U Maryland CIO search. Breakfast with Roz Hewsenian, CIO of The Helmsley Trust

09 / 27 / 2011
by Charles Skorina | Comments are closed

U Maryland seeks CIO, new CIOs and salaries, interviews

Comings & goings & salaries

Breakfast with Roz Hewsenian, CIO of The Helmsley Trust

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Comings and Goings:

 
Allison Thacker: A Rice alumna heads back to Houston:
 
After a year-long search, Rice Management Co. has tapped a San Francisco money manager to run the $3.8 billion Rice University endowment in Houston. Allison
 
Kendrick Thacker will take over as CEO and chief investment officer on September 12. She is a graduate of Rice, with an MBA from Harvard.
 
The slot has been empty since Scott Wise left last June to become head of Covariance Capital, TIAA-CREF’s new outsourcing startup, also headquartered in Houston. Rice Management Co was set up in 2009 as a semi-autonomous asset manager for the Rice endowment, following the example of similar structures at Harvard, Stanford, University of Texas, and other multi-billion-dollar endowments.
 
In his last year at Rice, after twenty years as CIO, Mr. Wise had W-2 income of $229,431, including $78,422 base, $56,250 bonus and $94,759 “other” compensation. In addition, he earned $110,876 in deferred and nontaxable compensation.
 
Ms. Thacker has an excellent resume but doesn’t strike one as an obvious choice to run a major endowment with its broad spectrum of asset classes and strategies. As a managing director at RS Investments she managed long-only mutual funds, with a special focus on technology.
 
RS Investments descends through a long, tortuous genealogy from the old Robertson Stephens & Co boutique investment bank which was a big deal-maker in Silicon Valley in the 80s and 90s. The parent company was shuttered after the Tech Bust in 2002, but their money-management subsidiary morphed into the present mutual-fund and institutional investment manager, now majority-owned by the Guardian Life insurance Co. They have about $15 billion AUM, including $10 billion in its family of mutual funds. Although I’ve never had the pleasure of meeting her, Ms. Thacker labored right around the corner from my office here in downtown San Francisco.
 
Clearly the fact that Ms. Thacker earned her undergraduate economics degree at Rice carried weight with the search committee. She acquired not only a BA there, but also a spouse. She graduated in 1996 and her now-husband Troy Thacker was a year behind her in the class of ’95. In a press release, Rice president David Leebron emphasized that, as a Rice student who benefited from financial aid, she understood the critical role of the endowment in supporting the school’s finances.
 
This should not be dismissed as sentimentality, either. Compensation is important, but so is a commitment to institutional goals. Consider Dr. Swensen at Yale, who was lured away from Wall Street to help out Old Eli. Or Brian Webb, now CIO at Baylor University. Baylor was having trouble holding on to a good endowment head, but decided that Dr. Webb, a Baylor grad married to another Baylor grad and parent of two or three more Baylor grads, might stick around.
 
Ms. Thacker will have her work cut out in following Scott Wise, who was an outstanding CIO. But Rice may hope that she will at least stay awhile. Mr. and Mrs. Thacker’s three children will have to go to college somewhere, after all.
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Melissa Moye: Interim no more
 
A. Melissa Moye is now permanent chief investment officer at Maryland’s MSRPS pension in Baltimore. She had been interim CIO since October, when predecessor Mansco Perry left to run the Macalaster College endowment in Minnesota.
 
She will now head up the $38 billion pension’s five-person investment office (a deputy CIO and four managing directors), with a base salary of $240 thousand.
This is almost a promotion-from-within, but not quite. As Maryland’s Deputy Treasurer for Financial Policy, Ms. Moye wasn’t part of the investment office, but was responsible for briefing her boss, Treasurer Nancy Kopp, on pension business (Ms. Kopp is ex-officio chair of the pension’s governing board.)
 
Before taking the state post in 2007, Ms. Moye was SVP and Director of Investment Services at Amalgamated Bank, a New York-based institution. And, while holding down that day job she also served in 2003-2007 as a volunteer board member and investment committee member for MSRPS.
 
Ms. Moye’s labor-friendly background may help explain why she was originally recruited for the MSRPS board of trustees. Amalgamated Bank is wholly-owned by the Workers United labor union (formerly: Amalgamated Clothing and Textile Workers); in fact, it’s the only union-owned bank in the U.S. The bank is headquartered in New York, but Ms. Moye listed a Silver Springs,
 
Maryland address when the governor appointed her to the board as a public member for 2003-2007. And, in previous jobs, she was senior analyst for the Service Employees International Union’s pension investment program and an economist for the American Federation of State, County and Municipal Employees. (AFSCME is Maryland’s largest state employee union.)
 
While she has been closely involved with the fund since 2007, and has a strong resume, Ms. Moye had no direct responsibility for portfolio management until she got the interim CIO appointment ten months ago. Fortunately, the markets cooperated, and the fund returned 20.04 percent for the year ending June 30, 2011, most of which was on her watch.
 
FY2011 has boosted the fund’s five-year average return into positive territory; it’s now about 4.02% by our calculations. But they still have a dismal funding ratio of about 65%.
 
My sources tell me that MSRPS was in talks with at least one other individual for the job, an in-place CIO at a major fund, who was prepared to take the job until his current employer offered him a substantial raise to stay home.
Ms. Moye will have a base salary of $240 thousand, plus a performance-based bonus, according to published reports. This is the same (plus rounding) as Mr. Perry’s $239,700 base in his last year. But, according to the Baltimore Sun, Mr. Perry also received an “effectiveness” bonus of $15,978 and a performance bonus of $79,892 in that year, bringing his total compensation up to $335,570.
 
Maryland state executives at Ms. Moye’s level make around $150 thousand, so this will make a nice bump for her, while leaving compensation for the slot about the same from the state’s point of view. So, everybody’s happy.
 
Ms. Moye — Dr. Moye we should say — received her BA from Earlham College in 1984; and, supported by a graduate Fulbright scholarship, she earned a PhD in economics from Notre Dame in 199

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Skorina (and the University System of Maryland Foundation) are seeking a CIO:

The USM Foundation lost its excellent chief investment officer back in June when Michael Barry was hired away by the Georgetown University endowment. Now they need a new one, and I’helping.
 
University System of Maryland includes the five University of Maryland campuses and six other public universities. The USM Foundation invests funds on behalf of the System and some other institutions, including several community colleges. Their portfolio AUM is about $900 million.
 
If you’re just hearing about this opening and are interested, or know someone who might be, please pass the word and contact me; I’m still accepting resumes.
We’re looking for a seasoned investment pro with the demonstrated ability to run a large, multi-asset-class fund. The Foundation’s next CIO will have to understand the theory and practice of portfolio allocations, risk management, and the whole spectrum of assets, including alternatives and hedge funds. You’ll also need the management chops to run a staff, interface with a board and make hiring-firing decisions regarding external managers. The Foundation lays special emphasis on the ability to communicate with all of its constituents. All of their member-institutions have a seat at the table, and a successful CIO will have to be able to listen to their concerns and explain his decisions.
 
The position is located in the DC area and the compensation will be highly competitive.
 
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The USMF Endowment: Best of breed for thirty-five years:

In 1976 a wealthy benefactor gifted the University of Maryland with a herd of pure-bred Angus cattle. Lacking a convenient legal mechanism to receive them, the university created the Foundation, with the herd as its first asset
 
You can still view their lineal descendants grazing peacefully on Maryland’s Eastern Shore. They are on the Foundation’s books (at $1.6 million), but they’re not part of the investment portfolio, so the next CIO will not require any background in animal husbandry.
 
Since 1976 the Foundation has diversified away from livestock into almost everything else. If you’re interested in the CIO job, or just want to see what the portfolio looks like and how it has performed, you should check out the 2010 annual report.
 
It’s here:
I have to look at a lot of these things and it is, in my opinion, a model of how a fiduciary ought to clearly communicate its intentions and results. For the 2010 fiscal year, the Foundation reported a five-year average return of 3.2%. This is highly respectable relative to its peers over that tumultuous period.
 
But return is only part of the story. We’re well aware that investors seek risk-adjusted returns, even though explicit measurements of volatility usually aren’t disclosed. Well, here they are. USMF conveniently cites volatility (standard deviation) for each class of assets.
 
We see, for instance, that their “Multi-Strategy” (i.e., hedge-fund) investments (27 percent of the total portfolio) have done exactly what they’re supposed to do. The five-year hedge-fund return crushed its benchmark by 5.4 percent vs. 2.3 percent. And they earned that 5.4 percent with just 7.5 percent volatility over five years, while public equities returned 2.6 percent with 12.1 percent volatility. Higher returns; lower volatility: that’s what a portfolio needs from a hedge-fund allocation to justify their higher fees, and the Foundation’s managers delivered.
 
And, we can see that even that public equity portfolio was being run with relatively low risk. It not only beat their benchmark (MSCI All Country Index) by 2.6 percent vs.1.2 percent over five years, but did it with much lower risk: 12.1 percent volatility vs. 19.1% for the benchmark.
 
That excellent performance from the hedge-fund allocation (and, indeed, the portfolio generally) can be partly attributed to current investment committee leader David Saunders (CEO of fund of funds giant K2 Advisors) and previous committee chair Ken Brody (co-founder of hedge fund Taconic Capital Advisors), who had both the experience and contacts to put the foundation into the top tier of funds.
 
This is all by way of saying that the next CIO will be joining a high-performing operation and will have to be prepared to hit the ground running

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Out and about: a visit to the Apocalypse
 
My trip to New York last month was eventful and, while I am no more sinful than your average Manhattanite (or San Franciscan, for that matter), I began to wonder if some kind of Old Testament wrath was being visited on your humble correspondent.
 
First, we felt an earthquake that was centered in Virginia but radiated all the way up to the Upper East Side. Now, I’m from San Francisco, where we ride out quakes with aplomb, and without even slopping our lattes. But in New York, it was… unnerving.
 
Then came a hurricane that was not quite so cataclysmic as Mayor Bloomberg predicted, or cable-broadcasters hoped, but still pretty impressive.
When we heard that locusts were massing in Weehawken, ready to swarm through the Lincoln Tunnel, we decided it was time to head home.
 
I did have some interesting conversations with various notables, including Roz Hewsenian, new CIO of The Helmsley Trust, which I report below.

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My Breakfast with Roz: Looking for the ten-percent solution:

 
Rosalind Hewsenian was appointed chief investment officer of the $4 billion Helmsley Trust in June, 2011.
 
She was hired as Deputy CIO of the newly-formed foundation last April. Linda Strumpf, formerly of the Ford Foundation, had been brought in to build the investment office, and she handed the CIO keys over to Ms. Hewsenian once it was up and running.
 
Ms. Hewsenian grew up in New York, graduating with a B.S. from the State University of New York and an MBA from Pace University. She worked for twenty years as a senior consultant with Wilshire Associates in California, and now she’s back in New York with a whole new career.
She was kind enough to meet me for breakfast when I was in New York last month.
 
Skorina: Roz, you were with Wilshire Associates for twenty-one years, working with both corporate and public pensions; you were even lead consultant with mega-pension CalPERS. Do things look different now that you’re actually sitting in the CIO’s chair of a private foundation like Helmsley?
 
Hewsenian: I like this chair just fine, Charles, but, yes, a private foundation is a whole different animal from the corporate and public pensions I worked with.
Pension accounting and investing is conceptually simple. Employees and employers bargain to determine benefit levels. Then the consultants are called in to study actuarial tables and available investment returns across asset classes. Finally, they tell the parties what those benefits will cost and how they’ll have to finance them from contributions and/or investment earnings.
 
The answers are in the back of the book. There’s no mystery.
 
Skorina: Well, okay. But if it’s so simple then why are so many public pensions so underfunded? I don’t think it was just the recession. I talk to investment managers everyday, and they don’t seem less competent than anybody else. What went wrong?
 
Hewsenian: All this stuff you read about public pensions being in trouble today is because some officials – not all, but some – either hid the true cost of the pensions from the public or failed to adequately fund the obligations, or both. Either deliberately or not, they made promises their successors just can’t keep.
In the corporate world, things were different. They used realistic rates of return and they paid into the plans what they needed to meet the obligations. There are some exceptions, but most corporates are in much better shape than most publics.
 
And, during most of my consulting career, all pensions – all investors, really — were operating in a golden age, although we didn’t really know it. For almost thirty years we had one of the best economic periods in our nation’s history, maybe the world’s history. Since the early 1980s, despite a couple of short, sharp recessions, and some market gyrations like the dot-com bust in 2001, equities mostly went up, interest rates mostly drifted down, and inflation wasn’t a problem. Looking back, people call it the Great Moderation.
 
We could count on the stock market growing eight to ten percent a year and, although interest rates had a long decreasing slide from the Volker years, they stayed mostly above five percent. You could make money in stocks, you could make money in bonds and, with an allocation to both, you could get fairly low volatility. So investment officers rode this great benign wave which made everything look easy.
 
Skorina: You’re getting me nostalgic, Roz. Don’t forget, we all looked better, too!
 
Hewsenian: Speak for yourself, Charles! But then things got tricky. Along with rising markets the investment world created a little something called benchmarks. They were artificial but lovely little metrics which basically let all stock-pickers look good. As long as an equity manager met his benchmark, he got his bonus because, since everything basically was going up, it didn’t really matter if the benchmark was a little behind the S&P or a little ahead. Everything was going up so what’s the fuss? Except for the truly incompetent, investment managers delivered returns sufficient to meet the obligations of institutional investors, the bonuses arrived, and life was good.
 
Skorina: Well, I guess there are relative benchmarks and then there are absolute benchmarks. Obviously, funds would rather use the former. They can say, “Hey, we’re losing money a lot slower than most people. Yay for us.” But for a private foundation with no revenue stream, losing money slowly just means you’re going out of business in twenty years instead of fifteen years.
 
Hewsenian: Exactly. For me, and for a lot of other investors, if they were honest, relative returns won’t cut it any more. That’s ancient history. We’re now living in an absolute return world.
 
Look at what I face – what all investment officers face. Two percent Treasuries, three percent dividends, and possibly, just possibly a five percent total return on the very best corporate equities. That’s it.
 
But I need eight to ten percent to run the foundation, so I’ve got a big problem.
 
Remember, the five percent mandatory payout that foundations face was set years ago when markets were wonderful. They aren’t wonderful any more but we still face that five percent payout to fund our mission, plus an additional one percent for administrative costs, plus two to three percent – or more – for when the eventual inflation dam breaks, plus another one percent to grow, hopefully, instead of stagnating. That’s ten percent, Charles.
 
And, no matter what, I must not lose money. A big crash like we had two years ago is horrible for foundations. Unlike endowments, we don’t have donors to make up the damage and, as I said, we can’t just cut the payout for awhile without losing our tax-exemption.
 
Skorina: Roz, I’m starting to wonder why you took the job.
 
Hewsenian: I like a challenge, Charles. This is where I can take all that experience and make it count. And that has to start with honesty about how hard it’s going to be.
 
Here’s how I look at the world this morning. For years the U.S. caught some lucky breaks. President Clinton, like President Obama, tried to pass an expensive healthcare bill, but Clinton’s got shot down. But his tax increases went through anyway, so we had sensible budgets during the Clinton years.
 
Then President Bush came in, and we had 9/11, and we had the great defense stimulus; two expensive wars and tax reductions. Meanwhile, China turned into the great growth machine, and happily lent us all the money we needed at low rates, while keeping consumer prices down.
 
But now we’ve had a terrible recession, expensive and ineffective fiscal stimulus, Mr. Bernanke has shot his shot, there’s no GDP growth, and no one knows what to do. There’s nothing left. Tax the rich? I don’t see any way to eliminate the deficits with tax increases. I don’t see a balanced budget coming. What we need is growth, but I don’t see where that’s coming from, either, at least domestically. Ultimately, investment returns are created by economic growth.
 
Skorina: Well, I don’t do politics, at least not in public. But if the object is to dramatically cut the deficit, then I agree the math on taxes doesn’t seem to work. You can’t confiscate all the income above $250K. On the other hand, the kind of moderate tax increase that might be politically possible – say, raising the 35 percent rate to 40 percent for top earners – would only put a small dent in the deficit. Our debt-to-GDP ratio would just get up to Southern Europe levels three or four years later than otherwise.
 
Okay, that’s all above my paygrade, anyway. So, everything sucks. But what are you going to do for the Helmsley Trust?
 
Hewsenian: I use what I’ve learned. First, and obviously, I’m looking for exceptional managers. I think I know how to do that. But I’m not very happy with many of the hedge fund managers right now. They are suffering the same fate as the long-only managers; too many managers, too many crowded trades, and lousy customer service. I suspect that will change, at least I hope so.
 
Also, I’m looking at things differently now. Basically I see investment opportunities within three broad categories; liquidity risk mitigators, inflation protectors, and return generators.
 
I said that customer service at money management firms is lousy. Most hedge funds aren’t very good at it and this needs to change. I have to deal with my trustees in real time, and when they want information and guidance, I can’t wait for the quarterly newsletter. I need feedback and I need it now. Markets and economies are moving rapidly and they want to know where we stand. I expect my managers to respond to my concerns on a real-time basis. If they can’t do that, I’ll fire them and find someone who can.
 
Skorina: Thanks for breakfast, Roz, I always enjoy hearing someone speak their mind.
 
Rosalind: My pleasure, Charles; let’s do it again.
 
U Maryland seeks CIO, new CIOs and salaries, interviews
University System of Maryland Foundation (and Skorina) seeks a CIO:
Comings & goings & salaries

Breakfast with Roz Hewsenian, CIO of The Helmsley Trust

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Comings and Goings:

 
Allison Thacker: A Rice alumna heads back to Houston:
After a year-long search, Rice Management Co. has tapped a San Francisco money manager to run the $3.8 billion Rice University endowment in Houston. Allison Kendrick Thacker will take over as CEO and chief investment officer on September 12. She is a graduate of Rice, with an MBA from Harvard.
The slot has been empty since Scott Wise left last June to become head of Covariance Capital, TIAA-CREF’s new outsourcing startup, also headquartered in Houston. Rice Management Co was set up in 2009 as a semi-autonomous asset manager for the Rice endowment, following the example of similar structures at Harvard, Stanford, University of Texas, and other multi-billion-dollar endowments.
In his last year at Rice, after twenty years as CIO, Mr. Wise had W-2 income of $229,431, including $78,422 base, $56,250 bonus and $94,759 “other” compensation. In addition, he earned $110,876 in deferred and nontaxable compensation.
Ms. Thacker has an excellent resume but doesn’t strike one as an obvious choice to run a major endowment with its broad spectrum of asset classes and strategies. As a managing director at RS Investments she managed long-only mutual funds, with a special focus on technology.
RS Investments descends through a long, tortuous genealogy from the old Robertson Stephens & Co boutique investment bank which was a big deal-maker in Silicon Valley in the 80s and 90s. The parent company was shuttered after the Tech Bust in 2002, but their money-management subsidiary morphed into the present mutual-fund and institutional investment manager, now majority-owned by the Guardian Life insurance Co. They have about $15 billion AUM, including $10 billion in its family of mutual funds. Although I’ve never had the pleasure of meeting her, Ms. Thacker labored right around the corner from my office here in downtown San Francisco.
Clearly the fact that Ms. Thacker earned her undergraduate economics degree at Rice carried weight with the search committee. She acquired not only a BA there, but also a spouse. She graduated in 1996 and her now-husband Troy Thacker was a year behind her in the class of ’95. In a press release, Rice president David Leebron emphasized that, as a Rice student who benefited from financial aid, she understood the critical role of the endowment in supporting the school’s finances.
This should not be dismissed as sentimentality, either. Compensation is important, but so is a commitment to institutional goals. Consider Dr. Swensen at Yale, who was lured away from Wall Street to help out Old Eli. Or Brian Webb, now CIO at Baylor University. Baylor was having trouble holding on to a good endowment head, but decided that Dr. Webb, a Baylor grad married to another Baylor grad and parent of two or three more Baylor grads, might stick around.
Ms. Thacker will have her work cut out in following Scott Wise, who was an outstanding CIO. But Rice may hope that she will at least stay awhile. Mr. and Mrs. Thacker’s three children will have to go to college somewhere, after all.
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Melissa Moye: Interim no more
 
A. Melissa Moye is now permanent chief investment officer at Maryland’s MSRPS pension in Baltimore. She had been interim CIO since October, when predecessor Mansco Perry left to run the Macalaster College endowment in Minnesota.
She will now head up the $38 billion pension’s five-person investment office (a deputy CIO and four managing directors), with a base salary of $240 thousand.
This is almost a promotion-from-within, but not quite. As Maryland’s Deputy Treasurer for Financial Policy, Ms. Moye wasn’t part of the investment office, but was responsible for briefing her boss, Treasurer Nancy Kopp, on pension business (Ms. Kopp is ex-officio chair of the pension’s governing board.)
Before taking the state post in 2007, Ms. Moye was SVP and Director of Investment Services at Amalgamated Bank, a New York-based institution. And, while holding down that day job she also served in 2003-2007 as a volunteer board member and investment committee member for MSRPS.
Ms. Moye’s labor-friendly background may help explain why she was originally recruited for the MSRPS board of trustees. Amalgamated Bank is wholly-owned by the Workers United labor union (formerly: Amalgamated Clothing and Textile Workers); in fact, it’s the only union-owned bank in the U.S. The bank is headquartered in New York, but Ms. Moye listed a Silver Springs,
Maryland address when the governor appointed her to the board as a public member for 2003-2007.
And, in previous jobs, she was senior analyst for the Service Employees International Union’s pension investment program and an economist for the American Federation of State, County and Municipal Employees. (AFSCME is Maryland’s largest state employee union.)
While she has been closely involved with the fund since 2007, and has a strong resume, Ms. Moye had no direct responsibility for portfolio management until she got the interim CIO appointment ten months ago. Fortunately, the markets cooperated, and the fund returned 20.04 percent for the year ending June 30, 2011, most of which was on her watch.
FY2011 has boosted the fund’s five-year average return into positive territory; it’s now about 4.02% by our calculations. But they still have a dismal funding ratio of about 65%.
My sources tell me that MSRPS was in talks with at least one other individual for the job, an in-place CIO at a major fund, who was prepared to take the job until his current employer offered him a substantial raise to stay home.
Ms. Moye will have a base salary of $240 thousand, plus a performance-based bonus, according to published reports. This is the same (plus rounding) as Mr. Perry’s $239,700 base in his last year. But, according to the Baltimore Sun, Mr. Perry also received an “effectiveness” bonus of $15,978 and a performance bonus of $79,892 in that year, bringing his total compensation up to $335,570.
Maryland state executives at Ms. Moye’s level make around $150 thousand, so this will make a nice bump for her, while leaving compensation for the slot about the same from the state’s point of view. So, everybody’s happy.
Ms. Moye — Dr. Moye we should say — received her BA from Earlham College in 1984; and, supported by a graduate Fulbright scholarship, she earned a PhD in economics from Notre Dame in 199
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Skorina (and the University System of Maryland Foundation) are seeking a CIO:

The USM Foundation lost its excellent chief investment officer back in June when Michael Barry was hired away by the Georgetown University endowment. Now they need a new one, and I’helping.
 
University System of Maryland includes the five University of Maryland campuses and six other public universities. The USM Foundation invests funds on behalf of the System and some other institutions, including several community colleges. Their portfolio AUM is about $900 million.
If you’re just hearing about this opening and are interested, or know someone who might be, please pass the word and contact me; I’m still accepting resumes.
We’re looking for a seasoned investment pro with the demonstrated ability to run a large, multi-asset-class fund. The Foundation’s next CIO will have to understand the theory and practice of portfolio allocations, risk management, and the whole spectrum of assets, including alternatives and hedge funds. You’ll also need the management chops to run a staff, interface with a board and make hiring-firing decisions regarding external managers. The Foundation lays special emphasis on the ability to communicate with all of its constituents. All of their member-institutions have a seat at the table, and a successful CIO will have to be able to listen to their concerns and explain his decisions.
The position is located in the DC area and the compensation will be highly competitive.
Also, I’m in New York City again this week. My schedule is pretty full, but if you’re close by and want to talk about the Maryland position (or anything else), give me a call and maybe we can get together.
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The USMF Endowment: Best of breed for thirty-five years:

In 1976 a wealthy benefactor gifted the University of Maryland with a herd of pure-bred Angus cattle. Lacking a convenient legal mechanism to receive them, the university created the Foundation, with the herd as its first asset
You can still view their lineal descendants grazing peacefully on Maryland’s Eastern Shore. They are on the Foundation’s books (at $1.6 million), but they’re not part of the investment portfolio, so the next CIO will not require any background in animal husbandry.
Since 1976 the Foundation has diversified away from livestock into almost everything else. If you’re interested in the CIO job, or just want to see what the portfolio looks like and how it has performed, you should check out the 2010 annual report.
It’s here:
I have to look at a lot of these things and it is, in my opinion, a model of how a fiduciary ought to clearly communicate its intentions and results. For the 2010 fiscal year, the Foundation reported a five-year average return of 3.2%. This is highly respectable relative to its peers over that tumultuous period.
But return is only part of the story. We’re well aware that investors seek risk-adjusted returns, even though explicit measurements of volatility usually aren’t disclosed. Well, here they are. USMF conveniently cites volatility (standard deviation) for each class of assets.
We see, for instance, that their “Multi-Strategy” (i.e., hedge-fund) investments (27 percent of the total portfolio) have done exactly what they’re supposed to do. The five-year hedge-fund return crushed its benchmark by 5.4 percent vs. 2.3 percent. And they earned that 5.4 percent with just 7.5 percent volatility over five years, while public equities returned 2.6 percent with 12.1 percent volatility. Higher returns; lower volatility: that’s what a portfolio needs from a hedge-fund allocation to justify their higher fees, and the Foundation’s managers delivered.
And, we can see that even that public equity portfolio was being run with relatively low risk. It not only beat their benchmark (MSCI All Country Index) by 2.6 percent vs.1.2 percent over five years, but did it with much lower risk: 12.1 percent volatility vs. 19.1% for the benchmark.
That excellent performance from the hedge-fund allocation (and, indeed, the portfolio generally) can be partly attributed to current investment committee leader David Saunders (CEO of fund of funds giant K2 Advisors) and previous committee chair Ken Brody (co-founder of hedge fund Taconic Capital Advisors), who had both the experience and contacts to put the foundation into the top tier of funds.
This is all by way of saying that the next CIO will be joining a high-performing operation and will have to be prepared to hit the ground running

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Out and about: a visit to the Apocalypse
My trip to New York last month was eventful and, while I am no more sinful than your average Manhattanite (or San Franciscan, for that matter), I began to wonder if some kind of Old Testament wrath was being visited on your humble correspondent.
First, we felt an earthquake that was centered in Virginia but radiated all the way up to the Upper East Side. Now, I’m from San Francisco, where we ride out quakes with aplomb, and without even slopping our lattes. But in New York, it was… unnerving.
Then came a hurricane that was not quite so cataclysmic as Mayor Bloomberg predicted, or cable-broadcasters hoped, but still pretty impressive.
When we heard that locusts were massing in Weehawken, ready to swarm through the Lincoln Tunnel, we decided it was time to head home.
I did have some interesting conversations with various notables, including Roz Hewsenian, new CIO of The Helmsley Trust, which I report below.
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My Breakfast with Roz: Looking for the ten-percent solution:

 
Rosalind Hewsenian was appointed chief investment officer of the $4 billion Helmsley Trust in June, 2011.
She was hired as Deputy CIO of the newly-formed foundation last April. Linda Strumpf, formerly of the Ford Foundation, had been brought in to build the investment office, and she handed the CIO keys over to Ms. Hewsenian once it was up and running.
Ms. Hewsenian grew up in New York, graduating with a B.S. from the State University of New York and an MBA from Pace University. She worked for twenty years as a senior consultant with Wilshire Associates in California, and now she’s back in New York with a whole new career.
She was kind enough to meet me for breakfast when I was in New York last month.
 
Skorina: Roz, you were with Wilshire Associates for twenty-one years, working with both corporate and public pensions; you were even lead consultant with mega-pension CalPERS. Do things look different now that you’re actually sitting in the CIO’s chair of a private foundation like Helmsley?
 
Hewsenian: I like this chair just fine, Charles, but, yes, a private foundation is a whole different animal from the corporate and public pensions I worked with.
Pension accounting and investing is conceptually simple. Employees and employers bargain to determine benefit levels. Then the consultants are called in to study actuarial tables and available investment returns across asset classes. Finally, they tell the parties what those benefits will cost and how they’ll have to finance them from contributions and/or investment earnings.
The answers are in the back of the book. There’s no mystery.
 
Skorina: Well, okay. But if it’s so simple then why are so many public pensions so underfunded? I don’t think it was just the recession. I talk to investment managers everyday, and they don’t seem less competent than anybody else. What went wrong?
 
Hewsenian: All this stuff you read about public pensions being in trouble today is because some officials – not all, but some – either hid the true cost of the pensions from the public or failed to adequately fund the obligations, or both. Either deliberately or not, they made promises their successors just can’t keep.
In the corporate world, things were different. They used realistic rates of return and they paid into the plans what they needed to meet the obligations. There are some exceptions, but most corporates are in much better shape than most publics.
And, during most of my consulting career, all pensions – all investors, really — were operating in a golden age, although we didn’t really know it. For almost thirty years we had one of the best economic periods in our nation’s history, maybe the world’s history. Since the early 1980s, despite a couple of short, sharp recessions, and some market gyrations like the dot-com bust in 2001, equities mostly went up, interest rates mostly drifted down, and inflation wasn’t a problem. Looking back, people call it the Great Moderation.
We could count on the stock market growing eight to ten percent a year and, although interest rates had a long decreasing slide from the Volker years, they stayed mostly above five percent. You could make money in stocks, you could make money in bonds and, with an allocation to both, you could get fairly low volatility. So investment officers rode this great benign wave which made everything look easy.
 
Skorina: You’re getting me nostalgic, Roz. Don’t forget, we all looked better, too!
 
Hewsenian: Speak for yourself, Charles! But then things got tricky. Along with rising markets the investment world created a little something called benchmarks. They were artificial but lovely little metrics which basically let all stock-pickers look good. As long as an equity manager met his benchmark, he got his bonus because, since everything basically was going up, it didn’t really matter if the benchmark was a little behind the S&P or a little ahead. Everything was going up so what’s the fuss? Except for the truly incompetent, investment managers delivered returns sufficient to meet the obligations of institutional investors, the bonuses arrived, and life was good.
 
Skorina: Well, I guess there are relative benchmarks and then there are absolute benchmarks. Obviously, funds would rather use the former. They can say, “Hey, we’re losing money a lot slower than most people. Yay for us.” But for a private foundation with no revenue stream, losing money slowly just means you’re going out of business in twenty years instead of fifteen years.
 
Hewsenian: Exactly. For me, and for a lot of other investors, if they were honest, relative returns won’t cut it any more. That’s ancient history. We’re now living in an absolute return world.
Look at what I face – what all investment officers face. Two percent Treasuries, three percent dividends, and possibly, just possibly a five percent total return on the very best corporate equities. That’s it.
But I need eight to ten percent to run the foundation, so I’ve got a big problem.
Remember, the five percent mandatory payout that foundations face was set years ago when markets were wonderful. They aren’t wonderful any more but we still face that five percent payout to fund our mission, plus an additional one percent for administrative costs, plus two to three percent – or more – for when the eventual inflation dam breaks, plus another one percent to grow, hopefully, instead of stagnating. That’s ten percent, Charles.
And, no matter what, I must not lose money. A big crash like we had two years ago is horrible for foundations. Unlike endowments, we don’t have donors to make up the damage and, as I said, we can’t just cut the payout for awhile without losing our tax-exemption.
 
Skorina: Roz, I’m starting to wonder why you took the job.
 
Hewsenian: I like a challenge, Charles. This is where I can take all that experience and make it count. And that has to start with honesty about how hard it’s going to be.
Here’s how I look at the world this morning. For years the U.S. caught some lucky breaks. President Clinton, like President Obama, tried to pass an expensive healthcare bill, but Clinton’s got shot down. But his tax increases went through anyway, so we had sensible budgets during the Clinton years.
Then President Bush came in, and we had 9/11, and we had the great defense stimulus; two expensive wars and tax reductions. Meanwhile, China turned into the great growth machine, and happily lent us all the money we needed at low rates, while keeping consumer prices down.
But now we’ve had a terrible recession, expensive and ineffective fiscal stimulus, Mr. Bernanke has shot his shot, there’s no GDP growth, and no one knows what to do. There’s nothing left. Tax the rich? I don’t see any way to eliminate the deficits with tax increases. I don’t see a balanced budget coming. What we need is growth, but I don’t see where that’s coming from, either, at least domestically. Ultimately, investment returns are created by economic growth.
 
Skorina: Well, I don’t do politics, at least not in public. But if the object is to dramatically cut the deficit, then I agree the math on taxes doesn’t seem to work. You can’t confiscate all the income above $250K. On the other hand, the kind of moderate tax increase that might be politically possible – say, raising the 35 percent rate to 40 percent for top earners – would only put a small dent in the deficit. Our debt-to-GDP ratio would just get up to Southern Europe levels three or four years later than otherwise.
Okay, that’s all above my paygrade, anyway. So, everything sucks. But what are you going to do for the Helmsley Trust?
 
Hewsenian: I use what I’ve learned. First, and obviously, I’m looking for exceptional managers. I think I know how to do that. But I’m not very happy with many of the hedge fund managers right now. They are suffering the same fate as the long-only managers; too many managers, too many crowded trades, and lousy customer service. I suspect that will change, at least I hope so.
Also, I’m looking at things differently now. Basically I see investment opportunities within three broad categories; liquidity risk mitigators, inflation protectors, and return generators.
I said that customer service at money management firms is lousy. Most hedge funds aren’t very good at it and this needs to change. I have to deal with my trustees in real time, and when they want information and guidance, I can’t wait for the quarterly newsletter. I need feedback and I need it now. Markets and economies are moving rapidly and they want to know where we stand. I expect my managers to respond to my concerns on a real-time basis. If they can’t do that, I’ll fire them and find someone who can.
 
Skorina: Thanks for breakfast, Roz, I always enjoy hearing someone speak their mind.
 
Rosalind: My pleasure, Charles; let’s do it again.
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The Skorina Letter

Publisher: Charles A. Skorina
Editor: John C. Legere