Special Report on Midsize Endowments
(Performance, compensation and costs – the best of the best)
Punching above their weight: The Skorina Top 20 Midsize Endowments:
The NACUBO and Commonfund people do great work putting out annual statistics on endowments in their NCSE studies. But they only report investment returns for statistical aggregates and those don’t tell the whole story.
Our analysis of mid-sized endowments reveals that, although it’s good to be big, it’s not decisive for investment performance. In fact, some of these mid-sized overachievers, produced industry-leading returns.
The NCSE tables tell us that big endowments (over $1 billion) had mean five-year returns of 1.7 percent, while midsize endowments ($500 million to $1 billion) earned only 1.2 percent.
But, if we combine and rank the performance of the midsize endowments and large endowments (See: The Ivys and Alt-Ivys: A post-season look at performance, pay, and pitfalls https://www.charlesskorina.com/775/ ), thirteen of the top twenty are in the mid-sized bracket and Penn, Yale, Brown, and Harvard, among others, would not have made the cut.
The two tables below rank the highest-performing midsized endowments by their five-year and three-year returns. We even include some of those famous Ivy schools for reference, so you can see how our midsize over-achievers compare to the big guys.
Further along, we reveal how much these high-achievers are paid for their efforts.
We recruit chief investment officers and senior asset managers, so we focus on the individuals and teams responsible for the investment process. The chief investment officer (or director of investments) listed is the current incumbent. If there has been recent turnover, we say so in the footnotes. If the school is committee-led, we also (in most cases) note the current chair of the investment committee. We also note the schools who have chosen to outsource, and to whom. This is another real option for a fund of this size.
The $500 million to $1 billion bracket is interesting to us because this is a transition zone for the endowment management model. Most schools above $1 billion have a CIO and a professionally-staffed investment office. Most schools under $500 million do not. The latter mostly rely on volunteer investment committees and outside consultants.
In this bracket the economics of setting up an investment office can often be argued one way or the other depending on specific institutional needs, and we see a mixture of management models.
In some cases we see a sort of hybrid: endowments who have hired a director of investments (“DOI” or similar title) as a full-time, on-site manager to coordinate the investment program. The DOI usually does not have the same credentials and experience as a typical, full-bore CIO (nor the same authority or compensation), but there are exceptions to that as well. We’ll have more to say about that below.
More learned commentary follows; but now on to the stats:
Top 20 Midsize Endowments, 5-Year Annualized Returns (2008-2012):
NB: All returns are for fiscal years ending 30 June, except: Colgate U, Trinity U, and Macalester College, all ending 31May.
CIOs appointed after Jul 2007:
02 Gorrilla, Adele N.: Oct2008 – Present.
Succeeded Michael Horst (DOI): Jul2007 – Oct2008
07 Perry, Mansco: Oct2010 – Present.
Predecessor: Craig Aase: Jul2007 – Oct2010.
13 O’Donnell, Hugh: Aug2012 -Present.
Predecessor: Douglas E. Reinhardt: Jul2007 – Aug2012.
Top 20 Midsize Endowments, 3-Year Annualized Returns (2010-2012):
CIOs appointed after Jul 2009:
01 Bethea, Jim: May2010 – Present
03 Kennedy, C.A.: Apr2010 – Present
Predecessor: E. J. Grefenstette: Jul2007 – Mar2010
07 O’Donnell, Hugh: Aug2012 – Present
Predecessor: Douglas E. Reinhardt: Jul2007 – Aug2012
09 Martin, Anne: 01Aug2010 – Present
Predecessor: Thomas Kannam: Jul2007 – Oct2009
10 Kramer, Michael (DOI): 2010 – Present
16 Scheer, Karl: Spt2011 – Present
Predecessor: Thomas Croft: Jul2007 – Jul2011
17 Gallo, Sam: Jun2012 – Present
Predecessor: Michael Barry: Jul2007 – Jun2011
Investment Committee Chairs:
Cooper Union: John C. Michaelson
Colorado College: Eben S. Moulton
Mount Holyoke College: Betsy Palmer
Trinity University: Marshall B. Miller, Jr.
Clash of the Titans: NCSE vs SSME:
The NCSE (NACUBO Commonfund Study of Endowments) reported 73 endowments between $500 million and $1 billion for the 2012 fiscal year. Our Top 20 lists are constructed from a 60-item subset of the NCSE. We call it (muted fanfare) SSME: the Skorina Study of Midsize Endowments. It contains about 80 percent of the NCSE midsize cohort.
The “missing funds” are those for which we couldn’t obtain official return figures and/or could not even make plausible estimates. Most of them are public colleges whose financial statements are per GASB standards and who do not house most of their endowment funds in satellite private foundations. It is possible that one of more of them had returns which should have put them in one of our Top 20 lists. If so, we regret the omission, and can only gently suggest that they could have avoided this fate by disclosing their returns in some more prominent way.
We used estimated returns in some cases to make an initial ranking. Those estimates, based on FASB-standard financial statements and/or IRS Form 990 filings, are only approximations, but good enough to let us separate the sheep from the goats. The high performers (corresponding roughly to the top quartile) were further scrutinized and confirmed by correspondence with the schools. The returns in our Top 20 lists are all either official 5-year/3-year numbers; or were annualized by us from official year-by-year numbers, which yields virtually the same result.
We have a little more about our methodology in an appendix at the end of this letter.
On the 5-year Top 20 list, all 20 endowments beat both Yale and Harvard, and 7 of them beat Princeton. But, in justice to the big guys, we have to recall that Columbia University and University of Chicago (with 4.9 percent and 4.2 percent returns, respectively) still outperformed all the midsizers except Cooper Union. Cooper’s 5-year return is real, but it’s also an interesting special case, which we discuss below.
Most of the high-performers on both lists have a full-time, in-house investment professional. A chief investment officer or director of investments (DOI) is specifically tasked to endowment matters at 15 out of 20 on the 5-year list, and at 18 out of 20 on the 3-year list. We think this is a key factor in generating consistently good investment performance over time.
Four of the schools on the 5-year list use a committee-led governance model, but only one on the 3-year list.
Three schools are outsourced: the Syracuse University endowment is managed by Mercer; the Middlebury College endowment is managed by Alice Handy’s Investure; and the University of Colorado outsources to Christopher Bittman’s Agility group at Perella Weinberg Partners. Mr. Bittman, of course, was previously CIO at the University of Colorado Foundation before he set up Agility.
And, as we might expect, there is considerable overlap: twelve schools appear on both lists.
We give more weight to the 5-year returns, so we award Adele Gorrilla at Denison University bragging rights as highest-performing CIO. Ms. Gorrilla is followed closely by Paula Volent at Bowdoin College and Kris Kapoor at Furman University.
The Long Haul: Building investment smarts at Denison, Bowdoin, and Furman:
Endowment investing is a long-term game, and consistency counts. So let’s talk about the long haul. How does a small school like Denison U (it’s in Granville, Ohio, by the way) beat the pants off most of the Ivys? After all, this is Ms. Gorilla’s first CIO job, and she is the first to get that title at the school. And, she’s only been aboard for four years out of our 5-year period. How did they get so good?
I had the pleasure of meeting Adele Gorilla at a conference in Boston this spring but, since I hadn’t yet crunched these numbers, I didn’t realize just how well her endowment had been doing.
She has a BS from Wharton, worked as an analyst for Goldman Sachs, picked up her CFA, and spent five years as a senior staffer at the University of Minnesota endowment. But there was a firm foundation at Denison before she was hired in 2008.
Under her predecessor, director of investments Michael Horst (now at Texas Tech) the endowment grew from $200 million to $700 million in twelve years and delivered outstanding returns. On a ten-year basis, back in 2008, Denison already ranked 51 out of 421 in the NACUBO universe: in the top 12 percent.
Behind the investment office is a strong investment committee, including Lee Sachs (Dension ’85), CEO of Alliance Partners and a former U.S. assistant Treasury Secretary; and private equity vet John Lowenberg. That same committee ran the search that found Ms. Gorrilla.
Another top performer on our 5-year list, Paula Volent, has been responsible for the Bowdoin endowment for 13 years, and before that, trained for five years under David Swensen at Yale. Bowdoin’s performance is nothing new. As far back as 2007, when the big Ivys were still riding high, Bowdoin, with its three-person investment office, earned a 24 percent return, better than most of the big schools.
Ms. Volent, with an art history degree from NYU, actually started out to be an art conservator, working at places like the National Gallery in Washington. But she turned to the dark side, earning her MBA at Yale and switching to investment management.
Bowdoin, up in Hampshire, Maine, is a long way from Wall Street, or even Boston. Last year it was revealed that Ms. Volent was opening a satellite investment office New York City where she will spend half her time. As her endowment closes in on $1 billion, it will undoubtedly be easier not only to keep tabs on managers from a New York office, but to attract the quality internal staff a larger endowment will need.
Furman University didn’t just suddenly get good, either. They matched Bowdoin’s 24 percent return in 2007, even before Kris Kapoor came aboard. Starting with a traditional 70/30 portfolio in 2002, they revamped their allocations until they had 40 percent to alternatives by 2007. They also re-organized their governance structure. VP Finance Mary Lou Merkt and board member Francie Heller, then head of the pension and endowment group at Bear Stearns, drove the process that culminated in the hire of their first CIO. Ms. Heller currently runs her own firm, Heller Advisory, in New York, and still sits on the Furman board and chairs their investment committee.
Mr. Kapoor, a Furman alumnus, returned to the South Carolina school as CIO in 2007. It was his first endowment job, but he’d had ten years of portfolio management experience, first at the Michelin North America pension, then at BB&T Asset Management.
…and, somewhere north of Lake Wobegone:
Not all the children in Minnesota are above average, but some of the endowments are.
Honorable mentions are in order for two small schools in the North Star State: Macalester College in Saint Paul, and Carleton College in Northfield.
Macalester landed a highly-credentialed CIO when they hired Mansco Perry III in late 2010. Mr. Perry had been running far more money – $33 billion – as CIO of the Maryland state pension. But he had family back in Minnesota and was happy to return. Again, he was a new guy stepping into an already-excellent operation. Under veteran Craig Aase, Macalester was already in the top decile for both 5-year and 3-year returns in 2010. Mr. Aase had been moved over from VP Finance to full-time CIO when that position was created in 2002. He began swapping equity exposure for alternatives, which amounted to 40 percent of the portfolio by the time Mr. Perry came aboard.
Jason Matz at Carleton, doesn’t have to credit a predecessor. He was hired as the school’s first CIO in 2004, when the investment committee set up a four-person office and planted it in Minneapolis, forty miles from dozy little Northfield (that city’s proud motto is “Cows, Colleges, and Contentment,” and nothing much has happened there since Jesse James robbed their bank in 1876). On his watch, the fund has grown from $500 million to $646 million in nine years, with consistently above-average returns.
Mr. Carnegie’s Other Institution:
The number-three fund on our 5-year list is not a college at all. The
Carnegie Institution of Washington (aka, Carnegie Institution for Science) is not to be confused with Carnegie Mellon University, which appears on our 3-year list. And, although it’s listed as an educational endowment by NACUBO, it’s not a degree-granting school; rather, it sponsors basic scientific research in many fields.
CIW earned an outstanding 3.6 percent over five years, and did it without a CIO. It does, however, have a hard-working director of investments in Michael Pimenov, who oversees the day-to-day operations of the fund and ensures that the investment committee’s policies are being carried out. And that investment committee is led by some impressive people.
Before his recent health problems led him to step back from some of his commitments, Yale’s David Swensen sat on that committee (he’s still listed as a non-voting “senior trustee”). They also benefit from the advice of Dr. James Duffy, one of the founders of advisor/outsourcer Strategic Investment Partners in DC. Board vice-chair Suzanne Nora Johnson, a retired Goldman Sachs vice-chair who sits on numerous boards, is also an active participant.
Another influential member is a Brit (actually, a Scotsman) named Christopher Stone. Mr. Stone, who was elected to the board in 1997, isn’t well known on these shores, but he runs a big pot of money in the UK. He’s been in charge of David (Lord) Sainsbury’s family office for more than a decade. (Lord Sainsbury, a former politician who was made a life peer by Tony Blair, is an heir to the Sainsbury grocery-store fortune.) This group seems to pull together very collegially, and the results speak for themselves.
Mr. Cooper’s awkward legacy: The 77-story endowment:
Up there in the number-one spot for five-year returns is
Cooper Union, in New York City’s East Village, with a 5.36 percent 5-year return. But it isn’t quite what it seems.
Think of it this way: CU’s endowment consists of a smallish $110 million endowment pool; plus the Chrysler Building. CU owns that Art Deco landmark, or at least the land underneath it, valued on their books at about $555 million.
If we strip out the Chrysler Building and look only at CU’s conventional endowment pool, they’re still doing fine over five years, with a return of about 2.5 percent. On a three-year basis, the performance of their pool fades to just 6.9 percent, down in the bottom quartile for midsize endowments in that period; but the endowment-cum-skyscraper still makes our 3-year Top 20, with a good 10.7 percent return.
It appears that the hedge funds – specifically, the absolute return strategies they loaded up on in 2007 – helped cushion their losses in FY2009, when the managed pool was down only 14 percent. That portfolio hasn’t helped them much in the “recovery” years but, arguably, those funds are just doing what they promised, providing protection against downturns and modest returns in an up-market, while the endowment relies mainly on its real estate for cash income.
CU, which is lightly staffed (and getting lighter as they aggressively cut their budget), has no internal endowment manager. John Michaelson, who was investment committee chair 2008 – 2010 championed that hedge-fund allocation at the time, and the school brought him back as committee chair in 2012, so he seems to have their confidence.
Someone – perhaps it was the sainted Harry Markowitz himself – said that diversification is the only free lunch in investing. But here we have an institution with more than 80 percent of its assets sitting at 47th and Lex: elegant, illiquid, and an affront to modern investment theory.
Inventor and philanthropist Peter Cooper founded his school (in imitation of the French École Polytechnique) in the 1850s. He was a man ahead of his time in many ways. For instance, he insisted that women would be admitted on the same basis as men, an innovation which Harvard didn’t adopt until 1963.
A grateful city declared that CU’s real estate would be forever exempt from property taxes. And, that magic anti-tax bullet has permitted CU to do some real estate deals on a very favorable basis. Currently,
Tishman Speyer Properties, which leases and operates the building, not only pays CU $9 million in annual rent, but also an additional stream of $18 million in so-called tax equivalency payments. An office building is already a pretty illiquid asset, but CU also has to consider that if they ever tried to sell it outright, instead of just leasing it, it would go back on the city’s tax rolls. The right to that tax revenue couldn’t be transferred to a new owner, making it worth more to CU than it would be to any potential buyer.
So, right or wrong, the CU board has implicitly decided that the benefit of owning the property tax-free exceeds the benefit of a more diversified endowment. But now they have other problems.
Speaking of free lunches, CU’s students, for the first time in one hundred fifty years, have recently started to get tuition bills and, as you can imagine, this has not gone over well. At their graduating ceremony in May, half the audience turned their backs on President
Jamshed Barucha when he spoke.
When Mayor Bloomberg, also in attendance, was asked what he could do about it, the diminutive billionaire said that he’d already given $350 million to his own alma mater this year (Johns Hopkins University), and that was all he had to spare; but he spoke impressively and wished them all well.
New York Times’ ace business reporter James Stewart wrote a good update on the CU situation back in May. It’s here:
We think he’s a bit harsh in blaming CU’s problems on their “endowment.” Their troubles stem more from bad strategic decisions made at the board level, not on endowment management per se.
Mr. Michaelson (founder of private equity firm Michaelson Capital Partners) appears to have held up his end; given the unusual portfolio he was handed. Even with a big asterisk, their returns have been exemplary.
Who’s leading the committee-led endowments?
Four of our midsize high achievers have no full-time internal endowment manager that we can discern. But they’re performing very well, anyway. Who’s in charge?
Some pretty accomplished investors, as it turns out.
Mr. Michaelson at Cooper Union we introduced above. He has an MA from Oxford, and an MBA from Harvard. He runs Michaelson Capital Partners in New York, and also sits on the investment committee of Eton College in the UK.
Dr. Eben S. Moulton chairs the investment committee at Colorado College. He’s a partner at Seacoast Capital Partners, a private equity firm in Massachusetts. Colorado College is his undergrad school. He also has an MBA from Columbia and a PhD in finance from Vanderbilt.
Betsy Palmer, chair of Mount Holyoke’s investment committee, is a Columbia MBA and is currently head of North American marketing for the UK investment advisor Lindsell Train
Marshall B. Miller, Jr. chairs the Trinity University investment committee; an attorney with the Jackson Walker law firm in San Antonio, he has a B.A. from Washington and Lee University and a J.D. from the University of Denver.
Paying for performance at midsize endowments:
Bob Dylan once croaked that “none of them along the line know what any of them is worth,” which may be so; but we can usually find out what they’re paid.
Compensation for CIOs who appear on our Midsize Top 20 lists is stated below.
Most of the comps in this chart are from calendar year 2010, the latest publically available. Also, please note that comps for some of the newer CIOs are estimates based on the pay of their immediate predecessors in calendar 2010. That includes: Perry, and O’Donnell. Mr. Kennedy’s comp estimate is based on his predecessor in calendar 2009.
Compensation of CIOs at High-performing Midsize Endowments:
Fee to outsourced CIO:
We also have a hard number for the outsourcing fee paid by the University of Colorado Foundation to Perella Weinberg in FY2012.
University of Colorado Foundation, Perella Weinberg:
$2.2 million is about 28 basis points on an endowment of $771 million. This is consistent with what we know about the range of outsourcer fees: from 20 to 50 basis points on AUM.
We have no definite number for Middlebury College’s fee to Investure on its slightly larger endowment, but we suspect it’s about 30 bps, similar to Perella’s relative to AUM.
An internal investment office for endowments in this group might have a total annual budget anywhere from a bare-bones $500 thousand per year to an ample $2.5 million, including CIO comp. In terms of basis points, we think they budget in the range of 15 to 30 bps on AUM. Of course, that doesn’t include fees to an outside general consultant. Those vary widely, but could be another 15 or 20 bps if the school orders freely from the consultant’s menu of services.
Readers can make what they will of the CIO comps above. As usual, they seem to be as much a function of AUM as of relative performance.
Most of the big comps include substantial bonuses in 2010. Among the five largest endowments on this list for which we have 2010 numbers, four of the CIOs got large bonuses. The exception is Saint Louis University, a Jesuit school where most of the administration salaries are relatively modest.
Stalking the DOI: Some observations from the field:
In our Top 20 lists we’ve sometimes identified a director of investments (DOI) in lieu of a chief investment officer.
That title (or some near-equivalent) doesn’t always convey the substance of the job. Some DOIs are essentially CIOs, with all the usual credentials and perquisites, but without the formal title. In other cases, the DOI function is more administrative than managerial, with an emphasis on coordinating and liaising between the various parts of the investment management machinery. Still others fall somewhere between those poles.
We’ve concluded that these organization-specific nuances, while interesting, are less important than the fact that some individual has been specifically tasked with minding the endowment store on a full-time, in-house basis. These tasks can be, and often are, parceled out on a catch-as-catch-can basis among the staff of the Treasurer or VP-Finance, but we think this is usually less effective.
No matter how brilliant the investment committee-members may be, they assemble and deliberate as a body only a few times a year. Most have day-jobs which take priority. Consultants are fine but, at the end of the day, they are hired guns and serve multiple clients. To see that the investment plan is actually being executed, it’s highly desirable to have someone in-house focusing on it full time, even if it’s a humble DOI who may not have all the credentials (or compensation) of a full-bore CIO.
Of course, every organization has its own specific needs and its own unique cast of characters, and must use the governance set-up with which it’s comfortable.
I had a chat with a real, live DOI recently, and he put these points better than I could:
Ryan Tidwell at Oklahoma State University Foundation. Mr. Tidwell is a young man with a BBA in finance (summa cum laude) from Baylor University and a CAIA credential. He was working at the University of Alaska Foundation in 2011 when he applied for a new DOI job at OSU in Stillwater. The OSU Foundation invests about $450 million in endowment funds.
Skorina: Ryan, why did the OSU Foundation decide to create a DOI slot and put you in it?
Tidwell: OSU was consultant-driven (using a regional consultant) until 2012. Up till 2008 it worked pretty well. But after the crunch the board realized that there was a lot they didn’t understand about what was going on. We also had some concentrated positions in funds associated with a major donor, which hit some strong headwinds in that period. And they realized that some of our largest external managers were not even aware that OSU was the investor. Their relationship was strictly with the consultant.
Skorina: So, when did they decide they needed you?
Tidwell: Well, they decided in 2010 they needed somebody full-time. They got 80 resumes, but when they started talking to people they realized that a lot of them weren’t even clear about where Oklahoma is, let alone Stillwater. Literally didn’t know. I was working as an analyst at the University of Alaska Foundation when I sent in my resume. But I had gone to Baylor University in Waco, Texas, so I had a pretty good idea where Oklahoma was, and my wife’s father and grandfather went to OK State, so we all knew the territory.
Skorina: Home-field advantage. Amazing how often it works.
Tidwell: Yep. I was hired in March of 2011 and spent the next nine months learning about our investments and managers and bringing the board of trustees fully up to speed on what we owned.
Skorina: You’ve been there two years now. Is the DOI setup working the way they expected?
Tidwell: Yes, I believe so. Outside of the formal quarterly board meeting, consultants just don’t have the time to spend with board members on nights or weekends. With me in-house, they can take as much time as they need to get up to speed on investment matters. Part of my job is to be available whenever and wherever they need me. The board now gets much more attention with me on staff and they like that.
Skorina: Everybody likes attention.
Tidwell: Yes, they do. But don’t get me wrong. Our trustees are very capable, savvy people. We’re lucky to have them. It’s a matter of time. None of them can spend all day, every day minding the store. That’s my job.
Skorina: So, you and the board are still happy with each other?
Tidwell: So far, I think everyone is pleased with our arrangement.
Skorina: Thanks for talking to me, Ryan.
Tidwell: Good meeting you, Charles.
Appendix: Top 20 Methodology:
To get bullet-proof Top 20 lists we would have had to rank all 73 of the midsize endowments listed by NCSE, then skim off the twenty high-performers for three and five years.
Our SSME dataset includes performance figures on a subset of the NCSE: 60 of them, or about 82 percent.
For each of them we started with either “hard” (official, publicly disclosed) or “soft” (estimated by us) returns for the five fiscal years 2008-2012.
Those estimated returns are approximations, but good enough for our purposes. After cutting the bottom half of the list, we scrutinized the remaining high-performers for which we had only estimates, and cajoled official people into giving us official numbers to confirm or adjust our estimated returns.
The difference between the NCSE and SSME sets – 73 versus 60 – consists of 3 Canadians, which we omitted; and 10 others for which we had neither official returns nor plausible estimates. They are mostly public colleges who issue only consolidated GASB financial statements and who do not park all or most of their endowment in a legally separate foundation.
It’s possible that some among those 10 did very well. If we have omitted any such, then we regret it, and can only respectfully suggest that they should have told the world about their performance if they wanted it to be celebrated.
The power of FSP 117-1:
It’s not a dietary supplement; it’s an accounting rule. The FASB, bless them, unleashed it in 2008. If you’re someone who needs to know why they did that, then you probably already do.
Among other things, it requires certain additional disclosures in FASB-audited financial statements which permit us to roughly estimate return on investment for endowment funds. Most private colleges started making those disclosures in 2009, but in many cases they did it retroactively to 2008. The latest version of the IRS Form 990, in its Schedule D, requires a very similar reconciliation of endowment funds from 2009 onward. These are based, ultimately, on the same accounting numbers.
Public colleges, whose financials are audited per GASB standards, can choose to opt out of recent FASB rules, including FSP 117-1, and, apparently they all do. That’s why those public college financial statements are unhelpful to us, as we explained above.
So, as of fiscal year 2012 we have, for the first time, five-year data on a uniform basis with which we can estimate many 5-year (and 3-year) annualized endowment returns even if officially-calculated returns aren’t readily available. While these yield only approximations of the “real” returns, they are good enough to tell us pretty definitely whether they are high, low, or medium performers compared to their peers, especially when annualized over several years.
Any estimates based only on annual dollar amounts will necessarily diverge from official rates of return. Internally, institutions keep their books on a monthly basis, and their consultants hand them attribution analyses with month-by-month returns. Annualizing those twelve monthly numbers gives a more theoretically correct time-weighted rate of return than a single-period yield. But, since we know the error range, this blunt instrument is still useful, as long as we handle it carefully.
We used the so-called Midpoint Dietz algorithm (AKA “simple Dietz,” “original Dietz,” etc.) to compute annual returns from financial data. It does nothing to help with time-weighting, but it does partly correct for so-called “external flows” and gets a little closer to a GIPS-style return.