In this issue:
- Comings and Goings
- Hedge funds are still OK
- Two CIOs speak their mind
- Where’s the money?
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Comings and Goings:
A while back we noted the quiet departure of Josh Kaplan from Drexel University in Philadelphia. He was hired with trumpet-flourishes in 2007 as their first-ever CIO. But when their interim president announced the not-bad 2009 endowment results he thanked long-time CFO Thomas Elzey and omitted any mention of the departed Mr. Kaplan, who had allegedly been running the shop.
We can now close the loop on that one. Mr. Kaplan just surfaced with a new job at Ascension Health in St. Louis as senior director of investments.
In the same week, Drexel hired Catherine Budd Ulozas to replace Mr. Kaplan, although she will not be given the CIO title. She will be director of investments and will be “working with” Mr. Elzey to oversee Drexel’s $451 million endowment. Ms. Ulozas was recruited from banking firm ING Direct in Wilmington.
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University of Florida just announced that their first CIO, Michael D. Smith, is leaving to become a partner at Global Endowment Management LP, which offers outsourced investment-office services to nonprofits. The UF endowment was down 19.2% for fiscal 2009, to $1.01 billion. But the school in its press release lauded Mr. Smith’s six-year track record and warmly wished him well in his new position.
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In chilly upstate New York, the departure of James Walsh, Cornell University’s CIO since 2006, seemed a trifle less warm. Cornell, heavily dependent on its endowment to fund operations, lost $1 billion in fiscal 2009 — about 25% — and has faced some painful cutbacks. Mr. Walsh, who had been recruited from Hermes Investment Management in London, will be returning to the UK. On his watch Mr. Walsh ramped up the investment office substantially, from 17 to 25 staffers.
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Finally, up in the Great White North, just as they were firing up the Olympic Zambonis in Vancouver,University of Toronto announced that the functions of UTAMCO, the University’s asset management company, were being folded back into the treasurer’s office. UTAMCO contributes only 5% to UT’s expenses, but payments to the university budget had to be suspended at one point because of liquidity problems.
The Globe and Mail harrumphed that this “foray into aggressive U.S.-style investing is coming to an end following a decade of disappointing returns and a $1.5 billion loss that wiped out nearly 30 per cent of the school’s pension and endowment funds in a single year.”
In 2000 UTAMCO became the first standalone money-management firm associated with a Canadian university. University of British Columbia was the second one, and so far seems to be sticking with its decision.
Hedge funds and private equity (23% and 16% of the portfolio, respectively) were singled out in a critical report as the “U.S.-style” villains, although UT also made bad bets on the strength of the Canadian dollar.
UT president David Naylor said that UTAMCO’s leader will now work under the direct supervision of the school president. Other reports say that William W. Moriarty, the current CEO of UTAMCO, has been invited to become CIO within the school administration.
Mr. Moriarty was recruited in 2008 from RBC Capital Markets, the investment banking arm of Royal Bank of Canada. His predecessor at UTAMCO, Felix Chee, then became an advisor to China’s sovereign fund, the $200 billion China Investment Corporation.
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Endowments Still Heart Hedgies:
NACUBO (National Association of College and University Business Officers) has finally released its endowment study for the fiscal year ending June 2009. The report (now co-authored by Commonfund) was unveiled on January 30 at a New York conference keynoted by Dr. David Swenson, architect of the now slightly-less-shiny Yale Endowment Model.
That stomach-churning and (they hope) unique year drew so much attention to the endowment world that NACUBO issued an early-bird version of the report back in December, which we mentioned previously.
Now that we have a good, clear look into the rear-view mirror, does it reveal anything that an informed observer didn’t already know? More important: what does it portend for the future that anyone can still do anything about? The endowments still hold over $300 billion and are among the largest investors in alternative assets. How they react to this experience will have major consequences for alternatives managers worldwide.
Well, the losses have now been precisely calculated: the 842 institutions responding racked up average declines of 18.7% in FY 2009. That’s a little less dire than might have been inferred from last fall’s headlines when Harvard had lost 27.3% and the construction cranes stood idle on the banks of the Charles. Dr. Swenson’s own Yale endowment lost an only slightly-less-abysmal 24.6%. As the report details, mid-size and smaller endowments with less volatile portfolios generally had smaller losses than the marquee-name institutions. Overall, the endowment CIOs are now looking at what their colleagues over in the athletic departments call a “rebuilding year.” Or three, or four.
Institutions surveyed lost, on average, 22.5% just in the awful first quarter alone (July 2008 to Nov 2008). That means that most of them participated in the nascent market recovery, trimming their losses to just 19% by the end of the fiscal.
When the dust cleared at the end of June the percentage of alternative assets in large (over $1 billion) endowment portfolios stood at 61%, a new high, and up from 52% in FY 2008. But this can’t be interpreted as just more love for the category. We know that a lot of those big endowments found themselves embarrassingly illiquid due to lock-ups (or capital calls) from those same alternative managers, and had to raise cash by selling liquid stocks and bonds and thereby nudging up alternatives as a percentage of AUM.
Still, looking at the longer-term trend among endowments of all sizes, the allocation to alternatives has risen remarkably, from 11% just six years ago to 51% as of June. And, despite pangs of buyer’s remorse among a few hard-hit institutions, there is no reason to think that the trend is reversing.
Cambridge Associates’ hedge-fund honcho, David Shukis, speaking to reporters at the NACUBO conference, said that most hedge-fund withdrawals were by private investors such as family offices. But for the most part, he said, long-term institutional investors such as endowments maintained their commitment to hedges. That doesn’t mean they were happy, however. Mr. Shukis noted that his clients expected – demanded – improvements in transparency and fee structure, with more flexible lockups. But the 2/20 fee standard still hasn’t crumbled.
For instance, Ralph Alvarez of Florida State University (with a $400 million endowment) reported at the same conference that “We tried to negotiate fees but we found the quality of managers we invested in would not negotiate.”
Mr. Shukis emphasized that the smaller hedges are still in the game. “We are still actively looking for newer managers and exploring ways investors can diversify their portfolios.” He noted that smaller managers “are dedicated to succeed and can participate in smaller transactions. There are opportunities out there but people need to be selective. He said that Cambridge prefers to see a year or more of performance from new managers, although performance numbers are only part of their due diligence, which includes a multitude of qualitative factors as well.
Parts of the NACUBO/Commonfund report are available to the public.
See:
http://www.nacubo.org/Research/NACUBO_Endowment_Study/Public_NCSE_Tables_.html
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CIO Viewpoints: Lou Morrell of Wake Forest and Sally Staley of Case Western Reserve:
According to Lou Morrell, the former CIO of Wake Forest University, the “endowment model” is not dead, but CIOs must have greater freedom to react to events. And in the future, successful CIOs will spend more time managing the money as well as the process.
In an article in FundFire (a Financial Times property) on February 25, Lou points out that as universities rely more heavily than ever on high returns from their investment portfolios, they have to be more focused on the issue of liquidity. The timing and severity of the 2008 meltdown could not have been predicted, but the lack of portfolio liquidity made the problems for colleges and other institutions far more severe than should have been. And it’s important that they learn the right lessons from the experience.
Endowment and foundation portfolios “should be global in nature and include asset classes such as commodities and currencies. It should also have an opportunistic tactical component that is dynamic in nature and allows for dealing with volatility and extreme events while enabling the fund to optimize its return potential.”
Lou has a track record that should command attention. He joined Wake Forest as CIO in 1995 and formally retired in 2009, but still runs a $300 million tactical sub-fund for them until June 2010. Over his ten-year span he delivered an annualized return of over 11%, handsomely beating the S&P and the MSCI.
Lou, who stuck to equities, long-only mutual funds and index ETFs in his sub-fund, had the liquidity needed to meet all of the endowment’s spending commitments when the storm hit last year.
Lou will have more to say on this subject at the Terrapinn Asset Allocation Summit in New York on May 17-18.
See: http://www.terrapinn.com/2010/aasusa/
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I had a chat last week with Sally Staley, CIO of Case Western Reserve University in Cleveland, who seems to be on the same page as Lou Morrell regarding liquidity and maintaining close day-to-day tactical flexibility in managing her endowment pool.
Ms. Staley and her team were honored by Institutional Investor magazine as “Large Endowment of the Year for 2009.”
The award noted that Case stayed significantly underweight to equities and built cash position to bolster liquidity
Ms. Staley’s team also developed a cutting-edge proprietary system that provides an almost-real-time view of the asset allocation, including the risk versus benchmarks and the daily cash position.
Case’s 19% decline in the last fiscal year was better than many of their peer institutions, and they avoided most of the liquidity problems that mauled the Ivys. It also helped that Case only draws about 10% of its budget from the endowment and didn’t have to face dramatic spending cuts. The endowment now stands at $1.5 billion as of 2009 year-end, compared to $1.4 billion in 2008. That’s an 8 percent increase calendar-year to calendar-year, and a very respectable win after last year’s vertiginous drop.
I asked her how she did it.
She said, “First, of course, I work with the investment committee to set the policy statement, allocations, and spending policy. But on a day-to-day basis I’ve been given considerable discretion about how to meet my goals.”
“About five years ago I hired a risk manager who built detailed data management capabilities and helps us understand all the “what ifs” under various scenarios.”
“The joke was that I wrote a terrible job description,” Sally said, “but I said that I would know what I wanted when I saw it. Fortunately, the individual we hired knew what we wanted and convinced me that he was the man for the job. Once I interviewed him, I agreed. Along with that hire we built internal data capabilities to report on an almost real time basis on our allocations by asset classes, managers, holdings, liquidity windows, exit notices and, of course, performance data. As a result, we can see where we stand on a daily basis and have a relatively clear picture of what we can do and how fast we can do it.”
Finally, they are improving their in-house investment capabilities, so that they don’t have to depend solely on the performance of outside funds and managers. They have direct relationships with certain markets and can take steps to hedge and optimize some risk/return strategies.
“Here’s one example,” she said: “Our staff looked at the performance of our long-only managers and determined that, in one case, we could replace the manager with a structured product which would give us far more upside potential with no more downside risk.”
Long term, Sally, like many investment managers these days, has a whole new respect for long-tail risks: the dreaded Black Swans. She emphasizes better management of volatility; the need for a larger liquidity cushion. And, of course, Rule One: Don’t Lose The Money.
“It’s clear that “equity beta” hit us hard in the downturn,” she said. “So, we have to consider what investments and capabilities we should have going forward if this turns out to be only the beginning of the roller-coaster ride. We are taking a hard look at all investment options on a global basis. Currencies, options, structured products.”
“My day starts with one thought.” she concluded. “I can always do better”.
And, if you’re in Rio next month, you can catch Sally when she presents at the Brazil Investment Summit, a hot event for all of you readers focused on the BRIC sector.
See: http://www.terrapinn.com/2010/bis/SPK-ms-sallyj-STALEY.stm
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Recent Reports and White Papers That Are Worth a Look:
Carbon 360 LLC has issued Capital Introduction Trends 2010, which surveyed third-party marketers about where they expect to find hedge fund money.
The report opined that institutional investors would be more receptive to newer managers, that fee structures would remain stable, and that more money would be moving from foreign investors into the U.S. The European share of investment money will be large, but probably declining relative to the rising Asian share.
80% of respondents expected to obtain funds from institutional investors. 67% were looking to family offices and/or pension funds. 58% expected to do business with funds of funds. Only 21% thought they would be selling to wealthy individuals.
Geographically, Europe was expected to be the major funding source by 60% of respondents, closely followed by North America. Only 12% were looking to Asia, although the share of Asian money was up from previous surveys.
The full report is available here:
https://www.carbon360.com/viewdocument?documentID=7385
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Casey Quirk, the Connecticut-based consulting firm, issued their Consultant Search Forecast 2010 (co-authored with eVestment Alliance). It surveys 70 pension and endowment consultants, the gatekeepers who find and vet outside investment managers for institutional investors.
The good news is: more money for everybody — both traditional asset classes and hedge funds. “Investment consultants expect North American institutional investors to award nearly $430 billion in mandates to asset managers during 2010, up 13% over 2009.
The good/bad news: increased turnover in consultants means that more of the managers they presented to institutions will be fired. But others will have to be hired to replace them.
Other findings:
Even though we keep hearing that inflation is a dead issue, 80% of respondents think that inflation-protection will be a key theme for investors.
80% also expect strong search activity for hedges; only 50% see equal interest in private equity or real estate.
70% of respondents see a shift toward fund of funds vehicles versus direct investment in hedge funds or private equity.
The entire study is here:
http://www.caseyquirk.com/docs/research_insight/Casey%20Quirk%20eA%20Consultant%20Survey%202010.pdf
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Parting Shot: Hedge Funds! Is There Anything They Can’t Do?
The extraordinary power wielded by these sinister entities continues to surprise even sophisticates like us.
Item: In Greece, according to newspaper reports, the government has sicced their intelligence service on foreign hedge funds. EYP (the Greek version of the CIA) is hunting down hedgies who may have been aggressive sellers of Greek bonds or speculators in related credit default swaps. The press and the government are pretty sure that these foreign devils are behind all their troubles.
The Wall Street Journal last week reported that, “Greece was the principal author of its own debt problems, “with a lot of help from their EU colleagues who “turned a blind eye to its flouting of financial rules” But they’re probably in the pay of the anti-Greek conspirators.
We hope the Greek James Bonds are only licensed to divert blame, but we wish them luck.
