12/01/2021

The good news is that, according to the current administration, the rich will pay for everything.

The bad news is that, according to the current administration, you’re rich.

— P. J. O’Rourke

Institutional investors delivered once-in-a-lifetime investment performance for fiscal 2021, from about 25 percent at the sleepiest public pensions to 65 percent at Washington University, St Louis.

As the late standup comedian Jackie Mason used to quip, “these are returns even the mafia can’t get.”

Take the eight Ivy endowments, for example.  Their performance soared from a tepid 6.28 percent average a year ago (and ten-year 9.52 percent) to a sizzling 41.75 percent for fiscal 2021 as our chart below shows.

(please hit link for chart)

As of June 30, 2021, the S&P 500 tallied a twelve-month total return of 40.79 percent against the Barclays Agg ETF return of minus 0.3 percent.  Even a plain vanilla 70/30 portfolio rang up about 26 percent.All things equity had a run for the ages, but how long can it last?

Private-market-heavy, risk-on endowments, foundations, and pensions enjoyed their best performance ever, thanks to eye-popping venture capital and private equity returns and good old-fashion leverage.

But here’s the caveat, if history teaches us anything, it’s that nothing lasts forever, be it empires or bull markets.  Everything ends, the only question is when.

And now here’s the bad news

According to Preqin, the unrealized portion of global venture-capital portfolios skyrocketed to $1.33 trillion by March 2021, up from $803 billion in December 2019.

How are multi-asset institutional investors going to handle their asset allocations over the next few years when venture capital marks are up 80 percent, yet nothing is being realized (where’s the cash?) and investment staffs have planned for VC commitments in the 15 percent to 25 percent range.

As Sam Gallo, CIO at the University System of Maryland Foundation puts it, what do you do when an overvalued asset class takes over your book, eats up your risk budget, and threatens your ability to continue allocations across the entire portfolio?  Meanwhile, every VC manager and their cousin is raising a new fund every month and if you don’t re-up, they will never let you in again.

Here’s another pickle.  Let’s say a pension or endowment lays on a one percent bitcoin position that jumped to eight percent overnight.  Should they rebalance back to one percent so as not to reduce their allocations to other asset classes?

Or what if bitcoin drops fifty percent as it has done at least seven times in the past, cutting that new eight percent allocation down to four percent of book?

Endowments and pensions are supposed to be long term investors, so in theory they should hold on to that bitcoin position.

But keep in mind that CIOs get bonuses by minimizing tracking error relative to their benchmarks, especially on the downside.  No board likes to miss benchmarks by more than two percent a year.

What to do?

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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.

Groupthink Happens

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.

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08/23/2021

Our latest Outsourced Chief Investment Officer (OCIO) report below features one-hundred-four firms managing industry assets of $3.27 trillion as of March 31, 2021, an increase of 15% over the prior six months.

By comparison, last year we reported 15.8% growth for the entire twelve-months ending September 30, 2020.

All things equity – public markets, private equity, venture capital — produced a year for the ages and our herd of OCIO providers kept pace with the bulls.  Overall OCIO growth matched Alpha’s broad market index and slightly trailed Alpha’s moderate endowment and foundation diversified style index.

 

Alpha Nasdaq OCIO Indexes

 

One-year Performance

ending 3-31-21

Broad Market

30.69

Endowment & Foundations

35.77

Aggressive Asset Allocation

46.34

Moderate Asset Allocation

33.17

Conservative Asset Allocation

7.71

MSCI ACWI

55.31

S&P 500

56.35

Bloomberg Barclays US Aggregate

0.71

60% MSCI ACWI /

40% Bloomberg Barclays US Agg

31.12

 

The OCIO Story

Our friend Jon Hirtle, of Hirtle, Callaghan & Co, officially launched the OCIO service model in 1988 (with fellow Goldman Sachs vet Don Callaghan) and it’s been full steam ahead ever since.

(See Jon Hirtle’s iconoclastic guest commentary below –– and his full article OCIO My Foot! here.  We welcome all points of view)

The core idea was to offer a diversified and full-discretion money management function to family offices and institutions who could no longer effectively or affordably manage the money in-house.

OCIO firms offer the proven performance of the best endowment and foundation investment managers at a reasonable price.  And they can replicate the entire investment office with the process and structure to cope with the complexity of modern portfolios and mounting operational and regulatory burdens.

We’ve been charting the growth of the OCIO industry for well over a decade in our annual OCIO reports and the heirs of Hirtle, big and small, seem mostly to have flourished.

Today the industry is bifurcated, highly diverse, intensely competitive, and the nine largest providers on our OCIO list – Aon, Blackrock, Goldman Sachs, Mercer, Northern Trust, Russell, SEI, SSgA, and Willis Towers Watson – with their size and resources dominate the largest segment, corporate pensions.

These nine firms control nearly two trillion in OCIO assets or 60% of the outsourced segment, but from what we hear and see, the market for discretionary asset management services among foundations and family offices shows no sign of slowing.

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08/12/2021

Women pursuinging positions as chief investment officers had better buckle up.  It’s a long hard road.

Preqin’s Impact Report 2020, Women in Alternative Assets applauds endowments and foundations for employing women.  They claim that 37.4% of senior, 48.6% mid-level, and 48.4% of junior positions at foundations, and 28.2% of senior, 42.2% mid-level, and 41.6% junior positions at endowments are held by women.

That sounds fine on the surface, but we all know the old saying about lies and statistics.  Where are the women chief investment officers?

We have worked with institutional investors for years recruiting CIOs. We even wrote about The mysterious shortfall in women chief investment officers.  For us, there are only two questions: who manages the money and how well do they do it?

Human Resources, legal, administration, as important as they may be, are staff functions and costs centers, but chief investment officers are executives with line responsibility.  They make money  – the only revenue generators for foundations and a major source of support for endowments, hospitals, charities, and pensions.

So, how are the women doing?

From the looks of things, impressively well.  Our third chart below (and 2020 endowment performance report) suggests that gender has no bearing on investment performance.

Unfortunately, this news does not seem to have reached the boardrooms.

In our last newsletter – Searching for the Next Swensen: Part II – we highlighted the prodigious talent machine at the Yale investment office.

We even compiled two charts, included below, of YIO and Yale university alumni who moved on to CIO roles, and included their backgrounds and ages when they were hired as CIOs.

Notice something odd?

The men were much younger than the women when they were hired for CIO roles – ten years on average.

In other words, board members seemed more inclined to take a chance on younger men than younger women.

Other than Casey Whalen (30yrs) at Truvvo, Kimberly Sargent (39yrs) at the Packard Foundation, and Letitia Johnson (39) at Amherst, all the women were in their forties before boards took notice.

Yet all the men except for Rob Wallace (49yrs) at Stanford were in their thirties.

Granted this is a small sample, but these recruits came from Yale, every headhunter’s ground zero.  They are all very good at the YIO.

I mentioned to Janet Lorin at Bloomberg News that the next Yale CIO will mostly likely have a Yale background, be on the younger side and, of course, be wicked smart, have animal ambition, and a maniacal focus.  Hey, we know those women (and men).

Will the Yale University trustees show a willingness to stretch and take a chance on gender as they once did on youth?  David Swensen was thirty-one years old when William Brainard ’62 PhD and provost at the time hired Swensen to manage the endowment.

Perceptions don’t change overnight, but the investment office has done an excellent job of recruiting and training superior female chief investment officers.  Maybe now’s the time to bring one home.

I’m not the only one who feels this way, let’s hear it from the source.

Our goal is a level of diversity in investment management firms that reflects the diversity in the world in which we live.  Genuine diversity remains elusive, giving investors like Yale and your firm an opportunity to drive change.  Success will be measured by hiring, training, mentoring, and retaining women and minorities for positions on the investment teams at Yale and in your firm.

David Swensen, October 2, 2020, Yale Investments Office

We have been in the search business for well over thirty years and here’s our take: there are plenty of talented women waiting for a CIO opportunity and our research shows they perform among the best.  So go ahead, reach out, we’ll all be better for it.

— Charles Skorina

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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.

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