OCIO Growth in 2019: The Party’s Over

10 / 29 / 2019
by Charles Skorina | Comments are closed

No one knows exactly when the Southern Cottontail Rabbit diverged from its other 19 (or so) North American Cottontail cousins, becoming its own distinct species of bunny.

In evolution these things just happen.

Similarly, among financial institutions, modern banks seem to have evolved from traditional moneylenders somewhere in northern Italy in the late 14th century.  But that fateful development could only be recognized in retrospect.

Our friend John Hirtle, of Hirtle, Callaghan & Co, claims that he (with fellow Goldman Sachs vet Donald Callaghan) birthed the OCIO species in 1988.  He's a very nice (and imposing) man, so we take him at his word.

In any case, there were soon several smallish firms pursuing the OCIO business model in the early 1990s.

The core idea was to offer a diversified and full-discretion money management function to family offices and others who could no longer effectively or affordably do the job in-house (even with the help of traditional trust banking services).

The job was becoming too sophisticated and complex, both conceptually and operationally.

Observing their success, a number of larger firms joined the scrum in the OCIO space and, in a couple of decades we had the OCIO landscape of today, managing not just billions, but trillions of dollars.  And reaping proportionate fees therefrom.

We've been charting the growth of the OCIO industry for the past decade in our annual OCIO report and the heirs of Hirtle, big and small, seem (mostly) to have flourished.

In our shiny new 2019 report we observe that total OCIO assets grew from $1.98 Trillion to $2.38 Trillion. That's a year-over-year growth rate of 19 percent.

That's pretty impressive! But, the AUM increase is not as vigorous as the annual growth over the previous four years (2014 through 2018).  And some of the increase represents a "reclassification of assets" at two OCIO providers.

So, three decades into the OCIO era, we're minded to ask whether the OCIO growth rate may be slowing, maybe even plateauing.  Are the OCIO rabbits multiplying faster than the green, green grass of customer money they live on?

Let's consider the evidence, both statistical and anecdotal.

The hard numbers



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From Russia, with math! Anastasia Titarchuk takes over New York State’s CRF fund

09 / 17 / 2019
by Charles Skorina | Comments are closed

Anastasia Titarchuk just moved up to permanent chief investment officer and deputy comptroller of New York State’s $216 billion CRF fund after three years as Deputy CIO and a year as Interim CIO.

NYSCRF is the county’s third-biggest public pension fund after CalPERS and CalSTRS in California.

We have a revealing Q&A with her just below; but first here’s some context about CRF, which doesn’t usually get as much ink as the big West Coast funds.

Investment Performance

Here are the latest multiyear returns for these three mega-pensions and CRF hold its own very well on a comparative basis. (CRF has a non-standard fiscal year, but we have helpfully stated all figures as of June 30, 2019.)

For 2019, CRF tops both the Californians with 7.1 net return.

Over 10 years the New Yorkers were a close second to CalSTRS, with 9.8 percent vs. Chris Ailman’s 10.1 percent.

Investment Performance NYCRF, CalSTRS, CalPERS

[Click "read more" below for charts and complete report]

Only Mr. Ailman at CalSTRS was CIO for a whole decade (now approaching two decades!).  Ms. Titarchuk was interim CIO for all of 2019.  And, of course, Mr. Meng at CalPERS is the newbie, in office for only the last six months of the 2019 fiscal year.

Funded Status

A very big deal for public pensions is an actuarial number called funded status, which other institutional investors don’t have to think about.  The calculation depends on some tricky estimates, and opinions differ about what’s a healthy number.  But higher is always better.

A recent Milliman Study of 100 major U.S. pensions found that only 11 have a funded status over 90 percent, and NYSCRF is one of them, with an enviable 94 percent as of 2018.

Good investment performance can help improve this number, but it’s only one factor.  Still, a low funded ratio tends to attract attention in a not-good way and can cast a pall over the whole system.



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The mysterious shortfall in women chief investment officers

05 / 06 / 2019
by Charles Skorina | Comments are closed

In our last newsletter we looked at the number of women CIOs at big endowments*.  Among 109 North American endowments over $1 billion we identified 20 (including one female director of investments and one CFO who liaises with their OCIO providers).

That’s just eighteen percent – less than one out of five.

For this issue we also took a look at the mid-sized schools (in the $500 million-to $1 billion bracket), to see if the situation is any better.

Unfortunately, that’s a no.  We found 10 females among 85 schools.  That’s just 12 percent – a significantly lower representation that among the bigger schools.

We've inserted a chart below with the CIOs ranked by AUM.

Twelve percent in this group is not quite as bad as it sounds.  That’s because mid-size endowments are less likely to have dedicated in-house investment staff – either men or women.

Many prefer to outsource, or to use a committee-and-consultant model without an internal investment office.

But it’s still not a great number.

Although we haven’t done an exact count, we should note that females are well represented among professional slots at the major OCIO firms and consultants.  These are good jobs, and often a gateway to CIO jobs (although they usually don’t pay as well).

This may somewhat mitigate the overall situation for women jobseekers.

Charting the trend

That’s the static picture, but the trend is even more important.

Is that gap worsening, or about the same over recent years?

Unfortunately, it seems to be widening.

Looking at recent turnover, 9 departing female CIOs have been replaced by men; while only 3 were replaced by other women.

Just one departing male was succeeded by a female.

These turnovers are detailed in the next chart.



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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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