Charles Skorina looks at people and issues in the world of Endowments, Foundations, Hedge Funds and Alternative Investments
Wesleyan University: Another Very Quiet Departure:
Chief Investment Officer Thomas Kannam has left Connecticut’s Wesleyan University for parts unknown. The school’s president announced that he had left to “pursue other activities.“ Kannam, a Dartmouth MBA, had been with the endowment since 1998, but was only promoted to full-fledged CIO a couple of years ago.
In recent decades, Wesleyan’s endowment has underperformed little Ivy peers like Amherst and Williams. But their troubles go back before Kannam’s tenure. The school seems to have adopted a conservative, bond-heavy strategy at the end of the 70s and missed the big stock run-up that followed. Also, it has taken a bigger annual bite of the endowment for operating expenses than most schools – over 7% until recently – and maxed out its borrowing with $200 million in 35-year bonds now outstanding. The fund lost 19 percent over five fiscal quarters as of a year ago, down $715 million to $580 million. Late last year they had to suspend a major construction project and cut back on routine maintenance to balance the budget.
In any case, they now have a chance to reset the endowment under new leadership.
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On The Road Again:
I’m often impressed – or appalled – at the grueling travel schedule many of my hedge fund and private equity clients commit to. I understand that they have to get up close to both their investors and their portfolio companies to stay in the game, but the mileage they rack up requires real stamina.
Wanda Dorosz, CEO of Toronto-based Quorum Funding, invests in the oil and gas technologies sector. She alternates her usual UK, Oslo, Abu Dhabi, Dubai and Bahrain run with her other regular orbit: Toronto-Calgary-Red Deer-Houston-LA.
Chuck Johnson of Tano Capital, meanwhile, is currently monitoring his fund’s investments with his quarterly five-week swing through Singapore, India, Singapore again, HK, a handful of Chinese mainland cities, New York, and home.
And, Doug Metcalf and Bill Lawton of Seagate Global, are digging for private equity investments in China and the Philippines on their usual two to three month journeys to China and Southeast Asia, hitting places I can’t even find on the map.
Business out in Asia and the Middle East is looking very good, from what thy tell me. But with the Euro hitting a buck fifty and China slowing down to a “mere” 8% growth rate, it’s hard not to get a bit depressed about our prospects here at home.
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Harvard: top pay, tepid performance
Harvard University operates on a bigger scale and in a brighter spotlight than most, but one fundamental problem extends all the way down the food-chain: paying top investment talent what they could make elsewhere. There is always going to be some cultural strain at mission-oriented non-profits, and finding an acceptable balance is never easy.
Bloomberg reporter Gillian Wee has gotten a peek under the skirts of the Harvard Management Company and told all, revealing which outside managers hit their targets, which didn’t, and by how much. The numbers, just coincidentally, align with the CIO’s push to bring more money in-house, which could re-ignite a whole cycle of controversy at Cambridge as Wall Street-size salaries collide with Harvard-size egos and egalitarian politics.
Most of the endowment (about two-thirds) is currently invested with 63 outside managers. Now, “internal data” mysteriously acquired by Bloomberg shows that only 25 of them hit their targets (and only nine, or 14%, of those actually made any money).
That leaves thirty-eight funds – 60% of them – who not only lost money, but failed to even hit their benchmark targets.
Given that Harvard lost 27% of its endowment last year – the worst performance in the Ivy League – it’s not surprising that most of its managers lost money. But this report names names and provides details that are rarely available to sleuths and cynics like us.
There’s Jon Lavine (Harvard MBA), who runs Sankaty Advisors under the Bain Capital umbrella. Sankaty’s high-yield bond strategy lost 65% of the $383 million it ran for Harvard and trailed its benchmark by a dismal 61 points.
And sharing the doghouse is Dinakar Singh’s TPG-Axonlong-short fund, which lost $47 million of Harvard’s money, 16 points behind its benchmark.
Seth Klarman (Harvard MBA, and a B-school lecturer), beat his target by a respectable 6 points, but that wasn’t nearly good enough in a bad year. He still lost $400 million of Harvard’s original $2.5 billion stake in hisBaupost Group.
There are a few heroes, too. Ed Lampert at ESL Investments in Connecticut turned Harvard’s $118 million into $134 million, beating his benchmark by 39 points. And John Grayken’s (Harvard MBA ’82) Lone Star VI Fund in Dallas, targeting distressed debt in the residential mortgage space, returned 7.5% to his alma mater, topping their target by 21 points.
More details here:
http://www.bloombergmarkets.org/apps/news?pid=20601109&sid=akEKjenRO24Q
Some of these gentlemen will be invited back next semester; some probably won’t be getting the thick envelope.
The larger point: Where does this leave the current version of the Harvard investment model? According to Bloomberg, Ms. Mendillo, the endowment CIO, is “reducing the influence of independent firms.” But then they carefully note that she “declined to comment on Harvard’s external fund managers or her plans to shift more money in-house.”
Mmmm.
It’s important to note however, that in the decade ending this June – even including the awful recent year – the Harvard endowment earned an average of 14% annually, according to Mebane Faber at Cambria Investments. Respectable returns by any standard.
Yet the last time Harvard emphasized internal management, under Jack Meyer (CIO from 1990 to 2005), his impressive money-making machine was blown up by some of its angry beneficiaries. Meyer paid his people based on performance and in 2004 the top performers got over $100 million in total. A lot of money, but a trifle compared to the tens of billions that the endowment was earning in those fat years.
But some 60s-era alumni thought these salaries were unseemly. A great, Harvard-style dust-up arose. So, Jack Meyer along with thirty of his best and brightest, in an “Atlas Shrugged” moment, left Harvard to found Convexity Capital Management.
With exquisite irony, Harvard is now paying Jack Meyer much more to manage much less of its money.
There’s never been any love lost between the B-school types and the “real” Harvard across the river. If the activist alumni didn’t want to pay in-house managers what they were worth even five years ago when returns were high, how much will they stand for when returns are more modest and Harvard is freezing salaries for the poets and post-structuralists who stay on the right side of the Charles?
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Don’t forget the Connecticut Hedge Fund Association’sGlobal Alpha Forum:
It’s on November 5th at the Hyatt Regency in Greenwich, CT.
John Thain, former (and final!) CEO of Merrill Lynch will open the conference on Thursday, and have a chance to get it all off his chest.
Dr. Richard Sandor of the Chicago Climate Exchangewill offer a preview of the dreaded and/or longed-for Cap-and-Trade regime. Plus many other academics, gurus and practitioners from all over.
If you have any plans to head back east for some pre-holiday studies, shopping, or bonding with relatives, we would love to see you.
The Agenda and a link to registration form is here:
http://globalalphaforum.org/agenda.html
Register Now!
