In this issue:
Comings and goings: Lawrence Kochard, Pamela Peedin, Mansco Perry
Corporations are doing great. Too bad they are not hiring.
Eric Doppstadt: A chat with the new CIO of Ford Foundation
Ken Lambert and Nevada PERS: Plain Vanilla is Good Enough:
How to Fail Conventionally as a Fund Manager
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Comings and Goings:
Lawrence Kochard: Back to Old Virginia
When Lawrence Kochard came aboard as their first chief investment officer in 2004, Georgetown University’s endowment was $680 million, barely large enough to justify his salary. Today, it’s up to $1 billion and has vaulted from 77th to 67th in the national rankings.
Now he’s taking a new job nearby but working on a much bigger canvas. He’ll be running University of Virginia’s $4.6 billion endowment as CEO of UVIMCO, the school’s investment management company.
He steps in on January 1st, but no moving vans will be involved. Mr. Kochard already resides in Charlottesville and has longstanding ties to the Old Dominion, where he took his undergrad degree at William and Mary. Then, after a northern detour in the 1980s to University of Rochester for his MBA and a stint on Wall Street (Goldman Sachs, of course), he was back to Virginia in the late 90s to earn an MA and PhD in economics from UVA. He taught on their regular faculty for a time, then as an adjunct professor at UVA’s graduate business school while he managed equities and hedge funds for the state pension. And, one of his sons is currently a junior at UVA’s engineering school.
His C.V. must have seemed almost too perfect. As he said in an interview: “Without realizing it, I think I have been preparing for this job for the past 20 years.”
But the move wouldn’t have happened without an unexpected turn of events. Chris Brightman, the UVA CIO from 2004 to March, 2010, had been doing a good job, by all accounts, but then became embroiled in some unfortunate personal problems and abruptly resigned, opening the door for Mr. Kochard.
I had a chance to chat with Larry a while back about his book. Yes, he writes books, too. While he ran the Georgetown endowment he also taught a graduate course called Investment Management for Endowments and Pensions (using Swensen’s Pioneering Portfolio Management as a textbook) and, in all his spare time, also wrote, along with co-author Cathleen Rittereiser, Foundation and Endowment Investing: Philosophies and Strategies of Top Investors and Institutions (2008).
As Georgetown CIO, Mr. Kochard earned $570 thousand (including benefits and deferred items) in 2008. He is also a board member at Janus Capital Group, who paid him $176 thousand (cash and stock) in 2009. Mr. Brightman’s total compensation as UVA’s previous CIO was about $2.5 million in 2008.
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Pamela Peedin: A Daughter of Dartmouth Returns to Hanover
A question we often hear is: how can a non-profit institution afford to hire first-rate investment managers when they can’t match Wall Street salaries? Part of the answer is sobering: if they are trying to compete strictly on salary, they can’t. But sometimes you can supplement a sub-Wall Street salary with psychic income that Wall Street can’t match.
Dartmouth lost its last CIO, David Russ, in 2009, when he was lured away by Credit Suisse, which probably left Dartmouth asking the same question I just posed. Mr. Russ had a fine resume, but his degrees were from University of California, and he had spent most of his career in California and Texas. One may doubt whether he had much visceral attachment to Dartmouth or to New Hampshire.
Now, they’ve handed the job to Pamela Peedin, who has run Boston University’s $1 billion endowment for the past three years. She’s a double Dartmouth alum: undergrad degree in 1989 and MBA from Dartmouth’s Tuck School in 1998. Previous to BU, she spent nine years at Cambridge Associates, advising various non-profits with aggregate AUM of $2.5 billion. She will start her new job in Hanover in February.
Mr. Russ made $843 thousand in 2008 (as compared to $500 thousand for the president of Dartmouth) and Ms. Peedin’s salary negotiation undoubtedly started around there. Money always counts. But we suspect that the search committee also weighed her ties to the college and long-time residence in the northeast, nonmonetary factors that can make all the difference in holding a high-value employee.
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Mansco Perry: Following a class act at Macalester College:
Minnesota’s Macalester College isn’t a national name-brand, but the school’s $587 million endowment means it’s punching above its weight relative to its 2,000-student enrollment. That’s almost $300 thousand per student, making it comparable on that basis to Ivys like Cornell, Penn, or Columbia.
Craig Aase, a Macalester alumnus who spent his career on the campus and became its first CIO in 2002, is credited with bringing state-of-the-art management to a mid-sized endowment. He moved cautiously but deliberately to replicate what the big guys were doing, including direct investment in hedge funds rather than via fund-of-funds, and a strong commitment to alternatives generally. Macalester earned 12.3 percent in FY 2010, comparable to the average Ivy school (see our Ivy wrap-up, below). And it limited its losses to just 13.4 percent in FY 2009, when Yale and Harvard were losing twice as much.
Macalester has recruited Mr. Aase’s successor from the public-pension world. Mansco Perry III, chief investment officer at the $33 billion Maryland State Retirement Agency, picked up the reins in St. Paul on November 1st. As CIO of the Maryland pension, Mr. Perry produced a 14 percent return, putting it in the top third of comparable public plans.
Mr. Perry has Midwestern roots. He earned his BA at nearby Carleton College (Northfield, Minnesota), an MBA from University of Chicago, and a JD from William Mitchell College. And he worked for several years in Minnesota at the Federal Reserve Bank of Minneapolis and Carleton College.
We suspect that Mr. Perry will have negotiated a better pay-package than his predecessor’s. Mr. Aase’s total compensation was about $187 thousand in FY 2009. Mr. Perry’s total compensation at the MSRA was $336 thousand in 2009, including a $16 thousand bonus for beating the fund’s annual target.
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Michael Abbott: Cornell bets on another Brit:
James Walsh, an Englishman whom Cornell University had brought across the pond to run its $4.4 billion endowment, resigned and returned to London earlier this year. Cornell’s losses and financial stress during the late unpleasantness were pretty severe, and it’s thought that Mr. Walsh, whether justly or not, was made to absorb some of the outrage.
Mr. Walsh has set up a London-based hedge fund nostalgically named Cayuga Capital Partners (Cornell is situated on Cayuga Lake in New York State’s picturesque Finger Lakes region).
But now, after not just a national, but a trans-national search for a replacement, Cornell has summoned…another Englishman: Michael Abbott, who previously managed $2 billion in hedge fund money for Robeco-Sage in London.
There seems to be no shortage of Londoners ready to rusticate among the Finger Lakes, if the emoluments are adequate, which they seem to be.
In 2008, the latest year available, Mr. Walsh received compensation totaling $889 thousand. This included $414 thousand base pay and a $420 thousand bonus based on the fund’s performance in FY 2007.
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Observations:
Eric Doppstadt: A chat with the new CIO of Ford Foundation
Last month, on my way to an appointment with Ford Foundation CIO Eric Doppstadt, I stopped to admire the view in the lobby of the Foundation’s grand headquarters in Manhattan. I like big city architecture, and this building is worth a long look.
The edifice opened in 1967 and was done in the style of the great Finnish modernist Eero Saarinen (actually designed by his students Roche and Dinkeloo soon after Saarinen’s death).
Instead of looking out (at other office buildings), the Foundation’s worker-bees all look inward at a sunny, soaring, ten-story atrium filled with a miniature tropical forest of plants. It was very cutting-edge stuff forty years ago, and still impressive today.
It was also in 1967 that the Foundation’s annual report, written by then-president McGeorge Bundy, noted that “…the true test of performance in the handling of money is the record of achievement, not the opinion of the respectable….over the long run caution has cost our colleges and universities much more than imprudence of excessive risk-taking.”
Mr. Bundy, one of the principal advocates of the Vietnam War in the Kennedy and Johnson administrations, had decided to take a break from his foreign-policy exertions and see what could be done about earning more money for America’s colleges.
He commissioned influential studies attacking the old assumption that the “prudent man” rule of personal trust law applied to management of endowment and foundation funds. Along with the dissemination of modern portfolio theory, these initiatives cleared the path for more sophisticated and non-traditional portfolio management at the Ivy schools and, ultimately, among most large non-profit institutions. Larry Kochard (see above) tells the story in his book Foundation and Endowment Investing.
Ancient history, I suppose. But when we’re perplexed about where we’re headed, it’s always worth retracing the steps that got us here.
Back in the present moment, I made it through the verdure and up to Eric’s office. He’s a fellow University of Chicago MBA, 20-year veteran of the Ford Foundation and, with the recent departure of Linda Strumpf, its current chief investment officer.
Like all the investment pros I’ve spoken to recently, he’s re-thinking his assumptions and re-calibrating his risks in a very uncertain time. For one thing, liquidity looks pretty good to him right now.
“I see nothing wrong with holding lots of cash and keeping my powder dry, Charles. Occasionally we see an opportunity to earn a little extra money. And when we do we are prepared to move quickly. But there is no obvious beta and few really compelling investments.”
Eric and his staff are “pure global” in their outlook and research. Whether it’s a custom opportunity in non-agency mortgages, dodging a resurging leveraged-loan bubble, or resource plays in emerging markets, his staff of fourteen are sifting through many ideas, but investing in very few.
He sees equities on a Fed-induced sugar-high and fixed-income rates falling through the floor. With such big-foot interventions driving the markets, Eric is hewing to the old and honored rule that you don’t loose what you’ve got and look long and hard before leaping.
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Ivys and Others:
In the Post-Game Wrap-up (Almost) Everybody Beats Yale:
The last (and least) of the Ivy League (Brown University in Providence, Rhode Island) has now been heard from, so we can do an official post-game wrap-up of their endowment performance.
Now, all of these endowments will piously tell you that a single year’s performance is of no great importance, and that only long-term earnings interest them as they gaze out at those far horizons and ages yet to come.
Well, sure. But the fact is, everybody wants to beat Yale. And, this year, (almost) everybody did.
This does not change the fact that Yale returned 16.62% from 1985 to 2008 and Harvard returned 15% over the same period. But let’s let Columbia have its moment of glory. Not to mention my own University of Chicago, which (so far) tops this year’s list among all major endowments, Ivy or not.
The big story, of course, is that endowments are offsetting some of the huge negative returns of FY 2009. Overall, they lost 18.7% last year. Which is why all the current press releases include words like “recovery” and “rebound.”
On the other hand, we are still not revisiting the glory years when Harvard and Yale routinely, almost contemptuously, beat the S&P. This year, they both underperformed the broad stock index, although the weighted average of all the Ivys moved just slightly ahead of the S&P.
When announcing their results, most schools say very little about what (if anything) they’ve done to reset their allocation in the most recent year. The NACUBO/Commonfund report, due out in three months, will give some clues about allocation-shifts, at least in aggregate.
From the sparse information available, we suspect that most schools made few major changes and that their performance tended to track their exposure to equities as we saw above.
The eight Ivys, ranked by FY 2010 investment returns:
Columbia ($6.5 bil) – 17.0%
Princeton ($14.4 bil) – 14.7%
Cornell ($4.4 bil) – 12.6%
Penn ($5.7 bil) – 12.6%
Harvard ($27.4 bil) -11.0%
Brown ($2.2 bil) – 10.2%
Dartmouth ($3.0 bil) – 10%
Yale ($16.7 bil) – 8.9%
Ivy Total AUM: $80.3 bil
Ivy Weighted Avg ROI: 11.9%
Ten major (over $2 billion) non-Ivys who have announced their FY 2010 results so far:
University of Chicago ($5.5 bil) – 18.9%
University of Texas/UTIMCO ($22.3 bil) – 16.8%
University of Virginia ($4.5 bil) – 15.1%
Stanford ($15.9 bil) – 14.4%
Duke ($4.9 bil) – 13.0%
Northwestern ($6.3 bil) – 12.4%
University of Michigan ($6.6 bil) – 12.3%
MIT ($8.3 bil) – 10.2%
Rice ($3.8 bil) – 10.2%
New York University ($2.4 bil) – 8.0%
Non-Ivy Total AUM: $80.5 bil
Non-Ivy Wtd Avg ROI: 14.2%
Ranking all eighteen, Ivy and non-Ivy:
University of Chicago ($5.5 bil) – 18.9%
Columbia ($6.5 bil) – 17.0%
University of Texas/UTIMCO ($22.3 bil) – 16.8%
University of Virginia ($4.5 bil) – 15.1%
Princeton ($14.4 bil) – 14.7%
Stanford ($15.9 bil) – 14.4%
Wilshire Institutional Investors Median – 13.0% (Foundations and Endowments)
Duke ($4.9 bil) – 13.0%
Cornell ($4.4 bil) – 12.6%
Penn ($5.7 bil) – 12.6%
Northwestern ($6.3 bil) – 12.4%
University of Michigan ($6.6 bil) – 12.3%
S&P 500 (01Jul2009-30Jun2010) – 11.63%
Harvard ($27.4 bil) – 11.0%
Brown ($2.2 bil) – 10.2%
MIT ($8.3 bil) – 10.2%
Rice ($3.8 bil) – 10.2%
Dartmouth ($3.0 bil) – 10%
Yale ($16.7 bil) – 8.9%
New York University ($2.4 bil) – 8.0%
Total AUM: $160.8 bil
Wtd Avg ROI: 13.0%
These eighteen schools account for about half of all U.S. endowments in the over-$2 billion bracket, including most of the biggest, making them fairly representative of the whole large-endowment universe.
NACUBO/Commonfund won’t release their official report on U.S. endowment performance until January, but they furnished some preliminary aggregate numbers a week ago, based on returns from just eighty schools out of 840 they follow.
Returns By Endowment Value, 2010
Endowment Size Average Return
Under $25 million 14.1 percent
$25 million – $50 million 11.3 percent
$101 million – $500 million 13.8 percent
Over $1 billion 12.3 percent
Average 12.6 percent
Source: NACUBO-Commonfund Institute Study of Endowments (Preliminary Data)
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South Carolina looks North: Yanks discover the Canadian model of private equity for public pensions:
U.S. Institutions traditionally invest in private equity in exactly the way the big private equity firms want them to: as passive limited partners.
KKR, Carlyle, Blackstone, et al, drive the bus and collect those excellent fees; the LPs make money if and when the IPOs work, and all is as it should be, if you happen to be David Rubenstein or Leon Black.
Up in Canada, however, the two big public pensions have been trying to outflank the big PEs, and often succeeding. The Canadian Pension Plan (CPP), for general government employees) and the Teachers‘ pension both have savvy, well-staffed PE units who put money directly into portfolio companies, sometimes jointly with “real” PE firms, and sometimes on their own hook, acting as lead investor.
In the case of Teachers’, the pension fund has actually spun off a separate organization: Teachers’ Private Capital. Like any PE investors, they’ve had hits and misses, but over 19 years, Teachers’ has gotten an average return of 9.7% from its PE unit. Over that same period, U.S. pensions earned a median annualized 8.5% for all investments. From the point of view of public pensions, that 9.7% is very nice-looking number.
Teachers’ has about $10 billion in PE investments, run by a staff of 55.
Down here in Yankeeland, despite all of the wailing from big public pensions about the high fees exacted by the PE titans, there has been remarkably little interest in the Canadian model, until now.
In South Carolina, of all places, state pension CIO Robert Borden is proposing to spin off a separate company to originate private equity deals, hoping that they can find investments as good as the big guys offer them, without paying the lush fees.
There has been some political fallout from this bold plan, as one might expect. For one thing, Mr. Borden plans to put himself at the head of this enterprise, which will start up with $5 billion out of the pension’s total $25 billion portfolio. But, according to a well-informed source I’ve spoken to, Mr. Borden has got the support of his board and has the legal authority to move ahead, even though the governor and some legislators are raising objections.
Mr. Borden commissioned a Booz & Co study which, remarkably enough, reported just the result he might have wanted. Booz says the pension could save $2 billion in fees over ten years by sourcing its own deals and paying its satellite company much less than the traditional 2-and-20 fees.
I have a little trouble with this theory. Unless I am missing something, the management fees and hurdle rate are the first things paid back to the limited partners before profits are distributed. So, unless the PE fund is a loser overall, the management fee is ultimately not a cost to the LP. So, whether the management fee is 2% or zero is irrelevant, at least in the long run.
Another problem: I’m sure Mr. Borden is smart guy, but can he really, consistently, turn up better deals than the people who have been doing this for twenty or thirty years?
In theory, that talent can be purchased, and here he offers a rationale that makes a little more sense. Mr. Borden says that right now is the best time in a generation to hire some really good PE guys and girls, since thousands of them have been laid off and have mortgages to pay. He proposes to open an office in Manhattan and staff it up with some of these hungry refugees, at least thirty professionals within the next year. Eventually, he hopes to have 60 people investing $8.7 billion, which would make the company almost as large as the Canadian Teachers’ Private Capital described above.
As an executive search guy, I have to admit that this is a clever idea. But finding and hiring high-quality people quickly and by the dozen is…well…harder than it looks. Believe me. And, everything moves in cycles. In six months or a year, the landscape could look very different. The big PEs could suddenly be doing $10 billion deals again (stranger things have happened) and then they will be in a position to hire the best people right back from under South Carolina.
Good luck, Mr. Borden.
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Ken Lambert and Nevada PERS: Plain Vanilla is Good Enough:
Ken Lambert, the CIO of the Nevada Public Employees Retirement System (NAPERS) with $22 billion AUM, runs a plain-vanilla, mostly stocks-and- bonds portfolio that would have looked right at home in the Eisenhower administration.
He has 55 percent equities, 35 percent fixed income, and 10 percent private equity (mostly legacy) portfolio, with high concentrations – no one manager holds less than 5 percent of the portfolio assets. For staff, he has one assistant. So when you consider the low fees he’s paying, and minimal staff expenses, Scott is a cheap date (but a really nice guy!).
I had a chance to talk to him recently, and he explained that his real secret sauce, if he has one at all, is his proprietary rebalancing formula.
This process was developed over several years and signed off on by his board. It’s just classic rebalancing: when one asset class becomes more expensive, whittle it down (i.e., sell high), and load up on the cheaper asset class (i.e., buy low). In practice, its’ more complicated than that, with an in-house algorithm that guides the process; but it still doesn’t require a lot of maintenance.
As the 2008 crash uncovered bargains, Lambert’s rebalancing machine kicked in full force. According to Ken, “We had a plan in advance for downturns and all we did was implement that plan in a very disciplined manner. A lot of funds pride themselves on being more sophisticated. But our philosophy is pretty simple, really, and we think simplicity is the ultimate sophistication.”
Overall the system has done pretty much what it was designed to do. The highs are not as high and lows not as low as many peer funds have experienced, and long-run returns have been decent.
As Ken said in a 2009 interview for Institutional Investor magazine, he’s “trying to do a few things right as opposed to doing lots of things not very well.”
So, how does it work? My rough calculations and public reports show them up 10.8 percent in FY 2010. Better than Yale, and about the same as Harvard. In 2008 and 2009 they had negative returns of -3.4 and -15.8 percent, respectively. Before the meltdown, in 2006 and 2007, they returned 8.6 and 14.8 percent, respectively. Note the modest losses in the bad years, compared to most name-brand pensions and endowments.
It isn’t fancy, but it works just fine for Nevada.
Ken has low political and bureaucratic stress since everyone has signed on to the system. And the general public seems to understand the process. No letters to the editor about the “risky” tactics of the state pension, which is probably fine with his bosses.
Ken’s family runs a wine business back in Northern California, where he has worked off and on. He says if the NAPERS board doesn’t need him, he can always go back to making wine. The Ledsen Winery in Sonoma, I’m told, turns out some very tasty Russian River Sauvignon Blancs and Zins.
See: http://www.ledsonwinery.com
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Connections:
Fresh news and views from aiCIO magazine:
Our friends at aiCIO magazine address the same audience we do: global institutional asset managers. They started up a year ago and are putting out a very impressive product. Of course, they cheat by using actual journalists.
Now, they’ve launched “Consultants’ Corner,” a series of video interviews with some of the top consultants in the field. Senior Editor Paula Vasan talks with, e.g., Inalytics founder Rick Di Mascio, whom we’ve mentioned in our own letter, about strengthening due diligence and identifying the most effective money managers. Also, Bob Burke of Mercer, with new research on improving equity porfolios, and John Ehrhardt of Milliman on trends in pension funding.
Lots of fresh insights and no consulting fee involved. And, you get to see Paula Vasan. Win, win, win.
Go to www.ai-cio.com On the homepage, find the “multimedia” button, which will take you right there.
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Alors! Funds of Hedge Funds may actually add some value:
Researchers at EDHEC — the French grand ecole devoted to graduate business studies — have just turned out a nice little paper that could be of practical use to many institutional investors.
“Do Funds of Hedge Funds Really Add Value?” takes up exactly that question. Smaller institutions in particular have tended to use FOHFs as entry-points to the hedge fund market, relying on the expertise of the FOHF managers to assemble a diversified portfolio of hedge funds and furnish due diligence. In return, the investor pays an extra layer of fees. And, of course, from the point of view of start-up hedge funds, the FOHFs offer an important source of funding to help them get airborne.
Recently, it’s been widely reported that institutions are backing out of FOHFs and doing more direct HF investment. So, is this because the FOHFs don’t provide any additional risk-adjusted returns to justify their extra fees? Or is there some other reason they have lost some popularity?
The authors conclude that, in fact, the extra fees are justified. The study itself is pretty intelligible and may even be useful to practitioners.
Here’s the link:
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Richard Chilton: An old-school money-manager woos the pensions
Senior reporter Christine Williamson just filed an excellent Q&A with Richard Chilton, Jr. of Chilton Investments in Pensions & Investments.
Mr. Chilton came up the hard way, as a long-only analyst at Alliance Capital and Allen & Co., before starting his own long-short fund in 1992.
He’s putting his best foot forward for P&I’s pension-manager-readers, of course, but he makes some very good points about why he’s been able to bond so successfully with those folks.
Since he started as a mutual-fund manager, he knew that every transaction would be scrutinized by the pensions who were his customers. The transparency was built in, and he’s carried that attitude forward. Chilton was SEC registered back when most hedge funds didn’t bother and set up an informative website in early Internet days.
“We didn’t gate any of our clients in 2008 during the market crisis. We were used a little bit as an ATM back then, as clients needed liquidity, but that money has come back.”
“Not a lot of people in this industry have grown up as full-fledged money managers. Very few have grown up as pension managers.”
His comments about process and transparency are cutting-edge, yet thirty years old. And date back to the time when pension funds actually expected to know what a manager was doing with their money.
One other comment, which I’ve heard from some other long- time money managers, caught my eye. In a tapped-out world, major public companies have some awfully healthy-looking balance sheets to stand behind their equity.
“In my career, there have been very few opportunities to buy blue-chip companies – and I’m not talking about mega-blue-chip companies – at such a cheap multiple. The consumer is overleveraged, the states are overleveraged, the federal government is overleveraged, but companies are in the best shape they’ve been in 50 years; lots of cash and low debt”
See link: http://www.pionline.com/article/20101115/FACETOFACE/311159987/1021
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Parting Shot:
How to Fail Conventionally as a Fund Manager:
The great John Maynard Keynes once observed that “it is better for reputation to fail conventionally than to succeed unconventionally.”
Now, a pension fund professional, wisely styling him/herself as “Anonymous” offers some advice to colleagues who want to cash in on this Keynesian wisdom.
For instance:
Keep up appearances: For simple assets, such as stocks and bonds, trade small positions around the benchmark so that you keep up appearance of being an active investor. This is necessary to justify a large internal organization to your Board, without taking any significant career risk.
Pass the ball to Beckham: Put all complex investment strategies in external funds with well-known pedigrees. If things blow up, you can always say “if the big guys can’t do it, no-one can”. Augment this career insurance with a consultancy-approved fund selection process, so
that you can show that you have done everything within your power to ensure success.
Then there’s ticking the boxes, enjoying the free lunches, and, always, making liberal use of “Best Practices.” Because, they’re the best, mate, and who can criticize that?
There is much more in “How to Fail Conventionally as a Fund Manager” in the Fall issue of Rotman International Journal of Pension Management.
The link is: http://utpjournals.metapress.com/content/lw142p2932317800/fulltext.pdf
