Groupthink is a phenomenon that occurs when a group of well-intentioned people makes irrational or non-optimal decisions spurred by the urge to conform or the belief that dissent is impossible.
– Psychology Today
It’s hard to find an independent thinker among university endowments these days. Every board member wants to hire a Swensen clone and every CIO wants to partner with Sequoia. Group-think and safety-in-numbers has become the new endowment-model-norm.
David Swensen was one of a kind, a different thinker, a pioneer. Swensen blazed a trail thirty years ago and his first book was called Pioneering Portfolio Management for good reason. It was all new stuff. Forget public markets. Spend your time on private opportunities with less visibility and more upside.
Today that trail he blazed has become a freeway and the endowment model is one very crowded trade.
Richard Ennis, co-founder of EnnisKnupp (AON), points out that in 1994 large endowments with AUM over one billion dollars held on average less than twenty managers in their portfolio.
Twenty-five years later the average was well over one hundred, with some holding close to three-hundred funds (asset managers, commingled funds, and partnership interests, NACUBO Study 2019).
The strategy du jour on campus is mostly about appeasing the VC and PE gods, doubling down with existing managers and anteing up to the spin-offs. No one wants to be excluded from a new manager or the next flagship fund.
Proliferation drives up costs of course. With management fees of two percent of AUM plus a twenty percent carry, plus broken-deal fees and every conceivable expense charged back to the fund, the load can run six to ten percent.
As an aside, we hear that Swensen was cutting back on managers and growing more conservative in his final years. We’ll see what course Matthew Mendelsohn and staff chart going forward, but we suspect there will be headwinds.
Mr. Mendelsohn has the smarts and the will but he does not yet have Swensen’s clout.
A recent paper in the Journal of Risk and Financial Management suggests (as do countless others) that it all begins with the boards. They set the tone and lead by example, for better or worse.
“The author argues that selecting investment committee members with expertise in diverse asset classes, promoting an open-minded and learning environment, and employing the principles of portfolio theory” leads to higher risk-adjusted returns.
That all sounds fine, but we wonder about the “open-minded learning environment” part. With a few notable exceptions, the biggest, scrappiest, contrarian carnivores on Wall Street turn into risk-adverse consensus-huggers when they take a seat on college boards.
Most board members accept the position because they love the institution and its mission, but the reputational risks of sitting on a nonprofit board outweighs the rewards.
Board members never get credit for good performance but always take the heat for any blowup. As a consequence they seek consensus and institutional cover.
The first question most board members ask when presented with something new and different – a candidate or investment opportunity – is, “who did the other school hire? Or “who else is doing this?”
They all hire the same recruiter, interview the same ten candidates, and ask for the same set of referrals from their buddies on other boards.
Let’s be honest here. If the David Swenson of 1985 had applied for the CIO position at Yale today he would not have made it past the first round of interviews. A young untested Wall Street banker with a knack for interest rate swaps? Not a chance.
Recruiting investment executives is our business so here’s some news for boards with searches on the docket.
There are about seven-hundred CIOs at tax-exempt institutions in the US and fifteen-hundred fully-baked up-and-comers ready to step into a CIO role in the nonprofit space.
And we have yet to list all the sell-side superstars and family office gems that would love the opportunity to serve their school.
But many of these individuals look different, think different, and they don’t like wearing choke-collars so they seldom get a chance to interview, let alone an offer.
Let’s talk about consultants.
If your investment advisor with two-hundred clients, has the inside skinny on your impressive under-the-radar new manager, or catches wind of that special fee you privately negotiated, or uncovers your plans to redeem from a certain fund, how soon do you suppose before their co-workers and other clients know?
There’s a reason why family offices seldom use consultants. They don’t want others knowing their business.
When it comes to money there are very few saints.
Fashion and FundingRead More »
Talent hits a target that no one else can hit. Genius hits a target no one else can see.
– Arthur Schopenhauer, German, philosopher
Chief investment officers are an eclectic group with a singular purpose – protect assets while generating income. The great ones add value that can last for generations.
Under David Swensen’s stewardship, for example, the Yale University endowment reported total AUM of $31.2 billion on June 30, 2020, a full third more than if Yale had put the endowment in an S&P tracker fund in 1985, the year Mr. Swensen started as CIO. And that’s after billions in distributions to the school. He will be missed.
But how do we find the next generation of investment superstars? Who will be the next Swensen, Volent, Malpass, Falls, or Golden?
Recruiting these executives is our business, and we avidly follow all institutional and family office investment heads managing assets over $500 million – and many with less – tracking their performance and pay and scrutinizing their abilities.
For us, the search process begins with two questions.
The first is data-driven. Can we identify skill and persistence in a candidate’s background?
The second is based on intuition and experience. Is this candidate someone that catches our eye? Piques our curiosity?
Oscar Wilde wrote in Lord Arthur Savile’s Crime and Other Stories that, “It is better to have a permanent income than to be fascinating.” And while we certainly agree with the author’s sentiment, we think a fascinating background is an important contributor to a great investor.
Let me explain.
We’ve looked at an untold number of resumes over the years and met with countless candidates. Most were bright and hard-working and yet, there wasn’t much to distinguish one from the other.
But every now and then, someone just jumped off the page. Their backgrounds were different, interesting, exciting.
Maybe they spent a year living on a Navajo reservation, learning the language, and volunteering in the health clinic. Or they set up a cloth dyeing business in Thailand, or sourced rare wood veneers in the Malaysian rain forests.
As search consultants we never stop looking for these individuals. Their memorable stories make our day.
Here are three exceptional examples of what we mean.
Paula Volent – Artistic Endeavors
Ms. Volent has dominated the institutional investment performance charts for years, but that wasn’t where she started or intended to be.
Armed with a BA in art history and chemistry from the University of New Hampshire, Ms. Volent set her sights on the art world and a role in paper and canvas preservation.
After six years as a curatorial assistant at the Bowdoin College Museum of Art, a year at the Clark Art Institute, more schooling at NYU’s Institute of Fine Arts – MA and certificate in art conservation – and additional internships at the Palace of Fine Arts in San Francisco and the LA County Museum, the business side of art caught her eye and she thought it time to earn a return on her years of study and training.
She launched a conservation studio in an empty grocery store in Venice Beach and cast her net in that fragmented and diffuse world Sarah Thornton described as “a loose network of overlapping subcultures held together by a belief in art.”
From 1990 to 1994 this was Volent’s beat, mixing and meeting with the celebrity elite, LA artists, and big-money collectors, canvassing for prospects and building her brand.
Yet, with all that hustle, she still found time for business classes at UCLA, an incidental yet pivotal move which ultimately changed the course of her career.Read More »
According to Forbes, there are a record 493 new billionaires on the latest “Richest in 2021” list, of which 10 hit the jackpot through SPAC mergers and 60 from IPOs. Sooner or later, some of them will establish a single-family office.
They will be in good company. Oprah has one. Gates has one. The Pritzkers and Waltons have half-a-dozen. But why would someone who has just made a fortune want to hire a room full of advisors to tell them what to do with their money?
Probably because, just like the rest of us, most newly-flush fortunaires worry about their wealth and how to manage it.
Even John D. Rockefeller had worries.
The Rockefeller family office and philanthropic endeavors are legendary role-models for modern philanthropists and family wealth managers.
But, as Ron Chernow points out in “Titan”, his definitive biography on Mr. Rockefeller, John D. worried constantly about his wealth and his philanthropy. So he created a structure and hired experts to deal with the demands on his fortune. His office became the template for most contemporary, large American family offices.
Making It versus Keeping It
All family offices, including the Rockefeller’s, start for the same reasons. There’s a need to organize the personal side of an individual’s life and now there’s money to pay for help.
But as the family grows so does the stable of houses, cars, planes, travel, and staff. And taxes!
Entrepreneurs and business titans mostly made their money from shooting the lights out on a single venture. Blavatnik, Brin, Dell, Gates, Zell, Zuckerberg, went “all in” and won big. Their recipe? Highly-concentrated investments, risk-taking, innovation, and sheer audacity.
But preserving a legacy is different. Wealth is created by entrepreneurs, but maintained through diversification, sophisticated risk-management, and prudence. The psychological profile of the former does not easily transform to the latter.
Successful entrepreneurs build competitive advantage into their businesses, but that advantage doesn’t naturally transfer to diversified investing. It’s a different mind-set and a different set of skills.
Time and Money
The more complicated life becomes, the more issues there are to deal with.Read More »
There is no place like America for exceptional investment talent.
Our country continues to produce and attract the world’s best and brightest and, along with Canada and Mexico, owns 58% of the world’s financial assets ($136 trillion) and collected 64% of all asset management revenues ($150 billion) in 2020. See: Boston Consulting Group Global Wealth 2021.
But with all our talent and resources, the challenge of building superior investment teams that can endure and outperform over a decade or more is daunting and seldom achieved.
Yale, Princeton, MIT, and Bowdoin have had a great run. Goldman Sachs and JPMorganChase have outlasted most of their peers.
And yet, while consistent, multi-decade superiority isn’t impossible, it’s exceedingly rare. Many redoubtable firms have just vanished.
There are a very few, semi-mythical beasts like the recently deceased Mr. David F. Swensen, Ph.D., Yale’s long-serving chief investment officer and Warren Buffett, of course.
Swensen built a process for identifying superior outside managers, cementing relationships, and staying with them as long as they were judged to have the edge. He was also an innovator with first-mover advantage in many respects which can’t be replicated.
One of my professors at The University of Chicago once remarked that some money managers seem to have the touch. And we can theorize, not always correctly, about how they do it. But most of them have a run bracketed by a certain period or a set of conditions, and then they are gone.
Even James Simons of Renaissance Technologies – the best trader ever – just had a losing year.
Why is this?
Paul Wachter, former investment chair of the University of California Regents, outlined the criteria used by the UC regents during their search in 2014 for a chief investment officer.
Mr. Wachter listed three principal qualities the UC board looked for in a candidate.
Organizational skills: Someone with serious organizational skills, who could work effectively with a big institution like the UC system.
Personality: Someone with the personality to work constructively with all of those different constituents, from the board and president to student groups.
Investment skill: But he added a caveat to number three.
Mr. Wachter said, “what you can’t tell in an interview is how good of an investor someone is. If you look at their track record in their previous position, you’re seeing the product of an entire team or institution.”
As readers of The Skorina Letter have no doubt noticed, we spend a great deal of time mining and analyzing the investment performance and pay of asset managers and chief investment officers. We look for skill and persistence and the data to support our search recommendations.
But, as Mr. Wachter points out, identifying a superior investment leader is not that simple.
Why?Read More »
Public pensions, endowments, and foundations will announce blow-out performance when returns are released this fall.
Thanks to bold moves and celestial markets the fiscal year ending June 30, 2021 will be a block-buster for the ages.
A little over a year ago, around March 2020 when markets fell off a cliff, veteran chief investment officers scrambled to rebalance and put their extra cash to work, a gutsy call but not without precedent.
Modern portfolio theory – and the 2009 crash – taught CIOs that when markets crater, investors big and small should rebalance (i.e., buy everything in sight).
Experience, history, and luck were on their side. As of April 30, 2021, the S&P 500 has had a one-year total return of 45.98% and the Barclays Agg ETF returned a minus 0.27%, so a plain vanilla 70/30 portfolio scored about 32.1%.
As a result, equity-heavy, risk-on pensions will have their best returns in years. We could see thirty percent and more.
Endowment and foundation CIOs should do almost as well thanks to eye-popping, co-invested venture and private equity returns and good old-fashion leverage. E&Fs may hold less equity and more alts, but many private market pay-offs were extraordinary.
On the other hand, for those CIOs and investment committees who missed the 2009 memo and panicked — slashing equity exposure then belatedly rebalancing at much higher prices — things aren’t looking so good!
Sub-par returns don’t sit well with trustees and donors. There will be consequence.
CIO Turnover: Pink Slips and Greener Pastures
Poor performance is not the only reason for a rash of CIO departures over the coming year. Early retirement is in the air.
Many investment heads have grown accustomed to the no-commute, work-from-anywhere lifestyle during covid and they don’t look forward to rejoining what they left behind.
They saved their money, invested wisely, and now have a healthy retirement cushion. Many have told us privately that they plan to retire early.
Registered Investment Advisors hear the same thing. Over the past year we’ve spoken with over two-hundred RIAs and they say that among clients in their fifties, early retirement is the number one question on their minds. “I don’t want the commute, stress, and hassles any more. Do I have enough to retire now?
For those of us in the search business, it’s going to be a very busy year.
When the Music StoppedRead More »