No one knows exactly when the Southern Cottontail Rabbit diverged from its other 19 (or so) North American Cottontail cousins, becoming its own distinct species of bunny.

In evolution these things just happen.

Similarly, among financial institutions, modern banks seem to have evolved from traditional moneylenders somewhere in northern Italy in the late 14th century.  But that fateful development could only be recognized in retrospect.

Our friend John Hirtle, of Hirtle, Callaghan & Co, claims that he (with fellow Goldman Sachs vet Donald Callaghan) birthed the OCIO species in 1988.  He’s a very nice (and imposing) man, so we take him at his word.

In any case, there were soon several smallish firms pursuing the OCIO business model in the early 1990s.

The core idea was to offer a diversified and full-discretion money management function to family offices and others who could no longer effectively or affordably do the job in-house (even with the help of traditional trust banking services).

The job was becoming too sophisticated and complex, both conceptually and operationally.

Observing their success, a number of larger firms joined the scrum in the OCIO space and, in a couple of decades we had the OCIO landscape of today, managing not just billions, but trillions of dollars.  And reaping proportionate fees therefrom.

We’ve been charting the growth of the OCIO industry for the past decade in our annual OCIO report and the heirs of Hirtle, big and small, seem (mostly) to have flourished.

In our shiny new 2019 report we observe that total OCIO assets grew from $1.98 Trillion to $2.38 Trillion. That’s a year-over-year growth rate of 19 percent.

That’s pretty impressive! But, the AUM increase is not as vigorous as the annual growth over the previous four years (2014 through 2018).  And some of the increase represents a “reclassification of assets” at two OCIO providers.

So, three decades into the OCIO era, we’re minded to ask whether the OCIO growth rate may be slowing, maybe even plateauing.  Are the OCIO rabbits multiplying faster than the green, green grass of customer money they live on?

Let’s consider the evidence, both statistical and anecdotal.

The hard numbers

Anastasia Titarchuk just moved up to permanent chief investment officer and deputy comptroller of New York State’s $216 billion CRF fund after three years as Deputy CIO and a year as Interim CIO.

NYSCRF is the county’s third-biggest public pension fund after CalPERS and CalSTRS in California.

We have a revealing Q&A with her just below; but first here’s some context about CRF, which doesn’t usually get as much ink as the big West Coast funds.

Investment Performance

Here are the latest multiyear returns for these three mega-pensions and CRF hold its own very well on a comparative basis. (CRF has a non-standard fiscal year, but we have helpfully stated all figures as of June 30, 2019.)

For 2019, CRF tops both the Californians with 7.1 net return.

Over 10 years the New Yorkers were a close second to CalSTRS, with 9.8 percent vs. Chris Ailman’s 10.1 percent.

Investment Performance NYCRF, CalSTRS, CalPERS

[Click “read more” below for charts and complete report]

Only Mr. Ailman at CalSTRS was CIO for a whole decade (now approaching two decades!).  Ms. Titarchuk was interim CIO for all of 2019.  And, of course, Mr. Meng at CalPERS is the newbie, in office for only the last six months of the 2019 fiscal year.

Funded Status

A very big deal for public pensions is an actuarial number called funded status, which other institutional investors don’t have to think about.  The calculation depends on some tricky estimates, and opinions differ about what’s a healthy number.  But higher is always better.

A recent Milliman Study of 100 major U.S. pensions found that only 11 have a funded status over 90 percent, and NYSCRF is one of them, with an enviable 94 percent as of 2018.

Good investment performance can help improve this number, but it’s only one factor.  Still, a low funded ratio tends to attract attention in a not-good way and can cast a pall over the whole system.

We have worked over three decades recruiting chief investment officers and advising boards on investment performance and our research on investment leaders goes back years.  No one has been a stronger supporter of building internal investment management teams than us.

But lately we’ve been wondering if non-profit boards and trustees are holding their investment offices accountable for performance.

Here is what’s bothering us: Many tax-exempt institutional investors have underperformed public markets for ten years and more and, according to board members we have spoken with, failed to meet the needs of their stakeholders.

In some cases, as we have highlighted in past newsletters, it’s the board’s fault.  Dissension or timidity tied the hands of highly skilled staff.  In others, the chief investment officer just didn’t have what it takes.

So, here’s the way some of our trustee clients see it: If the current investment team at an endowment, foundation, pension fund, or family office can’t out-perform the market over a reasonable period, say five to ten years, then the trustees or principals should replace them with those who can…or get out of the investment business.

In our latest study of large endowment performance, not one investment office out of the hundred we ranked beat the S&P over five years and only a third managed to out-perform a traditional sixty-forty stocks and bonds portfolio.

We tend to focus on foundations, endowments, and family offices but, in the larger universe of pension investors the story is mostly the same.

The annual report of the $150-billion Texas TRS fund (seventh-largest tax-exempt fund in the country) just became available, and Scott Burns at the Dallas Morning News gave it a hard look this week.

Over ten years (ending August 2018) they earned an annualized 7.1 percent with a portfolio that’s more than 40-percent invested in alternatives.

By comparison, the one-stop Vanguard Balanced Index Fund, invested entirely in marketable U.S. stocks and bonds, earned 9.95 percent.  The Vanguard fund also beat them over one, three, and five years.

He concludes:

The comprehensive annual report provides thoughtful reasons for this, laying out its sophisticated case for global equity, stable value, real return and risk parity investments.

But simplicity and low cost would have been worth $46.2 billion more [over the same ten-year period].

In our last newsletter we looked at the number of women CIOs at big endowments*.  Among 109 North American endowments over $1 billion we identified 20 (including one female director of investments and one CFO who liaises with their OCIO providers).

That’s just eighteen percent – less than one out of five.

For this issue we also took a look at the mid-sized schools (in the $500 million-to $1 billion bracket), to see if the situation is any better.

Unfortunately, that’s a no.  We found 10 females among 85 schools.  That’s just 12 percent – a significantly lower representation that among the bigger schools.

We’ve inserted a chart below with the CIOs ranked by AUM.

Twelve percent in this group is not quite as bad as it sounds.  That’s because mid-size endowments are less likely to have dedicated in-house investment staff – either men or women.

Many prefer to outsource, or to use a committee-and-consultant model without an internal investment office.

But it’s still not a great number.

Although we haven’t done an exact count, we should note that females are well represented among professional slots at the major OCIO firms and consultants.  These are good jobs, and often a gateway to CIO jobs (although they usually don’t pay as well).

This may somewhat mitigate the overall situation for women jobseekers.

Charting the trend

That’s the static picture, but the trend is even more important.

Is that gap worsening, or about the same over recent years?

Unfortunately, it seems to be widening.

Looking at recent turnover, 9 departing female CIOs have been replaced by men; while only 3 were replaced by other women.

Just one departing male was succeeded by a female.

These turnovers are detailed in the next chart.

In February we published an abbreviated list of five-year endowment performance for fiscal year end June 30, 2018 for 61 schools to compliment the release of the annual NACUBO TIAA study.  Today, we introduce our big list with one hundred large endowments.

Every CIO on our list is experienced, dedicated, and adept at running a diversified portfolio.  But MIT produced a five-year return of 12 percent while the University of Chicago posted 6.87.  Why the divergence?

Different institutions, different goals

Every school has its own endowment payout rate and tolerance for risk.  Some schools rely heavily on income, others place more weight on growing the principal.

It takes years to fully implement a multi-asset, multi-generational investment strategy and altering course mid-stream – a new investment chair? a change in CIOs? – can sap performance for a decade.

The challenge for the board and chief investment officer is to maintain course when market fluctuations shake conviction and crowd psychology rattles trustees.

Most high-performance institutions on our list have stable boards and long serving chief investment officers.  See: A College Investor Who Beats the Ivys.

Happy boards, happy staffs

The personalities, preferences, and experiences of board members interact in a variety of ways, usually good, sometimes bad, and occasionally incoherently.  The trick is to figure out how to work together, achieve a consensus on investment policy, and let the staff handle the investing.

#1: No surprises

Serving on a nonprofit board has many upsides; personal satisfaction, peer recognition, and an opportunity to make a difference.  But when things go wrong, the reputational risk is brutal.

No board member at Michigan State or Southern Cal could have foreseen the scandals that erupted on their watch.  And we wrote at length about past challenges at the Harvard endowment.  It takes a long time to dig out from under poor management as the current board and CEO/CIO can attest.

The job of the investment staff is not to beat Yale, it’s to meet the objectives set by the board.