Compensation and chief investment officers

11 / 04 / 2018
by Charles Skorina | Comments are closed

Who are the best-paid endowment CIOs?

Compensation is a delicate issue; but recruiters need to keep track of it.  And, we see no reason why we shouldn't share some of that bounty with our readers.   (See our complete compensation chart just below.)

Most of it is publicly available, anyway; as long as you're willing to scrounge for it.  Private schools and some publics disclose it in IRS filings.  The hitch is the long time-lag -- more than two years -- before the data is publicly available.  The corresponding data for most public schools is often fresher, but it's scattered among various and often quirky databases in various jurisdictions with various disclosure rules.

It's ironic that data for public colleges has sometimes been the least public.  But that's changed somewhat in recent years as more states adopt sunshine laws for public-employee pay generally.  Or, you can file a FOIA request.  But it's been like pulling teeth in many places.

And, even when public-school CIO comp is published, it can't always be trusted.  Clever college administrators have sometimes found (or constructed) loopholes in those sunshine laws which let them conceal part of the CIO pay-package.

A recent and noisy case in point arose in Michigan.  The official University of Michigan salary-disclosure listing (page 447) for 2017 showed CIO Erik Lundberg's total comp as $720,000.

We've been skeptical of that number for a while, but the U was eventually prodded into disclosing that Mr. Lundberg actually made $2 million in 2017.

Although the gross number had become public, the Detroit Free Press still sued the University to obtain details about how it was calculated.  

The judge sided with the Freep, but the university argued that they had legitimate reasons for keeping them private.

"Despite the court's ruling, we believe disclosure of the ... Incentive Plan will put U-M at a competitive disadvantage," a school spokesman said.  "Because there are very few public universities in our endowment peer group, virtually no comparison [sic] schools will ever have to make their plans public.  These are the employers against which the university competes for talent recruitment and retention."

The fact that a major university would go to some trouble to avoid disclosing that information does speak to the highly competitive market for top CIOs.  If you have a good one (and Mr. Lundberg is very good), there's always anxiety that someone with deeper pockets will whisk him or her away.   And, if you're crafting a competitive offer, it certainly helps to know exactly what you have to beat.

As the Lundberg case confirmed, these pay packages are complex.  In our chart below, we can only offer the bare numbers.



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CA vs NY: Performance and pay at the Mega-pensions

07 / 31 / 2018
by Charles Skorina | Comments are closed


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OCIO assets near $2 trillion after six-month 17.4% jump

06 / 20 / 2018
by Charles Skorina | Comments are closed

Eighty-one firms have updated their AUM and contact information for our latest Outsourced Chief Investment Officer (OCIO) list.

They include four new listings: Deutsche Bank with $15.5 billion, Ellwood Associates with $1.2 billion, LCG Associates with $0.382 billion, and Ballentine Partners with $6.6 billion in discretionary OCIO assets.

Our total reported OCIO assets have grown 17.4 percent in just six months.  That's double the year-over-year increase we measured over all of 2017.  And, almost all of that is organic growth in firms we were already covering.

That's what we call exponential growth!

Our OCIO coverage continues further below.  It includes our updated list of all vendors and an analysis of industry growth.



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Where do chief investment officers come from?

05 / 16 / 2018
by Charles Skorina | Comments are closed

Every year there are about 50 to 100 US nonprofit (tax-exempt) and family office CIO searches and that number will climb as more ultra-high-net-worth families (over $100 million AUM) form offices, create foundations, and hire professional investment talent.

PwC forecasts a near doubling in global AUM over nine years, from $84.9 trillion in 2016 to $145.4 trillion in 2025, and predicts the US share of this global wealth pie to rise from $46.9 trillion to approximately $71.2 trillion over the same period.

But where will families and institutions find these investment heads?  Asset owners want to know where to find good candidates, portfolio managers want to know what their chances are of landing a CIO job, and marketers for external money managers want to know whom to call.

Some families and institutions will select the OCIO option (outsourced chief investment officer) and place their assets with an outside firm, but most will choose internal management. 

As search consultants, we recruit and fill positions within three broad categories: nonprofit institutions, family offices, and the for-profit investment world of Wall Street investment banks, insurance companies, mutual fund managers, RIAs, hedge funds, and consulting firms.

All public pension systems, most endowments, and many foundations, health systems, associations, charities and corporate pension plans publish their fund returns and we use that information to rank and identify the top performing funds, chief investment officers, and senior asset managers.  Find the best performing funds and you are likely to find the best talent.

Most nonprofit funds over $1bn and about one third between $500 million and $1bn have CIOs.  In 2011, we counted about 1,300 CIOs and heads of investments at tax exempt institutions.

Today we track about 1,100 chief investment officers and another 800 up-and-comers in the nonprofit sector as the increase in endowments, foundations, and other nonprofits with a billion or more in AUM has been offset by a drop in the number of corporate DB plans.

Family offices: the best CIOs you’ve never heard of

 



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The Harvard endowment: mark-to-make-believe

03 / 21 / 2018
by Charles Skorina | Comments are closed

Before current management terminated the old compensation structure, the huge salary packages at HMC stumped us.  Every time we compiled our CIO compensation studies, we wondered how those paychecks could be so large when performance was so mediocre.

Some fault poor communication, siloed investment teams, and misaligned incentives, but we hear there were other issues – questionable benchmarks and bonuses paid “off-the-mark.”

Here’s how it worked. 

Most of HMC’s assets such as listed equities, fixed income and hedge funds, relied on public market prices.  And the private equity and venture capital portfolios were invested with outside managers who were responsible for valuing the assets.

But the natural resources portfolio was owned directly by HMC and valuations relied on third party appraisers hired by the staff who, in turn, controlled the process.

There were performance benchmarks, of course.  But staff set the benchmarks and beating those benchmarks depended upon valuations and valuations depended on a process controlled by the staff.  In other words, the carry was paid off of unrealized marks on illiquid holdings and superior performance was all but guaranteed.

Even better, there was no easy way to argue against those benchmarks and valuations.  As Matthew Klein wrote in the Financial Times about “private equity’s mark-to-make-believe problem,”

If it’s challenging to figure out what a thing is “worth” when some of the smartest people on the planet, armed with the fastest computers and the biggest datasets, are constantly discussing and betting on its value, it’s downright impossible for investment managers focused on illiquid assets to assess the value of anything they own until they exit their positions by selling to someone else.

Not surprisingly, there was great enthusiasm for these investments within the endowment.

As one source put it to me recently, in Las Vegas, the house wins, but at HMC, the players made the rules.

Fun with FASB

Non-profits must show their investments at “fair value” per FASB 124 on their audited financial statements.  That’s straightforward for publicly-traded securities.  But things get cloudier for illiquid alternative assets with no quoted prices: so-called “level 3” items.  And, it gets cloudiest of all for assets not in the hands of independent third-party managers.

Absent quoted prices the reporting entity must have some reasonable process for establishing those values and for adjusting them up or down from period to period.  If they pass that sniff test, and management has signed off on the process, then the external auditors will probably not second-guess them.

We don’t doubt that HMC had a rational-looking basis for the numbers they printed; but when the process can be influenced by insiders, and those insiders could be said to have a monetary interest in the reported values, there is room for skepticism.  We think the bare fact that there have recently been very significant write-downs under the new management and changes in the way compensation is paid should speak for itself.



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