Charles Skorina & Company
● RETAINED EXECUTIVE SEARCH ●
Our clients: visionary families, transformative nonprofits, Wall Street trailblazers
Our vision: build investment preeminence, create opportunity, enrich lives
Our work: provide talent, access, relationships, and insights
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Too many people think investing is easy – Warren Buffett
Guest commentary: Jon Hirtle
Executive Chairman, Hirtle Callaghan
Most universities distribute about 4.5 to 5 percent of their endowment’s value each year to support school operations. The investment office therefore must earn a bare minimum 4.5 to 5 percent to maintain the nominal value of the endowment and its ability to support the university in perpetuity.
But what about purchasing power? Inflation whittles away at buying power or “real” value, so endowments add an inflation component to their earning targets. The average inflation rate since World War Two has been 3.65 percent, a cumulative price increase of 1,653.36%. So, 8 percent would seem to be the minimum return required.
But it’s not that simple. Schools have faced massive cost pressures for years. According to Mercer, “Over the past 40 years, the inflation rate in the US higher education space — as measured by the Commonfund Institute’s Higher Education Price IndexTM (HEPI) — has exceeded the headline inflation rate as measured by the Consumer Price Index (CPI) by almost 40% on a cumulative basis.”
Given this uncertainty, prudent endowment boards aim for returns that include some growth in the capital, at least another 1 percent a year on average to cover contingencies and development. All things considered – operating expenses, financial aid, growth, and the unexpected (Covid cost schools billions) – we think a 9 percent hurdle rate is a more realistic goal.
What to do?
Capital market theory assumes that “the greater the risk that an investment may lose money, the greater its potential for providing a substantial return. Setting aside the historically strong stock market returns over the last decade (and two bear markets in 2020 and 2022) , “since 1950, public stocks have, on average, produced about 6 percent over inflation with one major caveat, there’s lots of price volatility along the way. (Chart: S&P Historic Performance.)
Over that same time horizon, investment grade bonds have on average produced a scant 2 percent over inflation, albeit with far less volatility.
So why not hold 100 percent stock portfolios? The problem is the above-mentioned volatility. The stock market experiences dramatic price drops from time to time, destabilizing budgets and generally scaring the hell out of trustees.
How about adding bonds to dampen drawdowns? Not so fast. Investment grade bonds are indeed far less volatile, but with real returns of only 2 percent, not close to what institutions need.
The Capable, Independent Investment Office
Welcome to my world. How can we capture real endowment returns that exceed what is required while actively managing downside risk? Here’s how we look at it:
We source and select a myriad of compelling investments that complement each other by rising and falling in price at different times, then assemble them in a way that captures stock-market-like returns with something like bond market volatility.
This is no small task. It requires a team of experienced professionals collaborating closely and, ideally, working inside an independent investment office with substantial power.
Only the largest universities have the resources to support such an office. Most endowments and foundations do not. David Swensen described the choice as between “those that are set up to make high-quality active management decisions and those that aren’t.”
Governance Alpha
There is yet another challenge. When endowments fail to achieve their required return over time, the investment staff or the Investment Committee or both are accountable. “Alpha” is investment jargon for value added or subtracted by active investment decisions.
Governance Alpha is a term that we coined years ago to differentiate the impact of committee or CIO decisions from those made by underlying specialist money managers. Just like Manager Alpha, Governance Alpha can be either positive or negative.
When an endowment fails to earn its required return, it is most often the result of Governance Alpha, well-documented behavioral tendencies, present in all humans, which challenge retail investors and endowment committees alike.
For example, “Recency Bias” encourages committees to chase recent returns. Without a seasoned and savvy CIO with the power to check those tendencies, Governance Alpha often turns negative. That’s why a professional and independent investment operation is so important.
The OCIO solution
OCIO firms offer the proven performance of the best large institutional and family investment offices. And they have the resources, talent, structure, and process to deliver those required returns and cope with operational and regulatory burdens and the complexity of modern portfolios.
—Jon Hirtle
Read More »NEWS AND COMMENTARY
ABOUT
Mark L. Baumgartner, new CEO/CIO University of Florida Investment Corp
Katharine “K.C.” Krieger, new CIO at The Getty
x CIO, The Eli and Edythe Broad Foundation , x Cambridge Associates, BA Colby College
Vincent Tuohey, next president PRINCO
13yrs MITMCo, 2yrs Littlejohn & Co. 4yrs US Army Captain (Iraq), BA & MBA Harvard, MA Cambridge U
Scott Chan, succeeds Chris Ailman as CIO of CalSTRS
SKORINA IN THE NEWS
9-2-21 Forbes: Insiders say Yale missed an opportunity to add diversity to its iconic $31bn endowment.
9-1-21 Institutional Investor: How to Reach the Allocator C-Suite.
5-7-21 BloombergNews: Yale Names Alex Banker Interim Endowment Chief, Plans Search
5-6-21 The New York Times: David Swensen, Who Revolutionized Endowment Investing, Dies at 67
5-6-21 Forbes: Yale Endowment Chief David Swensen Leaves Legacy of Top College Investment Leaders
CHARLES A. SKORINA & COMPANY works with leaders of Endowments, Foundations, and Institutional Asset Managers to recruit Board Members, Executives Officers, Chief Investment Officers and Fund Managers.
Mr. Skorina also publishes THE SKORINA LETTER, a widely-read professional publication providing news, research and analysis on institutional asset managers and tax-exempt funds.
Our Practice:
• We recruit Board Members and Executive Officers, Chief Investment Officers and Senior Asset Managers.
• Our research and analytics are backed by over thirty years of hands-on recruiting experience and an unrivaled personal network.
• We collect performance, compensation, and background data on most senior institutional investment professionals in the U.S. and the funds they manage. We analyze that data to construct profiles of those managers and their funds, identify best-in-class people, and map their career trajectories.
• We share our research and insights in a widely-read professional newsletter – THE SKORINA LETTER – and website – www.charlesskorina.com.
• The New York Times, Wall Street Journal, Bloomberg, Thompson Reuters, Financial Times (Fundfire), Institutional Investor, Pensions & Investments, Private Equity International, and the institutional investment community use our research and analysis. Skorina has been interviewed on chief investment officer compensation issues on Bloomberg TV.
• Our work is regularly re-printed in Allaboutalpha.com and other industry magazines, blogs, and third- party web postings.
• We focus specifically and effectively on the world we know: Board members and Executive Officers, Chief Investment Officers, and Senior Asset Managers at institutional investment firms and funds – including sovereign wealth funds, endowments, foundations, pension funds, banks, investment banks, outsourced chief investment officer firms (OCIO), and sell-side money managers.
Prior to founding CASCo, Mr. Skorina worked for JP MorganChase in New York City and Chicago and for Ernst & Young in Washington, D.C.
Mr. Skorina graduated from Culver Academies, attended Michigan State University and The Middlebury Institute of International Studies at Monterey where he graduated with a BA, and earned a MBA in Finance from the University of Chicago. He served in the US Army as a Russian Linguist stationed in Japan.
Charles A. Skorina & Co. is based in Tucson, Arizona.
Endowment Performance 2024: How Sweet It Is
Being too far ahead of your time is indistinguishable from being wrong — Howard Marks
Our latest fiscal year-end 2024 endowment performance report features ten-year and one-year returns, and AUM for one-hundred-forty-four US and eight Canadian institutions, the latest available.
In our line of work, acquiring talent and capabilities for institutional and family office clients, we like hard data on the individuals who drive the investment decisions. Returns may be historical, but they are useful clues to an investor’s – and board’s – views, process, and discipline.
We consider a ten-year span to be a rigorous and revealing measure of the strength of an institution’s long-term investment abilities, but we remind our readers that there’s much more to the story.
Board members and administrators set the parameters for investment execution, and they are the ones to judge whether their goals are met. Every school has its own endowment payout rate and tolerance for risk and that’s what CIOs aim for. Some schools rely heavily on income, others place more weight on growing the principal.
A tale of two markets
For those institutions holding substantial U.S. public equity stakes life is sweet. As Chris Markoch at MarketBeat writes, the S&P was up twenty-three percent in 2024, “driven by earnings growth and sector leaders in AI, biopharma, and blue-chip companies.”
Sometimes it’s best to run with the herd, to paraphrase our Mr. Marks. But for endowments with heavy exposure to alts, particularly private equity, there were challenges.
PE has performed well for forty years. But there are periods when the economy tanks, deals stagnate, and returns to investors slow to a trickle.
Here’s Peter Lynch’s droll take on fickle Mr. Market, and a few partisan comments on PE from Alisa Amarosa Wood and Chris Harrington, partners at KKR, and Ludovic Phalippou, professor of Financial Economics at Saïd Business School, University of Oxford.
Opposing pundits aside, we take comfort in the chart below, a cheerful visual we ran in September’s newsletter from MFS investment Management depicting the S&P’s bumps and grinds.
S&P 500 Index cumulative returns for 1-, 5-, and 10-year periods following end of bear market
Tenure and Turnover
What a difference a decade makes. Only about a third of the CIOs in our FY2024 endowment investment report logged ten years or more tenure, and those are mostly the ones on top.
Mr. Philip Zecher, CIO at Michigan State University, and our featured guest below, will soon pass the ten year mark and the endowment’s splendid performance reflects his time and attention.
Chief investment officers new to the position, Ms. Geeta Kapadia at Fordham for example, barely have time to roll up their sleeves and grab a pitchfork. It takes five years at least to clear, plough, and seed an endowment, and five more to fully bear fruit.
College endowments consist of thousands of gifts with strings and legally binding contracts attached. To repeat a well-worn trope, it takes years to fully implement a multi-asset, multi-generational investment strategy and altering course mid-stream – a new investment chair, a change in CIOs, court battles – can sap performance for a decade.
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Phil Zecher, chief investment officer
Michigan State University
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