In this issue

Only the best for Oprah

Foundation position available

Pay, performance and politics


Comings and Goings:

Peter Adamson: Only the best for Oprah

Oprah Winfrey, the world’s first self-made female billionaire, hires whoever she needs to do whatever she wants: chefs, trainers, hairdressers, couturiers and pop-psychologists.  Now she needs a top-flight money-wrangler to set up a family office and has plucked Peter Adamson from his current job as chief investment officer for the $5 billion Eli Broad interests in Los Angeles.

The 47-year-old Stanford MBA manages the Broad foundations as well as direct investments through their family office.  And, judging from the visible part of his portfolio, he has done it very well.  In fact, he was being feted asLarge Foundation Manager of the Year by Institutional Investor magazine just as the move was announced.  Back in the 90s, he was an advisor to Robert Bass and the Bass family interests in Fort Worth.  So Ms. Winfrey will be his third billionaire boss.

The portfolio of the Broad Foundation looks a lot like one of the Big Ivys, but this is not entirely the work of Peter Adamson.  Mr. Broad was an early investor in many of the name-brand hedge and buyout firms even before he hired a CIO in 2001.  In a 2005 interview, Mr. Broad measured himself against David Swenson’s Yale endowment: “That’s our target,” he told a reporter, noting that in fiscal 2004 Yale had returned only 18 percent, whereas Broad had scored 20 percent.  In 2007, the latest available year, the foundation posted a return of about 26%.

Mr. Broad, like Ms. Winfrey, is an entrepreneur and philanthropist who started with nothing.  After cashing out his holdings in SunAmerica – selling it to AIG in 2000 – he hired Mr. Adamson to keep the Broad fortune growing at least at fast as Eli and Edythe Broad were giving it away.

Unlike Mr. Broad, Ms. Winfrey, at age 56, is very much in mid-career.  In January she’ll launch her most ambitious project yet: the Oprah Winfrey Network, cabled into 70 million homes.  Although she’s currently worth only $2.3 billion, her star is still rising, and Mr. Adamson may well rise with it.

Her new network will dish up the usual fare: e.g., In the Bedroom With Dr. Laura Berman (hummm!), Enough Already (Peter Walsh continues his quest to help people declutter their lives!), and much, much more.  Many have profited from this stratum of popular taste, but few have strip-mined it as relentlessly as Ms. Winfrey.

Shares of Discovery Communications, Ms. Winfrey’s 50/50 partner in the new network, are up about 35% since the new channel was announced six months ago.  And DISCA now has a PE of 26, while Google’s is merely 23.

At a Milken conference last year, Mr. Adamson boasted that at the Broad office things move fast.”We have one decision-maker [Eli Broad] who makes decisions in about 15 seconds,” as opposed to dealing with an investment committee who meets four times a year.

He will again be dealing with a single, decisive boss, albeit a very different one.  It will be interesting to see whether they meld as smoothly and profitably as the Adamson/Broad team.  We wish them both success in their new endeavors.


Scott Wise: An old Owl gets a new perch

Scott Wise is a Rice University alum, pitched for the Rice Owls as an undergrad, and has run their endowment for more than twenty years.  But, despite the long association and his $865 thousand compensation (in FY 2008), he’s just been lured away by a private-sector firm.

Last Fall, the Houston school spun off Rice Management Company to run its endowment, with Scott Wise as its first president.  Now he’s gone after just eight months on the job, with Rice scrambling to find a replacement.

Mr. Wise will be heading up TIAA-CREF’s new outsourced-CIO operation which, conveniently for him, will be domiciled in Houston.  The unit is described as a “fully outsourced investment office, with capabilities of managing multi-asset-class portfolios.”  His new employer is (mostly) organized as a nonprofit, although it lost its federal tax-exempt status ten years ago.  But it’s ranked number 86 on the Fortune 500 and there’s no doubt that it’s now aggressively competing in its several lines of business.

TIAA-CREF (which apparently has no easier-to-pronounce sobriquet, and badly needs one) was founded 90 years ago to provide retirement annuities to college professors.  In recent decades it has grown into a major financial services company, offering products such as mutual funds to the general public.  It claims $425 billion under management, including $26 billion in publicly-listed mutual funds.They now join the many other aspiring CIO-outsourcers whom we have mentioned in this letter from time to time.

Since taking over the Rice endowment in 1989, Mr. Wise has nearly quadrupled it, from $990 million to $3.6 billion, making it 19th-ranked in the country in FY 2009.  That growth-rate is not in Harvard/Yale territory, but it’s a respectable average 11 percent annual return, versus 9 percent for all U.S. endowments over the same span.


Charles A Skorina: Foundation position available

I have been retained to find a Director of Investments for Casey Family Programs, the nation’s largest operating foundation focused entirely on foster care.

The Director of Investments will work with the Chief Investment Officer on selection and management of the foundation’s entire private markets portfolio.

Pease call me for particulars.


Rick Dahl and MOSERS: Pay, performance and politics in Jefferson City

A few weeks ago, Rick Dahl put on his tux and stepped to the dais in the ballroom of the Mandarin Oriental hotel in New York to accept his award as Small Public Fund Manager of the Year.  It’s a swell place for a party, perched up on the 36th floor of the Time Warner building on Columbus Circle, with a sweeping view of the park through the floor-to-ceiling  windows.

We hope he enjoyed the view and the moment, after piloting his $7 billion Missouri State Employees Retirement System (MOSERS) to a handsome 18.5% return in calendar 2009.  After all, some big-time public pensions we won’t name — but whose initials are CalPERS — only managed 11.8% in the same period.

The folks covered by MOSERS don’t make any payroll contribution to their pension: it’s powered entirely by Missouri taxpayers and Rick Dahl’s investment team (with a little help from his colleagues and his boss, Executive Director Gary Findlay).  So everyone back home should have been pleased when Mr. Dahl handed them about $600 million last year over and above his 8.5% target return, yes?  Well, no.

In fact, a small, nasty tempete de merde has been brewing back in Jefferson City.

Per their employment agreements, Mr. Dahl and Mr. Findlay are supposed to get performance bonuses if and when they beat their benchmarks over a five-year span.

The system’s five-year annualized return – including the horrible fiscal 2008, when it lost 24 percent – was 4.92 percent, compared with its benchmark of 3.9 percent (based on passive investment in the same asset classes).  That translates into an extra $385 million earned by MOSERS over 2005-2009: $77 million per year that the taxpayers didn’t have to come up with.

Looks like a win-win, so where’s the problem?

The problem is that Missouri Governor Nixon and his legislature are in the middle of a political death-march: laying off employees, raising college tuitions, cutting services for the disabled.  Now they have to publicly hand Rick Dahl a $250 thousand bonus, effectively doubling his $250 thousand base salary.

The guv last year called the MOSERS bonuses “unconscionable.”  But he said he would be taking bold action to produce a compensation system that is “open, transparent and accountable to the taxpayers.”

All we know is what we read on the Internet, but the MOSERS incentive plan seems to be spelled out quite clearly on its website, which says, inter alia: “Given the long-term nature of the retirement program, investment staff is evaluated on five-year investment performance increments to eliminate incentives associated with short-term market swings… All MOSERS’ staff is subject to the risk of reduced or no incentive compensation if they fail to exceed industry benchmarks.”  Referring to last year’s bonuses (for 2004- 2008): “The fund has grown in value by $1.2 billion despite the one-year market losses of 2008.  Of that growth, $597 million is a direct result of the skill of MOSERS’ internal investment staff.  The incentive payments made to the investment staff is 1/20th of 1% of that.”

Heck, everybody’s salary at MOSERS is listed on a searchable database, right down to the penny.  There’s Mr. Dahl’s current year-to-date salary as of April month-end:  $83,436.32. And last year he made $364,308.96, including bonuses.  Looks pretty darn transparent to us.


Some of the Missouri pols seem to grasp this whole pay-for-performance idea.  The Chair of the state’s House Budget Committee, Allen Icet, said: ” Is it worth paying somebody an extra $125,000 to bring in tens of millions of dollars?  That’s kind of a no-brainer.”

Others are fuzzy on the concept.  One MOSERS board member, Kevin Simmons, who’s also the state’s Commissioner of Administration, said he would rather pay Mr. Dahl and his staff  “what they’re worth…just like we pay our state employees.  We don’t have to pay bonuses.”

Here we seem to be watching the cultural-tectonic plates of the public sector and private sector grinding up against each other.  In the former, one is paid to show up (plus seniority and overtime); in the latter, one is paid for results, and invited to seek other opportunities when they aren’t forthcoming.

This isn’t the first time the MOSERS team has been recognized as outstanding.  Two years ago, Plan Sponsor magazine named them Public Plan Sponsor of the Year.  Back then, before the 2008 meltdown, they had racked up a five-year annual return of 15.1 percent and had been consistently ranked in the top quartile among their peers.  Plan Sponsor concluded that their performance was rooted in an innovative and very flexible organizational structure.

Director Findlay, following the lead of governance consultant John Carver, overhauled the investment team’s relationship to its board about ten years ago.  The basic idea was to make the board focus on the organization’s overall purposes and leave the operating staff with broad discretion to execute.

Mr. Dahl could, for instance, hire or fire outside investment managers or make some shifts in asset allocations within a broad band, without separate board approval.  Meanwhile the board sets overall  objectives and monitors performance (including those pesky bonus plans) without meddling in the details.

“Mr. Dahl said: “From my standpoint, it is being able to come in every morning and assess whether there is an opportunity we want to take advantage of, and if we find something that makes sense, we are in a position to move on it very, very quickly.”

“Investment results at many public funds are not necessarily a reflection of what was possible to do.They are a combination of what was possible to do and the timing of board meetings.”

“The amount of time spent educating lay trustees as to the merits of these decisions, and then getting eleven – or however many happened to make up the board/committee – independent risk tolerances incorporated into the decisions lowers the probability that the decisions get implemented.”

Todd Smith, former chair of the MOSERS board, told Plan Sponsor in 2008 that the system’s entrepreneurial atmosphere suits the investment team: “I think that is probably the only reason that [Mr. Findlay] and some of the other employees are still here, because we give them that freedom.  I know for a fact that many of them have had offers to move to another job and double their salary, and they have said no.  They enjoy the environment we have here.”

Now that the politicians in Jefferson City are finding it inopportune to maintain that “entrepreneurial atmosphere,” we wonder whether Mr. Dahl, Mr. Findlay, and all of their high-performing colleagues might be reconsidering their options, and whether the next offer to double their salaries might not get a closer look.


Out and About:
Global Macro: A brief chat with Passport’s John Burbank

I encountered John Burbank, fellow San Franciscan and founder/CIO of global-macro fund Passport Capital, a few weeks ago at JFK on our way back to California.  We had a chance to chat for a few minutes about what’s on his mind and made a date to talk again soon.  He’s structuring defensive portfolios for clients in case the going gets really tough, and researching safe-haven countries for investment opportunities.

The next day I picked up the Barron’s issue featuring their Top 100 Hedge Fund list, and there was John’s Passport II fund ranked at number 20, up from number 24 last year. The ranking is by three-year annualized returns, and Passport returned a handsome 23.21 percent.  The issue (22 May) included an interview with John, and even a nice photo of him posed in front of the Transamerica Pyramid looking very macho in his trademark fleece vest.

Congratulations to him and his team on another fine year!

Here’s the Barron’s article:

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