Every year there are about 50 to 100 US nonprofit (tax-exempt) and family office CIO searches and that number will climb as more ultra-high-net-worth families (over $100 million AUM) form offices, create foundations, and hire professional investment talent. PwC forecasts a near doubling in global AUM over nine years, from $84.9 trillion in 2016 to $145.4 trillion in 2025, and predicts the US share of this global wealth pie to rise from $46.9 trillion to approximately $71.2 trillion over the same period. But where will families and institutions find these investment heads? Asset owners want to know where to find good candidates, portfolio managers want to know what their chances are of landing a CIO job, and marketers for external money managers want to know whom to call. Some families and institutions will select the OCIO option (outsourced chief investment officer) and place their assets with an outside firm, but most will choose internal management. As search consultants, we recruit and fill positions within three broad categories: nonprofit institutions, family offices, and the for-profit investment world of Wall Street investment banks, insurance companies, mutual fund managers, RIAs, hedge funds, and consulting firms. All public pension systems, most endowments, and many foundations, health systems, associations, charities and corporate pension plans publish their fund returns and we use that information to rank and identify the top performing funds, chief investment officers, and senior asset managers. Find the best performing funds and you are likely to find the best talent. Most nonprofit funds over $1bn and about one third between $500 million and $1bn have CIOs. In 2011, we counted about 1,300 CIOs and heads of investments at tax exempt institutions. Today we track about 1,100 chief investment officers and another 800 up-and-comers in the nonprofit sector as the increase in endowments, foundations,…
What does it cost to run an investment office?
In early 2016 certain Congressional committees sent letters to 65 major private universities asking for information about their endowments. It was worded as a polite request, but it came from people who could, for instance, compel the endowments to adopt a strict spending rate (like private foundations) instead of the more flexible regime they currently enjoy as “charities.” Needless to say, the schools all coughed up the information forthwith. Apparently, this data-dump just went into filing cabinets, and neither the schools nor Congress have been eager to share those reports with the general public. But our clients (nonprofit boards and “Wall Street” asset managers) find this information useful, so we scrounged up copies of 15 of the responding letters from various sources. The other 50 schools have kept theirs out of sight. We were especially curious to see what the schools had to say about endowment management costs, which has always been a cloudy issue for us. Commonfund agrees. In a 2015 study they opined that: …unlike other factors that affect investment returns, such as asset allocation and the many types of operational and investment risk, costs are almost certainly the least well understood. See: Commonfund Institute: Understanding the cost of Investment Management (October 2005). As we said in our OCIO report, the perceived cost of managing the endowment is a major factor in the decision to outsource, or not to. It’s not the only factor, but a big one. But how can a board make that decision if they don’t know whether they’re spending more or less than their peers? And, whether outsourcing will actually save them any money? Investment returns can be benchmarked to the second decimal place, but the costs of managing those investments are harder to come by. NACUBO and Commonfund include questions about those costs…
The Harvard endowment: mark-to-make-believe
In this issue The Harvard endowment: a never-ending story Where do chief investment officers come from? Ludovic Phalippou, an Oxford professor’s PE handbook The Harvard endowment: a never-ending story The Harvard Management Company has severely chopped its staff since N.P. “Narv” Narvekar arrived in December 2016: from 230 to 130 FTEs. And, with so many ex-employees on the loose, it’s now possible to piece together a clearer picture of how the Harvard endowment lost its mojo and how it’s trying to get it back. Benchmarks, mark-to-make-believe, and Potemkin villages Before current management terminated the old compensation structure, the huge salary packages at HMC stumped us. Every time we compiled our CIO compensation studies, we wondered how those paychecks could be so large when performance was so mediocre. Some fault poor communication, siloed investment teams, and misaligned incentives, but we hear there were other issues – questionable benchmarks and bonuses paid “off-the-mark.” Here’s how it worked. Most of HMC’s assets such as listed equities, fixed income and hedge funds, relied on public market prices. And the private equity and venture capital portfolios were invested with outside managers who were responsible for valuing the assets. But the natural resources portfolio was owned directly by HMC and valuations relied on third party appraisers hired by the staff who, in turn, controlled the process. There were performance benchmarks, of course. But staff set the benchmarks and beating those benchmarks depended upon valuations and valuations depended on a process controlled by the staff. In other words, the carry was paid off of unrealized marks on illiquid holdings and superior performance was all but guaranteed. Even better, there was no easy way to argue against those benchmarks and valuations. As Matthew Klein wrote in the Financial Times about “private equity’s mark-to-make-believe problem,” If it’s challenging…
Endowment costs: The secret history
In this issue What’s it really cost to run an investment office? FY17 updated endowment performance President needed for West Coast asset manager What we’re reading ————————————————– In early 2016 certain Congressional committees sent letters to 65 major private universities asking for information about their endowments. They supposedly had an urgent need for this data and gave the schools just 30 days to respond. It was worded as a polite request, but it came from people who could, for instance, compel the endowments to adopt a strict spending rate (like private foundations) instead of the more flexible regime they currently enjoy as “charities.” Needless to say, the schools all coughed up the information forthwith. Apparently, this data-dump just went into filing cabinets, and neither the schools nor Congress have been eager to share those reports with the general public. Nevertheless, we scrounged up copies of 15 of the responding letters from various sources. The other 50 schools have kept theirs out of sight. We were especially curious to see what the schools had to say about endowment management costs, which has always been a cloudy issue for us. Commonfund agrees. In a 2015 study they opined that: …unlike other factors that affect investment returns, such as asset allocation and the many types of operational and investment risk, costs are almost certainly the least well understood. See: Commonfund Institute: Understanding the cost of Investment Management (October 2005). As we said in our OCIO report, the perceived cost of managing the endowment is a major factor in the decision to outsource, or not to. It’s not the only factor, but a big one. But how can a board make that decision if they don’t know whether they’re spending more or less than their peers? And, whether outsourcing will actually save them any…
Scott Wilson steps up: Washington U lands a prime Chief Investment Officer
In this issue Scott Wilson step up, from Grinnell to Washington U Keystone Kapers, “governance” and Pennsylvania ERS Harvard professor Mihir Desai, why everyone hates finance ————————————————– Scott Wilson steps up Washington University lands a prime Chief Investment Officer Washington University in St. Louis has landed a splendid new chief investment officer for its $8 billion endowment: Scott L. Wilson of Grinnell College. The hire was announced last week and conducted by WUSL’s interim CIO and search committee chair Eric Upin. Mr. Upin is a highly qualified CIO in his own right. He’s a Harvard MBA, former CIO of the Stanford endowment and, more recently, a senior partner and CIO at outsourcer Makena. (Check out Makena’s standing in our updated OCIO list, coming next week!) Mr. Wilson served for more than seven years at the $1.9 billion (FY 17) Grinnell College endowment in Iowa, including three years as CIO. He’s a Grinnell grad, and was working toward an MS in financial mathematics from the University of Chicago when he was transferred to Tokyo. Before joining Grinnell he held a series of hands-on bond- and derivatives-trading jobs, including a long tour in Tokyo working for Bank of America and Barclay’s Capital. And every summer he likes to get away from it all by retreating to his cabin somewhere up a mountain side in a remote part of Alaska. He arrives in St. Louis with the global perspective needed at a major endowment in this era. We know, for instance, that he has been shifting equity money into ex-U.S. markets since 2014, including establishing a foothold in sub-Saharan Africa (through private-equity deals), where many have feared to tread. Kim Walker departed St. Louis in December after a 10-year tour as founding CIO at the WU Investment Management Company. She had no announced…