Comings and goings, compensation, pension fund performance
Myra Drucker’s amazing CIO academy
High hedge fund returns may be an illusion
The strange fate of Dr. Barr Rosenberg
From the Publisher:
In my day job I do retained executive search work for endowments, foundations, pension funds and institutional money managers. So, referrals to search assignments are always welcome. Call me anytime.
You’re looking at my night job: The Skorina Letter, which now has several thousand readers among chief investment officers, portfolio managers, and industry professionals.
Our focus is on the human side of the business: who’s hired; who’s…um…left to pursue other interests; how much they make; and what they’ve accomplished. And, without encroaching on the Journal of Finance, we try to get some sense of how they look at the challenge of balancing risk and return in an uncertain world.
Comments and suggestions are welcome; corrections are respectfully considered; and rebukes are patiently borne.
And, may all of you have a very happy Christmas. Thank you for reading our little missive.
The New New Normal?
Our Recovery Summer didn’t pan out all that well for most of the country. But here and there are signs that we are clambering up out of the abyss. Some execs I know at Franklin Templeton told me the other day that their current assets under management — $630 billion dollars — now exceed their pre-crash high. An impressive rebound.
Comings and goings:
Timothy Barrett – A public pension CIO goes corporate:
Timothy Barrett quarterbacked the San Bernardino County, California pension fund (SBCERA) to national recognition as Mid-sized Public Plan of the Year in 2007, but his board became restive after the fund lost 20 percent in FY 2008. That the losses were typical in that period didn’t make it any easier for elected politicians to endure, especially in light of ongoing public finance troubles, high unemployment, and layoffs throughout California. There seems to have been some conflict, for instance, over how much bonus, if any, Mr. Barrett was entitled to this year (for performance in FY 2009) as executive director and chief investment officer of the $4.9 billion fund.
Some reports indicate that he was contractually entitled to as much as a one hundred percent bonus on his $325 thousand base salary, which he has not received. In any case, Mr. Barrett resigned in October and has accepted a job as CIO of Eastman Kodak’s $11.3 billion corporate pension fund in New York State, beginning November 1st.
John C. Lane, Kodak’s previous CIO, left earlier this year to become Director of Investments (i.e., chief investment officer) of the $68.3 billion Ohio PERS state pension fund.
Timothy Carlson – Into the fray in Frankfort:
The $13 billion Kentucky Retirement System has a new chief investment officer: Timothy J. Carlson, who started work in Frankfort two weeks ago. He displaces Brent Aldridge, the pension’s Director of Alternatives, who had been holding down the fort as interim CIO since July, when the previous CIO resigned.
Adam Tosh, the previous CIO, was hired away by investment consultant Rogerscasey, where he is now Managing Director, Investment Solutions. Mr. Tosh’s last weeks in Kentucky were clouded by some questions about fees paid to placement agents. It seems that, in a previous job in Pennsylvania, he’d had some contact with one of the agents currently under scrutiny in Kentucky. Everyone is at pains to say that no actual wrongdoing is attributed to Mr. Tosh, and that they’re only concerned about the appearance of impropriety. But, since both the State Auditor and the SEC are still looking into KRS practices vis-a-vis placement agents, this remains a live issue in Kentucky, about which everyone is understandably sensitive.
Mr. Carlson, the incoming Kentucky CIO, is moving in the opposite direction from Mr. Tosh: from a consultancy to a CIO slot. For the last year he’s worked as a principal at EnnisKnupp in Chicago. He earned his MBA at Drake University in Iowa, and worked as a senior investment officer at Iowa’s state pension fund. Before joining EnnisKnupp, he also held CIO jobs at both the West Virginia Investment Management Board and the Marshfield Clinic in Wisconsin.
Mr. Tosh’s base salary had been capped at $168 thousand, but as KRS opened the search for his successor, they decided o waive the cap so that they could negotiate a competitive salary with the candidate. The only other uncapped position at KRS is that of Mr. Carlson’s new boss, Executive Director Mike Burnside. We can reasonably surmise, then, that Mr. Carlson’s base is north of $168 thousand, probably with performance bonuses attached.
As a headhunter, I was interested in Kentucky’s executive search selection process, which was laid bare in meeting minutes. In August, they picked from among four search firms: Butterfass (New Jersey), EFL Associates (Colorado), Hudepohl (Ohio) and the big guns from LA: Korn/Ferry International (California).
Director Burnside noted that Korn/Ferry’s fees could run to $100 thousand, significantly higher than the other three, making it a no-go. And Butterfass was too inexperienced in public pensions. The board were already familiar with Hudepohl – they had previously recruited Mr. Burnside himself (who recused himself from the vote on that account) – but Hudepohl couldn’t start the search immediately. That left EFL, which has recruited top pension officials in Wyoming, Oklahoma, and Pennsylvania; and who was ready to go. I also note that all the recruiters claimed that it was a buyers’ market for public pensions. They see a horde of out-of-work investment managers from the private sector who are willing to look at jobs they consider less-compensated but more stable.
One hundred twenty applicants were winnowed down to seven finalists, from which the board picked Mr. Carlson. And all in about ten weeks. KRS wanted a new CIO in place by January, and EFL gave them one by November 30.
Mansco Perry, the new chief investment officer at Minnesota’s Macalester College, called me the other day to say that he only wished that he had been making as much as I reported when he was CIO at the Maryland State Retirement Agency. His base was, in fact, about $230,000, not $333,000. We regret the error.
We can also report that Mansco is getting re-acquainted with his snow blower out in Minneapolis.
Myra Drucker’s amazing CIO academy:
This summer when I was doing some work for Joseph Boateng, chief investment officer of the $2 billion Casey Family Foundation, he told me a remarkable story about his mentor back at the Xerox corporate pension group, a woman named Myra Drucker. Ms. Drucker was the CIO, and Joseph’s boss.
“Myra told all of us in the investment office that she would consider her job a success if she accomplished just two objectives: first, meet her performance targets for the pension fund; second, develop all of us so well that each of us could go on to become a CIO. And you know what, Charles? We did. We all made it to that level. She is a role model I still look up to.”
I decided to get the whole story from Ms. Drucker, and when I called, she graciously took the time to tell it.
MD: “Today, in addition to Joseph, our alumni include Mary Cahill, who’s CIO at the Emory University endowment; Madoe Htun at the William Penn Foundation; and Matthew Wright at the Vanderbilt University endowment. I’m proud of all of them.”
“Actually, you could add Connie Caperella whom I trained when I worked at International Paper. She went on head the corporate pension at Pitney Bowes.”
CAS: “That’s an impressive record, Myra. Exactly how did you do it?”
MD: “First, obviously, you hire the best people you can find. Every hiring decision should be a big deal that gets your full attention.
“Then, push them. Make them stretch and take on new assignments. I rotated my people among asset classes. Nobody just sits at a fixed-income desk without ever having to deal with equities or alternatives. For every asset class and major initiative, I made sure there were two team-members assigned: a lead and a back-up.
“But it goes beyond just portfolio management. Everybody is exposed to the operational and administrative tasks. Everybody has to understand fund accounting.
“I know that some fund managers think they should be the sole interface with the board or trustees, and reserve that job to themselves. I think that’s a mistake. I made sure my people were in meetings with the board-members, and made presentations to them. “Managing” a board is a key, make-or-break skill for a fund manager, but if you’re not taught how to do it, how can you ever operate on that level?
CAS: “That sounds great for your staff, Myra, but what’s in it for you? With all that talent getting developed, didn’t you worry about having a lot of aspiring CIOs with no place to put them? Didn’t they all get happily hired away as fast as you could train them?
MD: “I think that’s the wrong way to look at it, Charles. Do you want to keep people less productive, just so they’ll stick around? Maybe you can’t measure it precisely or directly, but I’m confident that challenging and training my people gave me a higher-performing team and, ultimately, stronger investment returns, even if I thought I had to accept higher turnover. If you have great people, recruiters like you will find them and make them offers. But my policy was that nobody had to be secretive about that kind of thing. If they had other opportunities, I wanted them to know we could sit down and talk about it, and I would offer whatever advice I could.
“I think, all things being equal, if people are being challenged and engaged in their jobs, it will take a pretty big offer to hire them away; and meanwhile they’re going to give you the best they’ve got. That’s been my experience.”
These days, her board-memberships amount to a full-time job. Myra sits on four boards and she says she loves it.
Reflecting on what she said, it seems to me that the whole doctrine of leadership-development and succession planning is part of the DNA of corporate America, but seems to have less resonance among non-profit institutional investors.
Corporate examples abound. I spoke recently to Salim Shariff, who runs the corporate pension at Weyerhaeuser. He said that succession-planning is one of the main items he’s judged on when calculating his bonus.
Or consider the case of Hewlett-Packard. When their corporate pension CIO – Ken Frier – was recently hired as CIO of the Stanford University endowment, H-P moved one of his direct-reports into his job almost immediately. Gretchen Tai was promoted from deputy CIO to CIO as a matter of course. When I spoke to Ken, he said that he was proud that an investment professional he’d groomed was ready and able to move into his job.
There are a few recent instances of internal succession in non-profits. At the Ford Foundation, Eric Doppstadt was moved up into the CIO slot when Linda Strumpf left for the Helmsley Trust. And at the NYU endowment, when long-time chief investment officer Maury Maertens retired, Tina Surh moved into the position, albeit after a longer wait than should have been necessary given her experience and credentials.
But these are exceptions to the rule. Endowments, foundations, and public pensions usually look elsewhere for their executive directors and chief investment officers.
I don’t want to get too grandiose here, and suggest that a mid-sized non-profit investment office with a handful of professionals should try to operate like GE or Hewlett-Packard with regard to development and succession.
(Besides, I certainly don’t want to discourage any boards who prefer to recruit outside the organization and need the services of a search firm. Nothing wrong with that, at all. My contact information is prominently displayed below, and my door is always open.)
But I wonder if the directors, trustees, and investment committees who make policy for those non-profits are thinking about this stuff at all. CalPERS, for example, has about a hundred professionals on staff. And I know for a fact that they don’t have a formal professional development/succession-planning program worth mentioning. I believe it’s been discussed, but nothing has ever been implemented. They had plenty of money to spend on that Versailles-scale headquarters in Sacramento, though. I’m just saying…
Hall Capital Partners on picking outside managers:
Mary Campbell at FINalternatives interviewed Simon Krinsky co-director of portfolio management at Katie Hall’s Hall Capital Partners here in San Francisco. They focused on how to evaluate investment managers, a mysterious art that we’ve discussed before in this letter. Mr. Krinsky makes some fresh and cogent points about how it’s done.
“What we’re looking for is not only the ability to earn good returns for investors, but we need to understand the drivers of those returns”
Big hedge funds are less risky. Or are they?
Two recent publications discuss the relationship between the size of hedge funds and their performance, but they seem to point in opposite directions.
First Byron Wien, a Wall Street elder statesman whose views are always worth hearing, talks about the growth and prospects of the HF industry. He notes that most of the HF money over the past year is flowing into the largest funds, those over $5 billion AUM. This is consistent with the view that institutional money has been flying to safety, and investors judge these big firms to be less risky.
Spring Mountain Capital’s Haim Mozes and Jason Orchard have studied a mountain of data and concluded that the biggest hedge funds are both risky and poor alpha-producers.
Their thesis may cheer the smaller fund managers:
“In their quest for safety, investors have been willing to forego the higher returns that could be achieved with investing in smaller hedge funds for the perceived greater safety of investing in larger hedge funds. This paper provides evidence that this approach may be misplaced,”
In his briefing, Mr. Wien says that “More than 90% of the $9.5 billion net inflows into hedge funds in the second quarter went into funds with more than $5 billion under management. And during the first half of 2010 nearly all of the $23 billion invested in hedge funds has gone into funds with more than $5 billion in assets.”
But Mozes and Orchard conclude that those investors piling into the biggest funds have missed something:
“The larger a fund’s AUM grows, the higher its systematic exposure and the lower its alpha generation and ability to exploit volatility, [and] the worse it is likely to perform in a poor environment for equities and hedge funds. What appears to mislead investors into believing otherwise is that significant fund-raising by larger hedge funds leads to stronger performance in the near-term, and this performance may serve to validate the fund’s claim that it can continue generating strong performance even at much higher AUM levels. However, the fund-raising effect will not persist indefinitely. Therefore, we conclude that if the mandate of investing in hedge funds is that the investment should provide absolute returns that can be sustained even in weak equity markets and when other hedge funds struggle, very large hedge funds would appear increasingly unlikely to be able to fulfill that mandate.”
High hedge fund returns may be an illusion:
One more study that neither large nor small hedge fund managers will enjoy very much was published on the Web last year and updated on August 29. It has been accepted for the Journal of Financial Economics, but these days researchers don’t have to wait for the hardcopy to circulate their ideas.
Leaving aside the issue of fund size, Ilia D. Dichev at the Goizueta Business School at Emory University and Gwen Yu of the Harvard Business School, conclude that real-world returns for most hedge funds, big or small, are not very good. In fact, they are making just a hair more than Treasuries.
Hedge funds advertise performance data from inception, year to year, or monthly. But most investors join in crowded groups at irregular intervals (i.e., they “chase returns”). And, if you look at returns for the intervals in which most investors are actually in the funds, they are not impressive.
They write: “using factor models of risk and the estimated dollar-weighted performance gap, we find that the real alpha of hedge fund investors is close to zero. In absolute terms, dollar-weighted returns are reliably lower than the return on the S&P 500 index, and are only marginally higher than the risk-free rate as of the end of 2008. The combined impression from these results is that the return experience of hedge fund investors is much worse than previously thought.”
I was alerted to this study by Simon Lack on the AR (Absolute Return+Alpha) website. Mr. Lack, who worked at JPMorgan for 23 years, was impressed. If you don’t want to plow through the paper, you can read his summary: ‘Hedge fund IRR has been pathetic’ Nov 23, 2010 AR magazine.
AXA Rosenberg – Rebuilding a venerable quant shop:
There has been a final round of management changes at the beleaguered quant manager AXA Rosenberg in Orinda, California, where AUM has plummeted from $70 billion to $33 billion over the past year.
Jeremy Baskin, a Northern Trust veteran, has been tapped to replace Stephane Francois Prunet as CEO.
From 2003, Mr. Prunet was both CEO of AXA Rosenberg and global head of equities for the parent company, AXA Investment Management. The1987 graduate of the elite Institut d’Etudes Politiques de Paris will now ascend to a vaguely-described job as an adviser to the CEO of AXA IM, which operates outside the U.S. and claims $500 billion AUM.
Completing the reset of senior management, Will Jump has been moved up from senior research director to chief investment officer, succeeding William Ricks, who resigned last month. And, the firm hired its first chief risk officer, bringing in Anne Chefter, who had the same job at Fortress Liquid Markets. All of the above take up their duties in January.
Mr. Baskin, NT’s top quant manager, appears to be a good fit. He managed $24 billion as head of their Active Equities Division, responsible for all global fundamental and quantitative management and research. He’s a Northwestern/Kellogg MBA with a BA from Wesleyan.
Needless to say, all of the new guys will have their work cut out for them as AXAR tries to restore its crumpled reputation and lure back some customers.
All this commotion stems from a “coding error” in the firm’s trading programs which they were slow to detect and even slower to fix or to disclose to investors. When the parent company sent in a SWAT team from Paris to sort it all out, they announced that the chairman and founder Barr Rosenberg, abetted by Tom Mead, head of the quant research group, had squelched internal discussion and disclosure of the problem for months. Since this spring Dr. Rosenberg and the other incumbent senior managers have been pushed out one by one and AXA has now acquired 100% control of the battered firm.
And throughout the spring and summer, the big customers have peeled away as the bad news emerged.
The Ohio SERS pension pulled out a $25 million small-cap mandate. The Florida Retirement System exited with $400 million of large-cap funds. Schwab shut down four funds run by AXAR under Schwab’s brand-name, with total assts of over $1 billion. And so on. The investors who didn’t drop AXAR immediately have put it on watch lists from which it could be a short slide out the door.
AXAR has stated that a thorough review will eventually detail how the glitch affected client money, but it hasn’t yet been concluded or released and it isn’t clear when it will be.
The strange fate of Dr. Barr Rosenberg:
We should pause to contemplate the strange fate of Dr. Barr Rosenberg. He is not quite so well known as some of his peers in modern portfolio management. He didn’t win a Nobel like Markowitz or Sharpe, or get a theorem named after him. But he was there, Zelig-like when a lot of pivotal things were happening, and had a hand in many of them.
In the late 60s, John MacQuown set up a special unit inside the Wells Fargo trust department in San Francisco to work on cutting-edge financial products. Although he was a mechanical engineer with a Harvard MBA, he’d spent time communing with the finance professors at the University of Chicago, and brought their new thinking about portfolio theory to the West Coast. He assembled a dream team of consultants including Fama, Scholes, Sharpe and Black. He also recruited a smart young Berkeley professor from across the Bay: Barr Rosenberg.
By 1971, the Wells group rolled out the first successful commercial product based on the Chicago theories: a computerized index to track the performance of all NYSE stocks. (John Bogle’s Vanguard 500 Fund didn’t open until 1976). The Wells group was later bought out to become Barclays Global Investors (BGI), now king of the index ETFs. (Last year, of course, BlackRock bought BGI from Barclays Bank for $13.5 billion, when the bank needed to raise cash in the wake of the credit crisis.)
Dr. Rosenberg prospered as a consultant in the 70s, working out some new ideas in his Berkeley basement. He founded the consultant group BARRA and extended William Sharpe’s notion of “beta” risk by blending in financial data about individual firms, their industry sectors, etc, to get a new, beta-on-steroids, marketed as “Barr’s better betas.”
William Patterson, in his excellent recent book, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, described BARRA in 1985 as the axis mundi of the quant universe, where some of the quant stars of the 80s and 90s learned their trade, including Peter Muller, who went on to become top quant at Morgan Stanley.
In 1985, Dr. Rosenberg moved further up the food chain by starting his own asset-management company, most of which was eventually bought by AXA in 1999, making its founder a wealthy man (and freeing him up to pursue his lifelong interest in Tibetan Buddhism).
In his book Mr. Patterson notes that in recent years Dr. Rosenberg has “drifted away from the worldly pursuit of riches and has been teaching courses on Buddhism for the Nyingma Institute in Berkeley.”
In fact, he is the co-dean of the Nyingma Institute, and apparently hard at work spreading his faith. This fall, according to the course catalog, he taught “Entering the Bodhisattva Way,” expounding a 1,400-year-old book by the Tibetan sage Shantideva.
According to AXA, Dr. Rosenberg (with Mr. Mead) bore primary responsibility for covering up the coding problem, for which he was ejected in June. Yet, the firm’s CEO, Mr. Prunet, remained in place for five more months.
A bystander might suppose that the responsibility for day-to-day operations of the firm falls on the CEO, rather than on a semi-retired chairman who seems currently to be more interested in ancient Tibetan texts than in financial algorithms. Yet Mr. Prunet is still employed by AXA, if only nominally, while Dr. Rosenberg has been publicly shamed and shunned.
Perhaps this will all become clearer as AXA releases a complete story of what happened and starts the long, slow task of rebuilding its customers trust.
Public pension performance: a preview:
In our last letter we offered a roundup of annual results for some of the big endowments. We thought it might be useful to look at the performance of some of the big state-level public pensions in the same time frame.
The pensions are more various than the endowments in their fiscal years so, to avoid apples-and-oranges comparisons, we’ve just included the biggest who end their fiscal year on June 30 and omitted others. Although the books closed five months ago, in some cases audited numbers haven’t been made available until the last few weeks. We arbitrarily list the twelve largest by AUM with a June 30 closing, and rank them by return from July 1, 209 to June 30, 2010:
Rank/Plan Name/(AUM in $ billions)/ % Investment Return
01 New Jersey (Div of Pensions and Benefits) (AUM: 69.9): 14.8%
02 Pennsylvania School Employees (AUM: 49.1): 14.6%
03 North Carolina (AUM: 65.3): 14.4%
04 Virginia (VRS) (AUM: 47.7): 14.1%
05 Florida State Board (AUS: 118): 14.0%
06 Ohio State Teachers (AUS: 56.9): 13.5%
07 California Public Employees (CalPERS) (AUM: 200.5): 13.3%
08 Wisconsin Investment Board (AUM: 69.1): 13.3%
09 Washington State Board (AUM: 52.6): 13.3%
10 Massachusetts (PRIM) (AUM: 41.3): 12.8%
11 California State Teachers (AUM: 129.8): 12.3%
12 New York State Teachers (AUM: 76.8): 12.1%
S&P 500 01Jul2009 to 30Jun2010 – % change: 11.6%
Total AUM: $977 billion
Weighted mean investment return: 13.4%
The first obvious point is that this is an awful lot of money. Even with several big ($50 to $100 billion) pensions omitted, this dozen controls nearly a trillion dollars.
Second, every one in this group beat the S&P, most by a handy margin. That’s a crude benchmark for these variegated portfolios, but it still gives some perspective. With two exceptions, all of these funds have an allocation to equities between 40% and 60%, so clearly the other half of the portfolio was working hard for them this year.
The two outliers (Penn School and Washington State Board, with 28.4% and 36.6% equities, respectively), are not far enough off the mean to suggest that lower exposure to stocks was all that helpful.
Let’s recall how the endowments looked in the same period:
Our 18 big endowments in the last newsletter (archived online at our website) totaled $161 billion AUM, and booked an average return of 13.0%. But the spread around the mean was much larger, ranging from a stellar 18.9% at University of Chicago, down to a glum 8.0% at NYU. The pensions are much more tightly clustered. And, among the endowments, seven — almost half — booked returns below the S&P, including Harvard, Brown, MIT, Rice, Dartmouth and Yale, in addition to NYU.
Some of our readers will no doubt have deeper insight into how these two groups of investors managed to both converge on a similar average return, while markedly diverging as to the spread around the mean.
No pension in this group did nearly as well as University of Chicago. None of them did nearly as poorly as NYU.
Our friends at Pensions & Investments will be issuing a complete report on public and corporate pension performance in January, including data on asset allocations and returns to various categories. The pros will want to dig into that, but we thought our little preview might be of interest.
We omitted one of the biggest, Texas Teachers, with $100 billion AUM, because it has a fiscal year ending September 30. They reported a 12.6% return for that period and seemed pretty happy about it in their press release. It’s a respectable number and exceeded their own benchmarks and the S&P which in the FY ending 30 September climbed 10.2%.
The results triggered a $9.7 million bonus for the Texas investment crew. Chief investment officer Britt Harris will receive a $444,553 bonus on top of his $480,000 base salary. And, since they had a positive result in FY2010 (after losses in 2009), they are also eligible to receive deferred bonuses earned in prior periods. So, Mr. Harris also will get another $343,515 based on the fund’s 2009 performance.
Now look again at the performance of Penn School Employees, above. They earned 14.6% for their teachers, versus just 12.6% down in Texas. Will they be rewarded? You bet. The Penn investment team will get to divide up a total of $220 thousand among 26 people. Only four of those 26 have base salaries over $200 thousand. CIO Alan VanNoord makes $254 thousand. So the Penn CIO will get a bonus of maybe $10 thousand or so, while his Texas colleague gets $445 thousand (plus arrears).
And, needless to say, some Pennsylvanians are pretty het up about this extravagance. The Patriot-News reports that Governor Rendell protested the awards, noting that most state employees haven’t had a raise in three years. There has also been some grumbling among retired teachers in Texas re bonuses there. But, all in all, Texan culture seems to be less resentful about rewarding performance. Not to mention that the Lone Star State is in better economic shape, with unemployment at 8.1% versus 8.8% in Pennsylvania.
The Patriot-News says that Penn’s in-house investment shop costs $7.5 million per annum, while fees paid to outside managers total $510 million. It’s likely that those external managers who reap 98% of the investment budget make more than their in-house counterparts. But their compensation isn’t public knowledge and doesn’t incite the envy of the other Penn bureaucrats.