Educational Alpha: Conversation with Steve Novakovic, Managing Director, Educational Programs, CAIA Association
Release Date: May 7, 2025

Introduction

In Season 3, Episode [S3] of Educational Alpha, host Bill Kelly engages in an insightful dialogue with Steve Novakovic, the Managing Director of Educational Programs at the CAIA Association. The conversation delves into the evolving landscape of endowment investing, the shift towards total portfolio approaches, and the changing responsibilities of asset allocators. Steve shares his professional journey, from his early days at the Cornell University Investment Office to his pivotal role in shaping the KAYA curriculum. Together, they explore critical themes such as diversification, due diligence, retail democratization, ethical foundations, and the future of credentialing in the finance industry.

Background and Professional Journey

Steve's Early Career and Formative Experiences

Steve Novakovic began his career in 2005 at the Cornell University Investment Office, a role that provided him with exposure to a diverse range of alternative investments, including hedge funds, private equity, and real estate—areas that were not as mainstream at the time. He emphasizes the invaluable lessons learned during the 2008 Global Financial Crisis (GFC), highlighting how working through such volatility instilled a deep understanding of operational due diligence and risk management.

“I got to watch [private debt] as it was still probably described as being a nascent part of the industry and growing and participate in that.”
— Steve Novakovic [03:59]

Transition to CAIA Association

After nearly a decade with KAYA, Steve transitioned to the CAIA Association, where he now leads educational programs. His role allows him to influence the next generation of institutional investors by integrating real-world experiences and evolving industry trends into the curriculum.

Evolving Nature of Endowment Investing

Impact of the Global Financial Crisis and Shifting Responsibilities

Steve discusses how the GFC forced endowments to reassess their asset allocations and liquidity strategies. The crisis underscored the importance of having diversified income streams beyond the traditional 5% payout, especially as market downturns reduce the asset base supporting these payouts.

“When you have a time of crisis where assets fall and Even though the 5% payout is still the same, the asset base is smaller, and so the number coming is a little bit lower, that can have a huge impact depending on how proportional it is to the overall budget.”
— Steve Novakovic [08:06]

Manager Selection and the Rise of Passive Investing

The conversation highlights a significant trend: the shift from active to passive management in endowments. As markets become more efficient, the availability of alpha—excess returns above the market—diminishes, prompting institutions to favor passive strategies like index funds to enhance liquidity and reduce costs.

“Today, if you look at what a lot of the average endowments do, there's more and more passive in those portfolios...”
— Steve Novakovic [11:41]

Liquidity Challenges and Total Portfolio Approach (TPA)

Steve explains the complexities of maintaining liquidity within the endowment model, especially during market downturns. He advocates for a total portfolio approach that emphasizes flexibility and diversification across multiple access methods—such as direct investments, co-investments, and secondaries—to better navigate uncertainties.

“If you just have exposure to the S&P 500 via an index or an ETF, that liquidity is quite great. And the endowment model always viewed liquidity as being sourced from your equity portfolio.”
— Steve Novakovic [14:03]

Diversification and Due Diligence

The Role of Alternatives in Diversification

Bill Kelly underscores the significance of alternative investments in achieving uncorrelated risk premia. He cites Sylvia Kwan, CEO and CIO of Ellevest, emphasizing the pursuit of uncorrelated risks to enhance portfolio diversification.

“I try to get uncorrelated risk premia for my clients and if I can't find that in the public market, I look privately and it's interesting.”
— Bill Kelly [16:34]

Performance Dispersion in Private Equity

The discussion touches on the vast performance dispersion within private equity, illustrating the potential for substantial returns in top quartile funds compared to median performers. Steve highlights the importance of rigorous manager selection to capitalize on this opportunity.

“The distance of travel between that median to the top quartile is thousands of basis points and therein lies the opportunity set.”
— Bill Kelly [16:34]

Ethical Foundations in Investment Practices

Steve emphasizes the introduction of CAIA’s proprietary ethical principles, moving beyond the CFA Institute’s code of conduct. This initiative reflects the unique challenges and ethical considerations inherent in alternative investments.

“We've developed our own set that we can hang out and showcase the world, what we're all about, the integrity that we really promote a client first mindset...”
— Steve Novakovic [24:21]

Curriculum Development and Democratization

Advancing the KAYA Curriculum

Steve describes how the KAYA curriculum evolves annually to incorporate emerging trends and strategies in alternative investments. Recent additions include digital assets (crypto), growth equity, and infrastructure, ensuring that students are well-equipped to navigate the dynamic investment landscape.

“Geopolitics is a really good example of us sort of being on the leading edge there. ... create some material that could help allocators think about how to manage geopolitics and incorporate the analysis into their asset allocation process.”
— Steve Novakovic [21:41]

Embracing Total Portfolio Approaches

The curriculum now addresses the multifaceted nature of TPA, encouraging allocators to consider various dimensions of investment strategies and access methods. Steve illustrates this with an example of an allocator optimizing returns through co-investments by negotiating lower fees and leveraging direct investment expertise.

“...they were adding 500 basis points to value by going the co-investment route relative to what they were doing previously...”
— Steve Novakovic [30:44]

Democratization and UNIFI Platform

Bill introduces the concept of democratization in access to alternative investments, highlighting KAYA’s UNIFI platform. Steve elaborates on how UNIFI aims to bridge knowledge gaps and provide learning modules that empower investors to make informed decisions without overwhelming them.

“Kaya continues to be a source of credibility, reliability and confidence that what we're sharing is accurate, complete and appropriate.”
— Steve Novakovic [37:00]

Ethics and the Future of Credentialing

Importance of Ethical Compasses

Both Bill and Steve stress the critical role of ethics in investment professions. Steve reiterates that CAIA’s new ethical guidelines are foundational to maintaining trust and integrity within the industry, especially in an era where information is readily accessible yet often unreliable.

“There's a base level of expectation that you just are going to know things... It’s one thing to say, okay, I know what Sortino ratio is. But then what you're really getting at is critical thinking and judgment.”
— Steve Novakovic [34:19]

Impact of Generative AI on Credentialing

The conversation examines the potential influence of AI on credentialing processes. Steve remains optimistic about the enduring value of human-led education and community, asserting that AI cannot replicate the rigor, process, and human interactions that institutions like CAIA foster.

“Kaya is more than just a test. It's more than just a curriculum. It's the people who are around it, it's the community members that participate in our ecosystem...”
— Steve Novakovic [43:59]

Future Exams and Professionalism

Steve announces the upcoming exam window in September, encouraging continuous learning and emphasizing the importance of professionalism. He underscores that credentials are not merely academic achievements but are tied to ethical practices and real-world impact.

“Our next exam window takes place in September. Registration is open now and will be open for the next few months.”
— Steve Novakovic [47:22]

Insights and Conclusions

Balancing Knowledge and Ethics

The episode concludes with a reaffirmation of the balance between technical knowledge and ethical responsibility. Steve and Bill agree that while technical expertise is essential, an unwavering ethical compass is paramount to sustaining long-term success and trust in the investment industry.

“If you embarrass me and ask me to recite any one of these ratios, I might come up a little bit short, but the totality of what I took away from that was just outstanding.”
— Bill Kelly [37:00]

The Human Element in Education

Steve highlights the irreplaceable value of human connections and community in educational programs, emphasizing that these elements foster a supportive and engaging learning environment that AI cannot replicate.

“Human connections, human interactions, human engagement, that's the value of the community and that's the value of an organization like Kaya is facilitating that...”
— Steve Novakovic [43:59]

Commitment to Continuous Learning

Both speakers emphasize the necessity of perpetual learning and adaptation in the ever-evolving financial landscape. They advocate for educational programs that not only impart knowledge but also cultivate critical thinking and ethical decision-making.

“You have to have some form of an ethical compass, you're dead to the investor.”
— Bill Kelly [48:19]

Notable Quotes

• Steve Novakovic [03:59]: “I sort of got lucky to stumble into the job that I had out of college, but then to be able to have my eyes opened to a broader world of finance that I didn't know exist was just so fortunate.”

• Steve Novakovic [08:06]: “The organizations, the universities that had that greater of a reliance on the endowment were not much more challenged than those where maybe the endowment represented 10% of the budget.”

• Steve Novakovic [14:03]: “More so in today's environment is does it still make sense to have equities be a primary means of liquidity or sources of liquidity for them, or do you start to put greater emphasis on cash or tolerance for holding cash?”

• Bill Kelly [16:34]: “Alpha was there for the taking. But what I don't know is I don't think Preqin existed back then. I don't think PitchBook existed back then.”

• Steve Novakovic [24:21]: “We realized that increasingly it was time for us to have our own voice there. The world of alts is different from the world of traditional investments in a lot of ways.”

• Steve Novakovic [34:19]: “It's one thing to say, okay, I know what Sortino ratio is. But then what you're really getting at is critical thinking and judgment.”

• Steve Novakovic [43:59]: “Kaya is more than just a test. It's more than just a curriculum. It's the people who are around it, it's the community members that participate in our ecosystem.”

• Bill Kelly [48:19]: “You have to have some form of an ethical compass, you're dead to the investor. You're dead certainly to me. And your value in this industry is of very little worth, in my opinion.”

Conclusion

This episode of Educational Alpha offers a comprehensive exploration of the complexities and evolving trends within alternative investments and endowment management. Steve Novakovic provides valuable insights into the significance of diversification, ethical practices, and continuous education in navigating the dynamic financial landscape. The conversation underscores the critical balance between technical expertise and ethical responsibility, emphasizing the enduring value of human-led education and community engagement in fostering trust and integrity within the investment profession.

For those seeking to deepen their understanding of alternative investments and asset allocation, this episode serves as a rich resource, highlighting the importance of adapting to market changes, embracing comprehensive educational frameworks, and upholding unwavering ethical standards.

Learn more about the CAIA Association and stay updated with future episodes by subscribing to caia.org.