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.

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.

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.

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.

Talent is a flame. Genius is a fire. — Bernard Williams

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?