[Note: we published this piece on August 29, before Harvard announced its hire of N.P Narvekar and its disappointing returns for FY2016]
In asset management, as in other endeavors, size really does matter.
Bigger is better. But growth in AUM drives growth in headcount and complexity; and that can overwhelm existing structures and challenge management.
A few weeks ago in “Crunch Time for the Harvard Endowment” we referred to HMC’s hunt for a new “CIO” although, technically, the top job at HMC is “CEO.”
In this niche that’s often a distinction without much difference, and we tend to use “CIO” generically; but for Harvard there’s a real challenge behind that equivocation.
A CEO, in proper corporate-speak, manages people, structure, and processes. A CIO, of course, develops and executes investment strategy to maximize returns.
The HMC board hopes to find a candidate who is both an outstanding investment strategist and a proven, effective manager – a CIO and a CEO.
Some major endowments have separate investment management companies reporting to their own boards. In addition to HMC they include Columbia’s Columbia Investment Management Company, Stanford’s SMC, Virginia’s UVIMCO, Texas’ UTIMCO, MIT’s MITIMCo, Duke’s DUMAC, the University of North Carolina’s UNCMC, and a few others.
At UTIMCO and UVIMCO, the boss has both the CEO and CIO titles. At MIT, Seth Alexander is styled “president.” At SMC Robert Wallace is just CEO (they used to have a CIO as well). At CIMC Narv Narvakar is CEO, while Peter Holland is, technically, their CIO. Neal Triplett at DUMAC is “president and CIO.” And at UNCMC Jonathon King is President and CEO. A rose by any other name…
But Harvard is unique among endowments not only in AUM, $37.6 billion as of June 30, 2015, but also in headcount. HMC has well over 200 employees, of whom about 60 are investment professionals, while none of the other major endowments have more than 70 total employees.
In that regard Harvard is a Gulliver among Lilliputians, and that fact complicate the search now in progress.
Classical organizational theory argues that management gets harder as a geometric function of headcount, not just arithmetic increase. The number of possible relationships, including conflicts, rivalries and miscommunications, increases much faster than headcount.
UTIMCO, which manages money for the University of Texas and Texas A&M, is the second largest US endowment with almost the same AUM as Harvard, about $35.9 billion as of July 31, 2016, but CEO/CIO Bruce Zimmerman commands fewer than 70 people in total, only a third of HMC’s headcount.
The Yale Investment Office, with 25.6 AUM (June 30, 2015) notably, does not have a management-company structure. David Swensen, the “chief investment officer”, makes do with only about 30 people, and all are direct employees of the university. But this lean organization clearly hasn’t impeded their performance.
HMC’s size stems directly from their “hybrid” investment model, the house that Jack Meyer built. A lot of those people are doing direct investments in public and private markets. And that requires a deep bench of analysts, traders and portfolio managers – all functions mostly outsourced by Yale and other endowments.
We won’t presume to say that HMC’s size is a problem in itself, or that the most recent CEOs have been less-than-stellar managers; but we suspect those have been contributing factors to their troubles over these past ten years.
For Cal: a CIO who’s really a CEO:
At the University of California Regents the same individual reports to both the Regents as CIO, and to the president of the university as VP of investments. Under both hats Mr. Jagdeep Singh Bachher manages $8 billion of endowment money, plus $83 billion in pension funds for a total AUM of $91 billion.
His 60 FTE headcount is pretty small by corporate standards, but, according to Paul Wachter, the former chair of the Regents, they wanted a good manager, first and foremost.
When they were doing that search two years ago he listed the search criteria in this order:
Organizational skills: The CIO must be an effective manager of people.
Personality: The CIO must effectively deal with a wide range of constituents beyond the investment office.
Investment skills: The CIO must devise and execute a strategy with acceptably-high returns.
Mr. Bachher has excellent investment chops, but we also note that he was serving as chief operating officer at Alberta’s AIMCO when he was tapped for the UCR job. AIMCO had over 350 employees at the time, making the COO a serious, corporate-style manager. We think this was something that caught the eye of Mr. Wachter and his board.
The NACUBO-Commonfund NCSE study for 2015 found that the average staff size for a major (over $1 billion AUM) endowment was just 9.1 FTEs, including the CIO.
Clearly, a CIO managing 8 people doesn’t require a fancy management structure or corporate-management skills. Two or three investment professionals and an ops manager report directly to the CIO. Add a couple of junior analysts, accountants and support staff in a second tier; and there’s your typical $1 billion endowment investment office.
This can also be extended to many for-profit asset managers. Hedgies, private-equity, VC, real-estate, and mutual fund managers often run a lot of AUM with surprisingly few people, despite the extra staff for sales, marketing and compliance.
Only a few dozen big banks and asset managers break that mold. The skill-set needed to run BlackRock, CPP Investment Board, Goldman Sachs, or Morgan Stanley, or any of their major investment-management subdivisions, is very different from that needed to run most endowments, foundations and pensions.
Larry Fink figured it out at BlackRock and the company is adapting and thriving as it grows, up from eight people in 1988 to 12,000 employees and nearly $5 trillion in AUM today. Mr. Fink hires top talent wherever he can find it, most recently recruiting Mark Wiseman, the CEO of Canada’s CPP Investment Board (1,200 FTEs) to revitalize his active-equity business.
Ray Dalio, on the other hand, is an example of a founder struggling to manage the beast he created. Bridgewater Associates, born in Mr. Dalio’s apartment in 1975, now tallies 1,200 employees and $150 billion AUM. But the transition to a more mature management structure hasn’t been easy, and succession planning has been tumultuous.
When we suggested that Mary Callahan Erdoes would make a great manager for the Harvard endowment, we were thinking, in part, about her well-demonstrated management and political skills.
Henry Kissinger (who was a Harvard professor before he went to Washington) famously said that academic politics are so vicious precisely because the stakes are so small. But we suspect that anyone who can fly as high as Ms. Erdoes has at JP Morgan could thrive just as well at Harvard.
Revisiting our fantasy picks for the HMC job, and thinking harder about the CEO dimension of the job, we would add two to the list.
The very discreet and low-profile Narv Narvekar at Columbia was unjustly omitted from our previous letter, but he also deserves a strong mention. His CIMC team may only muster 21 people with all hands on deck, but their performance has consistently ranked among the top ten endowments for years.
And, speaking of discreet, low-profile CIOs, if we could add one more fantasy draft-pick name from the non-endowment sector it would be Michael Larson.
When Bloomberg reported on August 22nd that Bill Gates’ net worth had hit $90 billion, Mr. Larson’s name was, characteristically, omitted. But he is the chief investment officer who handles most of Mr. Gate’s personal money (through Cascade Investment LLC) as well as the assets of the Bill and Melinda Gates Foundation.
He took on the typical family-office challenge of turning a mountain of founder’s stock into a highly-diversified portfolio, while maintaining a CAGR of 11 percent from 1995 to 2014 (per Wall Street Journal, Sept. 19, 2014).
Mr. Larson, a fellow Chicago MBA, who manages over 100 staffers in Kirkland, Washington (half the staff and twice the AUM as Harvard), has clearly bonded with Mr. Gates and I highly doubt that he would ever leave after twenty-two years on the job.
But, any pushy and objective headhunter would be derelict not to have him on their call list. He’s that good.
A personal footnote:
I know that Michael takes the philanthropic mission of the Gates foundation seriously, and he has met the challenge of keeping that AUM climbing even as Mr. Gates continues to give away his money.
The $44 billion foundation has its philanthropic fingers in a thousand things, but I particularly applaud Bill and Melinda Gates for their relentless and effective campaign against polio, a disease that hit my family hard during the murderous epidemic of 1949. In a single year, at its zenith in 1952, 58,000 Americans were stricken.
It’s “conquered” and forgotten here in the first world. But the virus doesn’t care and is still out there, waiting. It likes to travel and tens of millions of people fly into the U.S. annually.
We can’t all write Gates-sized checks, but all of us can, and should, inoculate our children. Why take a chance?