Our March letter focuses on the venerable foundations of New York City and one of their most accomplished investment pros: Kim Y. Lew, chief investment officer of the Carnegie Corporation.

We have an in-depth conversation with Ms. Lew on her career in foundation investing and the future of women and minorities in her field.  We also look at pay and performance in the NYC foundations, with some illuminating charts for our quant readers.

Our friends at the Foundation Center tell us there are 243 American foundations with over $1 billion in assets and New York City harbors 31 of them, including some of the biggest and most storied.  The money wasn’t all made there, but it tended to flow toward Manhattan because that’s where the money-managers were.

According to David Swensen, “a deep appreciation of history” is essential to an investment professional.  Not just knowledge, mind you; but appreciation.  History may have temporarily put that money in their care, but markets and circumstance are always threatening to take it back.

Goethe’s Faust got it right when he declaimed:

“That which thy fathers have bequeathed to thee, earn and become the possessor of it!”

Mr. Carnegie and Ms. Lew:

When Andrew Carnegie endowed the corporation with $125 million in 1911 – perhaps $3 billion in 2017 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.

The Carnegie Corporation, headed by the eminent Vartan Gregorian, marked its centenary in 2011, the year Kim Lew became co-CIO, and it is still among the twenty-five largest foundations in the U.S. 

Despite continuing to give away at least $150 million every year (5% of net investment assets), the Corporation’s endowment is larger today – in constant dollars – than it was in 1911.  This is due in part to the forbearance of America’s taxpayers via the Internal Revenue Code, but also in large part to the skill of Ms. Lew, her colleagues, and their predecessors in maintaining impressive investment returns over the generations.

What makes a great chief investment officer?

All professional investors want to make money.  The question is, how and for whom?

In the for-profit world of Wall Street asset managers and retail mutual funds, the differences among managers reflect investor appetites, time horizons and risk tolerances.  They must all serve their customers, or the customers will walk.  But they are also profit-seekers, motivated by bonuses and the bottom line.

Most chief investment officers start their careers as traders, analysts, or consultants; working with spreads and price dislocations, capital structures and cash flows, or advising on asset allocations and manager selection.  Ex-traders like Sam Gallo, CIO at the University System of Maryland, are particularly valuable now, because they know how to move large books quickly and cut transaction costs, topics of keen interest these days.

Eventually, some find their way into the family office and non-profit world of multigenerational, multiasset investing, researching opportunities and managers in public and illiquid markets.

Dedicated family office CIOs – between 800 and 1500 in the US – invest in anything and everything; in stocks, bonds, loans, cold storage, tankers, and toll roads.  But tax implications become a priority; and family preferences – rational or not – drive the portfolio.

CIOs work at the pleasure of a complex and opaque authority whose circumstances, mood, location, and needs are subject to change at any time.  In the family office world, one often has no idea how much liquidity is required as family purchases can be large, lumpy and unpredictable. 

Both Alice Ruth and Jason Perlioni jumped to endowment CIO positions this year after long stints at family offices; Ms. Ruth moving to Dartmouth after nine years at Willett Advisors (Michael Bloomberg) and Mr. Perlioni moving to Johns Hopkins after ten years at the Pritzker Group.

Working for a family office can be an attractive and rewarding experience, but all family office CIOs understand Leo Tolstoy’s famous line from Anna Karenina, “All happy families are alike; each unhappy family is unhappy in its own way.”

Managing assets for tax-exempt Institutions differs from all the above.

Some institutions prioritize wealth creation while others prioritize transparency, political accountability, and risk minimization.  Endowments, foundations, hospitals, cultural institutions, corporate and public pension funds can fall into either group. 

In each case, however, the CIO job is what one makes of it; some are delegators, some are micro-managers, and some are just liaisons between a consultant and an investment committee.

Corporate and hospital chief investment officers structure their portfolios primarily to manage risk.  Corporate CIOs are liability driven and have a financial mindset.  They think in terms of payouts, terminal value, and matching durations.  They care less about outperforming peers because absolute return is seldom their top priority or that of their boards.  Bill Hammond, the CIO at AT&T and Jason Klein, CIO at Sloan-Kettering NYC, understand the mission of the institution; their job is to minimized liabilities and forestall surprises.

The “endowment model” of fund management prescribes a highly diversified portfolio of investments across public and private markets.  Most endowment and foundation CIOs strive to earn the best possible risk-adjusted returns and grow the corpus over decades.

Our letter this month focuses on the venerable foundations of New York City and one of their most accomplished investment pros: Kim Y. Lew, chief investment officer of the Carnegie Corporation.  

We have an in-depth conversation with Ms. Lew on her career in foundation investing and the future of women and minorities in her field.  We also look at pay and performance in the NYC foundations, with some illuminating charts for our quant readers.

Our friends at the Foundation Center tell us there are 243 American foundations with over $1 billion in assets and New York City harbors 31 of them, including some of the biggest and most storied.  The money wasn’t all made there, but it tended to flow toward Manhattan because that’s where the money-managers were.

According to David Swensen, “a deep appreciation of history” is essential to an investment professional.  Not just knowledge, mind you; but appreciation.  History may have temporarily put that money in their care, but markets and circumstance are always threatening to take it back.

Goethe’s Faust got it right when he declaimed:

“That which thy fathers have bequeathed to thee, earn and become the possessor of it!”

Mr. Carnegie and Ms. Lew:

When Andrew Carnegie endowed the corporation with $125 million in 1911 — perhaps $3 billion in 2017 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.

The Carnegie Corporation, headed by the eminent Vartan Gregorian, marked its centenary in 2011, the year Kim Lew became co-CIO, and it is still among the twenty-five largest foundations in the U.S. 

Despite continuing to give away at least $150 million every year (5% of net investment assets), the Corporation’s endowment is larger today — in constant dollars — than it was in 1911.  This is due in part to the forbearance of America’s taxpayers via the Internal Revenue Code, but also in large part to the skill of Ms. Lew, her colleagues, and their predecessors in maintaining impressive investment returns over the generations.

A New York story:

Kim Lew was born in Harlem, daughter of a Chinese immigrant father and an African-American mother.  She was admitted to one of New York’s most selective public high schools, the famous Bronx High School of Science, and then became the first in her hard-working family to reach college.

She earned degrees at the University of Pennsylvania and Harvard Business School, came home to launch a financial career in New York, and joined the investment office of the Carnegie Corporation in 2007.

That’s a tall mountain to climb for anyone, but especially challenging for a minority female.

By our own ballpark estimates, only about 25 percent of major educational endowments and about 30 percent of big foundation funds are managed by women, and only a handful are African-Americans.

So, hers is in some ways an unusual story, but New York is a place where unlikely people have always accomplished remarkable things.

Here’s a snapshot of New York City’s top foundation CIOs, where they work, and how much money they manage.

“Persistence of returns” is a phrase we associate with hedge funds.  It seems debatable whether there is any such persistence there.  Hedgies say there is; others are not so sure.

In the case of endowments and chief investment officers, however, it’s a verifiable phenomenon.

The chart below incorporates the latest numbers and lists the top-ten endowment performers (out of our Top 25 cohort) for 1, 5, and 10-year periods as of June, 2016.

What is remarkable is how the same funds tend to show up across the board, even in the more volatile 1-year numbers.

Seven funds – MIT, Princeton, Yale, Columbia, Notre Dame, Rice, and Stanford – show up in each table.  Dartmouth and Virginia both make two out of three (neither of them quite made the cut for 1-year returns).  Notre Dame’s consistency is uncanny: they rank 6th out of 10 on all three.

Rice’s consistent excellence may have been slightly unexpected.  It’s a Southern, non-Ivy school with “only” a $5.3 billion endowment; but it has outperformed Stanford and most of the Ivys in each measurement period.  Good work by Allison Thacker’s Rice Management Company.

Harvard throws in the towel, UTIMCO reboots

In our piece on Harvard last July titled “The Harvard Endowment: Time for some Creative Destruction?” we wrote the following…

It’s been ten years now since Jack Meyer stepped down as head of the Harvard Management Company, while David Swensen – now in his 31st year – has carried on at the Yale Investment Office.

Each endowment has pursued its own distinctive management model: HMC with its “hybrid” internal/external approach, versus YIO’s exclusive reliance on cherry-picked external managers. 

We can now call the winner: It’s Yale.

See: “The Harvard Endowment: Time for some Creative Destruction”

It’s here: https://www.charlesskorina.com/?p=3631

Well, the creative destruction has arrived in the person of Narv Narvekar.

On January 25^th, reporters Dawn Lim and Juliet Chung broke the big news in the Wall Street Journal that Harvard will adopt a new model of endowment management. 

Maybe we should call it the “Columbia model” rather than the Yale Model, but it amounts to the same thing.

In brief, Harvard Management Company will cut its staff by 50 percent, outsource internally-managed assets, and hire a CIO which, technically, HMC has never had.  The new CIO will be Richard Slocum, an old colleague of Mr. Narvekar’s from JPMorgan.

With a separate CEO and CIO, and a much smaller staff, HMC will look a lot like Columbia under Mr. Narvekar.

We all knew changes were coming, but we didn’t foresee such rapid and dramatic restructuring.  Obviously this happened with the full support of Chairman Paul Finnegan and the HMC board and was probably in the works since Mr. Narvekar was offered the job. 

See: http://www.wsj.com/articles/harvard-to-outsource-management-of-its-35-7-billion-endowment-1485363650

Texas Turmoil

UTIMCO picks a new path through a political minefield

Endowment returns took a beating last year and the turnover in chief investment officers tells the tale.

Among the big names to make an exit in 2016 was Bruce Zimmerman, longtime CEO of The University of Texas Investment Management Company (UTIMCO).

We wrote about endowment turnover in our last newsletter. 

See: https://www.charlesskorina.com/?p=4488

Texas is the home of big money, big egos, and bare-knuckled politics and the last few years have been uneasy ones for the UT system and, collaterally, for UTIMCO.

Here’s what happened: