Activity is the enemy of investment returns —Warren Buffett

Endowment board members tell us their schools must earn at least eight percent on average to support operations and administration, student aid, and capital conservation. Unfortunately, that’s a tough nut to crack based on recent performance.

Only forty-two of the one-hundred-nineteen funds over one billion AUM in our latest FY2024 endowment performance report achieved eight percent or more over the most recent ten-year period. Roughly one third. The average return for the entire group was seven-point-seven percent.

Even worse, just one of twenty-two endowments between five hundred million and one billion in our report beat the eight percent hurdle. Sadly, those are usually the ones that most need the income.

NACUBO-Commonfund will publish their annual report in a few weeks and we will see how their endowment universe performed. But for FY 2023 NACUBO reported an average return of seven-point-seven percent net of fees for all participating schools. Not much has changed.

The NACUBO chart below shows the volatility of 10-yr returns year by year from 2002.

Here’s the problem: over the last three decades most large endowments have tried to mimic the “Yale model.” But there was only one David Swensen, and he was an outlier, a different thinker, a trailblazer and his first book was called Pioneering Portfolio Management for good reason. It was all new stuff. Forget public markets. Spend your time uncovering private opportunities with less visibility and more upside. And get in early.

The School of Swensen produced many top-flight acolytes, but the master is gone and the world has changed. Today that trail he cut through the wilderness has become a freeway and the endowment model is a very crowded trade. Let’s let Mr. Swensen explain the conundrum.

I figured out when I revised Pioneering Portfolio Management that the most important distinction isn’t between the institutional investor and the individual. It’s between those that are set up to make high-quality active management decisions and those that aren’t.

The investment management world is a strange place in that the right solution is not in the middle. The right solution is at one extreme or the other. One end of the spectrum is being intensively active. The other is being completely passive.

If you end up in the middle, which is where almost everybody is, you pay way too much in fees and end up getting subpar returns . . . The passive group is not nearly as big as it should be. Almost everybody should be there.

First level thinking

Leadership is the capacity to translate vision into reality —Warren Bennis

Chief investment officers are C-suite executives. They manage a business that generates revenue and supports an enterprise. Be it OCIO, endowment, or family office, investment leadership matters.

We recruit these executives and facilitate OCIO selections so we pay attention to who they are, what they do, and how well they do it. Here are a few observations.

Larry Fink, CEO of BlackRock, describes leadership as “a consistent voice, a clear purpose, a coherent strategy, and a long-term view.” McKinsey defines leadership as “enabling others to accomplish something they couldn’t do on their own.” Jon Hirtle, executive chairman Hirtle Callaghan and former Marine Corps officer, considers leadership “the noble cause – serving the client.”

The authors of “What Makes a Great Leader,” list three qualities as key – architects, bridgers, and catalysts. “As architects, they build the culture and capabilities for co-creation. As bridgers, they curate and enable networks of talent inside and outside their organizations to co-create. And as catalysts, they lead beyond their organizational boundaries to energize and activate co-creation across entire ecosystems.”

Myra Drucker’s prolific CIO academy

Some years ago we spoke with Myra Drucker, the former chief investment officer of the Xerox corporate pension group, and wrote about her impressive internal CIO training program.

Notable alumni include Joseph Boateng, CIO of Casey Family Programs Foundation, MaDoe Htun, CIO of the William Penn Foundation, former endowment CIO’s Mary Cahill and Matthew Wright of Emory and Vanderbilt respectively (and founders of OCIO firms Acansas and Disciplina).

Mr. Boateng recalled that “Myra told all of us in the investment office that she would consider her job a success if she accomplished just two objectives: first, meet her performance targets for the pension fund; and second, develop all of us so well that each of us could go on to become a CIO. She is a role model I still look up to.”

When we asked Ms. Drucker for the secret to her CIO sauce, she answered this way: “First, obviously, you hire the best people you can find. Every hiring decision should be a big deal that gets your full attention.

“Then, push them. Make them stretch and take on new assignments. I rotated my people among asset classes. Nobody just sits at a fixed-income desk without ever having to deal with equities or alternatives. For every asset class and major initiative, I made sure there were two team-members assigned: a lead and a back-up.

“But it goes beyond just portfolio management. Everybody is exposed to the operational and administrative tasks. Everybody has to understand fund accounting.

“I know that some fund managers think they should be the sole interface with the board or trustees, and reserve that job to themselves. I think that’s a mistake. I made sure my people were in meetings with the board members and made presentations to them. “Managing” a board is a key, make-or-break skill for a fund manager, but if you’re not taught how to do it, how can you ever operate on that level?”

Time and money

“If I had asked my customers what they wanted they would have said a faster horse.” —Henry Ford

If you were sitting on a college board today, would you take a chance and hire a young David Swensen or Paula Volent to manage the money?  Radical thinkers cut from uncommon cloth?

Let’s reframe the question.  If institutional investing is all about finding alpha and maintaining an edge, why are so many tax-exempt institutions investing and hiring alike?

Almost forty-five percent of U.S. tax-exempt money is invested with just ten active managers, nearly double the amount two decades ago.  To quote one reader’s response to our recent query, “everyone’s in the same funds and there’s leverage everywhere.”

(click link for chart. Data from P&I, chart by Robert Snigaroff, President & CIO, Denali Advisors)

In theory, pensions, endowments, foundations, and the like seek active managers to obtain above-market returns.  In practice, that doesn’t seem to be how it works.

A former large endowment CIO mentioned recently that his team would scour the globe for unique opportunities, but the first thing his trustees would ask when told of any rare find was “what other endowments have invested in this?”

Safety in numbers

Most trustees accept the position because they love their institution, and often pay for the privilege, but the reputational risks of sitting on a nonprofit board outweigh the rewards.  Media assassinations felled some well-meaning board members recently.

Let’s be honest.  If the David Swenson of 1985 applied for a CIO position at Yale today, he would not survive the first round of interviews — a young untested Wall Street banker, working on something called interest rate swaps?  No way.

And how about Paula Volent, for twenty years the preeminent CIO at Bowdoin College, currently at Rockefeller University?  Year after year she has crushed our endowment rankings.

But she was an art history major running a West Coast fine arts conservation business before her swing to a Yale MBA and money management.  Would any college board dare hire someone with that background and mid-career makeover today?

The horns of our dilemma

Here’s our challenge. If boards want a “faster horse” they may not appreciate being shown EVs.

Our pool of investment talent includes hundreds of tax-exempt endowments, foundations, public and private pensions, health systems, associations, and charities, and thousands of for-profit analysts and managers at funds, family offices, OCIOs, RIAs, Wall Street banks, and asset managers.

Yet roughly sixty-five percent of endowment hires come from other endowments, a safe and like-minded cadre of about a hundred candidates.

But that’s not the only bottleneck. In the E&F world, men are twice as likely to land a chief investment officer position as women despite a near fifty-fifty split in staff roles. Our women in finance report focused on the time it took the double X cohort to reach CIO positions.

We counted heads and reviewed backgrounds and what did we find? Most female chief investment officers had an additional five to ten years of work history on their resumes compared to the men. In other words, the men were younger than the women when hired for CIO roles – ten years on average – with less experience.

And forget that hackneyed trope about taking a break for babies. Most served hard time at Morgan Stanley, Montgomery Securities, Goldman Sachs, and other financial firms while raising a family.

The gist is that board members seem more inclined to take a chance on younger men than younger women, which leaves fifty percent of the talent pool out to dry. We who recruit investment talent for industry-leading firms, funds, and families have learned that gender has no bearing on investment performance.

Words worth repeating

For those of us that hunt talent for a living, character, compatibility, and content are key.  Character embodies the qualities that define the individual, compatibility – that elusive emotional IQ that Daniel Goldman writes about –  builds trust, and content is knowledge and experience accumulated over a lifetime.  

Mellon’s John Hull Tops Non-Profit CIO Pay Rankings

Institutional Investor – March 15, 2012  •  Frances Denmark

Charles Skorina had a problem. As an executive search consultant specializing in filling investment officer holes at pension funds and endowments, he was often asked by boards of trustees to produce metrics to aid in candidate comparisons. But in his 30 years in the search business, such data had proved hard to come by ­— that is, until late January. That’s when Skorina’s “CIO Performance-for-Pay” ranking (see chart below) hit the institutional investor zeitgeist.