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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What does it cost to run an investment office?

04 / 01 / 2018
by Charles Skorina | Comments are closed

In early 2016 certain Congressional committees sent letters to 65 major private universities asking for information about their endowments.

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.  But our clients (nonprofit boards and "Wall Street" asset managers) find this information useful, so 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.

So, we've done 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.

 



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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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