In this issue
Global Macro opportunities: Passport Capital and Saudi Arabia?
Getty gets liquid: Jim Williams, CIO of the Getty Trust
Money and temptation: Louisiana police take a big pension hit
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Comings and goings:
USC finally gets a real CIO:
University of Southern California has just hired its first full-fledged chief investment officer: Lisa Mazzocco.
In the turmoil of 2008-2009, USC lost a quarter of its assets, way worse than the national average of -18.7%, and among the hardest hit among major schools.
The result seems to have been a shakeup in the investment office and a re-think and restructuring of USC’s endowment management.
Ms. Mazzocco, former CIO of the $33 billion dollar Los Angeles County Employees Retirement Association [LACERA], takes over the school’s $3 billion endowment on April 18th.
Ruth Wernig was effectively head of the endowment until she left a year ago. But she wore the title of Treasurer and Associate Senior VP, reporting to the school’s chief financial officer. Ms. Wernig landed on her feet at the California Endowment, as CIO of a similarly-sized portfolio.
Ms. Mazzocco, in addition to getting the new CIO title, will report directly to USC’s President Max Nikias; and will “work with,” but not report to, the school’s CFO; and, of course, she will mesh with the investment committee of the USC governing board. Whether the re-organization was initiated by the USC leadership or emerged from contract negotiations with Ms. Mazzucco, we don’t know. Maybe even the hard-working executive search guys were part of that conversation. But it gives USC an org-chart that looks more like its peers in the over-$1 billion-endowment club.
Ms. Mazzocco, with a BS from San Diego State and an MBA from Cal State Polytechnic, began her career with Wilshire Associates, moved to LACERA in 1992, then advanced to head of equities and Deputy CIO. She got the CIO post when her predecessor retired in 2006.
Note that Ms. Mazzocco has gone from running $30 billion for a public pension to running $3 billion for a private university, while almost certainly getting a nice pay bump. Still another datapoint arguing that public pensions are in a permanent uphill fight to get and keep good investment talent at prices they’re willing to pay.
At LACERA, given her years of service, she was probably at or near the top of the published CIO pay range of $255 thousand to $386 thousand. Then apply Skorina‘s Iron Law of Recruitment: real talent won’t move for less than a ten to twenty percent bump. It’s likely that she joined USC for $375 to $450 thousand, still on the low side among her peers at major private universities.
The real money, of course, goes to USC football. Lane Kiffin, despite an underwhelming record, was appointed head of the program in 2010 at $4 million per year. Mr. Kiffin, in turn brought along his father, Monte Kiffin as USC’s new defensive coordinator at $2 million per. Christmas at the Kiffin’s should be merry, whether or not the Trojans are in the Rose Bowl on New Year’s Day.
We’ll see whether Ms. Mazzucco or Mr. Kiffin turns out to be the better hire.
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TIAA-CREF jumps into the CIO outsourcing scrum:
Scott Wise, president and chief investment officer of TIAA-CREF’s new outsourced CIO subsidiary, Covariance Capital, announced his all-star lineup this week. And based on what I know of the bench, the team should be contenders.
I’ve meet both Michael Jawor, the Covariance deputy CIO and Daniel Feder, senior investment manager, and they’re both excellent hires. Michael is a University of Chicago MBA with eight years as CIO of fund-of-funds Glenwood/MAN in Chicago. Dan has an MA from Trinity College in Texas, a JD from Boston University, and eight years on the front line with the Princeton endowment. Two of the other announced hires, Holly Hardy and COO Andrea Reed, are from Mr. Wise’s successful team at Rice University in Houston.
Mr. Wise, after a long run as CIO of the $3.9 billion Rice endowment, opens the doors with $1 billion of stable seed money in the bank and the respected and conservative TIAA (with its $453 billion AUM) standing behind him. This should help give Covariance instant credibility, especially among academic institutions who already know TIAA in their role as administrators of college teachers’ pensions.
TIAA’s boss Roger Ferguson told Mr. Wise that he could locate the company anywhere that “made sense.” And that turned out to be Houston. With his experience in recruiting for the Rice endowment, he knew that there was plenty of Texas-educated talent who usually had to move to New York, Chicago, or California for good jobs, but who would be glad to stay home if they had a good offer.
Now Mr. Rice only has to get the attention of those $100 million to $2 billion institutions who may be susceptible to his outsourcing pitch. But it’s a crowded field which keeps getting more crowded. Makena, Investure, HighVista, Global Endowment Management, Balantine & Co, Agility Funds, Spider Management, and others too numerous to mention are already targeting this space, and it’s certain they aren’t all going to get a full meal.
With all their talent and backing Covariance is still going to have to do some stellar marketing to get their share.
Good luck, guys.
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Global Macro opportunities: Passport Capital and … Saudi Arabia?
I like to read the views of the global macro hedge funds. I like their wide-angled view of the markets, meticulous research and, above all, their willingness to stand apart from the herd. Looking at their bold but calculated risks really clears the palate after breathing all of the smog from the usual investing suspects.
For example, Passport Capital, John Burbank’s $4 billion fund here in San Francisco says in their year-end letter that they’ve got 8% of their money in the Middle East, with a focus on Saudi Arabia. With the region even more rickety than usual these days, that’s an opinion that gets my attention.
Mr. Burbank argues that, on a risk-adjusted basis, this makes sense. SA has low debt (all domestically held), high revenue, massive internal investments scheduled, and a young, underemployed workforce.
Those last two are connected. That river of revenue is going to be invested to help the kingdom mop up that surplus of unemployed youth. Hundreds of billions will be spent in the next few years on infrastructure for health, education and natural gas facilities. The profits will flow into local equities and the handful of foreigners with positions in them – like Passport.
Investors in emerging markets largely miss this bet – Saudi isn’t in the usual indexes. Passport is the largest U.S. investor in this area, but Mr. Burbank expects others will be following.
Passport also has 7% of its money in physical gold and Mr. Burbank doesn’t think the 2010 run-up in gold prices is a bubble. He sees strong, persistent forces pushing gold higher for years to come, and says it’s probable that the psychologically-important $1500 price will soon be breached.
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Getty gets liquid: Skorina talks to Jim Williams, CIO of the Getty Trust
James M. Williams, a fellow University of Chicago MBA, had a thirty-year career with Ford Motor Company before he joined the J. Paul Getty Trust in 2002.
The Trust runs the world-class Getty Museum, and its offices are located on the museum’s spectacular main campus in Brentwood, California, with stunning views of L.A and the Pacific Ocean. And whenever Jim needs a break he can stroll through the gardens and fountains or visit the Van Goghs, Monets, and Cezannes.
Henry Ford built a nice museum back in Dearborn, Michigan where Jim had his first career. But, with all due respect to old Henry, it’s nothing like this.
When Jim came aboard, the job was tidying up the portfolio after the dot-com crash. Six years later, the Trust had to deal with the market meltdown of 2008, which led to first-ever lay-offs and program cuts for the Museum.
The Trust had plenty of liquidity when the storm hit, so they had more freedom of maneuver than many others, but it was still a sobering experience that Jim and his team are still absorbing and learning from.
The value of the endowment peaked in FY 2007 at $6.4 billion, falling to $4.4 billion in 2009, exactly where it stood in 2002 when Jim took the job. Now, as of 2010, they’ve clawed their way back to $4.8 billion and are looking for another good year in 2011.
I had a chance to speak with Jim the other day about where he’s focusing right now.
CAS: Jim, could you characterize the Getty’s overall strategy? For instance, do you think of yourself as following something like the “endowment model” pioneered by Harvard and Yale?
JMW: Basically, yes. The “endowment model” is like that old saying about democracy – it has many flaws but it’s still better than everything else.
The main risks with the endowment model are leverage and liquidity, so we focus on those risks more than anything else. But we are still committed to alternative asset classes which we think provides a good balance of risk and return.
CAS: A lot of CIOs tell me that “managing the board” is often a bigger challenge than managing the money. Tell me about how you communicate with your board.
JMW: Our trustees are like most trustees, they have asymmetric risk. CIOs are responsible for both risk and return but trustees are focused mostly on risk. They don’t get a pat on the back if the endowment earns a higher return, but they have personal reputational risk if the endowment performs badly.
To provide the board with a clear and timely view of the Getty’s ability to pay its bills, we have created a quarterly one-page liquidity report which the board really likes.
CAS: How does that work? How do you define liquidity in a way that makes sense to non-financial types?
JMW: At the Getty, we define liquidity as all the assets in our portfolio that we can convert to cash within one year with no loss in market value. But our criterion for sufficient liquidity is having enough cash and equivalents available to operate if:
1. All private market commitments are called in at once with no distributions for four years.
2. The foundation continues its 5% payout for the next four years.
3. The stock market sustains a drop of 30% and doesn’t recover for four years.
CAS: That’s what I call real stress-testing! But it must help the trustees sleep at night knowing that they can keep the doors open even a real worst-case situation. Thanks so much for your time, Jim.
JMW: My pleasure, Charles
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Back to Alaska: a return visit with Jeff Scott
Jeff Scott took over as chief investment officer at America’s very own sovereign wealth fund in 2008. The $40 billion Alaska Permanent Fund is tasked with investing the state’s share of oil-production royalties.
About a year ago we had a fascinating conversation about his initiative at APF to make big investments with five selected external managers, levering them into learning partnerships with some of the best and brightest investment minds in the country.
Bridgewater, AQR, Goldman Sachs, PIMCO, and GMO were chosen. First, for their investment acumen, but also for their commitment to participate with the APF board on a regular basis (site visits, lectures, presentations), and provide perspectives and diverse points of view. Each got $500 million (part of APF’s $8 billion allocation to “special opportunities). Instead of being just black boxes generating investment returns, Jeff hoped that they could help to raise the level of the fund’s own game, gaining access to world-class investment talent without having to hire internal managers at world-class salaries.
All of which may sound slightly naive to investment vets. Hedge funds are happy to bank their fees, but keep their ideas close to the vest and aren’t in the consulting business. If they’ve already got your money, are they likely to offer consulting of any real value?
CAS: Jeff, how is this thing working out in practice? I’m always asking people how “real money” investors like endowments, foundations, and pensions can learn from the best money managers, and this looks like a tactic that could help them do just that: if you want our money, you have to provide some real, in-depth consulting to our board and management.
JS: Charles, this has actually worked better than expected on all fronts. We have been able to give the trustees direct access to Mohammad El-Erian, Clift Asness, Bob Prince, Mark Evans, and Ben Inker, along with many other experts. This has provided me, the board and staff members a much better understanding of the complexity of risk, the challenges in diversification, active risk budgeting, and perspective on how to allocate capital. Each firm has their own viewpoints and all have been invaluable.
Jeff is a very credible guy and I take him at his word. APF may have come up with something that others could learn from. If you can’t get fee reductions, maybe you can at least get more for your money.
For more details on what is going on at Alaska Permanent Fund, see Amanda White’s excellent article at Top100 Funds.com. It’s here:
http://www.top1000funds.com/profile/2011/04/13/alaska-fund-moves-external-cios-into-risk-culture/
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Louisiana police take a big pension hit:
I’ll start letting my guard down when people stop giving me reasons to keep it up. – Unknown
But who will watch the watchmen? – Juvenal
Where there is money, there is temptation. And boards who bear legal and moral responsibility for institutional money can never let their guard down. Whether it’s a once-respected, avuncular figure like Bernard Getz, or a bunch of retired police officials, trouble usually comes in an innocuous package. Frequent reminders are necessary. Here’s another one.
The Municipal Police Employees’ Retirement System of Louisiana (MPERS), in theory, has about $1.2 billion in assets. According to a report on April 15th by Elliot Blair Smith for Bloomberg News, it’s hard to know how much the fund actually has, because of corruption, shady dealings, and incompetence.
The ex-attorney for the fund, Randy P. Zinna, pled guilty last year to mail fraud; trustees have been sued for “glaringly poor investment choices”; a former independent actuary was hired as the chief investment officer and stayed on the payroll as an independent actuary. And so on. It was a snake-pit of corrupt, pay-for-play deals that have handed MPERS losses of up to 84%.
Conscientious institutions have enough problems. But trustees who take their seats and their emoluments and never ask a hard question are inevitably going to get rolled, and they will deserve it. All that dull due-diligence stuff — the documented procedures, the independent audits, the careful hiring-and-firing practices, and a healthy curiosity about what’s really going on – are what they’re there for.
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Responses: Why can’t a pension be more like a hedge fund?
I asked, they answered: Why can’t a pension (or endowment, or foundation) be run more like a hedge fund? Especially regarding how they deal with risk. (I was thinking specifically of some of the most respected funds like Seth Klarmann’s Baupost.)
When I sent this query out to my readers I was afraid it might sound silly or naive. Not that that ever stops me.
I remembered the misogynist Professor Higgins in My Fair Lady who asked the unanswerable musical question, “Why Can’t a Woman Be More Like a Man?”
Cause men are so friendly, good-natured and kind.
A better companion you never will find.
…Why can’t a woman…be like me.
To which the obvious rejoinder is: they’re completely, metaphysically different – just deal with it.
So I was surprised and gratified when I got some really thoughtful responses.
I have room for only a couple, and I have edited slightly for length. I will post more in future NLs or on my website. I heard from endowment guys, pension guys and even some hedge fund execs, all of whom I’ve labeled generically.
These include some well-known folks whose names I would love to drop, but can’t. Several specifically asked to remain anonymous so I decided to anonymize all of them.
A large university endowment CIO:
Hedge funds by incentive structure are short term. Endowment CIOs need to not lose sight of their long term focus. Hedge funds and endowments are not in the same business, however much some endowment professionals may wish they were. That’s not to say there isn’t something to learn from hedge fund best practices.
A hedge fund executive:
Charles: this is an interesting question.
If my experience covering CDPQ in Montreal is any guide, most of these large pension funds cannot stomach the direct risk. They think they do until a crisis erupts and then everything goes and a new organization is set in place. That’s what CDPQ did at least twice in the period I covered them. There is an inherent conflict between the political nature of these organizations and the freedom of movements that comes in the hedge fund world. Achieving a balance between these opposite cultures within one institution is almost impossible in my view. I am not even sure it is desirable.
