Archive for the ‘NEWS AND COMMENTARY’ Category

Ranking top colleges by 5-year returns

04 / 17 / 2019
by Charles Skorina | Comments are closed

In February we published an abbreviated list of five-year endowment performance for fiscal year end June 30, 2018 for 61 schools to compliment the release of the annual NACUBO TIAA study.  Today, we introduce our big list with one hundred large endowments.

Every CIO on our list is experienced, dedicated, and adept at running a diversified portfolio.  But MIT produced a five-year return of 12 percent while the University of Chicago posted 6.87.  Why the divergence?

Different institutions, different goals

Every school has its own endowment payout rate and tolerance for risk.  Some schools rely heavily on the income, others place more weight on growing the principal.

It takes years to fully implement a multi-asset, multi-generational investment strategy and altering course mid-stream – a new investment chair? a change in CIOs? – can sap performance for a decade.

The challenge for the board and chief investment officer is to maintain course when market fluctuations shake conviction and crowd psychology rattles trustees.

Most high-performance institutions on our list have stable boards and long serving chief investment officers.  See: A College Investor Who Beats the Ivys.

Happy boards, happy staffs

The personalities, preferences, and experiences of board members interact in a variety of ways, usually good, sometimes bad, and occasionally incoherently.  The trick is to figure out how to work together, achieve a consensus on investment policy, and let the staff handle the investing.

#1: No surprises

Serving on a nonprofit board has many upsides; personal satisfaction, peer recognition, and an opportunity to make a difference.  But when things go wrong, the reputational risk is brutal.

No board member at Michigan State or Southern Cal could have foreseen the scandals that erupted on their watch.  And we wrote at length about past challenges at the Harvard endowment.  It takes a long time to dig out from under poor management as the current board and CEO/CIO can attest.

The job of the investment staff is not to beat Yale, it’s to meet the objectives set by the board.  



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Nonprofits gird for tough new tax rules

03 / 13 / 2019
by Charles Skorina | Comments are closed

We’re executive recruiters, not lawyers, so you generally won't catch us opining on important lawyerly stuff like detinue, replevin, trover; or even usufruct (especially usufruct).  We'll leave all that to the learned JDs.

But, in our daily conversations with investment heads in the nonprofit investment world, we’ve been getting an earful about the latest Congressional tax edicts which will make hiring senior executives much more expensive.

The Bare Bones

The 2017 Tax Reform Act fills 500 pages of small print.  It has some good points and bad points apart from lowering individual and corporate tax rates, which got all the public attention.

Under “good,” it lowers the excise tax on beer to $16 per barrel.  No problem there.

But, under "not so good" are two sections pertinent to the heads of college endowments, and to nonprofit organizations in general.  Those include charitable grant-makers, symphonies, museums, hospitals, and many other charitable entities.

The first (Code Section 4968) imposes a 1.4% excise tax on the net investment income of certain private colleges and universities.  We had our say about this elsewhere.

The Yale Tax, as it might be called, will raise a risible $1.8 billion over ten years.

Calling this a drop in the bucket would be an insult to drops and buckets.  It's $180 million annually in a $3.8 trillion U.S. budget and strikes us as a political gesture which raises virtually no money and accomplishes no practical purpose, even for people justifiably aggrieved about college costs. 

The second section (Code Section 4960) is what nonprofits generally – not just colleges – are alarmed about as it begins to kick in this year, because it will raise the cost of hiring senior employees.

We recruit nonprofit investment heads and advise boards on compensation and performance.  So, any tax that makes hiring chief investment officers and other executives more expensive and complicated gets our attention.

More broadly, it makes it harder and more expensive for these charities to carry out their missions, which should concern everyone.

Section 4960 imposes an excise tax on "excess" executive compensation at tax-exempt organizations. 

Congress has decreed that any non-profit employee compensation exceeding $1 million is "excess." 

The tax will amount to 21 percent of the so-called "excess" compensation, and it will pertain only to the five highest-paid employees.

Chief investment officers – and CEOs, and football coaches – will be relieved to know that the tax will be levied on the employers, not on the employees.

But, it will obviously have a knock-on effect on how much they can afford to pay new hires, or how big a raise they can offer talented incumbents to help keep them aboard.

Some wag has referred to this as the Nick Saban Tax, in honor of the redoubtable Alabama football coach.  Coach Saban is said to be the highest-paid college coach in the country at $8.3 million in 2018.

Coach Saban is well known, and so is his compensation, at least among Southern Conference fans.  But there are more obscure execs also in the cross-hairs, e.g. Anthony Tersigni, CEO of the huge Ascension Health system in St. Louis, who earns even more.  He takes home $17.5 million, and a few other nonprofit healthcare execs were also up in the 8-digit range.  (The Act explicitly excludes practicing physicians, who are often the highest-paid people in these organizations.)

It looks like Ascension will be on the hook for at least an extra $3.5 million annually just to keep Mr. Tersigni.

We estimate that the celebrated Yale chief investment officer David Swensen is currently making about $6 million.  And we think the average CIO among big endowments now makes about $2 million.

All three of these gentlemen are among the very best in their respective professions, and they are arguably worth every penny of their – admittedly handsome – salaries.

Let's do the math for Mr. Saban: 8.3 minus 1.0, times 0.21, equals 1.5.  So, Alabama will have to budget for at least an additional $1.5 million yearly.  That’s a budget item they hadn't even thought of just a year ago.

The Wall Street Journal has counted 2,700 nonprofit employees (not just at colleges) who were paid over $1 million in 2014. 



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Family wealth: finding purpose, fighting entropy

01 / 15 / 2019
by Charles Skorina | Comments are closed

A conversation with Stuart Lucas: wealth manager, educator, and family scion

Stuart Lucas has double-barreled credentials as a wealth manager.

He's a Harvard MBA who worked for years with top-shelf financial firms including Wellington Management Company and Banc One (now JP Morgan Chase), where he led their Ultra HNW unit.

And, he is himself an heir to family money by way of his great-grandfather, E. A. Stuart, who founded the Carnation Company.  In 1985, the closely-held business was sold to Nestle, and the proceeds were distributed among Mr. Stuart's descendants.

In 2004, Mr. Lucas merged his professional and personal worlds by founding Wealth Strategist Partners, which continues today as the investment advisor to his and selected other family offices.

He has gone on to design and lead a Private Wealth Management executive education program, designed specifically for wealthy families at the University of Chicago Booth School, now in its 12th year.  And, as an adjunct professor, he has taught a Wealth and Family Enterprise Management course at the MBA level.

All this experience has also been distilled into his widely-read book, Wealth: Grow It and Protect It, for general readers; and into academic-quality papers for The Journal of Wealth Management.

We're delighted that he made some time to talk to us.

Keeping it in the family

It is better to have a permanent income than to be fascinating.

- Oscar Wilde

Skorina: Stuart, you've focused on high-net-worth families and their money for decades as a practitioner; an academic; and even personally, as a member of an extended, affluent family.  You probably know as much about this stuff as anyone in the business.

Where do you begin with a new client who has to deal with all of this for the first time?

Lucas: Charles, it's true I've been doing this for quite a while, but no one knows everything about it.  I learn something new every day.

A family office with significant wealth has many moving parts.  There's money-management per se, which you focus on; and it's crucial.

But, there are also the structural, legal, and tax issues.  And there are opaque but vital intra-familial and cultural issues that have to be dealt with.  They're all important, and all inter-related.

The laws and tax rates keep changing, so do markets, and so do the families themselves.  We try to design and execute an integrated strategy that balances all these elements.

Skorina: So, how do you start the conversation with a new client?

Lucas: When we sit down with a family who's thinking about hiring a wealth manager or setting up a family office, my top discussion points are:

  • What do you want to accomplish with your wealth?
  • What's the right structure for managing your family money? How will it be governed?
  • How will your family members be educated about their wealth and held accountable to each other?
  • Do you understand that taxes affect everything? Tax-planning is critical for wealth-preservation.
  • You will need help: a wealth advisor, an attorney, an accountant, and perhaps a family-office or outsourced chief investment officer.

 

The first - and foundational -- question to answer is: What do you want to accomplish with your wealth?  A sense of purpose is as important in managing family money as it is in managing a business or any other human enterprise.

And it helps to weld a family together.  To keep them engaged, they must find a balance between their common and individual needs.



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Chief Investment Officer Pay in 2018/2019

12 / 08 / 2018
by Charles Skorina | Comments are closed

Our projections - Growth slowing to 7 percent for endowment CIOs

Back in October, we reported the latest-available compensation numbers for 74 chief investment officers at the biggest (over-$1 billion AUM) endowments.

We used the most recent filings for our data, but those numbers (for calendar year 2015) were already pretty stale.

As we said then, the hitch is the long time-lag -- more than two years -- before IRS data is publicly available.

Now we're back with our own estimates of what these CIOs are actually making right now, in real time, extrapolating from 2015 to 2018.

We find that typical CIO pay has been growing at a compound rate of more than 7 percent per year

We looked at a large subset of those original 74 CIOs, 32 who had held office for five consecutive years, 2011 to 2015.  It's a big enough and inclusive-enough subset (big and small, public and private, geographically diverse) that we feel comfortable projecting our findings to the whole population of 74 CIOs.

From that time-series we projected out three more years to get point-estimates for 2018.

(To be clear, this is total W2 compensation, including base, bonus and "other" as classified by the IRS.  It omits other benefits which are not taxable to the CIO, but which may be significant.)

The median big-endowment CIO made approximately $609,000 in 2011.  Five years later, in 2015, he or she was making about $1,100,000.  That's a rise of about 80 percent over five years.

Stated as a compound annual growth rate (CAGR), that's 12.6 percent per year.

But that's based on historical data.  We then needed to push our trendlines out from 2015 to 2018, for which we have no data.  So, stand back, some freshman math is required.

 

We found that CIO pay is still growing briskly, but that the growth rate seems to be slowing in recent years.

 

From 2015 to 2018, we estimate that the median CIO in our sample grew his/her pay from $1,100,000 to $1,380,000, for a rise of 26percent over three years.

 

As a CAGR, that's 7.1 percent per year.

 

The chart below shows the pay for the 32 CIOs in our study and projections for the 21 who are still in office this year.



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A Total Enterprise Approach to Endowment Management

08 / 02 / 2016
by Charles Skorina | Comments are closed


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