Chief Investment Officers: supply and demand
By Charles A. Skorina
I am often asked just how many chief investment officer positions there are among U.S. tax-exempt institutional funds. How much turnover is there, and how tight is the market for these top-tier professionals?
Boards want to know how to find good candidates; portfolio managers want to know what their chances are of landing a CIO job; and marketers for external money managers want to know whom to call.
According to my research, the short answer is about 1,300 positions for full-time, professional CIOs at public, corporate and union pension plans; endowments; foundations; health systems; etc. And, I estimate the annual turnover rate at about 12 percent, or 160 openings per year.
That accounts for the demand side of the market, but the supply side is harder to enumerate. Most qualified candidates come from within the tax-exempt sphere, but many are also drawn from the broader ranks of investment and financial management. I can’t compute an absolute number of potential CIOs, but I have a pretty good idea where they have been coming from in recent years, and in what proportions.
I can say confidently that it’s a buyer’s market for CIOs, and I have the resumes and phone logs to prove it.
Let’s take a closer look at the numbers.
The demand side can be roughly quantified as a function of the number of funds over a certain size, adjusted for annual turnover. An estimate of the supply side will have to be more anecdotal than statistical.
In the U.S. there are approximately 1,300 endowments; foundations; healthcare organizations; corporate and public pension plans, etc, with funds big enough to justify a full-time, professional CIO.
As a rule of thumb, we can say that most funds over $1 billion AUM have a full-time professional CIO or equivalent, and most funds under $500 million do not. Of course, there are exceptions in both tiers. I know of some $300 million dollar endowments with CIOs and whose superior performance justifies funding the position. On the other hand, there are some billion-dollar funds with entirely outsourced investment management. The org chart doesn’t always seem to follow strict economic rationality. But what does?
For this analysis, I have assumed that all funds over $1 billion have a CIO and none under $500 million do. Then, averaging over the various sub-types of funds, I conservatively estimate that about one-third in the middle tier ($500 million to $1 billion) now employ a CIO, and two-thirds do not.
To keep the arithmetic tractable and the numbers round, I work my estimate this way:
First, for both public and corporate pensions (lumping multi-employer/union pensions and health systems into the latter), I use $800 million AUM as a cutoff and ignore the “transition zone.” That is, I assume all funds over $800 million have a CIO slot, and none under $800 million do. This yields about 800 U.S. corporate pensions and about 200 public pensions. I know, those numbers look suspiciously neat, but for a recent year they are, in fact, quite close. So: 1,000 CIO slots for pension funds.
Next, for endowments, foundations, and a nonprofit cats-and-dogs category I’ll just call “other,” I have counts for both the billion-plus and the half-a-billion-to-a-billion tier. I take all of the former and one-third of the latter as CIO slots.
So, we have:
Public pensions: 200 CIOs
Corporate pensions: 800 CIOs
Endowments: 100 CIOs (80 + 0.33 x 50 = 16.5 = 96.5 ~ 100)
Foundations: 80 CIOs (60 + 0.33 x 65 = 21.5 = 81.5 ~ 80)
Other tax-exempts: 90 CIOs (60 + 0.33 x 80 = 26.4 = 86.4 ~ 90)
Grand Total: 1,270 CIO slots
I have rounded liberally because the data do not justify more precision. Different sources count and classify the funds differently. And in any case the rise and fall of asset prices from year to year make a hash of the headcount within any AUM band. But I believe that 1,270 figure is conservative (i.e., a little on the low side).
As to turnover, I estimate that the typical CIO holds his job for five to eight years. That implies that one-fifth to one-eighth of the slots in the total population will turn over in any given year. That is: annual churn for the whole population will be between about 12.5% and 20%. Let’s be conservative again and use the lower number. That implies about 160 CIO openings per year. Close enough for search work.
How about the supply side?
First, and most obviously, CIOs are recruited from other tax-exempt funds. In my experience, about two-thirds of all CIO hires are tax-exempt to tax-exempt. So any of those 160 openings per year could be filled from among several hundred other CIOs and deputies looking to move up; typically either already CIOs at smaller funds, or second-tier portfolio managers at bigger ones. A billion-dollar pension might hire the CIO of a half-billion pension. Or a mid-sized college hiring its first CIO might be happy to get an experienced equities or fixed income manager from Yale or Princeton.
Lawrence Kochard, for example, moved from the billion dollar Georgetown University endowment to the $4.6 billion dollar University of Virginia endowment; followed by Michael Barry who left the $760 million dollar University of Maryland endowment to fill the vacant position at Georgetown.
Across categories things get more interesting. Notoriously, a billion-dollar endowment can lure away the manager of a much bigger public pension because salaries in the public pensions are lower. We just saw that happen when the USC endowment (about $3 billion) hired away Lisa Mazzocco, CIO of the $37 billion L.A. County pension fund.
Moves from corporate pensions to public pensions or endowments are not as frequent, but do happen from time to time. Bruce Zimmerman, for example, was hired away from Citicorp by the University of Texas System (UTIMCO); John C. Lane, Kodak’s former CIO, moved to the Ohio PERS state pension fund; Jim Williams, a thirty year Ford Motor Company veteran moved to the J. Paul Getty Trust and, of course; Ken Frier moved from HP to the Stanford Endowment.
Consulting firms are also a good source for CIO recruits. Pensions, endowments and foundations all use outside consultants to assist in asset allocation, recruitment, and supervision of outside managers. A half-dozen name-brand national firms dominate the market and their senior staffers are an obvious pool of talent. There is a slow, steady migration from Wilshire, Cambridge, Russell, Hewitt, Towers, Mercer, and the others; each with their own special focus, into CIO slots.
Everybody likes this. The tax-exempt gets someone who has been through a development program, has relevant experience, and may already understand its specific needs. And the consultant firm is not unhappy to see one of their alumni working on the “inside” of a client, because they will still need a consultant. The senior staffers among these firms comprise a pool of several hundred individuals with suitable resumes.
James Dunn, for example, the CIO at Wake Forest, was recruited from Wilshire Associates. And Cambridge Associates, the mother lode for endowment and foundation investment professionals, has populated dozens of CIOs slots including Kathryn J. Crecelius at Johns Hopkins, Cynthia Frost at Brown University, Pam Peedin at Dartmouth, Clarissa Hunnewell at Boston University, Nicholas Warren at Brandeis, and John-Austin Saviano at the University of California at Berkeley endowment.
I would guess that ten or fifteen percent of all CIO openings are filled from the consultant ranks every year.
That’s seventy-five or eighty percent of hires accounted for. The rest are sourced from what I can only inelegantly call “everybody else.” There are lots of outstanding analysts, traders and portfolio managers among hedge funds, institutional asset managers, investment banks, family offices, and even insurance companies. The fit may not always be as obvious or seamless, but there is no shortage of ambition and talent in the broader investment-management world.
A few that come to mind include Scott H. Richland, who joined Caltech as the CIO from Lunada Bay Investors, a private investment firm; Ashbel C. Williams, the executive director and CIO of the Florida State Board of Administration, previously a managing director at value hedge fund Fir Tree Partners; and last but not least, Larry Schloss, the CIO of the five New York City pension funds, overseeing about $100 billion, came from private equity firm Diamond Castle, where he was chairman, chief executive and co-founder.
Some of them feel unfulfilled running some specialized strategy and would prefer the challenge of crafting a full-spectrum portfolio, even a relatively small one. Some even feel that supporting the mission of a non-profit is more emotionally rewarding than earning a bonus on Wall Street.