than inflate it.

The reason this matters is not accounting hygiene. It is behavioral defense. If a manager marks a holding at $30 million and the market later offers $20 million, that manager will resist selling, because selling means booking a loss against a number that was never real to begin with. An artificially high mark becomes an anchor that keeps bad capital sitting still.

"Pricing is just a way to make sure that you are psychologically aligned to the reality of the market." — David Morehead, CIO of Baylor University's endowment (28:49)

The same instinct to remove psychology from decisions shows up in how Baylor handled the software sell-off in early 2026, when public software stocks fell 50% to 60% from their October 2025 highs on fears that AI coding tools would gut the entire industry. Morehead's edge, he says, was not technical. It was behavioral: he called friends who run mid-sized private businesses and asked whether they would rip out core software systems for an unproven AI tool. The answer was no, because software has to be right 100% of the time, and even a very good AI model, cited at roughly 93% accuracy by a major software CEO, is not good enough for books that have to balance (22:03). Baylor leaned into the sell-off rather than away from it, treating the panic as a mispricing of human behavior rather than a verdict on technology.

But leaning in did not mean betting everything at once. Morehead describes a mechanical rule for buying into falling markets: ignore declines of 0% to 10%, since that is normal noise for a portfolio with an infinite time horizon, then begin committing roughly a fifth of planned capital at each further 10% decline, from 20% down through 40% and beyond (35:48). The purpose is not to catch the exact bottom. It is to avoid the trap Morehead knows from experience, where an investor falls in love with a falling asset and keeps buying past the point of discipline. "I never wanna be all in," he says. "Things can always get worse" (00:31).

The Rules for Managers, and the Limits of Loyalty

Morehead extends that same discipline to how he treats the outside managers who run Baylor's money. He compares his job to a baseball general manager's: he recruits managers for specific roles, based on their demonstrated skill, the same way a team fields a third baseman and a shortstop. If a manager suddenly changes roles without warning, say, a stock picker who has always stayed fully invested wakes up holding 10% cash, Morehead fires them, regardless of recent performance.

"If I walk out on the field and I have two people on second base, someone's getting fired, and it's probably the third baseman who switched to playing second." — David Morehead (50:23)

Venture is treated as a partial exception. Morehead draws a line between a manager evolving with the market, moving from late-stage bets to earlier ones as valuations shift, which he tolerates, and a manager abandoning their entire investment philosophy, moving from backing proven products to funding unproven ideas, which he does not. The line is not about performance. It is about whether the manager asked first.

Some of Morehead's other habits are structural rather than philosophical. Baylor hires almost exclusively from undergraduate ranks rather than recruiting mid-career professionals, because the office sits in Waco, Texas, a hundred miles from both Dallas and Austin, and it is hard to convince an experienced coastal hire to relocate for a decade. The tradeoff is real: new hires take five or six years to develop, during which Morehead is effectively carrying the team. The payoff is retention. His two longest-tenured colleagues have been with him for sixteen and eleven years, and Morehead argues that longevity itself produces better returns over time (41:39).

None of this makes Baylor immune to bad timing. Its 2025 fiscal year return of 9.4% (45:50) lagged peers partly because a wave of private commitments made five years earlier was still working through its early loss-heavy period, a pattern investors call a J-curve, where private funds tend to show losses before gains appear. Morehead expects that drag to fade, projecting a return near 18.5% to 19% for the current fiscal year (47:15). He is unbothered by the comparison to schools with flashier numbers. Every endowment, he says, has different needs, and Baylor's is simple: get bigger, per student, faster than the problems facing higher education can catch up.

What lingers from the conversation is not a single tactic but a posture. Morehead does not trust size for its own sake, whether in fund multiples, headline valuations, or peer comparisons. He trusts a number attached to a clock, a mark that matches reality, and a manager who does what they said they would. It is a small, almost old-fashioned discipline, applied to a business that increasingly rewards the opposite.