OCIO assets up over 21% in Skorina’s latest OCIO list!

Last month in our annual OCIO report, we listed OCIO assets up 18% from the prior year.  We promised to come back with some additional thoughts about the outsourcing decision for endowments, and here we are.

Now, with recent AUM updates as of June 30th from a few big OCIO providers, we’re reporting $1.7 Trillion in full-discretion assets under management by outsourced chief investment officer firms.

That’s a year-over-year jump of $364 billion – or a little over twenty one percent – since September 2016!

See our OCIO list from last week with these latest updates here: https://www.charlesskorina.com/?p=5145

Our headline now says that total outsourced AUM is up over 21 percent (about $364 billion) year-over-year by our reckoning — but we didn’t hazard any guess about where all that money was coming from.

Our friend Dr. Alan Biller in Menlo Park, whose firm manages almost $40 billion on a full-discretion basis, has some thoughts on the matter.

We profiled Mr. Biller last year. See: Alan Biller: An accidental money manager

https://www.charlesskorina.com/?p=3916

Skorina:

Alan, you deal with prospective OCIO clients on a daily basis.  What do you think is driving the growth in this niche?

Biller:

The effort by corporate pensions to de-risk and off-load their retirement liabilities probably accounts for the lion’s share of the AUM growth, Charles. 

U.S. private pensions totaled about $25 trillion in assets as of year-end 2016 according to the latest OECD report (Organization for Economic Co-operation and Development).  

See http://www.oecd.org/pensions/private-pensions/Pension-Markets-in-Focus-2017.pdf

And endowments, foundations, health systems, charities, etc., account for maybe a tenth of that: $2 to $2.5 trillion.  So, that big jump you see in your list is bifurcated.  The growth rate for pension assets is probably well over 21 percent. The growth rate in E&F is, I suspect, more modest than that.

Pension investors can’t go to their employees for more money to meet unanticipated expenses, and they have no flexibility over distribution.  There are no rewards or promotions for meeting pension obligations; just the prospect of embarrassment if they can’t.  It’s understandable why they’re looking for ways to outsource the headaches!

Skorina: 

OK, we get that the E&F sector is relatively small in the total institutional world and probably hasn’t contributed more than $10 or $20 billion to that year-over-year OCIO growth.  But they’re still very desirable clients to OCIO vendors.  And we know you talk to a lot of them.  What are they saying about their needs?

Biller:

First, they’re worried about returns.  The last year has been great, but don’t forget that trailing 10-year returns have still been pretty poor for most institutions, with many falling short of their long-run targets.  Public market volatility has been high and, having been badly burned in 2009, they’re still worried about risk.

Meanwhile, university cost pressures are increasing, foundations struggle to maintain their level of grant-making, and health-delivery systems are being crushed under regulatory and pricing loads. 

All this is making it very tough for volunteer board members and trustees.  And you could add the rising emphasis on ESG and PRI investing (Environmental/Social/Governance and Principals of Responsive Investing).

There is a widening gap between the hours available from boards and committees on one hand, and the increasing complexity of their responsibilities.  I call it the “fiduciary gap.”  You referred to it as “meeting fatigue” in your last newsletter.  It’s the same thing.  There’s just so much you can reasonably ask of volunteer trustees who often have demanding day jobs.

Skorina:

There’s no doubt that ESG investing is more than a fad.  Just last month, Barnard College in New York switched their OCIO mandate from Investure to Strategic Investment Group because they needed more flexibility and expertise in that area to execute their divestment program.  That’s a $356 million pickup for SIG.

https://www.bloomberg.com/news/articles/2017-09-13/barnard-replaces-investure-as-manager-of-286-million-endowment

Biller:

When I ask a visitor why they are thinking about OCIO, I’m seldom asked about my asset-allocation views, or which managers I use.   Their concerns are more fundamental than that. T hey want to know: How can I keep my money safe?

Pension plans worry about paying their retirees while staying solvent.  Endowments and foundations worry that they may have to cut programs if the markets turn sour.

The people I talk to have a lot of promises to keep in a very uncertain world.  They’re looking for someone they can trust.  All of the technical issues come much later in the conversation.

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Endowment costs: A correction for Harvard

Suzanne Brenner, from Met Museum CIO to Brown Brothers Harriman

Ms. Brenner, x co-CIO at Metropolitan Museum of Art joined BBH as CIO. x Rockefeller Fdn, x QCS, x Ernst & Young. BA CUNY Queens College

Endowment costs: The secret history

In early 2016 certain Congressional committees sent letters to 65 major private universities asking for information about their endowments.  They supposedly had an urgent need for this data and gave the schools just 30 days to respond.

It was worded as a polite request, but it came from people who could, for instance, compel the endowments to adopt a strict spending rate (like private foundations) instead of the more flexible regime they currently enjoy as “charities.”  Needless to say, the schools all coughed up the information forthwith.

Apparently, this data-dump just went into filing cabinets, and neither the schools nor Congress have been eager to share those reports with the general public.  Nevertheless, we scrounged up copies of 15 of the responding letters from various sources.  The other 50 schools have kept theirs out of sight.

We were especially curious to see what the schools had to say about endowment management costs, which has always been a cloudy issue for us.

Commonfund agrees.  In a 2015 study they opined that:

…unlike other factors that affect investment returns, such as asset allocation and the many types of operational and investment risk, costs are almost certainly the least well understood.

See: Commonfund Institute: Understanding the cost of Investment Management (October 2005).

As we said in our OCIO report, the perceived cost of managing the endowment is a major factor in the decision to outsource, or not to.

It’s not the only factor, but a big one.  But how can a board make that decision if they don’t know whether they’re spending more or less than their peers?  And, whether outsourcing will actually save them any money?

Investment returns can be benchmarked to the second decimal place, but the costs of managing those investments are harder to come by.

NACUBO and Commonfund include questions about those costs in their annual NCSE survey, and report broad averages.  But there is almost no data on specific schools.  We also have suspected that the reported NCSE average costs are on the low side, but had no hard evidence one way or the other.

Recent 990 filings also require a dollar amount for “investment management fees,” but we haven’t had much confidence in that number.

So, we’ve attempted to do our own analysis of the cost data reported by those 15 schools.  It has some limitations, but we seem to be the only ones to have ransacked these letters.

The Nine “normal” endowments

Nine of the endowments offered plausible numbers (expressed as annual dollar amounts and/or percentages of AUM) for both their investment-office costs and fees paid to external money-managers for the three fiscal years 2013-2015.

Here’s what we extracted from their responses.

Larry Kochard joins Makena Capital Management

Mr Kochard, x CIO U Virginia joined Makena Jan 2018. x CIO Georgetown, x Vir Ret Sys, MA/PhD U Virginia, MBA U Rochester, BA William & Mary