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-thirty-nine 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

Count Lev Nikolayevich Tolstoy maintained that history was a vast “storm-tossed sea” of individual actions – complicated, unpredictable, impossible to fathom.

When it comes to the stock market, our thoughts exactly.

In the world of institutional investing, another vast and unpredictable expanse, there always seems to be a handful of hot hands who enjoy spectacular runs, but most shine within an era or a set of conditions and then they’re gone.  That does not mean their efforts were wasted.

The good Count’s gloomy perspective aside, we think CIOs can and do make a difference.  Take Mr. Phil Zecher, for example, Ph.D. Nuclear Physics from Michigan State University, and for the last ten years, chief investment officer at the MSU endowment.

In the years since Mr. Zecher took on the CIO role, the university’s endowment performance has steadily improved.  MSU’s ten-year return in our latest report rests comfortably at number nine on our list of one-hundred-and-eighteen over one billion AUM segment, a praiseworthy effort.

Pensions & Investments recently took note.  “Among the 44 endowments whose returns have been tracked by Pensions & Investments as of Nov. 11, the median return was 9.8%.  The top performer was Michigan State University’s endowment.  The East Lansing, Mich.-based $4.4 billion endowment returned a net 15.1% for the fiscal year ended June 30, 2024.”

Mr. Zecher is not cut from common endowment cloth.  Over half of all endowment and foundation chief investment officers come from other nonprofits.  Mr. Zecher, on the other hand, rocks a hard science and Wall Street risk background.

After earning his doctorate from MSU, (BS, Physics, Ohio University) he worked at Deloitte in NYC, co-founded a risk analytics firm, sold it, then joined a hedge fund as partner.  He began advising the MSU endowment in 2011 when I met him and eventually became the university’s first CIO.

It’s been pretty much uphill ever since, barring the rocky tenure of recent MSU presidents and a gymnastics scandal, the “annus horribilis” of MSU yore.

We spoke with Mr. Zecher about the endowment’s laudable performance, what he has done to focus the portfolio, and how he looks at the world of institutional investing.

Skorina: I think we first began chatting when you were sitting on the endowment advisory board and it’s been quite an odyssey since.  What led you from the halls of science to the temples of Mammon?