| Comings and goings:
Jane Mendillo: Harvard turns the page. We were not altogether surprised to learn last month that Jane Mendillo was stepping down from her position as president and CEO of Harvard Management Company, although neither Harvard nor Ms. Mendillo had hinted that the move was imminent. Only four months previously (February 8th) Andrew Bary at Barron’s had asked Ms. Mendillo: “How much longer do you want to spend running the Harvard endowment?” She responded: “It’s the best job in the world. I’d like to be here for as long as I’m adding value.” Several reporters called me for comments, and I could only tell them what we had already printed in this newsletter: Over the five fiscal-years since taking the job she and her staff received the highest compensation among their peers. And – among the same peers – HMC had delivered some of the lowest annualized returns, with or without adjustment for risk. We had, perhaps, headlined those rankings more starkly than other commentators. But they are the plain facts, which anyone can ascertain from public sources. We think such peer comparisons are legitimate and useful, which is why we do them. But we certainly don’t maintain that they are the only, or necessarily the best, way to measure the performance of an investment office; a point we have made repeatedly. We also sometimes hear that institutions are, or should be, focused only on longer-term performance, and that the 5-year returns we like to discuss are exiguous. But that comes close to implying that long-term and medium-term results are uncorrelated, which seems highly unlikely. Achieving superior 20-year returns usually entails climbing a ladder of better-than-average 5-year returns. Also, a focus on 20-year return necessarily shifts responsibility from any identifiable investment team, since CIOs rarely achieve that kind of longevity (the distinguished career of Dr. Swensen at Yale being an exception that proves the rule). As recruiters trying to understand the performance of specific managers, this is unhelpful. Ultimately, the only opinion of HMC’s performance that counts is that of the university’s senior board and chief executive: that’s the Harvard Corporation and President Faust. It’s their responsibility to judge whether the risk, return, liquidity, and so forth meet the specific needs of the institution; and whether any management changes are indicated. Their deliberations, of course, are opaque to us; we can only observe the fund’s public performance and the comings and goings of their managers. We have no animus whatsoever against Ms. Mendillo or her colleagues. We think our comments on Harvard and other endowments have been civil and factual, if sometimes slightly saucy. We sympathize with the challenges they face and respect the work they do. It was a real journalist, Senior Editor Dan Primack at Fortune, not us, who described HMC’s recent performance as a “train-wreck,” which we think was a bit over the top. According to comments by Ms. Mendillo, she had approached President Faust to discuss retirement sometime in April, two months after she told Barron’s that “I’d like to be here for as long as I’m adding value.” By then HMC would have had performance numbers for their third fiscal quarter and could reasonably estimate the impending full-year results. An impartial observer might speculate that those numbers weren’t very encouraging, and that they may have played some part in Harvard’s decision. We won’t see those official FY2014 results for a few months, at which time we can test our surmise. By then, Harvard may have a new endowment head. We have no idea who that might be, and we doubt we’ll be invited to do the search. But we hear that Mohamed El-Erian is fresh, rested, and available. |
| Dueling five-year returns?
The five-year return we calculated and published for the Harvard endowment was 1.7 percent (for fiscal years 2009-2013). It was the lowest among the eight Ivy League schools. It was also lower than any of the 15 of the largest public-university endowments we recently analyzed. We think it’s correct and no one has challenged it. It’s interesting to note that HMC did not report their own official 5-year return in their annual report for 2013, although they disclosed numbers for 1-year, 3-year, and 10-year performance. After Ms. Mendillo’s departure was announced several reporters told us that a Harvard spokesperson had given them a “conflicting” number: It was 11-to-12 percent, versus our 1.7 percent. They wanted to know why it differed from ours. Apparently, Harvard was giving out a number for the period ending June 30, 2014. It’s certainly much better than the previous 5-year number, and that improvement seemed to reflect well on the departing CEO. Of course, it was not comparable to our number. We’re sure Harvard didn’t intentionally mislead anyone, but some of the reporters we spoke to were initially a bit confused on this point. June 30th has only just come and gone, so the 5-year number for 2014 contains an estimate for FY2014 results, which are not yet officially available anywhere. We presume Harvard stated its number as a range because they don’t yet have a firm 1-year figure for 2014. The question is: is 11-to-12 percent a high, low, or mediocre performance for this 5-year period? It’s certainly a whopping 9 or 10 percentage points better than the previous number. But that big jump is because 2009 finally drops out of the calculation; and 2009 was a terrible year for all investors. All 5-year returns are going to look dramatically better when they’re re-calculated for 2014. Harvard will get a bigger boost than most, because their losses in 2009 (-27.3 percent) were especially severe. Still, this tells us nothing about Harvard’s performance relative to other institutions. One thing we can do is extract the implicit 1-year estimate for FY2014 contained in that 11-to-12-percent figure. That number implies a 1-year FY2014 return between about 13 and 18 percent, with 15.5 percent as the median estimate. Assume that other big endowments (the eight Ivy League schools; plus MIT, Stanford, Texas, Michigan, and Notre Dame) will do no better and no worse than a 13 percent return in 2014 (that being the implied lower bound of Harvard’s expected return). Would Harvard then move up in the comparative 5-year rankings, or would they still be at or near the bottom? On these (very conservative) assumptions, we estimate that Harvard would, at best, rank 7th among the eight Ivy League endowments, and 11th out of all thirteen endowments in our reference group. This would indeed be a slightly better ranking than in 2013, but leaving them still in the lowest quartile among their peers. In a few months we’ll see if we’re correct. |
| SURFING THE AGE OF ASSET MANAGEMENT:
WILL THE TIDE OF GLOBAL AUM LIFT ALL ASSET-MANAGEMENT BOATS? The future looks bright for investment-management professionals as global assets under management surge from the current estimated $87 trillion dollars to a projected $400 trillion in 2050. Andrew G. Haldane of the Bank of England recently declared that global assets under management presently stand at about $87 trillion and says they’ll rise 15 percent to $100 trillion by 2020, just five years from now. See: http://www.bankofengland.co.uk/publications/Documents Looking farther out, Mr. Haldane foresees global AUM quadrupling to $400 trillion by 2050, boosted by macro-trends in population growth, longer life spans, increasing GDP per capita, and accelerating growth in retirement savings in developing countries: “The drivers of this growth are reasonably well-understood. The pool of prospective global savers has become larger, older and richer, each of which tends to be a boon for the asset management industry. Since 1950, average life expectancy has risen by nearly 50%, world population has risen by a factor of three and world GDP per capita has risen by a factor of nearly 40. There is a strong cross-country correlation between GDP per capita and AUM relative to GDP.” Today, we may be shuffling through the anemic, slow-growth world of the New Normal in terms of conventional GDP measurement. But Mr. Haldane stipulates that AUM is growing much faster than GDP. For instance: “In the United States, AUM have risen almost fivefold relative to GDP since 1946, from around 50% of GDP to around 240% of GDP.” As he says: “If these trends are even roughly right, asset management may not only have come of age – we may be about to enter the Age of Asset Management.” Mr. Haldane, still a youngish 46, is considered one of the leading global-finance thinkers. He’s recently been named to the post of Chief Economist at BOE and, given his career trajectory, no one would be much surprised if he eventually rises to the BOE governorship, counterpart to the U.S. Federal Reserve Chairman. He is perhaps best-known in the U.S. for a provocative and influential paper he read at the Kansas City Fed’s annual Jackson Hole conference in 2012: “The Dog and the Frisbee.” Available here: http://www.bis.org/review/r120905a.pdf Mr. Haldane is chiefly concerned with the stability of global financial institutions, primarily banks. But, in his recent speech, he pointed out that funds were rapidly leaking out of the formal banking network and into…other things. We could broadly call them “asset managers,” but the proposed acronym is: NBNISII. That is: non-bank, non-insurer, systematically important institutions. These may include pension funds, hedge funds, private equity funds, sovereign-wealth funds, family offices, etc. Well, Mr. Haldane has his job, and we have ours. We’ll let him worry about the macro-behavior of these entities. But we think he probably has as good a grip on the overall stats and trends as anyone, and we’re interested in the expected impact of this money on the demand for investment-management professionals. This is global money, increasingly generated in the developing world, but a very disproportionate chunk of it, and the people who run it, will end up where they always have been: in the money-management institutions of the developed West, including the UK, US, and Canada. In other words, dear readers, in the institutions you work for or do business with. Mr. Haldane notes that the holdings in hedge funds, private equity, real estate, infrastructure, commodity funds, etc. — the areas requiring the most experience, training and expertise — have already tripled in less than a decade from under $2 trillion AUM in 2003 to over $6 trillion in 2012 and the pace shows no signs of relenting. |
| Outsourced CIO firms continue to hire as they ride the AUM wave.
In our own latest Ultimate Outsourcer List study, we noted that assets managed by OCIO firms have passed one trillion dollars as of March, 2014. See list and commentary here: https://www.charlesskorina.com/nl54-skorinas-untimate-outsourcer-list-ver-3-1/). And just last week (July 7, 2014) Christine Williamson, writing in Pensions & Investments, counted $1.206 trillion in assets under full or partial discretionary management as of March 31, 2014. All eyes on the high and ultra-high net worth segments. Another recent study by McKinsey & Company projects strong asset grow and management opportunities in the high and ultra-high net worth segments. Their July, 2013 global private banking survey reported that “over the past four years, millionaire wealth has grown by 8.5 percent annually to around USD 60 trillion at the end of 2012. By 2016, we project that some 16 million millionaires will control about USD 80 trillion in personal financial assets – 30 percent above current levels and nearly double the post-crisis trough. Future growth will be particularly fueled by the UHNW with over USD 30 million. We expect their wealth to increase by about 8 percent annually compared with about a 6 percent increase for core millionaires with USD 1 to 10 million.” The public pension sector will have to compete harder for investment talent. Even U.S. state and local pensions ($3.05 trillion in DB assets as of fiscal 2012) should see hiring increases as governments are forced to cover their massive unfunded liabilities (estimates range from $730 billion to $4.4 trillion) and look for better returns. See: https://www.census.gov/govs/retire/ And: “Underfunded Public Pensions in the United States: Managing the money. As absolute numbers, it’s hard to reconcile all of these stats, which probably include some serious double-counting. It’s the overall trend which interests us, and it’s unmistakable. And it’s impossible to model this secular growth of AUM to projected management jobs, but the trend is, again, unmistakable. As we concluded three years ago in our article “$58 Trillion – The Gift that keeps on giving”, all that money, public and private, has to be managed in some fashion by someone, and that someone expects to be well paid for his or her efforts. See: https://www.charlesskorina.com/the-skorina-letter-no-41/ |
