There can be few fields of human endeavor in which history counts for so little as in the world of finance. —John Kenneth Galbraith

I recently reviewed endowment performance and investment talent with the board of a major university.  Subjects under discussion included effective board structure, endowment office best-practices, and adaptive leadership for changing times.  My assignment is to research and report on investment office successes and failures, all-weather overachievers, and pathways to preeminence.

I’m not alone.  A growing number of boards and investment heads suspect the good times and bull market mania might not last and are taking precautions, de-risking and re-thinking conventional portfolio management. Heather Gillers caught the vibe in her recent Wall Street Journal article, “The Ivies Are Having Second Thoughts About Investing in Private Equity.”

We’ve heard rumblings for ages.  Howard Marks sounded the alarm three years ago in his memo Sea Change, when he cautioned that the rapid rates reversal and the end of free money would have profound implications for institutional investors:

It seems to me that a significant portion of all the money investors made over [the last forty years] resulted from the tailwind generated by the massive drop in interest rates.

All-weather winners

Managing money is one of America’s key competitive advantages and we recruit the managers who manage the money.  What hurts institutional investors and family offices hurts us.  If there’s stormy weather ahead, we scout for all-weather chiefs.

Who are the likely winners?  Our client would like to know.  An iconic venture capitalist once told me he put his money on tenacious, dogged optimists, the ones that assiduously work a problem and never give up.

During last week’s board review, as we discussed high-performance offices and indefatigable overachievers, I recalled an article on genius, and several qualities in particular:

Their openness to new ideas and their breadth of interests infuse them with seemingly irrelevant stimulation that can enrich blind variations.

Hey! I know these folks.

Searching through the haystack

We begin every assignment by looking at the data.  Hence our yearly performance reports.  Who’s on top and who’s not?  Returns may be historical, but they are useful clues to the views, process, and discipline of investors and boards and how well they work together.

Chart one*: Endowment payout levels versus performance

*My thanks to an astute west-coast CIO

As the chart implies, if we assume a four to five percent distribution for university operations, add a few points to pace inflation, and another percent or two for contingencies and growth, the investment office needs to generate an average return of at least 8.15%.  Who’s done that?

Our first league table at the end of this note ranks chief investment officers by ten-year returns – data from our January newsletter.  Sixty-seven of one hundred schools over one-billion AUM made that first cut, earning eight percent or more for the period. About two-thirds.  However, when we raised the bar to nine percent, a more realistic hurdle given all the unknowns, just thirty-two schools remain, one-third the total.

How about career experience and years of service we wondered?  How does that factor in?

Turning to the second league table at bottom, with start dates and years in the role, we re-sorted by tenure to spot the correlations between experience and performance.

In the group that generated nine percent or more, the count includes eleven CIOs out of thirty, 37 percent with ten years or more tenure, fifteen CIOs out of forty-three, 35 percent with tenure between five and ten years, and six of twenty-seven CIOs, 22 percent with four years or less.

Experience is important, and a helpful indicator.  But there’s more than that to a winning record.

That one in a million

What distinguishes top investment officers?  Recruiting talent is both science – can we identify skill and persistence in a candidate’s background? And art – intuition and experience.  Is this candidate someone that catches our eye?  Piques our curiosity?  Are their backgrounds different, interesting, exciting?  And how about that second-level thinking Howard Marks refers to?

Here is one example, Ms. Jane Dietze, Brown University’s chief investment officer and perennial chart-topper. Nothing run-of-the-mill about her story.

(Nor Ms. Paula Volent, who frequently held the top spot during her two-decade sway at Bowdoin College, or the many talented women looking for a chance to move up.)

Jane Dietze – Like Mother like Daughter

If you want to know what’s driving Ms. Dietze, you don’t have to look far.