Groupthink is a phenomenon that occurs when a group of well-intentioned people makes irrational or non-optimal decisions spurred by the urge to conform or the belief that dissent is impossible.

– Psychology Today

It’s hard to find an independent thinker among university endowments these days.  Every board member wants to hire a Swensen clone and every CIO wants to partner with Sequoia.  Group-think and safety-in-numbers has become the new endowment-model-norm.

David Swensen was one of a kind, a different thinker, a pioneer.  Swensen blazed a trail thirty years ago and his first book was called Pioneering Portfolio Management for good reason.  It was all new stuff.  Forget public markets.  Spend your time on private opportunities with less visibility and more upside.

Today that trail he blazed has become a freeway and the endowment model is one very crowded trade.

Richard Ennis, co-founder of EnnisKnupp (AON), points out that in 1994 large endowments with AUM over one billion dollars held on average less than twenty managers in their portfolio.

Twenty-five years later the average was well over one hundred, with some holding close to three-hundred funds (asset managers, commingled funds, and partnership interests, NACUBO Study 2019).

The strategy du jour on campus is mostly about appeasing the VC and PE gods, doubling down with existing managers and anteing up to the spin-offs.  No one wants to be excluded from a new manager or the next flagship fund.

Proliferation drives up costs of course.  With management fees of two percent of AUM plus a twenty percent carry, plus broken-deal fees and every conceivable expense charged back to the fund, the load can run six to ten percent.

As an aside, we hear that Swensen was cutting back on managers and growing more conservative in his final years.  We’ll see what course Matthew Mendelsohn and staff chart going forward, but we suspect there will be headwinds.

Mr. Mendelsohn has the smarts and the will but he does not yet have Swensen’s clout.

Groupthink Happens

A recent paper in the Journal of Risk and Financial Management suggests (as do countless others) that it all begins with the boards.  They set the tone and lead by example, for better or worse.

“The author argues that selecting investment committee members with expertise in diverse asset classes, promoting an open-minded and learning environment, and employing the principles of portfolio theory” leads to higher risk-adjusted returns.

That all sounds fine, but we wonder about the “open-minded learning environment” part.  With a few notable exceptions, the biggest, scrappiest, contrarian carnivores on Wall Street turn into risk-adverse consensus-huggers when they take a seat on college boards.

Most board members accept the position because they love the institution and its mission, but the reputational risks of sitting on a nonprofit board outweighs the rewards.

Board members never get credit for good performance but always take the heat for any blowup.  As a consequence they seek consensus and institutional cover.

The first question most board members ask when presented with something new and different – a candidate or investment opportunity – is, “who did the other school hire?  Or “who else is doing this?”

They all hire the same recruiter, interview the same ten candidates, and ask for the same set of referrals from their buddies on other boards.

Let’s be honest here.  If the David Swenson of 1985 had applied for the CIO position at Yale today he would not have made it past the first round of interviews.  A young untested Wall Street banker with a knack for interest rate swaps?  Not a chance.

Recruiting investment executives is our business so here’s some news for boards with searches on the docket.

There are about seven-hundred CIOs at tax-exempt institutions in the US and fifteen-hundred fully-baked up-and-comers ready to step into a CIO role in the nonprofit space.

And we have yet to list all the sell-side superstars and family office gems that would love the opportunity to serve their school.

But many of these individuals look different, think different, and they don’t like wearing choke-collars so they seldom get a chance to interview, let alone an offer.

Those Consultants

Let’s talk about consultants.

If your investment advisor with two-hundred clients, has the inside skinny on your impressive under-the-radar new manager, or catches wind of that special fee you privately negotiated, or uncovers your plans to redeem from a certain fund, how soon do you suppose before their co-workers and other clients know?

There’s a reason why family offices seldom use consultants.  They don’t want others knowing their business.

When it comes to money there are very few saints.

Fashion and Funding

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by charles | Comments are closed


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