Shawn Wischmeier’s big money move, more Performance for pay, Australian “supers”, the wave of the future:

Our performance-for-pay index revisited

More pay, less pain: Shawn Wischmeier is new CIO at Margaret A. Cargill Philanthropies

Are Australian “supers” the future of pensions? Interview with Hazel McNeilage, former COO of QIC



First things first: When we screw up – as we occasionally do – we try to correct ourselves early and prominently.

In our last newsletter we indicated that Erik Lundberg became chief investment officer at University of Michigan in October, 2007. In fact he arrived much earlier, in October, 1999.

We regret the error.


Comings and Goings:

Onward and upward with Shawn Wischmeier: Latest move makes him CIO of $6 billion US foundation:

Shawn Wischmeier, who has been chief investment officer of the $72 billion North Carolina Retirement System for just 19 months, has resigned to become CIO of the Margaret A. Cargill Philanthropies in Minnesota. Recently augmented by an inheritance, this group of foundations is currently valued at about $6 billion.

Mr. Wischmeier’s new salary was not announced, but CIOs at other top private foundations with more than $5 billion AUM typically pull down between $700 thousand and $2 million.

North Carolina Treasurer Jane Cowell announced on February 17th that he will be leaving Raleigh as of March 2nd.

In his new job Mr. Wischmeier will manage the assets of the Anne Ray Charitable Trust, the Margaret A. Cargill Foundation, and the Akaloa Resource Foundation. With a recent windfall from the estate of Margaret A. Cargill, they are now collectively one of the top ten American Foundations, comparable in size to the Packard, MacArthur, and Pew Foundations. Ms. Cargill, who died in 2006, was one of the eight heirs to the Cargill grain-trading fortune.

The Margaret A. Cargill Philanthropies are led by Christine Morse, and Mr. Wischmeier is only her latest acquisition. Anticipating the windfall, she’s added 30 new staff-members over the past year, with more to come.

Ms. Morse was a financial executive at Cargill Corporation before going to work at the family office, where she met Ms. Cargill. She is currently CEO and co-CIO of the Margaret A. Cargill Foundation. She and co-CIO Paul Busch earned $589,732 and $535,409, respectively in 2010, when the foundation had assets of only $1.97 billion.

Two short years ago, as CIO of the PERF pension in Indiana, Mr. Wischmeier made $126 thousand. Arriving in North Carolina in 2010, he doubled that to $320 thousand, with the possibility of annual bonuses up to 15%. Now, at Cargill Philanthropies, even at the low end among his peers, he will likely double his comp still again, making at least $650 thousand, and quite possibly over $1 million.

Mr. Wischmeier has two engineering degrees plus an MBA from Northwestern University/Kellogg. He came up through the Global Treasury Group at Eli Lilly before getting his first CIO position at Indiana PERF in 2006.

Mr. Ailman weighs in for us:

This is where we’d usually say something about low salaries at public pensions making stepping stones to bigger jobs for their best talent. But Christopher J. Ailman, the redoubtable CIO of California’s CalSTRS pension, beat us to it. He posted a comment at the Pensions & Investments website just fifteen minutes after P&I flashed the Wischmeier resignation on Friday. (At least, we presume that poster “C. J. Ailman” is that C. J. Ailman.)

He wrote:

Congrats Shawn! He is a rising star among CIO’s the public funds lose yet another quality CIO. Until there is a modicum of balance in compensation between Endowments, Family Offices and Public Pensions, the Public funds are going to continue to be a stepping stone. It’s a sad state for institutions that are so critical to some many people, pensioners, members, and the taxpayers. I guess they are the equivalent of small market sports teams. Bit of an irony that they are in fact the large money, yet hey are forced by their environment to operate with a small market business philosophy.

We couldn’t have put it more pithily. So, thanks for the guest editorial, Mr. Ailman. We owe you one.


CIO Performance-for-pay revisited:

Cheers and jeers:

Many readers and several industry publications commented on our CIO performance-for-pay analysis in Skorina Letter 35. Most of you liked it; some others, not so much. But everyone was civil and we appreciate all the feedback.

The original report is available on our website, here:

And, here are links to what others had to say:,_Other_CIOs.html

If you’re arriving late, here’s the short version:

We took our list of the 50 highest-paid non-profit CIOs and checked their investment returns for the five years 2006-2010. We divided that five-year return by their most recent compensation (i.e., basis points per $100K of comp). Then we ranked them by that performance-for-pay statistic.

The rankings were surprising. Some brand-name CIOs, including David Swensen at Yale and Jane Mendillo at Harvard ranked near the bottom. Some less well-known CIOs, with good returns but relatively modest comps, appeared to be much more cost-effective and ranked higher on our list.

We can’t respond to all the criticisms (or acknowledge all the compliments!) in detail, but we’d like to make some general comments about the uses and misuses of our findings.

But we’re special?

Most objections were variants on the same theme: performance of a fund (and compensation of people hired to manage it) should be judged by internal criteria. Peer-performance, they say, is irrelevant because every institution regards itself as peerless. And absolute investment return doesn’t matter; only the specific targets set by the organization.

For instance, did the portfolio provide income that held up its end of the institutional budget, while maintaining the corpus and adequate liquidity? Or, did the allocations stay in step with the policy portfolio; and did returns hit their benchmarks? Or, did the risk incurred by the CIO match the expectations of the board?

From this point of view whatever an institution chooses to pay its CIO is the “right” amount. Only the board is in a position to judge whether CIO performance is satisfactory, using their own specific standards.

CIO pay, then, may just be what economists call a “revealed” preference. It may not be the “right” price based on some abstract utilitarian rule like maximizing performance-for-pay. But the real world doesn’t always play by utilitarian rules, and boards operate with information, constraints, and goals which may be invisible to outsiders.

Insiders and outsiders:

Our response to these very good points is: External criteria can comfortably coexist with internal criteria.

Like it or not, all of these funds — even the “private” foundations, endowments, and charities — are tax-exempt only at the sufferance of state and federal legislatures, which means ultimately the citizens. And they are all important players in the economy as allocators of capital.

Funds are scrutinized by outsiders who want to know how they perform their missions and manage their resources. That includes people like me who try to understand the job market for investment managers. Inevitably, funds and their leaders will be compared to their peers on various dimensions, even if they would really rather not be.

Outsiders aren’t privy to everything the board and investment office know. They need objective, transparent criteria to help them understand what’s going on at specific institutions and in the market for investment talent generally. We think our performance-for-pay ranking is a useful tool for those outsiders; and maybe some insiders, too.

Some readers objected that our measurement could be misinterpreted and taken out of context. That’s certainly possible. But we provided all the supporting data and we think people can make their own inferences.

An analogy: Investors use a myriad of data and ratios to help them make decisions. The price-earnings ratio of a stock, for instance, is useful information; but only an idiot would buy or sell a stock based solely on its PE. We trust that our readers are not idiots.

Apples, oranges, and short-timers:

Several readers pointed out that our rankings included a few CIOs who were not on the job for the full five years 2006 – 2010.

We prominently included the start date of each CIO, and even highlighted the names of those who were aboard for less than three years. We thought this was sufficient warning.

But, in retrospect, we think this wasn’t the best possible way to present our findings.

Consider the estimable Jonathan Hook, for instance, who arrived only in mid-2008 at the Ohio State Universityendowment. It’s not entirely fair to saddle him with the mediocre performance of OSU before he got there (he was their first CIO), even with the explanatory note we included.

Mr. Hook’s performance at Baylor University in 2001-2008 was outstanding and, undoubtedly, that performance helped him get his job at OSU. In 2005, we note, Endowment and Foundation Money Management named him endowment officer of the year.

By our calculations, OSU’s average annual return in the three pre-Hook years 2006-2008 was about 5.1%. In that same period the Baylor endowment under Mr. Hook earned about 12.3%. Big difference.

His average return over 2006-2010 (splicing together his performance at both schools) was about 4.7%. And his weighted-average annual compensation was about $515,000.

On this basis, his pay-for-performance number (bps/$100K) is now 470/5.15, or about 92. And this would move him up from near the bottom in our ranking to near the top: from 49th to about 5th.

But this kind of ad-hoc treatment is obviously undesirable.

We could finesse this by simply omitting from the rankings any CIOs who didn’t work for a full five years at their current post, and we probably will do that in future.

One ratio to rule them all:

One important difference between portfolios is how much risk they want to incur. By modifying our performance-for-pay statistic we were able to look at the ratio of risk-adjusted returns to compensation. This went some way toward taking into account different institutional objectives and leveling the playing field.

Some readers seem to have missed this table because we put it in an appendix. We thought the “absolute return” version was easier to assimilate, so we put it up at the beginning. Besides, the rankings didn’t change very dramatically between the two versions.

Jim Dunn, who took over as CIO at Wake Forest University last year, endorses this approach to measuring CIO performance. He’s been quoted as saying that he’s the only CIO he knows of whose bonus formula is tied the risk-adjusted returns he achieves as measured by the Sharpe ratio.


Summing up, we think the 1.0 version of our performance-for-pay analysis provided useful information we haven’t seen elsewhere. Version 2.0 will be bigger and better.


Strewth, mate! Supers rule in Oz!

In 1992 Australian Prime Minister Paul Keating pushed through a system of national “superannuation” funds which are the main pillar of the Australian retirement system.

The supers are essentially defined-contribution vehicles. Employers make a compulsory 9% contribution and employees can add more on a voluntary basis. All the contributions go into investments specified by the employee. Most of the supers are non-profits, but a few are “retail” for-profit entities.

Thanks to the supers, Australians now have more money in managed funds, per person, than the citizens of any other developed country.

The most amazing aspect of the supers, from a Yankee point of view, is that they treat their citizens like grownups. Workers can choose among hundreds of competing funds and specify what kind of asset allocation they prefer. And, they can simply take their money along when they switch jobs. A lot of those funds go to work in the Australian economy, which has done very well over the past 20 years.

Super fund investors took a thumping in 2008/2009, as all investors did; but, by the end of 2011, the typical investor had broken even on a five-year basis. Over ten years, the typical superfund investment has generated an average annual return of about 4.5%, compared to just 2.7% for the S&P 500.

Hazel McNeilage, our guest today, helped invest money for some of the largest supers and she thinks that, in time, all advanced countries will follow their model.

Maybe, but it will be politically tricky. Mr. Keating, the father of the supers, was a trade unionist and Labor Party stalwart – a left-winger by American standards. But in 2000, when presidential candidate George W. Bushpointed to the Australian supers as a model for reforming the U.S. Social Security system, he was roundly denounced as the proponent of a crazy, right-wing scheme.

Still, Ms. McNeilage may be right in the end. We could do worse; and have.

Hazel McNeilage is the former head of funds management at the $60.2 billion Queensland Investment Corporation, a nonprofit owned by the government of Queensland. It’s the 4th-largest institutional fund manager in Australia, and its clients include 12 of Australia’s largest super funds.

She stopped by my office in San Francisco recently on her way from Brisbane to New York. We talked about how Australian CIOs look at the world and how the competitive pension management environment in Australia differs from the American model.


Hazel, you’re a truly global investment manager. From England, to South Africa; then Australia, Singapore, New York; and back to Brisbane, Australia as deputy CEO and head of funds management at QIC. What have you learned from all your postings?


I think some American politician said that all politics is local. Investing is global, but that doesn’t mean there isn’t always a strong home bias wherever you are. You invest based on what you know and if you’re in, say, Singapore you have a clearer view of Asia than you get from New York, and you use that edge.

In our case, even though Australia only has 23 million people, QIC has over half their AUM invested in-country. There are some practical reasons for that, which I’ll get into in a minute. But with public pensions, especially, there is always strong political pressure to invest at home.


So how is the Australian pension system different from pensions in the States?


I think we may actually be the model for where pensions are headed in Canada and, further down the road, the U.S. We have a good system, and I’m not saying that out of bias.

Almost all Australian super fund assets are managed by a handful of mostly private and crown-sanctioned money management firms like QIC. In fact, only a few banks and stray companies run their own pension plans. BHP Billiton, for instance, the giant mining firm which is Australia’s biggest company, does not have their own pension plan. All employees choose one of the “Supers” and that’s where the contributions go. Aussies don’t have to worry about losing their pension benefits if they change employers, get laid off, or just get lost in the bush for a few years. Pensions are independent entities. The government mandates a 9% employer contribution for all workers and that money stays in the hands of management companies like QIC until retirement.


So, your pensions are totally portable and they’re like a blend of U.S. Social Security, a defined contribution pension and a 401K, all in one. Government regulated, but privately managed.


That’s pretty close, Charles. Australia also has a separate means-tested social security system as a safety net for retirees, but the supers are the main source of retirement income for most people. The supers are closely regulated, but also intensely competitive. In the internet age, there’s a vast amount of information available to the public on how each plan is doing. Performance is closely followed and the employees can change plans if they’re dissatisfied.

The downside is a lot of herd behavior; the plans tend to follow each other closely. At QIC, in the typical “balanced” allocation which most people opt for, we have about 30% in Australian equities, 30% in foreign equities, 10% in Australian real estate, 25% in cash and fixed income, and 5% in infrastructure. And our competitors are very similar not much different. Of course, the Australian stock market has done well the last few years, so who’s going to be the first one to pull out? Nobody wants to be the first.

But there’s another factor here. If we are all dancing the same dance, with similar allocations, how do you get a better return than you’re competitor? Only one way: by cutting costs and becoming the low cost-provider. We call it the MER — Management Expense Ratio — and everybody looks at it. The funds even use it in their advertising.


So does that mean salaries are really low at the Australian plans? Like the public plans in the States?


Believe it or not, we can actually pay our management people very competitively. QIC has over 450 people in the investment management company (we don’t administer the benefits), and the salaries are probably equal to what the big US endowments and foundations pay, even though we are a quasi-public entity.


If everyone is well paid, how do you cut costs?


The cost of an investment actually affects investment behavior. Take private equity, for example. All the big Australian funds are cutting their investments in the PE mega-managers because their fees are so high when you look at all the ways they pull out cash.   It’s not just two and twenty, it’s special dividends, captive consulting fees, private jets. It all adds up. In the case of QIC, because of our size, for us to move the needle on an investment we would have to make a very big allocation to private equity. But that means our MER will get hit. So we and the others are pulling back from that sector.


That’s really interesting, Hazel. Everyone in the U.S. gripes about PE fees, but most funds still seem to be piling into them, expecting higher returns. How’s the Australian economy doing? Is it still a big resource play and coupled to growth in China?


It’s tricky now, Charles. Australia, unfortunately, is a two- speed economy these days. Mining is running flat out, no worries. But manufacturing and tourism have taken big hits. Our dollar is so strong that we are not competitive on manufacturing exports, and we’re not a particularly good vacation value. Australia is expensive. The Aussie dollar has doubled in ten years.


How about your career, Hazel? What’s next for you?


I’m still in the game, Charles! I’ve got a US green card, UK and Australian citizenship, my children are grown, and my husband and I own an apartment in Manhattan. We love New York and I think it’s time we returned. For my profession, it’s the center of the universe; and I have experience I think would be very valuable to a firm with international focus.

I told QIC that with my kids headed to Canada and the UK, my husband and I are moving on, I’m looking forward to the next chapter.


Thanks so much for stopping by, Hazel, I enjoyed it. Keep me posted on what you’re up to.


My pleasure, Charles. Maybe next time we’ll get together in New York.

[Ms. McNeilage’s planned departure from QIC was announced in September, 2011. It closely followed an announcement that QIC chief executive Dr. Douglas McTaggart will leave on June 30, 2012 after 14 years in the job.

Before his appointment to QIC, Dr. McTaggart was an official of the Queensland Treasury Department. He is one of many recent departures from official positions in the expectation that the Queensland government will change hands at the next election. It has been suggested that a government post might be available to him under a new Liberal National Party government.

It was announced last week that QIC had hired Damien Frawley as its new CEO. Mr. Frawley was previously CEO of BlackRock Australia in Melbourne.]


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