In this issue

Carnegie, GMO, CalPERS change horses

Leo de Bever – running $70 billion on the cheap

Ken Frier – a CIO looks ahead


Comings and Goings:

Ellen Shuman: A Swensen alumna leaves on top of her game

After twelve-and-half-years on the job, Ellen Shuman is calling it quits as chief investment officer of the historic Carnegie Corporation in New York.

Carnegie president Vartan Gregorian said on July 1st that she had resigned for “personal reasons” and that her departure date would be just two weeks hence, on July 15. Ms. Shuman reportedly earned $1,047,744 in the 2009 fiscal year for running the fund, which now has about $2.5 billion AUM.

I spoke to Ellen at her home in New Haven (from which she commutes into Manhattan every working day) and she pointed out that she’d actually given more than the two weeks notice implied by Mr. Gregorian’s statement.

“I’ve been here so long, that when I started talking about leaving, I don’t think they quite believed me at first. Then, when I started putting my personal stuff in boxes I guess they decided they better put out a press release,” she laughed.

And no, there was no complicated back-story. She’s feeling fine, but she’s been a portfolio manager for twenty-five years, counting both the Yale endowment and Carnegie.

“I just feel it’s the right time to take a break for some relaxation and reflection, and think about what to do next in my professional life. I have not had a summer off in twenty nine years.”

She said she was satisfied with Carnegie’s current allocations, especially their emerging-market positions.

“We’ve done really well with manager selection there,” she explained, “which is especially critical in that sector.” She mentioned Africa as a relative buy. Like China a decade ago, there is a growing consumer class, and the companies that serve them are going to do well for investors who get an early position.

Geoffrey Boisi, chair of Carnegie’s investment committee, will head up the effort to find a successor and oversee the investment office until then.

Ms. Shuman graduated from Bowdoin College in 1976 and got her MBA from Yale in 1984 (in the same class as Jane Mandillo, the current Harvard endowment head), then joined David F. Swensen’s team at the Yale endowment as he came aboard in 1985. She was a key player there for 14 years, until Carnegie recruited her (and, they hoped, her Yale-style investment mojo) in 1999.

While running the Carnegie fund, Ms. Shuman has remained a loyal acolyte of the Yale model, defending it even through the troubles of 2008/2009. In the ten years 2000-2009 (ending June 30), Yale returned earned an annualized 11.8 percent, net of fees. Carnegie’s ten-year return (ending September 30) was 8.4 percent, which was very respectable, but not quite up with her mentor.

But Carnegie isn’t an Ivy endowment. It depends on investment earnings to fund 100 percent of its operations, so stability of earnings is especially important. They returned an annualized 5.1 percent in the five years 2005-2009, versus just 3.6 percent for their peers, the private foundations surveyed by Commonfund.

And, if we zero in on the tough 2008/2009 period, Carnegie actually outperformed Yale with -6.5 percent annual return versus Yale’s -12.0 percent (with no adjustment for the slightly different fiscal years). Ms. Shuman did it with much less volatility, which her bosses probably appreciated, and with just a handful of investment staff vs. the 28 who work for Dr. Swensen.

This is a record to be proud of, and if Ellen needs some R-and-R, that’s fine with us.



A salute to Carnegie:

We should also pause to salute the Carnegie Corporation on its 100th birthday. Andrew Carnegie, who had already given away staggering sums for schools, libraries, and other good works, put much of his remaining fortune into the Corporation in 1911, intending it to carry on his work in perpetuity.

Along with the Russell Sage Foundation (1907) and the Rockefeller Foundation (1913), Carnegie became the template for the professionally-staffed and innovative American private foundation.

We note that Carnegie, under its first generation of leaders, rode out the Great Depression with impunity. When the stock market crashed they were holding a highly undiversified (but very handy) portfolio of high-quality corporate bonds, mostly debt of the U.S. Steel Corporation, which Mr. Carnegie had largely created.

The endowment grew a cumulative 37 percent between 1929 and 1935. And, with 20 percent deflation in the same period, its purchasing power soared. The old Scotsman must have been smiling down from his Presbyterian heaven as the Corporation carried on his work without ever having to invade the principal.

Investment theory and practice move on, but Mr. Gregorian and Ms. Shuman have done their part to hand off Carnegie’s mission to the next generation.



Brad Hilsabeck: An insider moves Up at GMO

Grantham Mayo Van Otterloo & Co (GMO), which manages $108 billion of institutional money in Boston, has shed its lightly-used, imported CEO and replaced him with a GMO insider.

 Marc Meyer, the 32-year-old firm’s first-ever CEO, was recruited from AllianceBernstein in March, 2009. Now, after a little more than two years on the job, he is “leaving to pursue other interests.” LTPOI is, of course, the universally-recognized international symbol for: “we fired him and we’re not even going to pretend we didn’t.”

His successor is Brad Hilsabeck, previously their chief of global client relations, who came aboard in 2003. He was made a partner in 2005 and moved up to the top marketing position in 2006. He had been a member of the firm’s Executive Office, the troika of senior execs who traditionally ran the firm, until Mr. Meyer was hired in 2009.

GMO, which is primarily a manager of institutional stock mutual funds, didn’t take any more damage than their peers in 2008/2009. In fact, their value-stock bias seems to have brought them through better than most. Nevertheless, management was revamped in 2009. Mr. Meyer was hired in March, 2009; then six months later, co-founder and chief strategist Jeremy Grantham was replaced as chairman by Arjun Divecha, who runs GMO’s emerging markets strategy from San Francisco.

Having decided they needed a single-headed CEO, however, their decision to hire a senior investment officer from another firm was clearly fumbled. Instead of an outsider and asset-allocation expert, apparently what they really needed was an insider with marketing skills.

GMO didn’t say explicitly why Mr. Meyer left, but almost. Mr. Grantham, the Malthusian scold who is the firm’s most public face, said he had confidence that Brad Hilsabeck “knows our style intimately and has everyone’s trust,” clearly implying that Mr. Meyer had fallen short in both respects.

When a newcomer lasts barely two years and is ignominiously dumped, we have what we headhunters call technically a “bad hire.” It’s rarely because of inadequate skill or experience, rather it’s how well the new guy understands and fits with the organization’s culture – an issue of compatibility. Or, as Mr. Grantham put it: style and trust. Assessing cultural fit is hard, but getting it wrong can be very expensive.



CalPERS loses its hedge fund boss:

Kurt Silberstein, the departing head of CalPERS twenty five billion dollars public equities and innovative hedge fund program, has left after twelve years to join U.S. Bank’s Ascent Private Capital Management. Craig Dandurand, his talented number two, will take over Mr. Silberstein’s responsibilities and report to Joseph Dear, the pension’s chief investment officer.

Working for CalPERS is seldom dull. In 2009, Mr. Silberstein made a decision to allow PAAMCO and UBS to continue to draw their management fees while new contracts languished in a bureaucratic morass.

CalPERS own website referred to “PAAMCO and UBS as a key “set of eyes” the pension system relies on to monitor their large hedge fund program, and said that “Silberstein’s hedge fund team rigorously monitors every aspect of the program with “questions, scrutiny, examination and thoughtfulness.””

Alas, for making an “executive decision” and doing his job, Mr. Silberstein “was temporarily placed on leave and fined, according to people briefed on the matter. Silberstein was forced to forfeit 10% of his $222,249 annual salary for six months and was placed briefly on administrative leave.”

Such a fuss about a guy so straight and honest that when we went to lunch three years ago he would not even let me buy him a $6 dollar burrito at a local Mexican fast food stand.

I wish him all the best. He is a terrific guy with sound judgment, deep experience, and a global rolodex. He should be a great asset to Ascent Private Capital Management. Hasta la vista.


Current Events:

Après le deluge…more deluge?

It was another of those interesting weeks last week, and, as we watch the markets open today, down about three hundred points as I write this (August 8, 2011), and wait to see if Armageddon is truly at hand, we note how some pension and endowment investors have been coping.

In the Wall Street Journal on Saturday, Jason Zweig reports:

It isn’t just small investors who are fleeing the U.S. stock market. Pension funds have been net sellers of U.S. stocks for 11 quarters in a row, notes Charles Biderman of TrimTabs Investment Research.

A leading money manager who sits on the investment committees of several endowment funds tells me that at every meeting he has attended for the past year, the only major topic of discussion has been how to get out of U.S. stocks and into alternative investments like hedge funds and private-equity portfolios.

“Some of the biggest pensions and endowments in the country,” he says, “want nothing to do with risk and nothing whatsoever to do with U.S. stocks.” Meanwhile, corporate insiders have been selling roughly 10 times more shares than they have been buying, according to Mr. Biderman.

And, Reuters reported on Friday:

“I feel like I’ve been through the ringer,” says Joelle Mevi, the chief investment officer of the Public Employees Retirement Association of New Mexico.

Mevi says she’s become “less optimistic” about the U.S. economy and is moving to sell some of the $11.6 billion pension fund’s stock holdings to double the fund’s cash reserve to $200 million. She notes that normally her New Mexico pension fund keeps nothing in cash.


Other Voices:

Tokyo Express: Is the U.S. on a bullet train to Japan 1990?

My friend Mebane Faber sent me a white paper last month that got my attention. Meb is co-founder and chief investment officer of Cambria Investment Management in L.A., and a very bright guy.

His paper “What if 8% is Really 0%? Pension Funds Investing with Fingers-Crossed and Eyes Closed” is all about…well, exactly what it says.

He asks if pensions and, by implication, everybody else, are really giving enough attention to worst-case scenarios. Specifically, what if the next decade for the U.S. starts to look a lot like the last decade for Japan? He crunches some numbers and shows what that scenario could mean for U.S. institutional investors.

Meb got some attention for this one. The Wall Street Journal talked about his thesis in early July, and he got an interview on CNBC.

Some people think the U.S.-as-Japan scenario is not farfetched. The Federal Reserve Bank of St. Louis President James Bullard recently proclaimed “The U.S. is closer to a Japanese-style outcome today than at any time in recent history.”

You can download a copy from SSRN:




A Dutchman on the prairie: A conversation with AIMCo’s CEO Leo De Bever

With just two-tenths of a person per square mile, Alberta may look big and empty, but it has plenty of oil, gas, and cowboys. Squint a little and it looks a lot like Texas, only colder.

In fact, by one measure it’s even richer than Texas: at $74,000 per capita, it has a higher GDP per-person than any other province or any U.S. state. It even has its own sovereign wealth fund to preserve a share of public oil-lease revenues for future generations.

But, like any commodities-based economy, Alberta has slumped or prospered, depending on world prices; and in slump years politicians were often tempted to raid the fund to cover current bills, or just “forget” to deposit any of those oil revenues. Finally, in 2008, voters decided to insulate their money from itchy political fingers by creating AIMCo, a semi-autonomous Canadian Crown corporation, and the new board hired Leo De Bever to run it.

Mr. De Bever was born in the Netherlands, where they have about 1,400 people per square mile. When he spoke to me one evening after a dinner engagement in Edmonton, I forgot to ask him if he was enjoying the elbow room.

As CEO (AIMCo has no chief investment officer, although they’re currently looking for one), Mr. De Bever’s job is to preserve and grow AIMCo’s US$74 billion (Can$71 billion) in assets. That includes the $15 billion Heritage (sovereign wealth) fund, plus almost $60 billion in public pension and other funds.

Mr. De Bever, a PhD economist (University of Wisconsin), has a distinguished resume as a manager of public money. He served ten years as a senior VP and head of risk management at OTPP, the Ontario teachers’ pension. OTPP was another early template of a pension organized as a Crown corporation, but Mr. De Bever didn’t get the chance to oversee the fund as chief investment officer. He resigned in 2006 to become CIO of Victoria Funds Management Corporation in Australia, hoping to create there the kind of independent pension-management entity he envisioned. Things in Melbourne didn’t work out to his satisfaction, so when he got an offer from the re-organized Alberta fund, he was receptive.

He seems to feel that he’s finally where he wants to be, building a cutting-edge public pension fund, and he’s not at all shy about explaining how he thinks it should be done. He’s a frank and engaging gentleman who, like most Dutchmen, speaks better English than I do, and was kind enough to take my call.

Skorina: Leo, it’s a pleasure to meet you.

De Bever: Good evening, Charles.

Skorina: Everybody looks at annual returns, and yours have been good. In your first full fiscal year at AIMCo – 2010 – you posted a 12 percent return. In the 2011 fiscal ending in March, you made 8.2 percent. You beat your benchmarks in each year, but you are still getting criticized for the compensation you and your managers get. Is that fair?

De Bever: What people should focus on is the total cost of running this fund and the returns we get, given the kind of marching orders we have. AIMCo’s clients are paying 0.3 per cent in fees for services versus the two percent they would pay in the private sector. And by the way, a lot of our assets are essentially cash accounts we manage for the province, and their returns are obviously low. If you look at just our $50 billion in investable pension and endowment funds, we earned over 10 percent.

Skorina: That brings up the subject of where the money should be managed. You’re on record as thinking that a major public fund like AIMCo should bring more management in-house. Why?

De Bever: Basically, internal asset management is much less expensive. The 80 percent of assets we manage in-house cost 40 percent of our total fee budget. The 20 percent of assets placed with outside managers cost us 60 percent of the fee budget. If we used outside managers for public equities, for instance, it would cost up to 200 basis points. We can do it internally for 40 to 50 basis points. All our public equities and fixed income is managed in-house, plus about half of our infrastructure and real estate, and one third of our private equity. For some PE deals in Europe and Asia we feel more comfortable investing with partners who know that territory.

Skorina: What are you saving by doing PE deals internally?

De Bever: A successful external private equity investment can cost 7 percent per year in fees and carry. We can manage it internally for around 1 percent. Of course, that presumes that we can afford to hire and retain qualified people. I believe we can.

Skorina: You personally made $1.4 million in the most recent fiscal, including a $900 thousand bonus. Some critics have suggested that’s too much. Is it?

De Bever: Our board sets the pay-scale, based on our performance over a four-year span. As I told a reporter, I don’t even make it into the Top 50 in Calgary!

Skorina: Does AIMCo’s status as a Canadian Crown corporation help to insulate you from political sniping?

De Bever: To a certain extent, yes. One of the essential tasks of a governing board is to set competitive compensation scales. When the governors of a public fund can’t do that, the result is often that they are just training managers who will ultimately go elsewhere.

Skorina: Chris Ailman is CIO of CalSTRS, the second-largest U.S. public pension fund. He recently told Paula Vasan at aiCIO Magazine


…that funds like his might be an out-dated business model. They don’t run in-house private equity, for instance. He said he feels like an investment management company trapped inside a government entity, and speculated that the Crown corporation model might eventually filter down from Canada to the U.S. I thought that was pretty candid of him. What do you think?

De Bever: The U.S. public pensions don’t do things like in-house private equity for two reasons: governance and blame avoidance. The Crown corporation is a framework where that can be done, with significant cost savings. U.S. pensions are also hampered by their salary structures. In 2008, the CEO of the CPPIB [Canadian Pension Plan, another Crown corporation] made US$3.2 million, while the head of CalPERS made $500,000.

Skorina: And, as of 2010, CalPERS’ five-year return is 1.7 percent; while CPPIB earned 4.0 percent. That speaks for itself, doesn’t it?

De Bever: It does, indeed.

Skorina: Thanks again, Leo.


A CIO for All Seasons: Ken Frier compares corporate and endowment portfolio management

Kenneth Frier spent ten years at Hewlett-Packard Company, including three years as chief investment officer of their pension plan. More recently, he served as CIO at the Stanford Management Company, which runs the Stanford University endowment. Earlier in his career, he held corporate finance jobs at the Walt Disney Company and Oracle Corporation; and was a consultant With Arthur Young & Co.

He was born in Cleveland, earned a BS in math and computer science at the University of North Carolina; then an MBA from Stanford University, where he was an Arjay Miller Scholar.

He recently stopped by my office in San Francisco for a chat, and I have to say he seems much too youthful to have so much experience under his belt.

Skorina: Ken, you’ve been congratulated for moving the Hewlett Packard pension fund out of equities ahead of the panic in the fall of 2008. You’re a math guy and very data-driven, so were you reading some internal alarms or following some indicators that told you that it was time to move?

Frier: Charles, I’d love to take credit for seeing around that corner, because it worked out well for us. But, the fact is I was just dealing with the situation in the plan when I took over.

When I was appointed CIO our defined-benefit plan had just been frozen. As you know, this has become a common event in the industry over the past decade as employers shift to defined-contribution plans.

When you’re frozen, all of a sudden your future liabilities become much clearer and more stable. We now saw that we were over-funded and by just how much. So, I felt it was time to de-risk the portfolio, while still earning enough to cover our future obligations.

I was thinking about the risks of market volatility and interest rates. As to the first, we were 70 percent in public and private equity, and I thought the stock market was over-valued. Starting from there, it seemed logical to reduce stock exposure, move into bonds, and then hedge interest rate risk, which is what we did.

We weren’t trying to time the market, but the timing did work out well for us. By “us,” I include the company and the employees whose money we were investing. There is a strong culture at HP that comes right down from our founders: do what’s right for the customers and the employees, even if it doesn’t necessarily seem like the most profitable move in the short run.

Skorina: You seem to take that seriously, Ken. My experience in the corporate world is that those lofty statements of principle sometimes get misplaced

Frier: Most people at HP really believe that, Charles, and I tried to hold up my end.

Remember, in corporate accounting, pension plan earnings above a required actuarial amount can be added to revenue on the income statement. So, it can be tempting for a company to “manage” them to goose their stated earnings in the short run. If you’re heavy in risky, but high-return assets, like stocks, projected earnings can be higher. Who’s to say what the correct estimate is? And that can give the company more “excess” pension earnings to help smooth quarterly income. No one is supposed to do it, but some companies push the envelope.

Of course, this catches up with you in the long run, when pension earnings swing the other way, but it can be a handy crutch when times are tough and people think they can get away with it.

That is not the practice at HP. My boss, the CFO, told me to do whatever I thought was in the best interests of the plan. Period.

Skorina: You’ve now worked with portfolios at both a major corporation and a big endowment, at Stanford. What are the differences?

Frier: I think the process of looking at risk and understanding the various factors that affect future earnings is probably more advanced in corporations, for obvious reasons. They have more money, bigger staffs, and they can piggy-back on all the analytical horsepower that’s been developed for the whole field of corporate finance.

Endowments are complicated entities. The liabilities are floating, at least in theory. If a school wants to reduce endowment spending from 5 percent to 4.5 percent this year, they can. Whereas, in a corporation, an actuary just tells you what checks you have to write, and it’s a hard number you can’t legally evade. But in practice, an endowment doesn’t really have that much leeway. Even a small cut in payout causes direct pain and suffering, and you will hear about it. Loudly.

Skorina: Given the uncertainty in the financial world, how do you construct an institutional portfolio for all seasons? Are there opportunities out there to help offset the risks? And how about interest rates? I know you’ve spent a lot of time in the bond market; you know that world.

Frier: Obviously, it’s a difficult time to make money. A frozen defined-benefit fund has a finite life. Endowments are supposed to last forever, so they must beat inflation and still cover their payouts. That isn’t easy. Currently, you need about a 7.5 percent nominal return to break even. To grow the endowment, you really need more, unless you want to depend entirely on donations. So, where are you going to get that with acceptable risk? Ten-year Treasuries are paying 3 percent, and the bull-market in fixed income seems over for now.

U.S. public equities at best are returning maybe 6 percent, and they don’t look cheap. Interest rates are bound to rise, so corporate margins, which are currently quite good, are bound to fall. This has already started in Europe. Up to now, we’ve had weak growth even with a boost from Fed stimulus, but they’re about out of ammunition.

There are still global opportunities, but how do you tune a portfolio to take advantage of them? Maybe establish a more conservative baseline for payouts and then go after alpha opportunities which public pension plans can’t get into. They’re the big, slow money, and if you can move faster, then you can often find some good deals. Endowments should exploit that strength.

For example, look at what has not recovered yet: residential real estate and private equity. Patient, long-term money should be looking at things like that.

Skorina: Any other thoughts about endowments?

Frier: I’ve spent the last year thinking about how to improve the endowment model. In the 2008 panic, endowments with very different-looking portfolios still fell in lock-step. The dispersion between the largest and smallest draw-downs was amazingly tight.

So, we need to look hard at what didn’t correlate with past crashes, hoping that they might remain less correlated in the future. That sounds obvious, but I’m not sure anyone has figured it out.

Skorina: What about the so-called risk-parity strategies which some consultants are recommending?

Frier: Moving to bonds and adding leverage may have worked fine in the past; but if you think, as I do, that we are headed for rising interest rates in the near future, it won’t work. No way.

Some kinds of momentum strategies are interesting. Also, perhaps, carry strategies in commodities. Long-term investors are moving into a period when simple answers won’t work. We need to take a very wide-angled view and look at everything with fresh eyes.

Skorina: Thanks for your time, Ken. It was great talking to you. And good luck with your next career move

Frier: Thanks, Charles.


Parting Shot:

Jailing the economists and other Argentine follies

I spend a lot of time down in South America, usually at a rural estancia a couple hours from wicked old Buenos Aires, and just across the Rio de la Plata in happy Uruguay.


We enjoy our rusticating, but we also keep an eye on turbulent Argentina just across the border, if only for entertainment value.

Recently, the government there threatened to throw Argentine economists in prison if they continue to issue independent (and accurate) inflation reports. Currently the economists are receiving heavy fines for failing to toe the line.

Real inflation in Argentina is running about 26 percent, but the government prefers to think of it as 10 percent, so that’s what the National Bureau of Statistics prints. No one believes them, of course, but that’s not the point. There’s an election coming up, and even the smallest, most transparent lies can help.

We tend to think of economists as annoying but essentially harmless creatures. And we would hate to see them behind bars like stray dogs in the pound, staring at us with their big, soft, sad eyes. No, not even Paul Krugman.

Ever since Evita became a big hit, people tend to think of Argentina as a sort of romantic, comic-opera nation, and that’s not too far off. But the Peronistas who still run things there have a dark side as well. If you sometimes feel exasperated with government malfeasance and over-reaching in the U.S., it’s sobering to come down here and see what government-by-edict can do to a potentially great nation.


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