Consultants: What are they good for?

10 / 04 / 2011
by Charles Skorina | Comments are closed

Search: Chief Hedge Fund Strategist, Comings and Goings, Are consultants worth it?

Russell Read: Russell of Arabia

Skorina (and a valued client) are seeking a Chief hedge fund strategist

Consultants: What are they good for?

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Comings and Goings:
 
 
Russell Read: Russell of Arabia:
 
Dr. Russell Read, who was chief investment officer at CalPERS from 2006 to 2008, has been hired as CIO of the Gulf Investment Corporation. The $6 billion sovereign wealth fund is jointly owned by Saudi Arabia, Kuwait and the four other states of the Gulf Cooperation Council.
I know Russ and I was as surprised as anyone when I heard that he and his wife were moving to Kuwait City where GIC is headquartered. I know they’ve done a lot of rebuilding since the late, un-lamented Saddam Hussein trashed the city in 1990, but it’s still not exactly a cosmopolitan hot-spot like nearby Abu Dhabi. It’s still hot, though. The average daily high in September is only about 44 degrees, but that’s Celsius. In American, that’s 111. But it’s a dry heat. And by October the dust storms usually abate.
 
I spoke briefly to Russ in his new digs and he says he’s excited to be there. He sees a big future for GIC as an asset manager and thinks he’s joined them at a critical and constructive phase. GIC is primarily an investor in regional infrastructure projects alongside private investors, but Russ thinks they will be broadening their portfolio over time.
 
During the final vetting process I understand that his new employers delicately inquired about some of his personal predilections and were both pleased and surprised to learn that Russ doesn’t drink alcohol. Not the kind of thing one puts on a resume, but you never can tell what’s going to help you fit into a new job.
Russ has a wall-full of academic credentials, including a BA in statistics and an MBA from University of Chicago; and an MA and PhD in economics from Stanford.
 
He began his professional career as an economist at First National Bank of Chicago and then spent several years as an actuary and investment analyst at CNA Insurance and The Prudential. He worked at Oppenheimer Funds in the 90s, and then at the Scudder group of Deutsche Bank where he rose to Deputy CIO before joining CalPERS in 2006.
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Karl Scheer: Cincy gets a family-office pro:
 
University of Cincinnati has hired Karl L. Scheer, a local family-office investment manager, as chief investment officer for its $1 billion endowment. He succeeds Thomas Croft, the school’s first-ever CIO, who left in September 2010.
 
Mr. Scheer’s salary is unavailable, but his predecessor had total compensation of $449,078 in 2009 according to published sources. That’s presumably an all-in number including untaxed benefits as well as W-2 income. The school’s second-ranking investment officer, Director of Investments Timothy Viezer made $333,418 in the same period, so it seems highly likely that Mr. Scheer’s starting comp will be north of that, which is a good figure for running a $1 billion fund at a mid-western public school.
 
University of Cincinnati does not publicize return-on-investment figures for its endowment, but when we did a rough calculation based on their financial statements we came up with a 5-year average annual return of about 5 percent for 2005-2010, which corresponds to Mr. Croft’s tenure. This is in line with the NACUBO five-year mean of 4.7 percent for endowments over $1 billion, although the school’s returns for the last two years seem to have fallen below the NACUBO averages.
 
Mr. Scheer is a Cincinnati native who worked for three years with a private-equity team, first at Russell Investments in Tacoma, Washington, then with Pantheon Ventures in San Francisco after Russell acquired Pantheon. From 2005 until his move to the university, he worked at Summer Hill Capital Partners in the Cincinnati suburb of Nash, Ohio. This appears to be an arm of Summer Hill, Inc., a low-profile multi-family office controlled by the Farmer family of Cincinnati. Mr. Scheer was a senior manager at Spring Hill, but apparently not the CIO.
 
Richard T. Farmer, retired founder of the privately-held Cintas Corp, is chair of Spring Hill and his son Scott D. Farmer, current CEO of Cintas, is a Spring Hill director. Richard Farmer, a staple on the Forbes list, is said to be worth $1.5 billion and has been referred to as the richest man in Cincinnati. Spring Hill appears to provide wealth management for two other local high-net-worth families in addition to the Farmers. One source indicates that they manage about $1 billion. The Farmer family has been a big contributor to that other Southern Ohio school, Cincy’s traditional rival Miami University, whose Farmer School of Business is named after its benefactor.
 
Mr. Scheer attended Cincinnati Country Day School and graduated from Harvard in 1997 with an A.B. in English. He captained the Harvard swim team in his junior and senior years, and was a 1996 NCAA All American. He is a CFA charterholder.
 
This may be an auspicious time to start a career at Cincy. We note that this weekend they crushed the aforementioned Miami University by 27 to zip. That’s six years in a row the Bearcats have trounced the RedHawks, the longest winning streak in their 116-year rivalry.
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Raudline Etienne: From Albany to Albright:
 
Raudline Etienne, chief investment officer of New York State’s $147 billion CRF pension, has been lured away by an elite Washington-based consulting firm. Her boss, Comptroller Thomas DiNapoli, has appointed the fund’s real estate manager, Marjorie Tsang, to fill the slot as interim CIO. Ms. Etienne, who has managed CRF’s portfolio since March, 2008, will join Albright Stonebridge Group (ASG) as a senior director in March, 2012.
 
According to state records, Ms Eteinne’s salary was $283,250 in 2010 and Marjorie Tsang, the current interim CIO, made $202,501. Hopefully Ms. Tsang will soon be receiving a raise.
 
ASG, led by former Secretary of State Madeline Albright, advises clients on corporate strategy and government relations, especially for developing countries. Other Clinton-administration vets and Washington insiders hold senior posts in ASG, including former National Security Advisor Sandy Berger and former U.S. Senator Warren Rudman. The firm is closely associated with investment firm Albright Capital Management LLC, which has about $500 million AUM, including more than $300 million from the Dutch pension PGGM.
 
Mr. DiNapoli, who is CRF’s sole trustee, appointed Ms. Etienne to the CIO job when he took office in January, 2008. Their respective predecessors — former Comptroller Alan Hevesi and former CIO David Loglisci — both left office in disgrace. They were prosecuted by state Attorney General Andrew Cuomo (now New York State governor) on charges of steering pension investment business to political allies. Mr. Hevesi is now serving a prison term and Mr. Loglisci also faces prison for assisting in the scheme.
 
From January 2003 to December 2006, any external investment manager who wanted a piece of CRF’s business needed to negotiate a way past Mr. Hevesi’s political gatekeepers. In return, those gatekeepers received millions of dollars in fees and expenses.
Mr. DiNapoi has understandably taken great pains to show that he is now running a non-corrupt organization. On Ms. Etienne’s departure, he noted that she “has been my partner in making the Fund among the most transparent and ethical in the country.”
 
Ms. Etienne emigrated from Haiti to New York City with her parents when she was four years old. She graduated with a BS from the School of Architecture at MIT and earned an MBA from UC Berkeley in 1994. She was an advisor to public pension systems for RogersCasey LLC until she was tapped to manage the CRF fund in Albany.
 
CRF, the country’s third-largest pension fund, earned 14.6 percent in the fiscal year ending March 31, 2011, and 25.9 percent in FY2010. The 2011 results raised their five-year average return (geometric mean) to 6.17%.
Ms. Tsang, the new interim CIO, has managed the pension’s real estate portfolio since 1999 and, like all the fund’s senior managers, holds the title Deputy Comptroller. She is a graduate of Yale University and Columbia Law School. Before joining the Comptroller’s office in 1993, she worked as a real estate finance attorney in private practice and has served as the state’s Assistant Counsel for investment transactions.
 
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Skorina (and a valued client) are seeking a Chief hedge fund strategist:

A multi-billion money manager in the mid-Atlantic area is looking for a director of hedge funds and has asked me to help.
For now, they would rather not be identified, but they are a prominent east-coast firm managing funds for institutional investors.
 
The person they’re seeking will create, source, manage, and service hedge fund strategies for the firm’s institutional clients.
 
A suitable candidate might be a head of alternatives at a foundation, endowment or pension fund; or a senior fund of hedge funds manager. He or she will probably hold an advanced degree in business or finance, a CFA or similar evidence of professional advancement, have 15 or more years of relevant experience, and will have superior presentation and client-contact skills.
 
This is a senior position reporting directly to the firm’s chief executive officer, and the incumbent will be a member of the firm’s investment policy committee.
Compensation will be highly competitive.
 
If you are interested in the job, or know someone who might be, please spread the word and forward resumes to my e-mail address. Please put “hedge fund strategist” in the subject line to help me give it proper priority.
 
Please call or email me: Charles A. Skorina (415-391-3431) skorina@sbcglobal.net
 
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Consultants: What are they good for?
 
Almost all tax-exempt institutional investors use consultants; they’re as ubiquitous as their PowerPoint slides. But their customers don’t always seem convinced they’re getting as much value as they’re paying for. They may be too polite to say that to their consultant’s face at the quarterly get-together, but they’ll say it to me.
I recently had a real, live consultant in my office, fresh from a long tour with one of the biggest, name-brand firms and had a chance to ask some of those impolite questions. He wanted me to omit both his name and his employer’s name from publication.
 
We’ll just call him Big C.
 
Skorina: So, tell me, C., what are consultants really good for? What value do they deliver?
 
Big C: Well, for smaller funds – say, under $200 million — we’re indispensable, and that’s where we’re worth every penny we bill.
We provide good research, personal attention, and a sophisticated view of the world that most small funds would not otherwise be able to access. Small funds don’t have investment staff trained in modern portfolio strategy and allocation. We fill that gap.
By the way, I thought you’d have a bigger office.
 
Skorina: Let’s stick to the subject. Does that usefulness taper off as you deal with bigger funds?
 
Big C: We don’t like to look at it that way, but there’s some truth in that. I think we provide essential services for funds up to $500 million. When conservative funds with legacy stocks-and-bonds portfolios start getting big, they really need to diversify into alternatives. We can bring them customized, deeply-researched hedge-fund and private-equity offerings they couldn’t possibly assemble on their own.
 
Skorina: Yes, but some boards feel they’re getting cookie-cutter service. You’re offering a fairly small list of favorite managers to all your clients on a one-size-fits-all basis.
 
Big C: Again, there’s some truth in that. But most consultants would argue that they’re finding the best managers out there. By definition, the top tier is pretty small. It’s also true that there are a lot of good funds that don’t make it onto the menu.
Except for Albourne, which probably has deep research on about 650 funds, consultants usually only know 75 to 100 funds really well. And they put probably 80 percent of their clients into 50 funds. So those funds have to be scalable and have capacity. But, to be fair, since the consultants are the gatekeepers to a lot of money, they are getting complete attention from those fifty funds. We never have any trouble getting our calls returned or our questions answered.
 
Skorina: They used to say that an IT manager could never get into trouble by buying IBM. So, I guess a consultant never has to apologize if he can get a client into Bridgewater or Och-Ziff.
 
Big C: You make it sound like a bad thing. Hey, if you’ve got ten million, I could get you into Bridgewater. I know people.
 
Skorina: Thanks a lot, C. Now, what do you do for the big guys in the billion-dollar club that they couldn’t do for themselves? I hear grumbling sometimes that all they get is group-think.
 
Big C: For funds over a billion, consultants are most useful doing special projects and passing along industry practices. Funds that big should be able to recruit a qualified investment committee and/or investment professionals and do most of their own heavy lifting with regard to allocation and monitoring outside managers.
I can understand the “group-think” charge and we all know that labeling something “best practices” doesn’t always guarantee that they’re really the best – or even practical. Sometimes there’s a temptation to peddle “new” ideas so we have something that sounds proprietary. It’s a business, after all, and you need to keep putting something fresh on the shelf. And, especially with the wave of recent consolidations in the industry, you could argue that diversity of opinion might be declining.
With all that said, most of us work hard to serve our clients. If we don’t, we know there are competitors who will.
 
Skorina: I’m always nosey about compensation. What do they pay you geniuses, anyway?
 
Big C: At our shop, a starting consultant gets about $120,000 with a 15 percent bonus opportunity. A senior-level will get $160K with a bonus up to 20 percent. A managing director gets $200K with a 40 percent bonus. Of course we, and the other major firms, have a few top guns who get competing offers all the time and we have to pay to keep them. I won’t name any names, but a few – very few – get up to a million.
 
Skorina: Thanks for stopping by, C. I’ll show you out the back way. No one will ever know you were here.
 
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Major Consultants and their clients:
 
Whatever one thinks of consultants, they are the gatekeepers to a vast amount of money. Investment & Pensions Europe estimates that there are currently about $40 trillion dollars among the top 400 institutional managers (pensions, sovereign wealth funds, endowments, foundations, and other tax-exempt).
 
I checked a couple of data bases for this article and found that at least half of the largest fifty U.S. tax-exempt funds in every major category use consultants – endowments, foundations, public, corporate, and union pension plans.
 
I also found that two groups — endowments and foundations — rely to a surprising degree on one firm for guidance. Cambridge Associates, by my count, advises at least 19 of the top 50 endowments and 17 of the top 50 foundations. And I’m sire this count is low, since not all funds publicly disclose their relationship with consultants.
 
To be fair, most investment offices can use all the help they can get. Most run very lean and just monitoring existing outside managers is incredibly time consuming. Scouting for new talent is more daunting still. We know that in the hedge fund industry alone annual churn is almost 10 percent, with hundreds starting up and closing down every year. And that’s just the hedgies. Add the private equity managers, real estate, CTAs, etc. and you have a ridiculously large universe. Only a crew of specialists with a big budget can possibly cull out the winners from the losers and the up-and-comers from the has-beens and never-weres. The major consultancies can argue that with their resources they at least have a fighting chance to do it.
 
As a special bonus, I pulled together a list of the major consulting firms, assigned to their major client categories. Some of them are highly specialized; others are more eclectic.
 
Here are many of the major consulting firms and some of their biggest client categories. Most of the firms consult across segments, but for this article I focused on the top sixty or so consultants and their dominant tax-exempt institutional client segment.
 
 Major consulting firms with biggest client categories

Endowments Foundations

Public

Medical Systems

Union

Corporate

Cambridge

Callan Associates

SEI

Alan D. Biller

Towers Watson

NEPC

Wilshire Associates

Slocum

Segal Advisors

Hewitt Ennis Knupp (AON)

Albourne America

Independent Fiduciary Services

Highland Assoc

Marco Consulting

Russell

Fund Evaluation Group

Strategic Investment Solutions (SIS)

Ellwood Assoc

Rogerscasey

Buck Consulting (ACS)

Hammond (Mercer)

Pension Consulting Alliance

Monticello

Milliman

Rocaton

Colonial

Hamilton Lane

Merrill Lynch

Bellwether

Cliffwater

Aksia

Investment Performance Service

Cardinal

Wurts

Altius Assoc (UK)

Meketa

Canterbury

Courtland Partners

Graystone

(MSSB)

Arnerich Massena

Marquette Assoc

Nuveen Investment Solutions

Pension Consulting Alliance

Portfolio Advisors

R.V. Kuhns

PCG (PE)

Franklin Park (PE)

Summit Strategies

Mercer (Hammond)