University endowments in the crosshairs

12 / 12 / 2017
by Charles Skorina | Comments are closed

The U.S. has the greatest university system in the world.  But it’s expensive.  And congress is about to make matters worse by taxing the endowment earnings of “large” private college and university endowments.

The latest congressional proposal aims to slap a 1.4 percent excise tax on the net investment income of any private university with an endowment of more than $250,000 per full-time student, about 70 universities.

Unfortunately, universities can ill-afford any additional hits to the bottom line.  A recent report by The College Board, found that a "moderate" college budget for an in-state public college for the 2016–2017 academic year averaged $24,610 and a moderate budget at a private college averaged $49,320.”

Private universities in particular lean heavily on their endowments for tuition assistance and operational support.  Melissa Korn noted in the Wall Street Journal earlier this year, that “schools with endowments over $1 billion funded just over one-third of institutional grant aid from their endowments, while those with endowments of less than $25 million used that pool to cover 5.8% of aid”.

Endowment pools are like savings accounts and endowment earnings the interest.  The more we draw from savings to spend today, the less money we earn to spend tomorrow.

Two years ago, I defended Yale’s endowment, arguing that its capital “is a perpetual source of support for present and future generations of students and faculty and, it takes a long time to accumulate.”

“Cambridge, the wealthiest university in Europe, took 800 years to amass an endowment of $8.1 billion.  Harvard's $36.4 billion took 377 years to accrue.  Upstart Stanford University grew its endowment to $21.4 billion in "just" 130 years.  And that "hoarded" wealth drove performance; American universities dominate the rankings of global higher education.”

Unfathomably, the latest congressional proposal to tax the earnings of “large” private school endowments turns that reality on its head.  The legislative war cry now seems to be “grab what you can today and let future generations fend for themselves”.

There are four sources of income for American universities and colleges and all four are under pressure.  State and federal support has been dropping for years.  Endowment investment returns appear likely to decrease.  Tuition costs have reached unsustainable levels.  And donor gifts have flatlined.

And that may not be the worst of it.  Clayton M. Christensen, the Kim B. Clark Professor of Business Administration at Harvard Business School (ironically, it’s an endowed chair!), sees half of America’s 4000 colleges and universities going bankrupt in the next decade or two, as online education “disrupts” the business models of traditional institutions and runs them out of business.

Our system of higher education – including the great private universities – has been a key asset in our national preeminence.  Financing that system is a growing challenge, but taxing endowment earnings or forcing unwise spending mandates on a handful of successful institutions will only aggravate the situation.

I closed my Yale piece by saying:

Endowments help channel private wealth to public purposes.  They are an American success story, and one reason Americans have never had to rely solely on the whims of a benevolent state, as in Europe.  I hope Congress doesn’t spoil the ending.

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Endowment costs: The secret history

10 / 18 / 2017
by Charles Skorina | Comments are closed

Endowment costs: The secret history

In early 2016 certain Congressional committees sent letters to 65 major private universities asking for information about their endowments.  They supposedly had an urgent need for this data and gave the schools just 30 days to respond.

It was worded as a polite request, but it came from people who could, for instance, compel the endowments to adopt a strict spending rate (like private foundations) instead of the more flexible regime they currently enjoy as "charities."  Needless to say, the schools all coughed up the information forthwith.

Apparently, this data-dump just went into filing cabinets, and neither the schools nor Congress have been eager to share those reports with the general public.  Nevertheless, we scrounged up copies of 15 of the responding letters from various sources.  The other 50 schools have kept theirs out of sight.

We were especially curious to see what the schools had to say about endowment management costs, which has always been a cloudy issue for us.

Commonfund agrees.  In a 2015 study they opined that:

...unlike other factors that affect investment returns, such as asset allocation and the many types of operational and investment risk, costs are almost certainly the least well understood.

See: Commonfund Institute: Understanding the cost of Investment Management (October 2005).

As we said in our OCIO report, the perceived cost of managing the endowment is a major factor in the decision to outsource, or not to.

It's not the only factor, but a big one.  But how can a board make that decision if they don't know whether they're spending more or less than their peers?  And, whether outsourcing will actually save them any money?

Investment returns can be benchmarked to the second decimal place, but the costs of managing those investments are harder to come by.

NACUBO and Commonfund include questions about those costs in their annual NCSE survey, and report broad averages.  But there is almost no data on specific schools.  We also have suspected that the reported NCSE average costs are on the low side, but had no hard evidence one way or the other.

Recent 990 filings also require a dollar amount for "investment management fees," but we haven't had much confidence in that number.

So, we've attempted to do our own analysis of the cost data reported by those 15 schools.  It has some limitations, but we seem to be the only ones to have ransacked these letters.

The Nine "normal" endowments

Nine of the endowments offered plausible numbers (expressed as annual dollar amounts and/or percentages of AUM) for both their investment-office costs and fees paid to external money-managers for the three fiscal years 2013-2015.

Here's what we extracted from their responses.

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OCIO assets up over 21% in Skorina’s latest OCIO list!

09 / 20 / 2017
by Charles Skorina | Comments are closed

With 77 firms heard from, we’re now reporting $1.7 Trillion in full-discretion assets under management by outsourced chief investment officer firms.

That’s a year-over-year jump of $364 billion – or a little over twenty one percent – since September, 2016!

See last year’s report, here:

The number of reported RFPs is also rising as institutions seek better returns and broader investment options.  OCIO providers, in turn, are beefing up their resources to meet the needs of current and prospective clients.

For example: Alan Biller, Hirtle Callaghan, Goldman Sachs, and Cambridge Associates, among others, all continue to add headcount and expand capabilities.

Hirtle Callaghan is hiring senior client-centric investment professionals, Goldman and Cambridge continue to mobilize and deploy their deep internal resources, and Alan Biller continues to build for the future and consolidate their commanding position in the multi-employer pension space.

Where are CIOs to come from?

As a search-committee chairman remarked to me recently, there are very few Joe Montanas to be had among nonprofit CIOs.  The accomplished stars and no-brainer candidates are mostly immovable. 

That’s obviously true among the mega-endowments. Seth Alexander, Andrew Golden, and Scott Malpass are happy where they are.  Recent hires like Narv Narvekar and Britt Harris were well-known to Harvard and UTIMCO, respectively, for years.  And in each case that is probably the only move either would have considered.

But much the same problem exists at smaller funds.  Proven leaders are already well-paid; and/or they’re closer to the end than the beginning of their careers.

Paula Volent, for instance, has done a stellar job at the $1.3 billion AUM Bowdoin College endowment, and is still relatively young.  But her board is – wisely – taking very good care of her.  It’s unlikely that another fund that size could match what’s she’s making.


Talent is still available at a reasonable price, lots of it.  But you have to look deeper and harder, and may need to move down to next-generation leaders who don’t have the long track-records that reassure nervous, picky boards.  Next-gen candidates bring less hands-on experience and must survive harder scrutiny.

Big Fortune 500 firms like GE spend years and millions of dollars training their leaders for top jobs.  Nonprofits don’t have the time or budget for that.

New CIOs must show up full-fledged ready to hit the ground running.

OCIO firms can offer the proven performance of those unobtainable super-stars at a reasonable price.  And they can replicate the entire investment office with the process and structure to cope with the complexity of modern portfolios and mounting operational and regulatory burdens.

An OCIO isn’t necessarily the best choice for your institution, but it’s an attractive proposition for many.  That’s why their AUM is still growing at that blistering pace.

Stay tuned for Part 2:

In our next newsletter, we will have more to say about the pros and cons of outsourcing, plus an extended analysis of endowment investment management costs, and conversations with some prominent outsourcing leaders.

For now, let’s just look at how the sector is doing and who’s available to take your call per our latest research.

On to the 2017 edition of Skorina’s Ultimate Outsourcer List!

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Top endowment chief investment officers: five year performance

07 / 05 / 2017
by Charles Skorina | Comments are closed

This letter looks at the most recent five-year performance of over one hundred of the world’s best university endowment chief investment officers.

We rank their returns, review their performance, and reveal their strategies for the decade ahead.

Endowment chief investment officers (and other non-profit CIOs) have an infinite investment horizon, a global playing field, and can invest in anything anywhere - within the broad policy limits set by their institution.  They are the top guns of the institutional investment world.

We recruit these investment heads for endowments, foundations, family offices and institutional investment firms.  And, we (and many others) regard the CIOs at major American universities and foundations as the best of the best.

A CIO candidate may have a sterling character, a stunning intellect, and a winning smile.  Those things do count.  But will he or she make money for our clients?  Recruiting a high-profile investment executive is a complex process, but it starts with objective measurements.

We compile the information presented in this report for internal use to help us as recruiters, and we think it will be useful to boards, trustees, CEOs and all our readers.

Chief investment officers “make things happen.”  Security selection, manager selection, timing, and fees play an important role in investment performance - allocations don’t explain everything!

We also uncover the emergence of a new consensus around a 60/40 – alternatives/public markets – portfolio, even as we report on the embarrassing success of the old 60/40 stocks/bonds

This is our SEER report: Skorina's Enhanced Endowment Report.  The enhancements are the names and returns of individual CIOs (or OCIOs), data which are not readily available elsewhere.

If you need further information, or help with hiring decisions, please call on us anytime.

Now, on with the show:

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Britt Harris and the rise of the Aggies

06 / 20 / 2017
by Charles Skorina | Comments are closed

Britt Harris and the rise of the Aggies

Thomas "Britt" Harris is a highly-respected investment manager around the world.  But, more importantly, he is a highly-respected investment manager in Texas.  More important, still, he's an Aggie.  And, now he's been named CEO and CIO of UTIMCO effective August 1st.

Aggies are graduates of Texas Agricultural and Mechanical University.  They form a proud, but slightly aggrieved subtribe among Texans.  But, at UTIMCO, their stock seems to be soaring.

The nine-member UTIMCO board traditionally includes three appointees of the University of Texas System, but only two from Texas A&M System which has always rankled the folks from College Station.

See: Texas turmoil: UTIMCO reboots,

Last month, UT Chancellor McRaven, who had held an ex officio seat, graciously stepped down so that the Aggies could name another board member.  This month, they named Janet Handley to that seat.  Ms. Handley just retired as chief investment officer at the Texas A&M Foundation.  She's a very nice lady, and the performance of her fund is chronicled in our upcoming Top 100 CIOs report.  More important, she graduated summa cum laude from Texas A&M in 1975.

Then the UTIMCO board voted to rename their organization, which is now officially the University of Texas/Texas A&M Investment Management Co.  That's a bit ungainly, so the Aggies conceded that they could still call themselves UTIMCO.  That's a relief to us, because that other thing won't fit in our charts.

For the Aggies, having one of their own in the top spot is just icing on the cake.  (They're also pleased that ex-Governor Rick Perry, still another Aggie, is now U.S. Secretary of Energy.)

Oh, and by the way, the Aggies would want you to know that the Texas TRS retirement system under Mr. Harris has outperformed UTIMCO under ex-CEO/CIO Bruce Zimmerman.

Although Mr. Zimmerman is technically a Texan, he went to Harvard, which should speak for itself.

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