In This Issue
- AJ Edwards, Cornell’s CIO, departs
- Russell Read packs his bags for Juneau and the APFC
- Maybe you can clone Yale’s endowment. A reader comments
- Skorina is searching for a Chief Investment Strategist
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A conversation with Russell Read, new chief investment officer at the Alaska Permanent Fund Corporation
Russell Read has just been appointed chief investment officer of the $52 billion Alaska Permanent Fund Corporation (APFC), and he’s headed for a state in crisis.
The collapse of global oil prices has put a big squeeze on all of the world’s oil producers; and in Alaska, where oil funds 90 percent of the state budget, Governor Bill Walker has nothing but bad news for his constituents. He may even have to reinstate the income tax after 25 years of living on the oil boom.
And he’s proposed to cut the cherished annual cash dividend the APFC pays to each resident: from $2,072 last year to just $1,000 in 2016.
Mr. Read arrives in Juneau on May 1, and he’ll have to hit the tundra running.
His appointment is part of a general recent shake-up at APFC.
Angela Rodell was appointed CEO six months ago, succeeding Mike Burns, who retired last summer. Ms. Rodell is a familiar face in the state capital and at APFC, having served as revenue commissioner under former Governor Sean Parnell and as an ex officio member of the APFC board.
Our friend Tim Walsh will also be a frequent visitor. He just inked a two-year contract as a part-time advisor to the fund. Tim is the former CIO of New Jerseys $72 billion pension fund and will add considerable heft to APFC’s strategic deliberations.
Last week I congratulated Russell on his appointment and we had a chance to catch up with a wide-ranging conversation about where he’s been and what lies ahead.
Skorina:
Russell, where to start? You pack one of the best resumes in the business, including a BA and MBA from University of Chicago and a PhD from Stanford. Then you had sell-side experience at Scudder and Oppenheimer, two years as CIO at CalPERS, and four years with the Gulf Investment Council in Kuwait. And now, you get to be CIO at APFC just when the state budget is melting down. Terrific timing!
Read:
It’s going to be interesting, Charles. APFC is the biggest sovereign wealth fund in the U.S. and one of the biggest in the world. It would be a challenge at any time, but especially now. We’re going to be playing a key role in the economic future of every Alaskan, through this bad patch and for decades to come.
Skorina:
You’re just getting acquainted with your new board. What are your impressions of the APFC board so far, compared to the boards and governance at CalPERS and the Gulf Investment Corporation?
Read:
I hope you’re not looking for invidious comparisons, Charles!
Well, let me put it this way. The APFC board focuses very pragmatically on generating revenue for the present and future citizens of Alaska. It’s a very business-like, P & L-oriented organization. They need to send a check to each resident every year, while also providing a rainy-day fund for the state. And, as you’ve noticed, it’s raining pretty hard up there right now.
I report to the executive director, Angela Rodell, a former muni finance executive and deputy commissioner of revenue for Alaska. And the chairman, Bill Moran, is president and director of First Bancorp. Everyone’s clear on the mission and they can all read a balance sheet and income statement.
At CalPERS, there were too many objectives. It wasn’t just how best to manage pension and health benefits, it was…can we unionize the employees in the portfolio companies of private equity firms that we do business with? Or, should we tilt toward investments in politically-desirable local and state projects? Each board member had their own constituency and agenda. Some of these may have been worthy objectives, but they vastly complicated the ostensible top-line objective: maximizing returns for state employees and retirees.
My time in the Gulf was focused more on funding projects which created long-term benefits for the seven Arab states which border the Persian Gulf: Kuwait, Bahrain, Iraq, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). My objective was to diversify and create new revenue streams; basically, diversify away from their dependence on oil. We had $30 billion in projects on the books when I left. It was a thoroughly fascinating four years.
Skorina:
So what opportunities do you see for a big fund like APFC? I’ve been talking to people at OMERS and OTPP lately, both big funds. Ontario Teachers just hit a home run: a 13 percent return on $154.5 billion in 2015 (with AUM finishing at $171.4 billion). Not bad. They got a huge 32 percent return in private capital, 16 percent in real estate and infrastructure, 18 in equities, and 6 percent in fixed income. Their only negative number was in natural resources, which were down 1.3 percent.
Read:
Yes, it’s an impressive performance at a very big fund. But, as we know, the Canadian model is hard to replicate in the U.S. for political and legal reasons. I know there are people at CalPERS who would love to set up an infrastructure subsidiary like OMERS did with Borealis. But it’s not going to happen. U.S. pension funds can’t seem to get there from here.
Now, there is one possible model I’ve been thinking about Charles, which might allow a group of US public pension plans to pool assets to invest in real estate and infrastructure, it’s called a mutual investment company. They are not common, but there are two prominent examples in the US: Vanguard and TIAA-CREF. Maybe that’s the way to create joint direct investment vehicles for public plans.
Skorina:
APFC earned 4.9 percent in FY 2015; maybe not as strong a performance as they would have wished?
Read:
Real estate did well, 9.8 percent on about 10 percent of the portfolio. And private equity was up 16.5 percent. U.S. equities were up 7.2 percent. But the more pertinent question is: where are the income and growth opportunities to come from in the years ahead, given this strange bond environment.
For a century, bonds were the bedrock of investments and retirement income. Since 2008 that has been turned on its head. Now, bonds are low-yield and high-risk. So, at a fund like APFC, we need to look for opportunities where size matters and we have an edge, things like real estate, infrastructure, or geographic opportunities.
Skorina:
What do you mean by geographic opportunities?
Read:
Well, let’s look out over the next twenty to thirty years. We’re long-term money, so where are long-term opportunities? Where is the growth to come from? Sixty 60 percent of the population growth over the next 35 years — to 2050 — will come in Africa and south Asia, mostly in cities.
My job in Kuwait kept me hopping around Africa and Asia looking at infrastructure projects, and I’ve been able to see a lot of this growth first hand. There are all kinds of frustrations and obstacles you can’t imagine compared to the developed world, but the cities are still going up.
So what sectors and companies will benefit if you’re going to build new cities? It will be technology, communications, and infrastructure.
Skorina:
I seem to recall that you’re an ardent musician. Do you still play the trumpet and sax? I imagine those long, cold winters in Juneau should give you plenty of time to keep your lip in shape.
Read:
Funny you should mention that Charles. I’ve been looking into it and, as it turns out, Juneau has an active and sophisticated music community. I’m looking forward to my new home as well as my new job.
Skorina:
Thanks so much, Russ, and good luck.
Read:
My pleasure, Charles.
APFC annualized returns:
Fiscal years ending 30 June 2015 (percent):
01-year: 4.9
03-year: 10.4
05-year: 10.1
10-year: 6.4
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Mr. Edwards departs:
Another turnover at Cornell:
Last week it was announced that A. J. Edwards would step down as Cornell’s chief investment officer as of March 31.
Mr. Edwards was a senior staffer from 2008 to early 2011, when he was bumped up to interim CIO. A year later they removed the “Interim.” So, he’s been in charge for almost five fiscal years.
How has the endowment performed on his watch?
The frank answer is: just fair for a $6 billion fund. But probably not up to the hopes and expectations of his board.
Cornell is the 19th largest in the country per NCSE. Since there are currently 95 schools in the over-$1 billion club, that means that 76 of them are less well-endowed than Cornell.
But over the last five fiscal years Cornell has performed below the average for this cohort. And bear in mind this is not a dollar-weighted statistic; it’s a simple average where Yale and Harvard have no more weight than University of Tulsa or Middlebury College.
Equally or more important from Cornell’s point of view is their performance versus their (mostly larger) peer Ivy Leaguers.
They highly under-performed Yale over 5 years, but that’s no disgrace. Almost everybody underperforms Yale.
On the other hand, they lagged Harvard only slightly over 5 years. But Harvard has been under-performing for years, and most big endowments have done as well or better.
We would be the last to put too much emphasis on a 1-year number, but it can’t have made good reading for the board when Cornell chalked up just 3.4 percent for fiscal 2015 while Yale and Harvard managed 11.5 and 5.8 respectively.
Cornell hasn’t had much luck keeping CIOs in recent years.
James Walsh, recruited from the giant British Telecom pension, had the job from 2006 to 2010. He was briefly succeeded by another Englishman, Michael Abbot, who had been CEO of fund of hedge funds giant Robeco-Sage; but Mr. Abbot lasted barely six months, leaving in April, 2011 under rather mysterious circumstances.
Mr. Edwards was hired in March, 2008 as part of Mr. Walsh’s push to expand and upgrade the investment office.
He earned a BA and MBA at University of Connecticut, then an MS in math from Fairfield University, also in Connecticut. Before he was recruited by Cornell he managed the $2.5 billion pension of Northeast Utilities in Hartford.
The latest salary figures available for Mr. Edwards are for calendar years 2012 and 2013:
2012:
Base: $494,146
Bonus: $825,000
W2 Total: $1,319,146
2013:
Base: $552,988
Bonus: $518,754
W2 total: $1,071,742
We presume his successor will get a package in the range of $1 million to $1.5 million.
We can’t help but notice that most of the highest-performing endowments have long-tenured CIOs, many going strong after ten years and more.
This is a chicken-and-egg problem. Does good performance follow longevity, or vice-versa? We suspect that longevity is an independent plus-factor in the equation. It takes time to cultivate relationships, train staff, and execute a long-term plan.
In any case the decision was made to find a replacement, and it was probably decided months ago.
The chair of the Cornell trustees, Robert S. Harrison (class of ’76), and the chair of the investment committee, Donald J. Opatrny (class of ’74) are both veteran finance executives who share more than an old school tie. (Mr. Harrison’s day job is CEO of the Clinton Global Initiative in New York which makes him one of the best-connected among the best-connected.)
Both were among the 200-odd Goldman Sachs partners when the firm went public in 1999. That cashed-out GS diaspora includes such notables as Abby Cohen, Eric Mindich, Henry Paulson, John Thain, Jon Corzine, Peter Weinberg, Peter Kraus, and many others.
The school’s press release concluded by saying that Edwards’ successor would be named by April 15.
So, clearly, a new CIO has already been selected and, for whatever reason, he or she won’t be officially anointed until Tax Day.
This will almost certainly be an outside hire. The two senior staffers co-heading the office on an interim basis – Cody Burke and Roger Vincent – are probably not in the running. If one of them or another staffer was in the line of succession, it would likely have been announced.
If all that is true, then Mr. Harrison and Mr. Opatrny launched a quiet search-and-selection process months ago in anticipation of Mr. Edwards’ departure. And a decent (two-week) interval was allowed to preserve everyone’s dignity.
This is all speculation, but we know how these things work, and it’s the way to bet. And no, we don’t have any intel on who the new guy will be. We’re as curious as anyone to see who shows up.
For those who haven’t heard, we should also mention here that Cornell’s President Elizabeth Garrett died just a few weeks ago, unexpectedly and at the shockingly-young age of 52.
The school’s first female president had been on the job less than two years when she announced in February that she had colon cancer and would undergo aggressive treatment. Her death was announced six weeks later. Our condolences to the Cornell community.
Five-year annualized returns as of June 2015:
Cornell………………….9.9
NCSE>$1 billion….10.4
Yale…………………….13.1
Harvard………………10.5
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Maybe you can clone Yale:
A reader tells us how he did it
We get some fascinating feedback from our learned readers, and here’s one we’d like to share with you.
A couple weeks ago we published an item titled “Why you can’t clone Yale” in which we opined that even a careful attempt to replicate Yale’s asset allocations wouldn’t be nearly enough to match their performance.
See: https://www.charlesskorina.com/3303-2/
Yale and a few other top endowments can get access to rising-star money managers who can’t or won’t accommodate most other investors, and thereby earn exceptional returns.
This is no secret, but it still represents a practical problem for institutional investors who are trying to raise their game. A clever use of index ETFs to replicate Yale won’t replace Dr. Swensen’s mighty rolodex.
Louis Ferrante is a CPA and CFA who is currently associated with the Columbus Nova private equity firm and also sits on the board of the CRM mutual fund group.
Earlier in his career he was co-chief investment officer of the Citigroup pension plan.
He and his colleagues actually set out to clone the Yale endowment back in 2000 and we’ll let him tell the story:
Charles,
I read with great interest your current newsletter featuring, “Why You Can’t Clone Yale.”
For almost ten years my colleague Ron Walter & I tried with the Citigroup Pension Plan.
In 2000, we implemented an endowment-model asset allocation as we merged the Citicorp & Travelers DB Plans together.
At a CFA executive education session at Harvard a few years prior, they had debuted a case study on the Yale Investment office, which got my attention.
In addition, I had the great privilege of being able to pick David Swensen’s brain on his investment philosophy. With an alternative asset allocation of approximately 40%, we were one of a handful of corporate sponsors investing like the major endowments. We were able to generate top quartile Fund performance and alpha from both allocation and manager selection.
As the article astutely points out, the easier part of the Yale Model is the asset allocation, assuming one can handle the apparent liquidity constraints of a high alternative allocation.
The harder part is gaining access to top and/or emerging investment managers. Institutions such as Yale and Harvard have access to managers that 99% of others do not. Given that we were a major financial firm and given the nature of Citigroup’s institutional clients, our access to top or emerging managers was perhaps better than other large non-financial sponsors and almost on a par with major endowments.
I remember David Swensen telling us, “Why spend time allocating money to a fixed income manager trying to outperform the Lehman Agg when the difference between a top-quartile manager and a bottom quartile manager is 10bps? The dispersion between a top performing alternative manager and a bottom one is significant. That’s where the effort should be.”
Manager access is perhaps the major reason why very few firms can duplicate the endowment model. I never forget a CIO from a major corporate sponsor telling me how a top venture capital firm shut him out of its latest fund even though the pension fund was one of their first major investors and had helped bankroll them.
The answer given by the venture capital fund? “The pension fund brought nothing to the table other than money and we want all our investors to be strategic.”
Regards, Lou
