There can be few fields of human endeavor in which history counts for so little as in the world of finance. —John Kenneth Galbraith
I recently reviewed endowment performance and investment talent with the board of a major university. Subjects under discussion included effective board structure, endowment office best-practices, and adaptive leadership for changing times. My assignment is to research and report on investment office successes and failures, all-weather overachievers, and pathways to preeminence.
I’m not alone. A growing number of boards and investment heads suspect the good times and bull market mania might not last and are taking precautions, de-risking and re-thinking conventional portfolio management. Heather Gillers caught the vibe in her recent Wall Street Journal article, “The Ivies Are Having Second Thoughts About Investing in Private Equity.”
We’ve heard rumblings for ages. Howard Marks sounded the alarm three years ago in his memo Sea Change, when he cautioned that the rapid rates reversal and the end of free money would have profound implications for institutional investors:
It seems to me that a significant portion of all the money investors made over [the last forty years] resulted from the tailwind generated by the massive drop in interest rates.
All-weather winners
Managing money is one of America’s key competitive advantages and we recruit the managers who manage the money. What hurts institutional investors and family offices hurts us. If there’s stormy weather ahead, we scout for all-weather chiefs.
Who are the likely winners? Our client would like to know. An iconic venture capitalist once told me he put his money on tenacious, dogged optimists, the ones that assiduously work a problem and never give up.
During last week’s board review, as we discussed high-performance offices and indefatigable overachievers, I recalled an article on genius, and several qualities in particular:
Their openness to new ideas and their breadth of interests infuse them with seemingly irrelevant stimulation that can enrich blind variations.
Hey! I know these folks.
Searching through the haystack
We begin every assignment by looking at the data. Hence our yearly performance reports. Who’s on top and who’s not? Returns may be historical, but they are useful clues to the views, process, and discipline of investors and boards and how well they work together.
Chart one*: Endowment payout levels versus performance
*My thanks to an astute west-coast CIO
As the chart implies, if we assume a four to five percent distribution for university operations, add a few points to pace inflation, and another percent or two for contingencies and growth, the investment office needs to generate an average return of at least 8.15%. Who’s done that?
Our first league table at the end of this note ranks chief investment officers by ten-year returns – data from our January newsletter. Sixty-seven of one hundred schools over one-billion AUM made that first cut, earning eight percent or more for the period. About two-thirds. However, when we raised the bar to nine percent, a more realistic hurdle given all the unknowns, just thirty-two schools remain, one-third the total.
How about career experience and years of service we wondered? How does that factor in?
Turning to the second league table at bottom, with start dates and years in the role, we re-sorted by tenure to spot the correlations between experience and performance.
In the group that generated nine percent or more, the count includes eleven CIOs out of thirty, 37 percent with ten years or more tenure, fifteen CIOs out of forty-three, 35 percent with tenure between five and ten years, and six of twenty-seven CIOs, 22 percent with four years or less.
Experience is important, and a helpful indicator. But there’s more than that to a winning record.
That one in a million
What distinguishes top investment officers? Recruiting talent is both science – can we identify skill and persistence in a candidate’s background? And art – intuition and experience. Is this candidate someone that catches our eye? Piques our curiosity? Are their backgrounds different, interesting, exciting? And how about that second-level thinking Howard Marks refers to?
Here is one example, Ms. Jane Dietze, Brown University’s chief investment officer and perennial chart-topper. Nothing run-of-the-mill about her story.
(Nor Ms. Paula Volent, who frequently held the top spot during her two-decade sway at Bowdoin College, or the many talented women looking for a chance to move up.)
Jane Dietze – Like Mother like Daughter
If you want to know what’s driving Ms. Dietze, you don’t have to look far.
The late Ms. Helen Dietze, Jane’s mother, a twice-widowed preacher’s daughter with a BA from the University of North Carolina at age nineteen; lived in France, Japan, Africa, and Thailand; studied in Florence, the Sorbonne, and Oxford University; loved tennis, skiing, and sailing; collected antiques for fun and profit and – wait there’s more – late in life she joined the Peace Corps. And lest we forget, Jane’s grandmother earned graduate degrees in Latin and Greek.
After a whirlwind childhood and an AB at Princeton – where Jane played three varsity sports: field hockey, squash, and lacrosse and captained two of the teams – it was off to the University of Cape Town for post-graduate work, and on to Johns Hopkins for an MA in Russian Studies, then two years at Goldman Sachs as an analyst. Then it gets really interesting.
About the time Paula Volent arrived in LA to start an art restoration business, Jane Dietze landed on the steppes of Eastern Europe, on assignment with the World Bank’s IFC – restructuring farms in Russia and investing in Albania, Macedonia, Turkey. It was 1992.
Let’s put this in context. The Soviet Union was falling apart in the early to mid-nineties. Conditions were fluid and governments were shaky. The cities and towns were more like Deadwood than Wall Street. No country for young women.
After four years “walking the line” it was back to D.C. and a software startup, sold eventually to PeopleSoft. Then fourteen years in venture capital and wealth management with Columbia Capital and Fortress Investment Group.
But as fate would have it, in 2012 Paula and Jane crossed paths. Volent offered Dietze a position as private equity director at Bowdoin which, a year later, brought her to the attention of Joe Dowling, CIO at the time at Brown University. He hired her as his backup and promoted her in 2018 when he left for Blackstone. It’s been quite a ride.
Final thoughts
The New York Times obituary of the late world-renowned physicist Richard P. Feynman included the following observation, “[Professor Feynman] was never content with what he knew or what other people knew.”
In our experience, this holds true for all top investors. They are world class networkers, they sit on boards, mentor staff and students, volunteer, and are active in cultural and social affairs. But they’re all skeptics until proven otherwise.
We asked Joe Dowling a few years back (who else?) how he would describe great investors. His comments are worth repeating.
- Great investors have the ability to step away from the crowd and have a variant perception and then act with conviction. They have different experiences that add up to cumulative investment knowledge. They develop a diverse lens to evaluate markets and managers and opportunities.
- They see patterns. CIOs meet with a lot of managers. Successful investors need to develop pattern recognition. A CIO probably needs to have met and evaluated at least four-hundred managers before they begin to really know what they are doing.
- They have intellectual curiosity and a strong work ethic. Nobody works harder than Paula and Jane – they grind it out. And the work is intellectually interesting to them. They are not tourists.
- Dynamic and social. They are relentless networkers. Fund managers like them so there is a fly-wheel effect. Their networks expand and, as a result, they are fed more and more opportunities.
- Humility. They have made a ton of mistakes but view them as learning experiences. They know and appreciate how difficult the business is. This filters through to the managers.
- Politics. They know how to engage, manage, and benefit from their investment committees. This allows them to rebalance into dislocations, pioneer new models like, for example, staking managers or investing in crypto before the herd took notice.
—Charles Skorina
(Download newsletter and tables as PDF)
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Endowment performance and CIO tenure
Table 1: Ranked by performance
The two tables below include only endowments with CIOs. 100 in this case, not the 123 in our newsletter report.
