The problem of our age is the proper administration of wealth. — Andrew Carnegie, The Gospel of Wealth, June 1889

Who manages foundation money and how well are they doing?

John Seitz, CEO of FoundationMark, gnawed on that bone for years while working as a hedge fund analyst, portfolio manager, and Outsourced Chief Investment Officer (OCIO).  Finally, in 2015, frustrated at the lack of available data, he established FM to produce and provide performance indices, peer group data, and research tools for nonprofits, asset managers, and Wall Street sellsiders.

As recruiters, we are avid consumers of investment metrics and publish a yearly endowment performance report to support our candidate and OCIO selections.  So, we asked Mr. Seitz if he would share his data on one hundred large US private foundations.  You will find his latest available foundation investment returns below.

We think his research and rankings are useful companions to our endowment studies, of interest to asset owners and all purveyors of investment products and services.

Foundations everywhere

College endowments bask in media attention, yet foundations embrace a much larger market, both in numbers and assets – about 3,300 foundations versus 573 endowments over $50 million, totaling $1.4 trillion versus $807 billion.

While the corporate world jettisons their pension liabilities, and head count flattens at endowments, health systems, and public pensions, the foundation community and family office segment (a major source of charitable largesse) is flourishing.

US Private Foundations

• 151: over $1 bn
• 185: $500 mil – $1 bn
• 343: $250 mil – $500 mil
• 1,076: $100 mil – $250 mil
• 1,613: $50 mil – $100 mil
• 116,000: under $50 mil

Source: FoundationMark

US Endowments

• 131: over $1 bn
• 75: $500 mil – $1 bn
• 257: $100 mil – $500 mil
• 210: $1 mil – $100 mil

Source: NACUBO

So far, so good

When Andrew Carnegie endowed his newly formed Carnegie Corporation with $125 million in 1911 – roughly $3 billion in current dollars – he founded the largest charitable entity of its day.  Along with the creation of the Rockefeller Foundation in 1913, this marked the beginning of the modern era of foundation philanthropy.

Today, U.S. tax-exempt charitable organizations are a major force in American life, administering 3.8 trillion dollars in assets, of which approximately a third reside in private foundations.

Jon Hirtle, executive chairman of OCIO provider Hirtle Callaghan puts it this way:

However beautiful the strategy, you should occasionally look at the results – No attribution

As luck would have it, we’re currently managing an OCIO (outsourced chief investment officer) search for a notable east coast organization and thought we’d share some of what we’ve learned over the years.  A few tips for our board and family readers.  Why this “noblesse oblige?”  If you believe the pundits, investment advisors are about to enter a new golden age of wealth management.

According to UBS and a flurry of broadsheets, “over the next 20 years, the world will experience the greatest transfer of wealth in history with $84 trillion expected to pass down to younger generations in the US alone.”

At the celestial end of the wealth spectrum, we find a little over half the world’s wealthiest living in the United States.  UBS counts 123,870 ultra-high-net-worth individuals with investable assets of $50 million or more on our shores, and the bank expects that number to top 180,00 in five years.

Add in another 3,300 foundations with assets over $50 million and no wonder both Cerulli Associates and Capgemini forecast voracious demand for OCIO services for years to come.

But with over one hundred firms on our latest OCIO provider list, how’s a family or institution to choose among discretionary investment managers?

Managing money ain’t cheap

As we wrote a few weeks ago in our OCIO summer update, it’s expensive to support an institutional grade full-service asset management platform.  Costs are climbing for infrastructure, cyber-security, audits, and compliance.

Boston Consulting Group, in their Global Asset Management 2023 review, estimates that – due to rising costs – the industry’s compound annual growth rate in profits “will be approximately half the average of recent years (5% versus 10%).”

In a related wealth report, BCG highlights the impact rising costs are having on smaller investment managers, those with less than $150 billion AUM (i.e., family offices and OCIO’s, among others.)

Most nonprofits and families (basically anyone under $500 million in investable assets) just don’t have the time or resources to build competitive and secure internal investment capabilities.  Hence the spiraling demand for professional full-service OCIO providers.

So, where to begin?

Your new best friends

Our advice?  Start your search by answering the following question.  How will you measure success?  Absolute return?  Capital appreciation?  A new admin building with your name on it?

Before you pick through our handy OCIO directory and cogitate on the entries, please write down what you would like your new investment partner to accomplish.  Best to set expectations before they are set for you.

Yes, I’m paranoid–but am I paranoid enough? ― David Foster Wallace, Infinite Jest

While working on the “Skorina Letter” subscriber database last weekend, I came across an email address that gave me pause.  A vague recollection.  Something about the Maddox Foundation and a scandal regarding contested use of foundation assets?

Sure enough, turns out the case caused quite a stir a few years back and the intrepid team at the Magnolia Tribune diligently shared with their fellow Mississippians the mounting allegations and disclosures, including some rather salacious revelations thanks to the unsealed deposition of a former employee.

Nonprofit World’s more restrained report on the drama, “One Foundation’s Legal Battle: A Cautionary Tale for All Nonprofits,” added context and a few words of wisdom for their nonprofit readers.

The combatants included Ms. Robin Costa, former secretary and treasurer of the foundation who became, upon the Maddoxes’ untimely death, president and arbiter of the foundation’s one-hundred-million-dollar bequest, a battalion of lawyers, judges, prosecutors, and witnesses, one state district attorney general, and a former Mississippi governor.

Litigation raged across state lines with accusations of gross mismanagement, high living, and double-dealing hurled back and forth among the adversaries.

It’s probably best to let the Magnolia team take it from here.  (See the above links and one more Magnolia item here.)  But in the end, the foundation clawed back about half the assets.

The moral of the tale?  When it comes to money, there are very few saints. There are good reasons for strict board governance, robust financial controls, and established public disclosures.

Which brings us once again to the subject of professional money management.  If you can afford to fund and build an internal investment team and layer on the checks and balances, that’s great.  We’re here to help.

But once donors set up a foundation or endowment it can get complicated, as the Maddox case illustrates.

The outsourced chief investment officer industry is growing for a reason, cost-effective available professional investment management with institutional grade controls and processes, and third-party fiduciaries with watchful eyes on the money.

As we wrote last week in our OCIO summer update, most nonprofits and families (basically anyone under $500 million in investable assets) just don’t have the time or resources to build competitive and secure internal investment capabilities.  The OCIO solution is an effective alternative.

— Charles Skorina

The best way to predict the future is to create it. ― Unknown

Our summer 2023 Outsourced Chief Investment Officer (OCIO) update features 101 firms, each with a designated contact individual and helpful hints to reach them: name, title, email, and phone number.  It’s the most comprehensive, accurate, and accessible available.

Our goal is to help families and institutions locate, review, and connect with full-service discretionary outsource investment managers.  As Henry Kissinger supposedly quipped when pondering a question on European leadership, “If you want to speak with Europe who do you call?”

The companies on our list care deeply about their customers.  Our directory makes it easy for prospective clients to reach them.

Holding On

For the year ending December 31st, 2022, OCIO providers managed to hold the line against volatile financial markets and investment headwinds, our new era of uncertainty to quote McKinsey.

Despite the Nasdaq losing a third of its value, 33%, the Russell 3000 down by 20.48%, the S&P 500 off 20%, and the Dow shedding 9%, total outsourced assets on our list dipped a tenable 9.5%, or $356 billion to $3.4 trillion.

It’s not all Strum und Drang, however, both Cerulli Associates’ OCIO Survey 2022 and Capgemini’s Wealth Management Top Trends 2023 expect healthy demand for OCIO services in the years to come.

According to Capgemini, “The growing complexity of assets, the necessity to adjust to volatile markets and uncertainties, access to experts, and shrinking investment management costs will heighten the profile of OCIOs.”

This is a common refrain from clients and contacts.  It’s expensive to support an institutional grade full-service asset management platform and it will only get worse.  Costs are climbing for infrastructure, cyber-security, regulatory audits and compliance, and access to liquid and alternative products and managers.

Given these challenges, there are only three ways most wealth and institutional money managers will grow — buy, sell, or merge.

This is just as true, by the way, for RIAs, which explains why so many are snuggling up to better resourced competitors.  Echelon Partners 2022 RIA M&A Deal Report tracked 340 announced transactions in 2022 alone, the tenth straight year of record acquisitions

The Gang of Eight

At year end 2022 eight firms – Mercer, BlackRock, Russell Investments, Goldman Sachs, SEI, AON, SSGA, and WTW – managed about 52% of the total AUM on our list.  These eight providers with their size and resources dominate the largest segment, corporate pensions.

But the corporate defined benefit business is a land unto its own, actuarial, regulated, and liability driven, with big-ticket AUM on offer, $1.78 trillion among the top 100 US plans.  In 2022, for example, BlackRock added $56 billion worth of new business from just two accounts, the $14 billion General Dynamics pension and the $42 billion Teamsters Central States Pension Fund.

Eight largest OCIOs by AUM

Follow the money, always follow the money – William Goldman, “All the President’s Men”

Bob Dylan wrote the evocative The Times They Are a-Changin’ in 1963, and sixty years later the song might just as well be a meditation on today’s unsettled times.

While large institutional funds – pensions, sovereign wealth funds, endowments – continue to invest as if nothing has changed, our family office clients are preparing for a more nuanced and conflicted scenario, building liquidity and waiting for clarity.

Changing times

After a 2,000-basis-point decline in interest rates between 1980 and 2020, the Federal Open Market Committee on March 16, 2022 finally changed the game and began the process of lifting their price controls on money. 

“Nowadays,” writes Howard Marks, “the ICE BofA U.S High Yield Constrained Index offers a yield of over 8.5%, the CS Leveraged Loan Index offers roughly 10.0%, and private loans offer considerably more.”

“In other words, expected pre-tax yields from non-investment grade debt investments now approach or exceed the historical returns from equity.”

And as Marks postulates, not only has the “sea change” in rates finally put an end to our golden era of free money, it also quite possibly signals the end of private equity’s buoyant forty-year run.

“Almost the entire history of levered investment strategies has been written during a period of declining and/or ultra-low interest rates.”

Along the watchtower

One of our family clients recently asked his private banker at Citi what he saw other large family offices doing.  The banker’s answer, “going to cash!”

The latest Goldman Sachs 2023 Family Office Investment Insight Report surveyed family sentiment and found that “since 2021, global family offices, on average, increased their combined allocation across cash and fixed income from 19% to just over 22% total — 12% in cash and cash equivalents, and 10% in fixed income.”

This move to liquidity and safety is hardly surprising.  As we wrote a year ago, family offices have been around for centuries and weathered every conceivable storm.

From the major-domos in ancient Rome to Rockefeller and Microsoft heirs, cash has always been king. Liquidity meant power and the means to act in good times and bad.

Maybe it’s also because family founders are usually operators who run businesses and in business, running out of cash is an original sin.

The clarity of hindsight

So, how are the nation’s largest pensions, the really big money boys and girls ($5.19 trillion in DB assets), dealing with this historic “shift?”  As nearly as we can tell, they don’t have much room to maneuver.

They’re still boosting their allocations to private markets despite massive amounts of dry power, intense competition, increasing rates, decreasing returns, and make-believe marks.

The $442 billion CalPERS pension, for example, announced in January that the  allocation to private equity would be increased from “8% to 13% starting with the 2022-23 fiscal year.”

Even if pensions wanted to alter course, however, they face performance pressures and institutional roadblocks.  Not to mention funding commitments and low liquidity.

Changing course means educating boards, building expertise, and overcoming vested interests, an unpleasant and for now unlikely process.  But with a snowballing funding crunch, something will eventually give.

To quote John Kenneth Galbraith, “There can be few fields of human endeavor in which history counts for so little as in the world of finance.”

Fixed income, how sweet it is