Charles Skorina & Company

The Skorina Letter No. 35

charles — Tue, 10 Jan 2012 15:36:45 +0000

Performance for pay: Is your CIO cost-effective?

(Check the 3 charts below)

Measuring the value of an institutional chief investment officer

As an executive recruiter, I study investment talent and identify people who will bring the most value to my clients.

But how do you measure the value of, say, an institutional chief investment officer? Talent, in the final analysis, is a commodity in the market like any other. Employers have limited resources; they want the best talent they can find, but at a price they’re willing to pay.

If this seems cold-blooded, consider how the CIOs themselves evaluate their own external money managers. CIOs watch the performance of their outside managers with a hawk-like gaze; or at least they’re supposed to. And if the return drops relative to the fee charged, and a superior return-for-fee is available elsewhere? Well, then changes are made.

Welcome to capitalism.

For our internal use and to help our clients, we compile data and track the performance of hundreds of CIOs and asset managers. Recently, we extracted and published a list of the 50 highest-paid nonprofit CIOs, which some readers seemed to like.

It’s still on our website, here: http://www.charlesskorina.com/

This time, we’ve started with that same list and tried to answer the question: who among these well-paid managers provides the most performance relative to their paychecks?

Specifically, we looked at their investment returns over the most recent five years, computed how many basis points they earned per $100 thousand of compensation, and then ranked them all by that measure of performance-for-pay.

We’ll have more to say about what it all means further below. But, without further ado, here’s the ranking of the highest-paid nonprofit CIOs according to the almost-famous Skorina Performance-for-Pay Index.

CIO Performance-for-Pay:

Basis Points of Return per $100K Compensation (FY2006 – FY2010)

Charles A. Skorina & Co.

Note: Blue highlighted CIO names indicate appointment after July 2007, serving less than 3 years of the 5-year FY2006-FY2010 period.

Performance for pay: What does it mean?

Surely at least some CIOs deserve their pay, because they produce consistently better returns than their peers. A shining example is Dr. David F. Swensen at Yale University. In the 21 years from 1985 to 2006 his team produced an average annual return of 16.3 percent, which is a truly distinguished record.

But was he really worth his pay? Most would say so. In 2006, at the end of that great run, he was paid $1.6 million. That’s a nice take-home; but paltry compared to what he could have made on Wall Street, as many have pointed out.

I was looking at those numbers and noticed I didn’t even need a calculator to divide (approximately) 1600 basis points by $1.6 million. It’s obviously 1,000 basis points per $1 million of compensation. Or, to get a more conveniently-sized statistic, we could say 100 bps of performance per $100K of compensation. Now, that’s a nice, round number. Hmmm.

So, right there was a simple, objective measure to help judge whether a nonprofit CIO (or any other investor) is worth his or her pay. How much performance (over some reasonable period) is their employer getting versus the compensation they pay to hire and keep him?

As we all know, things haven’t been quite so swell at Yale, and most other places, from 2006 to today. Yale’s 5-year annualized return as of the end of FY2010 was 6.2%. However, Dr. Swensen was making $3.8 million as of 2009. Do the same math — 620 basis points divided by $3.8 million — and we see that over that more recent 5-year span, he was delivering only about 16 bps per $100K of comp. The numerator goes down, the denominator goes up; and suddenly his performance-for-pay value doesn’t look quite so great.

But surely, if you stacked up Dr. Swensen’s performance fairly against his peers over that same difficult period he would still look pretty good on a relative basis. Wouldn’t he?

Frankly, I had no idea. So I decided to crunch some numbers and find out.

And, looking at the bar chart above, there’s Dr. Swensen, down toward the bottom. Per my ingenious performance-for-pay index, he ranks 46^th out of 50 among this group of high-paid CIOs. Ms. Jane Mendillo at Harvard University, against whom Yale is naturally compared, was two steps lower: 48^th out of 50 with just 10 basis points of return per $100K of compensation.

Now, if we cast our eye up to the number-one position, we find a CIO who doesn’t get as much ink: John E. Hull at the Andrew W. Mellon Foundation in New York. He runs about $5.1 billion AUM and has earned an annualized 6.5% return for FY2006 – FY2010. That’s very good in this period, but still only a little higher than Yale’s 6.2%.

Ah, but Mr. Hull is paid only $620 thousand, vs. Dr. Swensen’s $3.8 million. He’s delivering 105 bps of return per $100K of compensation; while Dr. Swensen delivered just 16 bps/$100K in the same period, as we pointed out. I think if I were sitting on the Mellon board, I’d conclude that Mr. Hull’s paycheck is a bargain relative to his performance. In fact, he’s now performing better, in this sense, than Dr. Swensen did in his glory days: 105 bps/$100K vs. Swensen’s 100bps/$100K in that earlier period.

Dr. Swenson, on the other hand, has a lot of longevity, and you could argue that he’s being compensated in part for all those years of outstanding returns, when he could have picked up his phone anytime and doubled or tripled his pay south of New Haven.

Now, bps/$100K is just a ratio, and you can interpret it any way you like. Looking just at 2006-2010, you might argue that Dr. Swensen is overpaid; or maybe Mr. Hull is underpaid; or both might be true.

Bps/$100K as an absolute number doesn’t mean much. But I would argue that rank-ordering by such a measure over a reasonable span of time is both interesting and meaningful.

We are not, by the way, asserting that we have invented a master-key that unlocks the secret of evaluating investment managers. Performance depends heavily on asset allocation, and that is at least partly in the hands of boards, investment committees, and consultants. Governance matters, staff talent matters, and a little luck never hurts. But we think our ranking is a useful tool to help understand a CIO’s value to his/her employer.

Here’s a table with more of our data for context; it’s a companion to the bar-chart. The first three columns rank each CIO by performance for pay, then their five year institutional return, and then their ranking by total compensation.

CIO Performance-for-Pay Ranking

including 5yr absolute returns and total compensation

50 Highest-Paid Nonprofit Chief Investment Officers

(bps/$100K of compensation: 2006-2010)

Charles A. Skorina & Co.

Note: Blue highlighted CIO names indicate appointment after July 2007, serving less than 3 years of the 5-year FY2006-FY2010 period.

This list is slightly different from the list of 50 highest-paid CIOs we published back in November, but it contains most of the same names.

You can read off the 5-year return and total compensation. Divide the former by the latter and, voila: out pops our bps/$100K statistic. Sort the list by that value and you have the ranking above.

In most cases the funds self-report their 5-year returns; or at least their annual returns, from which we calculated the 5-year geometric mean. In a few cases they are not so obliging, and we have had to hand-calculate a return from published financial statements. There’s a note further below about how we did it if anyone’s interested, or thinks we got one wrong.

The Winners:

Who are the people on top of our list, and why are they producing better returns relative to their pay than most of their peers? We’ll take a quick look at the top five.

1. John E. Hull, Andrew W. Mellon Foundation

Mr. Hull was previously CIO of a public pension — New York State’s $100 billion CRF fund – from 1985-2002. The most recent incumbent there, Raudline Etienne, made about $280 thousand in 2010. We doubt if Mr. Hull was making much more than $200K when he left in 2002. So, the job at Mellon would have been a big pay-hike for him. We can assume that he is a happy camper, making more than all but three or four of the highest-paid public pension managers in the country. And, without having to face the political sturm und drang that goes with being a public pension exec.

2. L. Erik Lundberg, University of Michigan Endowment

Mr. Lundberg was University of Michigan’s first CIO, arriving in the fall of 2007. The endowment was previously overseen by an investment committee, and the results were only so-so. In 2006 they earned 16%, ranking Michigan 22^nd among the 50 for return, but well behind the Ivys (Yale made 23% that year). And, make no mistake, Michigan wants to be thought of in the same bracket as Harvard or Yale; except with a real football team.

In the two fiscal years that can be attributed to him — FY 2009 and FY2010 — he did pretty well. In FY2009, Michigan lost 23.4%. Not good, but better than Princeton, Yale, Duke, Stanford, or Harvard; not bad for his rookie year. In FY2010 Michigan earned 12%, which moved Mr. Lundberg up to 22^nd ranking among this group of 50 for annual return. And, again, he surpassed Yale (9%) and Harvard (11%). On the whole, this was a very respectable performance which put Michigan at the number 20 spot for 5-year return among the 50, behind Yale, but ahead of Harvard and Stanford.

Mr. Lundberg was recruited from Ameritech, where he’d spent 19 years as a manager for their corporate pension and possibly concluded that he wasn’t going to get the top job, especially after Ameritech was acquired by the much larger, Texas-based SBC in 1999 (and was re-branded AT&T in 2006). This was a jump that probably made sense to Mr. Lundberg in 2007, even though he was starting at around $500K, low for a major endowment. He’s only about 45 years old and, as the school’s first CIO, can expect to catch up to his peers in pay over the next decade. Meanwhile, Ann Arbor has a good CIO at a very moderate salary.

3. Robert J. Manilla, Kresge Foundation

Robert Manilla, at the Kresge Foundation in Michigan, was another late arrival, succeeding Ed Hunia as CIO in December, 2008. Mr. Hunia was a top performer himself. Over 2004-2008 he achieved the best return of any endowment or foundation in the country (he received a Lifetime Achievement award from Foundation and Endowment Money Management as he retired).

But Mr. Manilla didn’t disappoint. Presiding over Kresge’s high-performance portfolio (with an Ivy-like 50% allocation to alternatives) he earned 15% in 2009 and 12% in 2010. Kresge is now ranked 4^th among our group of 50 for 5-year return. So the numerator on our ratio is pretty high. How about the denominator? How did they get a very capable successor to Mr. Hunia (who had total comp of about $780K in 2008) at around $700K?

Well, they didn’t interview at Goldman Sachs. Kresge Foundation is located in Troy, Michigan; for starters, which isn’t exactly Wall Street. Or even Ann Arbor.

Mr. Manilla went to work for Chrysler right out of college (he attended Oakland University, just outside Detroit), which probably seemed like a good idea at the time. He picked up an MBA from University of Detroit along the way. After 23 years at Chrysler, he was running the corporate pension. In 2008 the company was bleeding money and headed directly for Chapter 11, which it achieved just a few months later. In the chaos of 2008 it even seemed quite possible that the Chrysler DB pension would end up in the hands of the Pension Benefit Guarantee Corp, which would have left Mr. Manilla out of a job.

As an old Chrysler hand and a finance guy, Mr. Manilla could have clearly foreseen all this. It was an excellent time to pull the ripcord: and a chance for Kresge to acquire a valuable talent at a good price. And that puts Bob Manilla at no. 3 on our performance-for-pay hit parade.

4. Srinivas Pulavarti, Spider Management Company

Srinivas Pulavarti is CIO of University of Richmond and also president of UR’s semi-autonomous Spider Management Company. He’s a full-on quant who earned a BS in math and physics at Bangalore University, then an MS in financial math at Marquette University. He worked at the Johns Hopkins University endowment and then managed $14 billion in global pension assets at Citigroup before he moved to Richmond. He has the second-highest 5-year return in this group – 7.7% — behind only the impressive 7.9% Nirmal P. Narvekar earned for Columbia. (Note: Mr. Narvekar is president of Columbia Management Company. Strictly speaking, the CIO, Peter Holland, is his subordinate; a distinction which we will ignore.)

So, the two CIOs with highest absolute returns had similar backgrounds (both worked at another endowment: Johns Hopkins and University of Pennsylvania, respectively) both worked on Wall Street (at Citigroup and JP Morgan, respectively) both started their jobs at about the same time (Mr. Pulavarti in 2001 and Mr. Narvekar in July, 2002). But Mr. Narvekar makes $3.5 million at an Ivy school, while Mr. Pulavarti, with about the same return and longevity, makes just $820 thousand at a major public university. But Mr. Narvekar manages about four times as much AUM, and does it at an Ivy university. Maybe that makes sense.

Or, maybe not. Seth Alexander (number 6 on our list) runs the MIT endowment, which is much larger than Columbia’s ($9.9 billion vs. $6.5 billion) and has an excellent 5-year return not far behind Mr. Narvekar (7.2% vs 7.9%). Yet his comp ($890 thousand) is close to Mr. Pulavarti, and far below Mr. Narvekar, making Mr. Alexander sixth in our performance-for-par ranking.

Although MIT is not technically an Ivy school, can we seriously argue that Columbia commands a prestige-premium of that size? There may be no simple or obvious explanation but, for whatever reason, Mr. Narvekar has been able to negotiate a more generous bonus arrangement with his board. His bonus in FY2010 was $1.2 million. Mr. Alexander’s board should appreciate that they are getting excellent value from their CIO.

5. Deborah Foyle Kuenstner, Wellesley College

Deborah Kuenstner succeeded Jane Mendillo at the Wellesley College 99999endowment in 2009. She jumped from $470K total comp as CIO at the smaller Brandeis University endowment, to $620K at Wellesley, a nice bump for her. Ms. Mendillo, who had been making almost $1 million at Wellesley, jumped to about $4.8 million when she was recruited by Harvard.

So, everybody’s happy: Ms. Kuenstner got a $150K raise; Ms. Mendillo got a $3.8 million raise; and Wellesley reduced the cost of its CIO slot by $380K. Win, win, win. We will note that Wellesley’s investment performance in its first full FY under Ms. Kuenstner was not outstanding. Wellesley earned 9%, ranking it at 45^th among the 50. But her relatively modest salary and the solid performance under Ms. Mendillo in 2006-2009 still gives Ms. Kuenstner a good performance-for-pay ranking, even if it’s mostly inherited.

…And, the non-winners:

It’s not our intention to embarrass anyone, but it’s hard to avoid noticing that David Clay, the veteran CIO (since 1990) at Grinnell College in Iowa holds down the number 50 spot with a 5-year return of 0.0%. His thirty years of seniority partly explains why his salary is high enough to make our list. And, of course, a couple of other CIOs generated only slightly higher returns.

Grinnell does not self-report their investment return that we could find, except for 2009; so the 5-year return is our estimate from their financials. We’re pretty sure we aren’t off by more than 50 basis points; our estimate for 2009, for instance, exactly matched their self-reported -24% return. And even a 0.5% return would still make them lowest in the group of 50.

It may well be that a 10-year or longer period (which we did not calculate) would make Grinnell look much better. And it’s hard not to have some sympathy for Mr. Clay. Warren Buffett sits on his board and seems to take quite an active role. It can’t be easy for a CIO to do his job with The World’s Greatest Investor peering over his shoulder. In any case, Grinnell is not hurting. They have some generous alumni; and, on a per-student basis, they have one of the largest endowments in the country.

And now, the top three reasons why some may fault our study:

1. Your 5-year window is too short to evaluate performance!

If you insist that your fund will exist in perpetuity, then, logically, the relevant return-period is infinity; and even Excel can’t cope with that.

Three-year returns are often reported, but we think that’s too short to be meaningful. Ten years makes sense for some purposes. Even the longest-term private equity portfolio, for instance, should have a definite payoff within a decade, and ten years usually brackets at least one full business cycle, if not two. But for our purposes that’s too long. Our research suggests that that 10-12% of CIO jobs turn over every year; so in ten years we’d have an entirely new roster and couldn’t meaningfully compare their performance as individuals. We think 5-years is the Goldilocks choice for us: not too long; not too short.

At least some practitioners agree. In their excellent recent book, Outperform: Inside the Investment Strategy of Billion Dollar Endowments, John Baschab and Jon Piot raise that question with several CIOs.

James Hille of Texas Christian University (who stands high on our performance-for-pay ranking) said, “This must be viewed within a reasonable time period, and we’re looking at more like, three- to five-year time frame for that.”

James Walsh, then the CIO at Cornell, said, “The important thing is to make the evaluation fully comparable by looking at a longer period of time…[three years] is better than one year, but it’s probably still too short. It’s probably five years minimum.”

2. 2006-2010 was a weird and unique period, from which no valid inferences can be drawn about investment performance!

We took the most recent five-year period for which we could get complete data for most of the high-earning CIOs. They all faced the same markets, and it’s their relative performance we were interested in, not their absolute performance.

Most of the private foundations had calendar-year fiscal years vs. the June 30 fiscals of the endowments and pensions, but this also makes little difference over five years.

Technically, the period brackets a business cycle: we went into a recession, then emerged from it – sort of. It contained two good years, a bad year, a disastrous year, then a good year.

It could be argued that it’s exactly in tough periods like this when we see who’s earning their pay and who isn’t.

3. But, different funds have different risk preferences; you’re comparing apples to oranges!

We thought about that. Since we have annual returns for 2006-2010 in our database, we can easily compute standard deviations and Sharpe Ratios. If you’re willing to say that the ex post standard deviation of returns is an acceptable measure of risk and that the Sharp Ratio is an acceptable index of risk-adjusted return, then we can report that our performance-for-pay ranking doesn’t change very dramatically when we use the Sharp measure as numerator instead of 5-year return.

Our top-tier managers get re-shuffled a bit. Mr. Pulavarti moves up from 4^th to 1^st rank; Mr. Hull moves down from 1^st to 3^rd, and so on. But generally the CIOs who score high on absolute performance-for-pay also score high on risk-adjusted performance-for-pay. And Mr. Clay, alas, is still ranked 50^th.

In an appendix we have another table which includes standard deviations, Sharpe ratios, and a ranking of risk-adjusted performance relative to pay.

About those underpaid public pensions CIOs:

When we adjusted returns for risk, we did notice something interesting among the public pensions. We expected that they would have lower-risk portfolios than the Ivys, and they do. Georgia TRS, for instance, has an 11% standard deviation for the period, vs. 21% at Yale. That makes sense. Also, we often opine in our newsletter that public-pension CIOs are relatively underpaid. So, we thought that they would look better on a performance-for-pay ranking after we adjusted for risk. Not so; the ones in this group actually look worse.

Charles Gary, who was the CIO at Georgia TRS in this period (he has since moved on), actually moves down in the rankings: from 31^st to 45^th. They had an absolute 5-year return of 2.5%. Other funds had better returns relative to their risk and climbed higher in the rankings after the adjustment, pushing Georgia TRS down substantially. They emphasize on their website that they are focused on conservative investing and preservation of capital. It’s fine to be a conservative investor and accept a lower return, but their tradeoff doesn’t seem to have worked very well for them. Their Sharpe Ratio was 0.01.

Emory University had similar risk (SD of 12%), but had a Sharpe ratio ten times higher: 0.11. Emory’s CIO Mary Cahill had higher comp than Mr. Gary ($850K vs. $610K), but on a risk-adjusted performance-for-pay ranking she moves up slightly from 30 to 29, while Mr. Gary drops from 31 down to 45.

We should add that the four public pensions in our group of 50 are unusual by definition because their CIO comp relative to AUM is well above average among all public pensions. Britt Harris, for instance, appears to be the highest-paid public pension CIO in the country. We haven’t done the research, but we strongly suspect that most (lower-compensated) pension CIOs would look better than these do on a performance-for-pay basis.

Also, the publics are a different breed in many respects. Their governance isn’t as conducive to effective portfolio management as that of endowments and private foundations, which are more insulated from politics and bureaucracy. Still, based on our ranking, it appears that at least some of these “underpaid” public pension CIOs might not be underpaid enough.

Deep Thoughts:

We think this study is pretty cool — and even useful — but it doesn’t purport to explain why CIOs are actually paid what they are, or to offer definite guidance on what they’re really worth. As we point out above, it’s easy to find inexplicable anomalies. And we certainly haven’t grappled with the broad question of why compensation in different organizations is what it is; or what’s “fair.” We will leave that to the academic guilds. Somewhere, between the economists and philosophers, we’re sure they must have nailed this down.

I can certainly attest that many people believe they’re underpaid; but very few believe they’re overpaid.

CIOs are in the unenviable position of having their yearly performance set out to the nearest tenth of a percent. They’re a little shyer about disclosing their pay, but we try to dig that out in our newsletter.

There are all kinds of people in all kinds of organizations who make impressive amounts of money, even though their performance is almost impossible to measure objectively.

The political scientist James Q. Wilson has thought about this in his classic work on bureaucracies. He says that in “production organizations” managers can evaluate (and pay) people on the basis of their contribution because it’s possible to measure both outputs and outcomes.

Then there are “procedural organizations” where people are more likely to be assessed according to their compliance with rules and procedures. Processes are visible, but outcomes are not.

Worst of all are “coping organizations” in which effective management is almost impossible, since neither the processes nor the outcomes can really be observed or measured.

In the real world, I suspect that most organizations are blends of all of the above, but it’s an interesting typology. We also suspect that pay and performance in public pensions are partly explained by the fact that they sit closer to the “procedural” box of Prof. Wilson’s matrix than to the “production” box.

[See: James Q. Wilson, Bureaucracy: What Government Agencies Do And Why They Do It (Basic Books, 1991). Prof. Wilson focused on the public sector, but his analysis can be extended to organizations in general. Perhaps even yours.]

While we’re meditating on that, allow me to wish all of our readers a very happy and very prosperous 2012. And we’ll leave you with some observations by a great American businessman on the subject of performance and compensation.

In 1922 Babe Ruth was demanding $52,000 a year to renew his contract with the New York Yankees, a colossal salary for the time. He said: “A man who knows he’s making money for other people ought to get some of the profits he brings in. Don’t make any difference if it’s baseball or a bank or a vaudeville show. It’s business, I tell you. There ain’t no sentiment to it. Forget that stuff.”

In 1932 he was holding out for $80,000, and a reporter asked him how he had the nerve to ask for more than President Hoover was making. “Why not?” asked the Babe. “I had a better year than he did.”

=====================================================

Appendix I: Estimated 5-year returns:

A few private foundations with calendar fiscal years had not yet published FY2010 financials, so 5-year returns could not be calculated. They had to be dropped from the original list of 50. We just reached down a little deeper in our database to get the next-highest-paid CIOs for whom 5-year data was available.

In a few cases, mostly among the private foundations, no investment-return numbers are self-reported. For those we were forced to hand calculate a return based on their audited financial statements and/or their 990 or 990PF filings. We freely admit that our home-made returns probably aren’t exactly the same as the numbers they use internally. A fund’s custodian bank normally pushes all of their transactions through an algorithm which yields a proper “time-weighted” internal rate of return (aka to finance geeks as the Dietz algorithm).

Using only annual statements obviously reduces the information content and introduces some error with respect to the “real” return. There were still other vagaries among the financials, with different funds classifying items differently, but we did our non-CPA best and will spare you the details.

We were able to benchmark a couple of these numbers just by calling up someone we knew at a fund and asking if our number was close to their unknown-to-us internal number. In each case our error was only about 20 basis points. For this exercise, where we’re more interested in the rank-ordering than in the absolute values, we decided that if we could hit the “true” value within 50 basis points, it was good enough. Given that the range of returns is from 0% to 7.7%, an error of 0.5% wouldn’t change a CIO’s rank very dramatically, and we’re reasonably confident that we stayed within that limit for the handful we had to calculate.

In the bar chart we noted in blue those CIOs who were on the job for less than three out of the five years 2006-2010. Obviously, if a CIO didn’t set up shop before the middle of 2007 (given that most fiscal years started the period in July, 2005), it would be unfair to attribute all of that performance to him, whether it was good or not-so-good. Also, CIO names in italics indicate that they have recently left the job, although they were on duty in 2006-2010.

Appendix II: Performance-for-pay rankings using risk-adjusted returns:

Risk-Adjusted CIO Performance-for-Pay Ranking

50 Highest-Paid Nonprofit Chief Investment Officers

(Sharpe measure/$100K of compensation: 2006-2010)

Charles A. Skorina & Co.

Note: Blue highlighted CIO names indicate appointment after July 2007, serving less than 3 years of the 5-year FY2006-FY2010 period.

The Skorina Letter

Publisher: Charles A. Skorina

Editor: John C. Legere

The Skorina Letter No. 34

charles — Wed, 30 Nov 2011 00:12:35 +0000

Pushing back on fees; Talking to the top guns

Comings and goings: Alaska, New York, Illinois, California, and Connecticutt

What we’re reading: Pushing back on private equity and hedge fund fees

The view from Phoenix: A conversation with Paul Matson, AZ Retirement System

Comings and goings:

Jay Willoughby: Another hedgie heads to Juneau

For the second time in four years Alaska Permanent Fund has picked a hedge fund manager as its CIO. The $40 billion sovereign wealth fund has hired Jay Willoughby, previously a co-managing partner at Ironbound Capital Management in Princeton, New Jersey.

Ironbound, founded by former Merrill Lynch star Steve Silverman in 2002, quietly folded up and went away back in April after returning investor’s money. No one was saying exactly why they closed but, in any case, Mr. Willoughby was then at liberty, and he beat out 52 other candidates to land the job in Juneau.

Previous CIO Jeff Scott left in August to join at Wurts Associates in Seattle and executive Director Mike Burns has been filling in as interim CIO while the board sought a permanent successor.

Scott ran his own small hedge fund, Tahoma Capital, back in 2005-2007 and; before that, ran $60 billion in a hedge-fund-like absolute-return portfolio for Microsoft Corporation.

Some patriotic Alaskans had given him grief for keeping a house down in Seattle where his family lived. The Juneau Empire has reported that Mr. Willoughby and his wife will, indeed, be taking up residence in beautiful Juneau (population 31,000).

Mr. Willoughby’s base salary according to APF will be $325 thousand. This is slightly more than Mr. Scott’s $319,583 take-home in 2010.

Mr. Willoughby has an MBA from Columbia University and, like his former boss Steve Silverman, he’s a veteran of Merrill Lynch in New York, where he ran money for high-net-worth individuals.

I spoke to Jeff Scott the other day about the appointment. He said: “Mike Burns and the APF board know what they’re doing, and they wanted a money-manager rather than someone with a conventional non-profit CIO resume. APF is a public agency, but they’re not a pension.

As you know, Charles, we were moving toward a more risk-based approach to asset allocation in Alaska, and I think it’s something that will suit a hedge-fund veteran like Jay. I’m proud of the innovations we made at APF, and obviously Mike thinks Jay is the right guy to carry the ball.”

—————————————

Lee Ann Palladino: Always the bridesmaid; finally the Bride

Lee Ann Palladino has twice served as interim chief investment officer at Connecticut’s $22.4 billion RPTF pension. Now she’s been picked as their new permanent CIO.

When Susan B. Sweeney left the CIO job back in 2007, the board appointed Ms. Palladino, then manager of the pensions’ short-term funds, to be interim CIO.

State treasurer Denise L. Nappier, the state’s Investment Advisory Council and executive searchers Korn/Ferry undertook an “exhaustive” national search to unearth Tim Corbett, a candidate with “impeccable” credentials. He also happened to have “deep roots” in bucolic Farmington, CT, just ten miles from the treasurer’s office in gritty downtown Hartford.

Ms. Nappier even went the extra mile, pushing through a big pay-hike which raised the CIO’s maximum salary from $250 thousand to $350 thousand (with no bonus opportunity). Mr. Corbett’s actual salary in 2010 was $324,207 according to public records.

Ms. Palladino was appointed to a new Deputy CIO position as Mr. Corbett came aboard in July, 2009.

Unfortunately, Mr. Corbett took his impeccable credentials up to MassMutual in Springfield less than two years later, becoming their new CIO at, we suspect, much more than $350 thousand.

We note, by the by, that RPTF paid Korn/Ferry $194 thousand in 2008/2009, presumably for the Corbett hire (per their 2010 annual report). That’s about 60 percent of his first-year salary, which is pretty rich by industry standards.

So, again, Ms. Palladino has filled the breach as interim CIO for the past six months. But this time she was rewarded with the top job and, we hope, Mr. Corbett’s compensation package. Sometimes patience is rewarded.

Ms. Palladino has a BS in finance from Skidmore College in beautiful Saratoga Springs, New York; thirty years experience in investment management; and both CFA and CAIA credentials.

—————————————

Dhvani Shah and Michael Walsh: Two new CIOs for Chicagoland

Dhvani Shah:

Dhvani Shah, private equity chief at New York State Teachers pension, has signed on as CIO of the $23 billion Illinois MRF pension in suburban Chicago.

Ms. Shah is a fellow University of Chicago MBA, albeit of a slightly more recent vintage. And she has other Chicago roots, with a BA from Loyola and a five-year stint at the Northwestern University endowment before moving to New York.

Back in Albany she was responsible for moving NYS Teachers from a traditional U.S.-based fund of funds private equity program to an in-house global PE program running a $13 billion allocation. She previously spent eight years working on private equity deals for Bank of America. It’s an impressive resume for a relatively young woman.

There has been no indication that MRFI plans to expand its private equity allocation, but they now have the talent to do so if they see fit.

Ms. Shah succeeds Walter P. Koziol, who is retiring after twenty years on the job. We weren’t able to ascertain his salary, but, whatever it was, he deserved every penny. Mr. Koziol and the Illinois MRF leadership, with an assist from investment consultant Callan Associates, have racked up an impressive average 5-year return of 5.4 percent for 2006-2010, net of investment expense. That’s better than the mighty Harvard Management Company did in the same period (4.7 percent), and I’m pretty sure Mr. Koziol wasn’t pulling down $4.8 million in 2009, like Jane Mandillo.

MRFI also beat out Brown (5.2 percent), Rice (5.1 percent), UTIMCO (4.4 percent), and Texas TRS (2.9 percent) per self-reported 5-year returns over the same period, all of whom were led by CIOs earning seven-figure compensation.

Enjoy your retirement, Mr. Koziol, you earned it.

… and Michael Walsh:

At Chicago’s Municipal Employees’ pension (MEABF), CIO James L. Mohler is moving up into the executive director spot, and the board has picked Michael Walsh as the new CIO of the $5.3 billion fund.

Mr. Walsh has worked at City Hall since 2005, most recently as Chicago’s Deputy Treasurer. Now he’s headed four blocks north to the MEABF offices.

The City’s funds are parked in fixed-income instruments and cash, so Mr. Walsh will have to get up to speed on equities and alternatives under Mr. Mohler’s tutelage. But he’s had previous dealings with the city pensions from the treasurer’s office, which manages some of their cash; and, obviously, he has the board’s confidence.

Mr. Walsh earned a BS in finance from University of Illinois and an MBA from Northwestern University’s Kellogg School.

David Kushner: From fog to smog:

David Kushner has just taken over as chief investment officer of the Los Angeles County ERA pension fund. He was recruited from his post as CIO of San Francisco ERS after ten years on the job.

I’ve had some good conversations with Dave while he worked here in San Francisco. He’s a bright, hardworking pro with a wry sense of humor and I think LACERA’s lucky to get him.

If you can survive the bizarre politics of San Francisco then you are ready to handle anything. My opinion only, of course. Dave is a discreet guy who sticks to his knitting, a fine quality in a public servant.

He’s taking over a $40 billion fund, which is a big move up for him from the $13 billion SFERS. He’s also following a very good investment manager, Lisa Mazzocco, who was lured away by the USC endowment to be their first CIO, and has had a busy summer setting up her new office.

I haven’t talked salary with Dave, but I have good reason to believe that he will be getting something north of $350 thousand base in his new job.

Before he arrived in California he managed equities for ING Investment Management in Atlanta and was a senior portfolio manager at Florida State Board of Administration. In between, he founded and ran his own investment advisory firm in the 90s.

He spoke to me last week as he was settling into his new digs in Pasadena.

Skorina: Dave, you’ve worked as both a for-profit money-manager and then a non-profit CIO. What are the big differences?

Kushner: Well, a public pension manager works in a fishbowl. For instance, the right time to hire an outside manager is often when their strategy is out of fashion. It’s just an extension of the basic buy-low, sell high imperative. There are times when a value strategy or a convertible-arbitrage strategy isn’t working. That’s when you might want to invest, anticipating that another cycle is coming and those strategies will start to work again. Unfortunately, some reporter will then announce that you’ve invested in a manager who has had a couple of “bad” years, so you’re obviously an idiot or corrupt, or something. They don’t understand how this business works, and they’re unwilling to be educated. So there you are, trying to figure out the future, which you can still control to some extent; while your critics are raking through the past, which is now history.

Skorina: So, how do you dodge those bullets?

Kushner: You make sure you have have a process and then stick to it. That’s why we have public RFPs, and a board that has to buy in, and an automatic rule for putting managers on a watch list, and so on. It gives you something to deflect at least the more irresponsible critics. My board in San Francisco has been very good, by the way, and I hope they feel the same way about me.

Skorina: Best of luck, Dave.

Kushner: Thanks, Charles; stop and see me when you’re down south.

What We’re Reading:

Here are a couple of items which caught our eye last week and should interest our readers.

First, over at Bloomberg BusinessWeek, reporters Jonathan Keehner and Jason Kelly turned out a great feature on how the Texas Teachers pension (TRS) and other institutions are pushing back on private equity fees.

It’s “The People vs. Private Equity,” and you can read it here:

http://www.businessweek.com/printer/magazine/the-people-vs-private-equity-11232011.html

Why, they ask, since pension funds have always had all the money, did it take them so long to do this? They conclude that , for various reasons, institutional investors now have more leverage than they had in the past. And, if they’re lucky, they have someone like Steven LeBlanc.

Mr. LeBlanc, who runs a $35 billion PE allocation for TRS, is the protagonist of the piece. He started out as the CEO of a very successful real estate investment trust. So he’s been on the other side of the table as a general partner. When he butts heads with KKR and Apollo, it’s not a random collision; he knows what they know.

As the reporters note:

He approached the task with an edge that many pension managers, whose ranks are staffed largely by career public servants, didn’t have. “I’m probably a bit more aggressive than the average limited partner,” adds LeBlanc. “I’ve been a GP my whole career. That helps.”

Read the whole thing. Not only good reporting, but some entertaining prose.

Also, in the current Barron’s (dated 28 November), there’s a nice little piece which parallels the above, but focuses on hedge funds.

In “Pension Funds Strike Back,” reporter Jack Willoughby notes that:

“The pashas of the hedge-fund universe have failed to deliver that extra return for which they are so amply compensated, year in and year out. In the first nine months of this year, for example, the HFRI Equity (Total) index was down 5.3%, compared with a 1.3% gain for the S&P 500…Slowly, top pension funds are beginning to push back, insisting that hedge funds align fees more fairly with performance.”

Well, “fair” is always in the eye of the beholder and, as with the PE market, it depends on who has the leverage on a given day.

Mr. Willoughby reports a conversation with Larry Powell, Deputy CIO at the $20 billion Utah Retirement Systems. I’ve had some enlightening talks with Larry myself. He’s well-informed and can turn a phrase.

Larry and URS have been in the forefront of the push to better square fees with performance. As he tells Mr. Willoughby:

“I don’t think anyone is quite as aggressive as we have been. Even at the height of the hedge-fund mania in 2006 and 2007, I was negotiating and receiving concessions from managers on both fees and legal terms.”

Mr. Willoughby notes that institutions now represent almost 60 percent of the new investment in hedge funds, up from about 50% prior to the meltdown. Still, not all institutions are pushing hard.

As Larry Powell says:

“Unfortunately, many investors are performance chasers and rely almost exclusively on past performance, assuming it will persist in perpetuity…There are a lot of smart investors; however, there are a lot more dumb ones.”

He said it; I didn’t.

Unfortunately, the article is behind a pay-wall. But take a look if you have access.

The view from Phoenix: A conversation with Paul Matson:

Paul Matson grew up in Edmonton, Alberta and earned his MBA at Vancouver’s Simon Fraser University in 1988. He went to work as a portfolio manager at the Alberta Treasury, dealing with the assets that were later spun off into AIMCO, the provincial sovereign-wealth fund. After two more years with Alberta’s Workers’ Compensation Board, he hung up his big, puffy, down parka and headed for balmy Phoenix, Arizona.

He served seven years as CIO of the Arizona State Retirement System, moving up into the executive director’s chair in 2003. ASRS assets have nearly tripled since he joined the system, from $10.5 billion to $30.5 billion.

In his spare time he earned a second master’s degree at Arizona State University, an MA in International Relations with a focus on international terrorism. I’m not surprised. The best investment managers I know are people like Paul with wide focus and deep curiosity.

I’ve enjoyed talking to Paul from time to time, and when I saw that the Arizona Capitol Times had recognized him for his contribution to the state in public policy, I decided to catch up on how the world looks from Phoenix.

Skorina: Paul, it says here that you’re one of Arizona’s Leaders of the Year. Pretty cool. So, congratulations. I also wanted to ask you about something that’s been on my mind about the relationship between size and performance in investment funds.

I always tended to assume that mega-funds were limited in their ability to outperform, but then I saw that Bridgewater, with close to $100 billion in total assets, had returned 25 percent so far this year. I think that’s pretty amazing, and I bring it up because I know you deal with Bridgewater.

Matson: Thanks, Charles. And, as for Bridgewater, yes those are excellent numbers. But, in all modesty, I should point out that we did about 25 percent this year, ourselves.

Note: ASRS return for the fiscal year ending 30 June, 2011 was 24.6 percent. See:

https://www.azasrs.gov/content/pdf/financials/20110630_Total_Fund_Review_Q2.pdf

Skorina: So, you beat both Harvard and Yale! Congratulations again. OK, how did you do that? As I recall you run a pretty conservative portfolio.

Matson: Well, it’s true we have what many might consider boring allocations – roughly 40 percent US equities, 20 percent international equities, 26 percent fixed income, 7 percent private equity, 3 percent real estate, and about 4 percent cash and inflation-linked equivalents – but we take a tactical approach to our allocations. When we feel assets are mis-priced we take action. Our board gives us full authority to use our research and judgment.

Skorina: Can you give me some examples of what you mean when you say tactical?

Matson: Here’s one. After the 2008 meltdown our staff thought that equity prices were attractive. We decided to overweight them and we did it in a timely way. Last year we still thought stocks were relatively cheap. And, when long Treasuries rallied early in 2010, stocks were actually offering better yields than high-quality bonds. So, we stayed slightly overweight in domestic equities and it worked out. By the way, I think that equities are still pretty appealing; I’ll get back to that in a minute.

We also thought that credit spreads were wide and we should take advantage of them while we could, so we invested in some bank loans, floating-rate notes, and asset-backed loans.

One more point: We had very little exposure to real estate. Maybe that’s because we’re in the middle of the Sunbelt and had a front-row seat to the crazy run-up in land and building prices. We decided to stay away from them. It wasn’t a hard call, but it was a good one.

Skorina: That’s a good point , Paul: that your board gives you the latitude to hire and fire managers and tweak asset allocations without micro-managing your process. It looks more like what I see in the big Canadian pensions, where the board sets general policy and audits performance, but then leaves the driving to the pros. Could this have something to do with your Canadian roots?

Matson: I wouldn’t go that far, Charles. But I’ve been here for a while now, and the board has confidence in the investment staff. They’re also smart enough to know that the world is just moving too fast for management by quarterly review. In that sense, maybe you could say that our model is similar to some of the Canadian plans.

Skorina: Getting back to Bridgewater: You told me a while back that you have a few “strategic partners” including Bridgewater. What do you like about them?

Matson: We consider Bridgewater, Cargill, and Wellington to be strategic partners, not just investment managers. We like them for their research and immersion in the investment process. Take Bridgewater for example. They are data-driven and they have strong investment logic. I would say their research and investment logic is of academic caliber. We like Cargill because, really, who knows better what’s going on in certain commodities than one of the primary players in those markets? They have real-time intelligence that no one else can touch.

Skorina: I’m reminded of a conversation I had recently with someone who had worked at Koch Industries. They had a saying: “if you’re not part of the flow, you really don’t know.” Meaning that Koch, Cargill, ADM, and Glencore know more about what’s on the trucks, in the pipelines, and coming out of the mines than most CTAs. So they will always have an edge.

Matson: Exactly. And that’s why we sought out our partners.

Skorina: One more question, Paul. How do you size up then near future for investors? What are the big themes you’re thinking about?

Matson: A couple of things have our attention. First, on the positive side: As I mentioned earlier, I think equities are quite appealing at current prices. Many companies have strong balance sheets and their dividend yields are excellent. There are good stocks yielding nearly 3 percent in some cases. We think there are still good long-term opportunities there.

On the negative side: Of course, we’re watching the large European banks very closely and thinking about the implications for US investors should they collapse. Their true exposure to vulnerable sovereign debt is unclear. And, many US investors probably have higher exposures to European bank debt than they realize, through third-party investment firms. How can we protect ourselves? Or profit, for that matter?

Skorina: Paul, thanks for taking the time.

Matson: Glad to, Charles. And thanks again for the kind words

charles — Tue, 08 Nov 2011 00:30:52 +0000

Announcing the Skorina Top 50 CIO Salary List

Here’s a stripped-down version of our larger database which charts the compensation of the fifty highest-earning chief investment officers. I don’t recall seeing such a thing elsewhere and I thought it might be of interest to our readers.

Our internal document contains many more names, numbers, and details, but we’re not going to give away all the good stuff.

Rank	CIO NAME	Organization	AUM $ Bil	Total Comp	W2 Comp	Non-W2 Comp
1	Mendillo, Jane	Harvard U (HMC)	27.6	$4,754,379	$3,498,265	$1,256,114
2	Swensen, David F.	Yale U	16.7	$3,795,540	$3,715,724	$79,816
3	Narvekar, Nirmal	Columbia U (CIMC)	6.5	$3,447,953	$1,980,746	$1,467,207
4	Malpass, Scott C.	U Notre Dame	5.2	$2,057,827	$1,532,859	$524,968
5	Hoagland, Laurance	Hewlett Fdn	7.4	$2,015,635	$1,919,117	$96,518
6	Schmid, Mark	U Chicago	5.6	$1,790,730	$1,019,070	$771,660
7	Brightman, Chris J.	U Virginia (UVIMCO)	3.9	$1,708,610	$1,475,636	$232,974
8	Strack, Denise	Moore Fdn	5.2	$1,671,347	$1,411,230	$260,117
9	McLean, William H.	Northwestern U	5.9	$1,594,019	$1,529,011	$65,008
10	Golden, Andrew	Princeton U (PRINCO)	14.4	$1,458,504	$1,270,961	$187,543
11	Powers, John	Stanford U (SMC)	13.9	$1,395,189	$1,122,583	$272,606
12	Manske, Susan E.	MacArthur Fdn	6.0	$1,353,124	$1,353,124	NA
13	Triplett, Neal F.	Duke U (DUMAC)	5.7	$1,253,819	$682,076	$571,743
14	Moehling, John H.	Packard Fdn	6.4	$1,196,037	$1,062,359	$133,678
15	Shuman, D. Ellen	Carnegie Fdn	2.5	$1,152,874	$1,059,926	$92,948
16	Zimmerman, Bruce	U Texas (UTIMCO)	14.1	$1,127,186	$1,083,896	$43,290
17	Brenner, Suzanne	Metropolitan Museum	3.0	$1,120,956	$647,372	$473,584
18	Zimmerman, Landis	Hughes Medical Institute	16.8	$1,058,357	$1,022,458	$35,899
19	Boateng, Joseph	Casey Family Programs	1.9	$1,038,916	$838,350	$200,566
20	Wise, Scott	Rice U (RMC)	3.8	$1,038,536	$804,626	$233,910
21	Williams, James	Getty Fdn	3.5	$1,019,191	$962,086	$57,105
22	Frost, Cynthia E.	Brown U	2.2	$1,011,351	$836,028	$175,323
23	Harris, Thomas “Britt”	Texas TRF [Pension]	100.7	$1,001,512	$1,001,512	NA
24	King, Jonathan	U No Carolina (UNCMCo)	2.0	$983,764	$832,136	$151,628
25	Gilbertson, Kristin	U Pennsylvania	5.7	$961,059	$746,099	$214,960
26	Lawler, Paul	Kellogg Fdn	6.7	$925,565	$925,565	NA
27	Alexander, Seth	MIT	9.9	$888,495	$862,245	$26,250
28	Pittman, Scott	Mt. Sinai Medical Center	1.1	$873,511	$852,127	$21,384
29	Kim, Randy	Hilton Fdtn	1.9	$852,881	$793,580	$59,301
30	Smith, Michael J.	Mott Fdn	2.1	$852,153	$606,415	$245,738
31	Cahill, Mary	Emory U	4.7	$851,982	$812,621	$39,361
32	Pulavarti, Srinivas	U Richmond	1.6	$826,768	$684,315	$142,453
33	Crecelius, Kathryn J.	Johns Hopkins U	2.2	$825,947	$745,747	$80,200
34	O’Neil, Brian S.	Johnson Fdn	10.1	$808,800	$720,908	$87,892
35	Wright, Matthew	Vanderbilt U	3.0	$779,405	$687,356	$92,049
36	Manilla, Robert J.	Kresge Fdn	3.1	$774,816	$653,465	$121,351
37	Doppstadt, Eric	Ford Fdn	10.7	$768,126	$622,718	$145,408
38	Heil, Jeffrey	Doris Duke Char Fdn	1.6	$750,000	$750,000	NA
39	Walker, Kimberly G.	Washington U (St. Louis)	4.5	$710,836	$685,138	$25,698
40	Reeg, Gloria D.	NY Presbyterian Hospital	1.6	$683,968	$582,151	$101,817
41	Madding, Bruce W.	Henry J. Kaiser Fdn	0.6	$651,815	$506,517	$145,298
42	Berggren, Marie N.	U California	5.4	$637,823	$637,823	NA
43	Clay, David	Grinnell College	1.3	$628,243	$588,328	$39,915
44	Chilton, Colette D.	Williams College	1.5	$628,120	$518,250	$109,870
45	Hook, Jonathan	Ohio State U (OSU Fdn)	1.9	$627,300	$627,300	NA
46	Hull, John E.	Mellon Fdn	5.1	$620,616	$551,250	$69,366
47	Kuenstner, Deborah	Wellesley College	1.3	$620,116	$588,421	$31,695
48	Cary, Charles W., Jr	Georgia TRS [Pension]	45.9	$609,440	$609,440	NA
49	Danzig, Lisa	Rockefeller U	1.6	$608,209	$565,860	$42,349
50	Dean, Donna J.	Rockefeller Fdn	3.8	$589,577	$564,991	$24,586

Knowing Our Limitations

Certain limitations of our data should be noted.

We are looking at the “real money” side of the market. That is: the CIOs of endowments, foundations, public pension funds, healthcare organizations, and various other tax-exempt, not-for-profit funds.

We think this list is fairly comprehensive within those bounds, but we’ve undoubtedly missed someone.

There are a lot of people wearing the CIO title who work for money managers such as mutual funds, hedge funds, investment banks, insurers and so forth. They are not included for the very practical reason that their compensation is almost impossible to obtain.

To these unobtainables we must add the managers of major corporate pensions. They are often designated CIOs and manage tax-exempt money, but they need not divulge their pay. Family offices don’t run tax-exempt money but they, obviously, are even more discreet than Fortune 500 companies about CIO comp.

Of course, various consultants obtain confidentially-reported comp numbers, then use them to generate and publish (often for a fancy fee) industry means and medians while concealing the particulars.

But, unless you know the location, experience and pedigree of the CIO and the peculiarities of his/her employer, a comp number is often inexplicable.

One Cheer for the IRS

The Internal Revenue Service (and its Congressional masters) has compelled nonprofits to reveal more salary information over the past couple of years by updating the rules for forms 990 and 990PF. Much of our data is from these filings.

These still have limitations. As of today, the most recent 990 filings available are usually for fiscal year 2010, which typically ended last June. For 990PF filers, the lag may be even longer.

Per current rules, a filing must report salaries for the most recent calendar year ending within that fiscal year. In most cases that’s calendar 2009, which is now 21 long months ago.

Most of these people are now paid more than they made in 2009, but not always. The W2 compensation often includes a substantial performance bonus; so, ups and downs in the markets and whether you’re hitting your benchmarks causes year-to-year swings. But base salaries tend to rise over time. In general, we think that 2011 W-2 comps are five to ten percent higher than 2009 comps.

Turnover

In football (American football, that is, not that other sport) a turnover means a fumble or an interception. In my business it means that somebody got a better offer (and some hard-working recruiter earned a commission).

That 21-month gap means that we are (mostly) reporting comp as of 2009 paid to people on the job in that period.

This is annoying, but also interesting. In a previous article I came up with a turnover factor for CIOs of about ten percent based partly on empirical data and partly on informed estimates. What we see in this list of 50 is that ten percent have turned over in about a year and a half. On an annualized basis, that’s only about 7 percent, but this is a small sample and these are the highest earning CIOs. In our larger database the number is indeed about 10 percent, as I surmised.

People who have since moved on to a better paying job (or possibly retired) in the last year or so are italicized in the list.

They are:

01 Chris Brightman at University of Virginia, who was succeeded by Lawrence Kochard (from Georgetown University) back in June;

02 Ellen Shuman, who left Carnegie Corporation in July, with no successor yet named;

03 Scott Wise, who left Rice University in July to head up Covariance (CREF-TIAA) in Houston, and is succeeded by Allison Thacker;

04 Bruce Madding, who left the H.J. Kaiser Family Foundation in August 2010, replaced by Koonal Gandhi; and…

05 Lisa Danzig, who left Rockefeller University in April, replaced by Amy Falls, who moved over from Phillips Academy.

In most cases we can assume that the successor makes roughly the same salary as his/her predecessor, but not invariably.

A Rose is a Rose

We have omitted some annotations and data in this list, including specific job titles. We are using “CIO” in a generic, non-pedantic sense. Some of these people are officially styled “Managing Director of Investments,” or “Assistant Treasurer,” or various other titles. We are satisfied that in each case they run the organization’s investment function. In most cases they have a crew of subordinate portfolio managers reporting to them. The CIO, in turn, usually reports directly to their organization’s chief executive.

One obvious set of “non-CIO” CIOs consists of the people heading semi-autonomous units which manage college endowments, such as Harvard University’s Harvard Management Company. These leaders are usually titled President and/or CEO and may or may not also have “CIO” on their letterhead. Columbia has both a president of its investment company (Mr. Narvekar) and, reporting to him, a chief investment officer. This is unusual but, given that Columbia’s investment returns now lead the Ivy League for the second year in a row, it seems to work just fine for them.

Keeping it in the Family

Our sharp-eyed readers will notice the absence of the country’s (the world’s?) biggest foundation. Surely the manager of the Gates Foundation’s investments should be high on the list. Where is he?

Most of Bill Gates’ family money (housed in Cascade Investment LLC), as well as most of the $37 billion in the Gates Foundation, is managed by low-profile Bill Gates Investments in Seattle, which is headed up by low-profile Michael Larson. (The word “Gates” doesn’t appear on his business card, and when you call him, his assistant answers the phone by saying “investments.” Now that’s a low profile.)

I’ve enjoyed meeting Mr. Larson, a fellow University of Chicago MBA and an awesome investor, and, if I knew what he made, I suspect he might be in the number one slot on the chart. But I don’t, so he isn’t.

Mr. Larson’s salary is just one of several “known unknowns” among foundation CIOs who would rank high on our list, but whose compensation is offloaded to a separate, non-filing entity.” For instance, the $1.5 billionBroad Foundation in L.A. has a new CIO — Eric Schwartz, replacing Peter Adamson last year — but on the Foundation’s 990PF we can only see a dollar amount ($2.7 million in FY2009) charged over to the Broad family office, which is not a 990 filer. We don’t know the salary of Mr. Adamson back in 2009, or the family office staffing and overhead, or how costs are apportioned between family assets and the foundation. So be it. The best we can do is look at the comp for CIOs of similarly-sized foundations.

Things You Aren’t Supposed to Know

“Private” institutions like non-public colleges and foundations are required by the feds to reveal — eventually — what they pay their key employees. “Public” institutions, however — like public colleges and state pension funds — usually don’t, because they are not subject to IRS rules, and our elected state officials often see no good reason why you should know these things.

For salaries in this subset we had to turn to various other sources and sometimes came up dry.

Journalists and do-gooder groups can sometimes file freedom of information requests which compel public officials to reveal this information, or they know just where to look within the legislative sausage-making apparatus to find a number on some obscure document which never came near a press release. But this varies from state to state depending on local laws and the zeal of the newspapers. Salary figures, when available, are often out of date and lacking in detail (often limited to “base” salary only, and excluding other compensation.)

In a few cases we have had access to confidential salary data. In most cases we are just reporting what is publicly available if one is willing to dig. None of these numbers are guesses or estimates.

Show Us the Money

We aren’t payroll accountants and various sources furnish different levels of detail, but we’ve listed compensation in a way that makes sense to us.

“W2 Comp” includes base salary, performance bonuses and, sometimes, an “other” item. This is what the CIO actually receives in his/her monthly check, and on which income taxes are owed in the current year. Bonuses are not broken out separately here, but they are often substantial. In a few enviable cases, bonuses exceed base salary.

“Non-W2 Comp” includes deferred items which are not paid to the employee in the current period. This includes some kinds of pension payments and bonuses which will only redound to the employee in some future period. In addition to deferred items it also includes nontaxable benefits such as medical insurance premiums. Some CIOs also have significant untaxed expense account reimbursements, also lumped into this number.

“Total Comp” is just the sum of these two and is the number we use to rank the CIOs.

From the point of view of an employer — say, a board member — the total comp is what counts. It’s the total cost of the CIO to his employer.

From the point of view of a CIO or aspiring CIO, the W2 comp may be more interesting. It’s what he or she will actually have to spend this year.

When sources offer only a single number, we arbitrarily assume that it’s W2 income and list non-W2 comp as “NA.”

A Tale of Two Cities

So, what is the meta-message in this excellent chart?

What jumps right out is that only two public pension CIOs make the cut. And these two control more than a third of all the funds represented.

Britt Harris at Texas TRF in Austin and Charles Cary at Georgia TRS in Atlanta invest about $150 billion between them. All of the Top 50 taken together only manage about $420 billion.

Also, there are only two healthcare CIOs represented: Scott Pittman, who runs the money at Mt. Sinai and Gloria Reeg at Presbyterian Hospital, both in New York City.

All of the remaining 46 are educational endowments, private foundations, or foundation-like public charities like the Metropolitan Museum.

We didn’t have to run the list to discover that public pension CIOs are relatively underpaid, but it does underline that fact. Mr. Cary is responsible for twenty-nine times more money than Ms. Reeg, but Ms. Reeg made about eleven percent more in 2009.

That the market for CIOs is starkly segmented in this respect we already know. But it gets worse; or more interesting, depending on where you sit.

Let’s look again at Mr. Harris in Austin, who runs $100 billion for TRS, and compare him to, say, Jon Braeutigam who is CIO of the Michigan SMRS pension fund, managing $48 billion up in Lansing. Wait, he’s not on the list, you say? Exactly. Mr. Braeutigam didn’t come close to making the cut. According to the Lansing State Journal he made $109,895 in 2007, the latest we could find. Let’s generously assume that he got five-percent boosts in 2008, 2009, and 2010 (we hope he did), so that he was making about $133K in 2010 when Mr. Harris, according to the Dallas Morning News, was making $1,001,512 going into 2011.

True, Mr. Harris is responsible for twice the AUM, but he made nine times as much in compensation. So, there are some pretty dramatic differences in compensation policy even within the public pension space.

Mr. Harris’ take-home consists of a $480 thousand base, plus a $521,512 performance bonus for beating his benchmarks in previous periods. Even his base is at least three times Mr. Braeutigam’s. We haven’t nailed this down, but we very strongly suspect that Mr. Braeutigam has no such bonus opportunity. We’d be glad to hear about it if we’re wrong.

We are not bringing this up to embarrass Mr. Braeutigam or the great state of Michigan. Not at all. He seems to be doing a good job.

Both CIOs had been on board for about four years as of the end of FY2010.

For FY2010, Mr. Braeutigam’s fund earned 8.5 percent; the five-year return was 3.3 percent.

Mr. Harris’ TRS returned 15.6 percent for FY2010 ending 31 August, but only 2.9 percent over five years.

So, hmm. Mr. Braeutigam toiling up in Lansing has had measurably better results during his tenure than Mr. Harris when we look at the more meaningful five-year performance: 3.3 percent versus 2.9 percent.

Forty basis points, when you’re talking about tens of billions of dollars, means big bucks, as everyone reading this understands. That’s a difference of hundreds of millions of dollars in earnings when cash-strapped state governments are struggling to fund their pensions in hard times.

So, when performance is added to the mix, Mr. Braeutigam’s paycheck looks like a better and better deal to his employer.

Lansing and Austin are rather similar. They’re both mid-sized cities, both state capitals and both home to big state universities: University of Texas and Michigan State University, respectively. (Okay, Austin is bigger, and technically MSU is in East Lansing, not Lansing; work with me here.) MSU is a semi-alma mater of mine, and I have family in Lansing. And Mr. Braeutigam earned both his degrees from MSU. So I’m pulling for him.

But Britt Harris is a good guy, too, and I’m not suggesting (as some noisy Texans have) that he’s overpaid. We’re just looking at the numbers.

There’s no simple, obvious explanation of big disparities like this (and I’m citing just one example). I suspect it has something to do with the different cultures in the two states. Michigan tends to be union-dominated and officially egalitarian. Texas is right-to-work and more entrepreneurial. And, of course, Michigan has been in terrible fiscal trouble for years, while Texas is doing relatively well. All this is probably in the mix.

But when you don’t have good theories it’s always useful to look at the actual data, which is why we’ve offered our little chart.

By the way, if you have some use for information like this, let me know. I’m not giving it away, but give me a call and we’ll talk.

The Skorina Letter No.32

charles — Tue, 04 Oct 2011 03:07:42 +0000

Opening: 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?

========================================

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.

—————————————

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.

—————————————

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.

========================================

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.

========================================

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.

========================================

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.

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)

=========================================

The Skorina Letter

Publisher: Charles A. Skorina

Editor: John C. Legere

====================================

The Skorina Letter No.31

charles — Tue, 27 Sep 2011 23:41:23 +0000

U Maryland seeks CIO, new CIOs and salaries, interviews

University System of Maryland Foundation (and Skorina) seeks a CIO:

Comings & goings & salaries

Breakfast with Roz Hewsenian, CIO of The Helmsley Trust

========================================

Comings and Goings:

Allison Thacker: A Rice alumna heads back to Houston:

After a year-long search, Rice Management Co. has tapped a San Francisco money manager to run the $3.8 billion Rice University endowment in Houston. Allison Kendrick Thacker will take over as CEO and chief investment officer on September 12. She is a graduate of Rice, with an MBA from Harvard.

The slot has been empty since Scott Wise left last June to become head of Covariance Capital, TIAA-CREF’s new outsourcing startup, also headquartered in Houston. Rice Management Co was set up in 2009 as a semi-autonomous asset manager for the Rice endowment, following the example of similar structures at Harvard, Stanford, University of Texas, and other multi-billion-dollar endowments.

In his last year at Rice, after twenty years as CIO, Mr. Wise had W-2 income of $229,431, including $78,422 base, $56,250 bonus and $94,759 “other” compensation. In addition, he earned $110,876 in deferred and nontaxable compensation.

Ms. Thacker has an excellent resume but doesn’t strike one as an obvious choice to run a major endowment with its broad spectrum of asset classes and strategies. As a managing director at RS Investments she managed long-only mutual funds, with a special focus on technology.

RS Investments descends through a long, tortuous genealogy from the old Robertson Stephens & Co boutique investment bank which was a big deal-maker in Silicon Valley in the 80s and 90s. The parent company was shuttered after the Tech Bust in 2002, but their money-management subsidiary morphed into the present mutual-fund and institutional investment manager, now majority-owned by the Guardian Life insurance Co. They have about $15 billion AUM, including $10 billion in its family of mutual funds. Although I’ve never had the pleasure of meeting her, Ms. Thacker labored right around the corner from my office here in downtown San Francisco.

Clearly the fact that Ms. Thacker earned her undergraduate economics degree at Rice carried weight with the search committee. She acquired not only a BA there, but also a spouse. She graduated in 1996 and her now-husband Troy Thacker was a year behind her in the class of ‘95. In a press release, Rice president David Leebron emphasized that, as a Rice student who benefited from financial aid, she understood the critical role of the endowment in supporting the school’s finances.

This should not be dismissed as sentimentality, either. Compensation is important, but so is a commitment to institutional goals. Consider Dr. Swensen at Yale, who was lured away from Wall Street to help out Old Eli. Or Brian Webb, now CIO at Baylor University. Baylor was having trouble holding on to a good endowment head, but decided that Dr. Webb, a Baylor grad married to another Baylor grad and parent of two or three more Baylor grads, might stick around.

Ms. Thacker will have her work cut out in following Scott Wise, who was an outstanding CIO. But Rice may hope that she will at least stay awhile. Mr. and Mrs. Thacker’s three children will have to go to college somewhere, after all.

—————————————-

Melissa Moye: Interim no more

A. Melissa Moye is now permanent chief investment officer at Maryland’s MSRPS pension in Baltimore. She had been interim CIO since October, when predecessor Mansco Perry left to run the Macalaster College endowment in Minnesota.

She will now head up the $38 billion pension’s five-person investment office (a deputy CIO and four managing directors), with a base salary of $240 thousand.

This is almost a promotion-from-within, but not quite. As Maryland’s Deputy Treasurer for Financial Policy, Ms. Moye wasn’t part of the investment office, but was responsible for briefing her boss, Treasurer Nancy Kopp, on pension business (Ms. Kopp is ex-officio chair of the pension’s governing board.)

Before taking the state post in 2007, Ms. Moye was SVP and Director of Investment Services at Amalgamated Bank, a New York-based institution. And, while holding down that day job she also served in 2003-2007 as a volunteer board member and investment committee member for MSRPS.

Ms. Moye’s labor-friendly background may help explain why she was originally recruited for the MSRPS board of trustees. Amalgamated Bank is wholly-owned by the Workers United labor union (formerly: Amalgamated Clothing and Textile Workers); in fact, it’s the only union-owned bank in the U.S. The bank is headquartered in New York, but Ms. Moye listed a Silver Springs,

Maryland address when the governor appointed her to the board as a public member for 2003-2007.

And, in previous jobs, she was senior analyst for the Service Employees International Union’s pension investment program and an economist for the American Federation of State, County and Municipal Employees. (AFSCME is Maryland’s largest state employee union.)

While she has been closely involved with the fund since 2007, and has a strong resume, Ms. Moye had no direct responsibility for portfolio management until she got the interim CIO appointment ten months ago. Fortunately, the markets cooperated, and the fund returned 20.04 percent for the year ending June 30, 2011, most of which was on her watch.

FY2011 has boosted the fund’s five-year average return into positive territory; it’s now about 4.02% by our calculations. But they still have a dismal funding ratio of about 65%.

My sources tell me that MSRPS was in talks with at least one other individual for the job, an in-place CIO at a major fund, who was prepared to take the job until his current employer offered him a substantial raise to stay home.

Ms. Moye will have a base salary of $240 thousand, plus a performance-based bonus, according to published reports. This is the same (plus rounding) as Mr. Perry’s $239,700 base in his last year. But, according to the Baltimore Sun, Mr. Perry also received an “effectiveness” bonus of $15,978 and a performance bonus of $79,892 in that year, bringing his total compensation up to $335,570.

Maryland state executives at Ms. Moye’s level make around $150 thousand, so this will make a nice bump for her, while leaving compensation for the slot about the same from the state’s point of view. So, everybody’s happy.

Ms. Moye — Dr. Moye we should say — received her BA from Earlham College in 1984; and, supported by a graduate Fulbright scholarship, she earned a PhD in economics from Notre Dame in 199

========================================

Skorina (and the University System of Maryland Foundation) are seeking a CIO:

The USM Foundation lost its excellent chief investment officer back in June when Michael Barry was hired away by the Georgetown University endowment. Now they need a new one, and I’helping.

University System of Maryland includes the five University of Maryland campuses and six other public universities. The USM Foundation invests funds on behalf of the System and some other institutions, including several community colleges. Their portfolio AUM is about $900 million.

If you’re just hearing about this opening and are interested, or know someone who might be, please pass the word and contact me; I’m still accepting resumes.

We’re looking for a seasoned investment pro with the demonstrated ability to run a large, multi-asset-class fund. The Foundation’s next CIO will have to understand the theory and practice of portfolio allocations, risk management, and the whole spectrum of assets, including alternatives and hedge funds. You’ll also need the management chops to run a staff, interface with a board and make hiring-firing decisions regarding external managers. The Foundation lays special emphasis on the ability to communicate with all of its constituents. All of their member-institutions have a seat at the table, and a successful CIO will have to be able to listen to their concerns and explain his decisions.

The position is located in the DC area and the compensation will be highly competitive.

Also, I’m in New York City again this week. My schedule is pretty full, but if you’re close by and want to talk about the Maryland position (or anything else), give me a call and maybe we can get together.

========================================

The USMF Endowment: Best of breed for thirty-five years:

In 1976 a wealthy benefactor gifted the University of Maryland with a herd of pure-bred Angus cattle. Lacking a convenient legal mechanism to receive them, the university created the Foundation, with the herd as its first asset

You can still view their lineal descendants grazing peacefully on Maryland’s Eastern Shore. They are on the Foundation’s books (at $1.6 million), but they’re not part of the investment portfolio, so the next CIO will not require any background in animal husbandry.

Since 1976 the Foundation has diversified away from livestock into almost everything else. If you’re interested in the CIO job, or just want to see what the portfolio looks like and how it has performed, you should check out the 2010 annual report.

It’s here:

http://www.usmf.org/usmf/wp-content/uploads/annual-report0indf

I have to look at a lot of these things and it is, in my opinion, a model of how a fiduciary ought to clearly communicate its intentions and results. For the 2010 fiscal year, the Foundation reported a five-year average return of 3.2%. This is highly respectable relative to its peers over that tumultuous period.

But return is only part of the story. We’re well aware that investors seek risk-adjusted returns, even though explicit measurements of volatility usually aren’t disclosed. Well, here they are. USMF conveniently cites volatility (standard deviation) for each class of assets.

We see, for instance, that their “Multi-Strategy” (i.e., hedge-fund) investments (27 percent of the total portfolio) have done exactly what they’re supposed to do. The five-year hedge-fund return crushed its benchmark by 5.4 percent vs. 2.3 percent. And they earned that 5.4 percent with just 7.5 percent volatility over five years, while public equities returned 2.6 percent with 12.1 percent volatility. Higher returns; lower volatility: that’s what a portfolio needs from a hedge-fund allocation to justify their higher fees, and the Foundation’s managers delivered.

And, we can see that even that public equity portfolio was being run with relatively low risk. It not only beat their benchmark (MSCI All Country Index) by 2.6 percent vs.1.2 percent over five years, but did it with much lower risk: 12.1 percent volatility vs. 19.1% for the benchmark.

That excellent performance from the hedge-fund allocation (and, indeed, the portfolio generally) can be partly attributed to current investment committee leader David Saunders (CEO of fund of funds giant K2 Advisors) and previous committee chair Ken Brody (co-founder of hedge fund Taconic Capital Advisors), who had both the experience and contacts to put the foundation into the top tier of funds.

This is all by way of saying that the next CIO will be joining a high-performing operation and will have to be prepared to hit the ground running

========================================

Out and about: a visit to the Apocalypse

My trip to New York last month was eventful and, while I am no more sinful than your average Manhattanite (or San Franciscan, for that matter), I began to wonder if some kind of Old Testament wrath was being visited on your humble correspondent.

First, we felt an earthquake that was centered in Virginia but radiated all the way up to the Upper East Side. Now, I’m from San Francisco, where we ride out quakes with aplomb, and without even slopping our lattes. But in New York, it was… unnerving.

Then came a hurricane that was not quite so cataclysmic as Mayor Bloomberg predicted, or cable-broadcasters hoped, but still pretty impressive.

When we heard that locusts were massing in Weehawken, ready to swarm through the Lincoln Tunnel, we decided it was time to head home.

I did have some interesting conversations with various notables, including Roz Hewsenian, new CIO of The Helmsley Trust, which I report below.

========================================

My Breakfast with Roz: Looking for the ten-percent solution:

Rosalind Hewsenian was appointed chief investment officer of the $4 billion Helmsley Trust in June, 2011.

She was hired as Deputy CIO of the newly-formed foundation last April. Linda Strumpf, formerly of the Ford Foundation, had been brought in to build the investment office, and she handed the CIO keys over to Ms. Hewsenian once it was up and running.

Ms. Hewsenian grew up in New York, graduating with a B.S. from the State University of New York and an MBA from Pace University. She worked for twenty years as a senior consultant with Wilshire Associates in California, and now she’s back in New York with a whole new career.

She was kind enough to meet me for breakfast when I was in New York last month.

Skorina: Roz, you were with Wilshire Associates for twenty-one years, working with both corporate and public pensions; you were even lead consultant with mega-pension CalPERS. Do things look different now that you’re actually sitting in the CIO’s chair of a private foundation like Helmsley?

Hewsenian: I like this chair just fine, Charles, but, yes, a private foundation is a whole different animal from the corporate and public pensions I worked with.

Pension accounting and investing is conceptually simple. Employees and employers bargain to determine benefit levels. Then the consultants are called in to study actuarial tables and available investment returns across asset classes. Finally, they tell the parties what those benefits will cost and how they’ll have to finance them from contributions and/or investment earnings.

The answers are in the back of the book. There’s no mystery.

Skorina: Well, okay. But if it’s so simple then why are so many public pensions so underfunded? I don’t think it was just the recession. I talk to investment managers everyday, and they don’t seem less competent than anybody else. What went wrong?

Hewsenian: All this stuff you read about public pensions being in trouble today is because some officials – not all, but some – either hid the true cost of the pensions from the public or failed to adequately fund the obligations, or both. Either deliberately or not, they made promises their successors just can’t keep.

In the corporate world, things were different. They used realistic rates of return and they paid into the plans what they needed to meet the obligations. There are some exceptions, but most corporates are in much better shape than most publics.

And, during most of my consulting career, all pensions – all investors, really — were operating in a golden age, although we didn’t really know it. For almost thirty years we had one of the best economic periods in our nation’s history, maybe the world’s history. Since the early 1980s, despite a couple of short, sharp recessions, and some market gyrations like the dot-com bust in 2001, equities mostly went up, interest rates mostly drifted down, and inflation wasn’t a problem. Looking back, people call it the Great Moderation.

We could count on the stock market growing eight to ten percent a year and, although interest rates had a long decreasing slide from the Volker years, they stayed mostly above five percent. You could make money in stocks, you could make money in bonds and, with an allocation to both, you could get fairly low volatility. So investment officers rode this great benign wave which made everything look easy.

Skorina: You’re getting me nostalgic, Roz. Don’t forget, we all looked better, too!

Hewsenian: Speak for yourself, Charles! But then things got tricky. Along with rising markets the investment world created a little something called benchmarks. They were artificial but lovely little metrics which basically let all stock-pickers look good. As long as an equity manager met his benchmark, he got his bonus because, since everything basically was going up, it didn’t really matter if the benchmark was a little behind the S&P or a little ahead. Everything was going up so what’s the fuss? Except for the truly incompetent, investment managers delivered returns sufficient to meet the obligations of institutional investors, the bonuses arrived, and life was good.

Skorina: Well, I guess there are relative benchmarks and then there are absolute benchmarks. Obviously, funds would rather use the former. They can say, “Hey, we’re losing money a lot slower than most people. Yay for us.” But for a private foundation with no revenue stream, losing money slowly just means you’re going out of business in twenty years instead of fifteen years.

Hewsenian: Exactly. For me, and for a lot of other investors, if they were honest, relative returns won’t cut it any more. That’s ancient history. We’re now living in an absolute return world.

Look at what I face – what all investment officers face. Two percent Treasuries, three percent dividends, and possibly, just possibly a five percent total return on the very best corporate equities. That’s it.

But I need eight to ten percent to run the foundation, so I’ve got a big problem.

Remember, the five percent mandatory payout that foundations face was set years ago when markets were wonderful. They aren’t wonderful any more but we still face that five percent payout to fund our mission, plus an additional one percent for administrative costs, plus two to three percent – or more – for when the eventual inflation dam breaks, plus another one percent to grow, hopefully, instead of stagnating. That’s ten percent, Charles.

And, no matter what, I must not lose money. A big crash like we had two years ago is horrible for foundations. Unlike endowments, we don’t have donors to make up the damage and, as I said, we can’t just cut the payout for awhile without losing our tax-exemption.

Skorina: Roz, I’m starting to wonder why you took the job.

Hewsenian: I like a challenge, Charles. This is where I can take all that experience and make it count. And that has to start with honesty about how hard it’s going to be.

Here’s how I look at the world this morning. For years the U.S. caught some lucky breaks. President Clinton, like President Obama, tried to pass an expensive healthcare bill, but Clinton’s got shot down. But his tax increases went through anyway, so we had sensible budgets during the Clinton years.

Then President Bush came in, and we had 9/11, and we had the great defense stimulus; two expensive wars and tax reductions. Meanwhile, China turned into the great growth machine, and happily lent us all the money we needed at low rates, while keeping consumer prices down.

But now we’ve had a terrible recession, expensive and ineffective fiscal stimulus, Mr. Bernanke has shot his shot, there’s no GDP growth, and no one knows what to do. There’s nothing left. Tax the rich? I don’t see any way to eliminate the deficits with tax increases. I don’t see a balanced budget coming. What we need is growth, but I don’t see where that’s coming from, either, at least domestically. Ultimately, investment returns are created by economic growth.

Skorina: Well, I don’t do politics, at least not in public. But if the object is to dramatically cut the deficit, then I agree the math on taxes doesn’t seem to work. You can’t confiscate all the income above $250K. On the other hand, the kind of moderate tax increase that might be politically possible – say, raising the 35 percent rate to 40 percent for top earners – would only put a small dent in the deficit. Our debt-to-GDP ratio would just get up to Southern Europe levels three or four years later than otherwise.

Okay, that’s all above my paygrade, anyway. So, everything sucks. But what are you going to do for the Helmsley Trust?

Hewsenian: I use what I’ve learned. First, and obviously, I’m looking for exceptional managers. I think I know how to do that. But I’m not very happy with many of the hedge fund managers right now. They are suffering the same fate as the long-only managers; too many managers, too many crowded trades, and lousy customer service. I suspect that will change, at least I hope so.

Also, I’m looking at things differently now. Basically I see investment opportunities within three broad categories; liquidity risk mitigators, inflation protectors, and return generators.

I said that customer service at money management firms is lousy. Most hedge funds aren’t very good at it and this needs to change. I have to deal with my trustees in real time, and when they want information and guidance, I can’t wait for the quarterly newsletter. I need feedback and I need it now. Markets and economies are moving rapidly and they want to know where we stand. I expect my managers to respond to my concerns on a real-time basis. If they can’t do that, I’ll fire them and find someone who can.

Skorina: Thanks for breakfast, Roz, I always enjoy hearing someone speak their mind.

Rosalind: My pleasure, Charles; let’s do it again.

========================================

The Skorina Letter

Publisher: Charles A. Skorina

Editor: John C. Legere

The Skorina Letter No.30

charles — Wed, 31 Aug 2011 21:02:18 +0000

Special report – Should smaller endowments and foundations manage their own money?

The Zen of In-sourcing: Can small institutional funds resist the out-sourcers? Should they even try?

What is the sound of one small institution managing its own money? It’s not very loud, apparently, compared to the racket from all the people who want to do it for them.

Should smaller tax-exempt funds just give up managing their own portfolios and succumb to the siren song of outsourcing? I think the answer is: Not necessarily.

In a previous letter I presented mini-case-histories of two smallish college endowments which recently chose to outsource.

In this special issue, I look at the other side: some small funds which have eschewed outsourcing, and are doing just fine, thank you very much. Reports from the field suggest that resistance to outsourcing may not be futile at all.

Further below: we gather some wisdom from Jack Rich, CIO at Abilene Christian University; and, for you left-brainers, some statistics — my take on how many institutions are in this “small investor” category.

– CAS

————————————————–

Seeking enlightenment among the insourcers:

Wesleyan University’s endowment currently stands just north of our arbitrary $500 million cutoff for “small” funds, but CIO Anne Martin made some relevant observations when she spoke to aiCIO magazine back in June. She says that smaller funds can benefit from the same internal management discipline as big one.

“Build a diversified portfolio, pick great managers, approach asset allocation and rebalancing in a disciplined manner, and maintain a long-term horizon.”

She emphasizes that “[small funds] can be more concentrated with a smaller number of high-conviction managers. We don’t need to go to the 10th name on our private equity list, and we can get into terrific funds because we only need a small allocation.”

She cautions, however, that smaller institutional funds are more vulnerable in some respects. For instance, they must be especially vigilant about maintaining liquidity, since they don’t have the same borrowing power as big institutions.

See: http://ai-cio.com//channel/ASSET_ALLOCATION/Interrogation__Anne_Martin_Thinks_Liquidity_Is_Key.htm

Jack Rich, the CIO at Abilene Christian University in Texas (with $300 mil AUM), told me in a recent interview that even a one percent positive variance over a benchmark 70/30 return can generate several million dollars in excess returns; enough to support an investment office with money left over.

[See my interview with Mr. Rich below]

I spoke to a senior investment professional at a prominent San Francisco Bay area cultural institution who champions in-house management for smaller funds. He said:

“No external manager will have the total picture or insights into the institution and their unique needs. You can’t do that unless someone is on the inside. Also, there are many managers that consultants don’t cover, but I can find them and give us an edge.

Engaged and active investment committees have good ideas and access to managers. We can custom tailor our portfolio and remain flexible.

If I can add just fifty basis points, my salary is justified. Fifty basis points on $200 mil can buy you an office and director of investments and still have additional earnings for the endowment.”

————————————————————

My alma mater outperforms:

I can add the example of my own high school, Culver Military Academy in Indiana (now known as Culver Academies) to the list of small funds who successfully manage their own money. Culver has no CIO, but runs its endowment with a troika consisting of school president John Buxton; investment committee chair Jeffrey Adams; and consultant Brian Hunter, CEO of Strategic Capital Allocation Group in Boston.

Ironically, Mr. Adams is president of Balentine, an Atlanta-based investment manager which competes in the outsourcing market, although they don’t do business with Culver.

They have backup from the rest of board and the investment committee, which includes financial heavyweights like Peter Fasseas, chair of Metropolitan Bank Group, and Paul Gignilliat, a Senior VP at UBS Financial Services.

Culver has a rather amazing 75% allocation to alternatives, a full spectrum including event-driven strategies, long-short domestic and international strategies, global macro, managed futures, sovereign debt, credit strategies, distressed private equity, and royalty funds.

But, as Mr. Buxton pointed out in an interview, “the issue is not the percentage of alternative investments but the selection of managers who manage risk creatively and successfully in a volatile market place and the strategic placement of those managers in a portfolio.”

In 2008/2009 many institutions discovered that their alternatives weren’t alternative enough, but Culver seems to have achieved good non-correlation with conventional assets. They lost only 12.9% in FY2009 compared to the NACUBO average of -19%. They also avoided managers with lock-ups and gating provisions and faced no liquidity problems during the crisis.

Culver earned about 14.5% in FY2010, compared to the NACUBO average of 11.9% for their peers. So they’ve outperformed in both down and up markets. And it’s been noticed. They were named Small Nonprofit of the Year by Foundation and Endowment Money Management Magazine.

————————————————————

A conversation with Jack Rich of Abilene Christian University:

Jack Rich started thinking about the benefits of a full-time chief investment officer for ACU when the Texas school’s endowment was a mere $70 mil AUM, and he was still the chief financial officer. He and his colleagues continually studied the matter and when the endowment finally grew to $200 million, they decided it was time to pull the trigger and create a full-time CIO position. In 2005, Mr. Rich moved into the CIO job himself, handing off his CFO duties.

Over the past decade, ACU’s endowment grew from $147 million to $262 million, earning an average investment return of 8.9%. That’s one of the highest among all U.S. endowments, and puts ACU in a dead tie with Dr. David Swensen’s famous team at Yale. Like Yale (and Culver – see above), ACU is heavily tilted toward alternative assets, which make up about 70% of their portfolio.

Mr. Rich has been a thought-leader among his peers, and received the Rodney H. Adams Award from the National Association of College and University Business Officers (NACUBO) in July. He has worked for ACU, his undergrad alma mater, since 1991. He was previously president and COO of Morton Companies in San Antonio and also did stints at InterFirst State Bank of San Antonio and Arthur Anderson & Co in Dallas. He earned his BBA in 1976, then an MBA from University of Texas in 1980. He also holds a CPA credential.

Given the burgeoning number of outsourcing firms competing for business among smaller funds, it’s particularly interesting to hear why he thinks ACU should stick with their current structure.

He made several good points when I spoke with him a few weeks ago.

Skorina: Jack, what prompted the school to believe that running a $200 million dollar endowment (as it then was) with an in-house CIO was the right way to go?

Rich: Charles, we felt that if we could earn just one percent more than a benchmark 70/30 stocks/bonds portfolio, it would justify setting up an investment office and a full-time CIO. On a $200 million dollar portfolio, a one percent increase is two million dollars which more than covers our costs. I’m simplifying a little, of course — we worked through a lot of options and what-ifs – but that’s what it came down to.

Skorina: Performance counts, but the world is full of people who will promise you better performance. There must have been other factors you considered.

Rich: Sure. One big one is the just the ability to manage the portfolio in our own interests. For example, we currently have thirty percent of the portfolio in hedged vehicles, with significant emphasis on global macro managers and managers with a sharp eye on tail risk. And we are only twenty-two percent long public market equities and six percent in public market fixed income. I doubt we could get exactly that allocation if we relied on an outsourcer.

Also, due to our various long-time investments in oil and gas here in Texas, we have built up some expertise in that field and feel comfortable making investments in this area. The school has significant royalty income from our O & G holdings and, by the way, we feel these investments are an excellent diversifier and tail-risk hedge. We are currently at a fifteen percent of portfolio allocation in this asset class and would like to move to twenty percent when we see attractive opportunities.

Skorina: Jack, you’ve now had five years experience with this structure, what other pros and cons have emerged?

Rich: On the plus side, we feel that if we are willing to study and hustle and knock on doors, we will have a good chance of finding some excellent managers, even if we are not that big.

Skorina: How about the pricing you get from those managers?

Rich: We can’t count that as a plus for us, Charles. We’re not big enough to get much leverage. But we do feel we can get just as much quality as bigger funds, and that’s even more important.

Skorina: What else works for you?

Rich: Speed. In this climate of uncertainty we want to be able to move quickly if an opportunity presents itself or something goes wrong. We know what we can do and we can do it fast.

Skorina: So, would you conclude that everyone at your size should use your model?

Rich: No, I would not go that far. The relationship I have with the board and the way the board itself functions is crucial. The board has to have a high level of trust and confidence in the investment staff to function well; and vice-versa.

Not all boards have the time or personnel to make it work the way we do. If that’s the case, then outsourcing might make more sense.

Skorina: I really appreciate your comments Jack; always good speaking with you.

Rich: The same here, Charles.

Footnote: Jack wrote an excellent article about how an investment office can work productively with their board. ”All Oars in the Water” appeared in the March, 2011 issue of NACUBO’s Business Officer magazine.

You can read it here:

http://www.nacubo.org/Business_Officer_Magazine/Magazine_Archives/March_2011/All_Oars_in_the_Water.html

————————————————————

Revisiting the numbers:

As a crude rule-of-thumb, we can say that most tax-exempt funds over $1 billion AUM use professionally-staffed in-house investment offices; whereas, most funds under $500 million do not. The $500 million-to-$1 billion bracket is a transition zone, where we can find both models.

Those sub-$500 million funds typically rely upon a volunteer investment committee and an outside consultant to steer their portfolio and oversee external managers. A few also have a professional CIO or designated investment person on staff, although these are far less common when you get much below $400 million.

If we take $200 million as pretty much the absolute lower limit for in-house management (there are a few exceptions), even with a non-CIO model, then how big is the $200 million to $500 million AUM pie for U.S. tax-exempts?

As I have noted elsewhere (See: www.charlesskorina.com Chief Investment Officers – supply and demand), I believe there are about 1,072 such portfolios (excluding 800 corporate pensions which, historically, are almost all outsourced to money management firms or insurance companies). I estimate that only about 10 percent of these have a CIO or equivalent, so 90 percent have a pure committee-and-consultant model. Outsourcing is beginning to penetrate this group, but it’s still a new idea for most and that penetration is not very large – yet.

Tax-exempt institutional funds between $200 and $500 million AUM (Charles A. Skorina & Co estimates)

Endowments: 124

Foundations: 157

Health systems: 245

Misc other: 217

Subtotal: 743

Public pensions: 150

Subtotal: 893

Union pensions: 179

Total: 1,072

There is plenty of evidence to support the case for in-house investment management at endowments and foundations; even for those under $500 million. A savvy chief investment officer can earn good returns, brief the board in real time, and react quickly to market events. And, as Leonard Raley, the president and CEO of the University System of Maryland Foundation, pointed out to me recently, “a well managed in-house investment operation is tied directly to an institution’s ability to raise philanthropic funds as well as donor confidence.”

Some boards see the investment management function as integral to the institution’s purpose and feel comfortable being closely involved in the process. And others don’t.

For those that do, excellent investment talent is available, particularly in this tough job market. For those that don’t, my special report on outsourcing lists at least forty-two outsourcers willing to shoulder the burden. [See: www.charlesskorina.com Special CIO (chief investment officer) Outsourcing Edition, The Skorina Letter No. 28]

Whether a small institution insources, outsources, or uses some hybrid form to manage their investments is up to the board. What can’t be outsourced is the board’s responsibility to understand their specific needs and capabilities and find a structure that works for them.

The Skorina Letter No.29

charles — Mon, 15 Aug 2011 23:45:23 +0000

Special CIO (chief investment officer) Outsourcing Edition

1. Investment Outsourcing: a view from the bottom up (the intro)

2. Outsourcing for beginners: a conversation with Ball State CIO Tom Heck

3. Ball State, U North Dakota, Mt Holyoke – Compare, contrast and compute: Two virgin outsourcers and one veteran

4. Skorina’s Ultimate Outsourcer List

————————————————–

Investment Outsourcing: A view from the bottom up

There’s lots of information out there – or at least a lot of talk – about investment outsourcing (aka “CIO outsourcing,” aka “implemented consulting,” etc). Unfortunately, almost all of it comes from the people who are selling outsourcing services.

There’s nothing wrong with marketing, but I thought it would be useful to look at outsourcing from the customer’s point of view for a change. So, here are a couple of mini-case-studies: two roughly similar endowments - Ball State University and University of North Dakota – who both hired outsourcers this year, and how they did it.

For contrast, I also take a brief look at another endowment – Mount Holyoke College – which was an early adopter of the outsourcing model, and how they have fared.

In addition, and at no extra charge, I’ve compiled my own list of outsourcers, phoning around to get the best and latest AUM numbers I can find. There are other lists out there, but some are behind pay-walls or aren’t quite up to date. Mine includes a few firms I haven’t seen elsewhere, and is both fresh and free.

In a future report, I turn the coin over and look at some smaller funds which are deliberately and defiantly un-outsourced, and doing very well, thank you.

We’ll be back soon with a regular, less pedantic version of the Letter.

Oh, and if you decide you need a CIO instead of an outsourcer, my line is always open.

CAS

————————————————–

Outsourcing for beginners: A conversation with Ball State University’s Tom Heck

As of July, 2011, the Ball State University Foundation in Muncie, Indiana has hired the Agility unit of Perella Weinberg Partners to manage their $160 million endowment.

Agility’s team is headed by Chris Bittman, former chief investment officer of the University of Colorado Foundation, who joined Agility in 2009.

I had a chance recently to talk to Ball State chief investment officer Tom Heck about how they made their decision.

Skorina: Tom, thanks for talking to me about how you worked through this process.

When did you first start looking at outsourcing and how long did it take to pick a vendor?

Heck: We started talking about it in the spring of 2010, then appointed a task force at our November meeting. It’s taken us about a year, all told.

Skorina: Was there some specific catalyst that pushed you into action?

Heck: No, we just had a growing awareness that we couldn’t keep operating the same way in a different world. We had a big committee that met three times a year with a consultant bringing us allocation and manager recommendations. That was fine for managing a basic, long-term portfolio in a “normal” market. But, for a more complex portfolio in a “new normal” market,” not so much.

Dial those in and we just didn’t have the resources to effectively manage $160 million with a one-man investment office. We needed back-up, not just advice, and we were hearing that outsourcing might meet our needs.

An endowment should take a long-term view, but the world doesn’t always give you that luxury. Now, you need to constantly evaluate investment strategies, risks and opportunities, money managers, trading options, and back-office systems. Even with the help of a good consultant, we didn’t have the horsepower.

We needed a way to move faster, more tactically, to adapt to changing markets. And we needed access to a more sophisticated risk-management process.

Here’s a couple of questions we were asking ourselves:

Since 2009, tail-risk hedging is something our board has thought about. If we conclude that the market is especially risky, then exactly how would we hedge ourselves? What would it cost, and how would we manage the hedging mechanism? We don’t know. But an outsourcer should have the experience, methodology, and resources to get it done. If they do, we would want to give them that discretion.

Or, suppose we think some theme like the rise of the Chinese middle class represents big growth and investment opportunities. How do we monetize that conclusion? How does a small fund get access to those markets at a reasonable cost? ETFs? Companies? Commodities? Maybe some specialty funds? These are complicated questions.

Skorina: What was your first impression, once you jumped in and started calling vendors?

Heck: Mostly, confusion. It is a rapidly growing, evolving marketplace.

In theory, it’s a two-step problem. First we had to decide exactly what outsourcing model would work for us. Our committee was leaning toward keeping an investment officer on campus – that would be me! – we wanted a process that could complement our existing setup instead of replacing it.

Then, we had to decide which specific firm could give us what we wanted in terms of both cost-effectiveness and general comfort level.

In practice, though, we had to sort of do both things at once as we worked through our learning curve.

We learned right away that it’s hard to get impartial advice about this stuff. Most traditional consultants are looking at the outsourcing business themselves, or are already managing some money. They aren’t neutral advisors. Their fees are being squeezed, and they want to generate more income. And, of course, they don’t want to lose a client, so it’s a touchy question for them.

Then, once we began talking to firms, they seemed to fall into three broad camps.

First, there’s the group that comes out of the university endowment world. They understand multi-asset-class portfolios, the ebb and flows of donations, the school budget process, and the bureaucratic frictions. They spoke our language, and that’s where we ultimately ended up.

The second group is the traditional consultants. As I said, they’re getting hammered on all sides and most of them have already launched or are trying to develop a money-management group. At the same time, many are merging into mega-firms. The acquiring firms, up on top of the food chain, mostly come from the pension consulting world. That’s understandable, since the total AUM is much bigger in that category. There are some similarities, but also a lot of differences. It’s a culture of actuaries and liability management. That’s not us. We have different risks and different time horizons.

Then there are the big, full-service financial-services guys: commercial banks, investment banks, and the giant money managers. That’s a world driven by fees and transaction income. It’s not the world of patient, long-term money. So we chose not to go there.

Skorina: This has been a long quest for you guys, hasn’t it?

Heck: Charles, I’m afraid I’m just getting started!

Even in the E&F crowd, which is where we ended up, there’s still a whole menagerie of different investment philosophies.

Some preach strategic asset allocation with rigorous rebalancing. Others believe in the eventual reversion to the historical mean. That’s the “we think these securities are historically undervalued and will revert accordingly” group. They talk about underweighting or overweighting and a return to “normal,” whatever that is.

Still others say: forget conventional risk measurement and mean reversion and focus on deep risk assessment. Fine, but how are we going to make money?

Another group, which intrigued us, invests in a global-thematic manner. They think more like a global macro hedge fund, but with a longer-term perspective.

In the end, we felt the most important thing was not specific investment theories, but dealing with people who came from our world and understood our challenges and concerns. If we talk the same language, we’re confident we can arrive at a common view of the world regarding risk and return.

Charles: Once you narrowed it down to the E&F group, how did you evaluate them?

Heck: We identified eleven candidates and sent them our RFP. From the responses, we cut that group down to just seven and made site visits to all of them. Before we hit the road we worked with our board to prepare a list of questions to keep us focused.

Skorina: I know you don’t want to list the specific firms you passed over, but they include most of the usual suspects in the market, and our readers can fill in the blanks. So what were you looking for? What clinched the deal for Agility?

Heck: We put everything under three general heads: investment process, governance, and fees.

First, process: How do they make money? How do they construct portfolios? How do they monitor and manage risk? Is it just talk, or can they document it and show that it is really working as advertised?

Second, governance: How would they integrate with our investment process? Do they fit with our culture? Is it a stable organization with enough resources? Have they got the kind of controls and safeguards you expect to see in a business that handles other people’s money?

Finally, and very important, fees: Are the fees appropriate, and are they structured in a way that keeps their interests aligned with ours?

We tried to focus on the specific, practical stuff. It’s all very well to say you’re an outsourced CIO, but exactly how are responsibilities allocated and how do we keep everybody in the loop if you’re in another state or another time zone?

As you know, Charles, flying in and out of Muncie, Indiana is not the easiest thing in the world.

Skorina: Let’s see. First you drive two hours to Fort Wayne, right? Then you get on a very small airplane that goes to Chicago, and so on.

Heck: (Laughs) Well, usually it’s an hour-fifteen-minute drive to Indianapolis, but you see my point. What’s the interface? It’s our money, and we don’t necessarily want to wait for the end of the month to find out what’s going on, especially when the market gets as wild as it has been lately.

Who takes our calls? An investor-relations person? A portfolio manager? Is the CEO available to us? What’s the frequency of briefings? Who has the discretion to make decisions? How much input could we have if conditions started to change for us?

And, from a purely self-interested standpoint, what part could I play in the process?

Then we had a bunch of questions: We’ve heard about your investment philosophy, but what did you actually do the day Lehman failed? Or the day of the Japanese earthquake, or the Wall Street flash-crash? Let’s see your trading records and hear what you told your clients.

We also looked hard at the back-office strength, the biographies of the team and what kind of environment they worked in. What is the typical size of the clients? Are they in the billion-dollar club, or smaller funds like us? How exactly do they blend a new fund into their business in terms of both portfolio management and operations?

Last, but far from least: what’s the long-term performance; how does it stack up against the benchmarks and versus in-house managed funds? If your customers haven’t been making at least as much money as their peers, then why are we having this meeting?

It was hard with some firms to really know what they had, what was going on back behind the shiny conference rooms. “Transparency” is everybody’s favorite buzz-word, but you need the attitude to go with it.

We also looked at what kind of growth mode they were in. Some firms are in an asset-building phase. That’s fine, but is growth all they care about? We liked the ones who said that asset management is not an infinitely scalable business and at a certain level, they would feel comfortable and probably not go higher. From our point of view, bigger isn’t necessarily better.

Also, how big a fish are we to them? We’d like to feel that our business is important to them. From that point of view, there’s sort of a just-right size for a potential partner.

I’m afraid this is turning into a ten-part mini-series, Charles. You want to hear more?

Skorina: Absolutely. Most of the information out there is, let’s face it, sales-talk from outsourcers. You never hear about how things look from the customer side. Especially from somebody who’s just been through the process and has the scars to prove it.

Heck: Ok, a few more points, then.

Alignment of interests is something we kept hammering at. We really wanted our partner to have some skin in the game, the same way hedge funds do. We wanted to know we wouldn’t be alone in the foxhole when things went wrong.

Skorina: I can’t close this off without talking about fees again. You’re the customer and you have a budget. You need to know what it costs.

Heck: Again, not easy. There are different formulas, so it’s hard to get clarity and make direct price comparisons among firms. How much do we pay for advice? How much are we paying for overhead? How is a performance fee calculated? For a commingled fund, how are the fees broken out?

We had to understand how returns net-of-fees would look between different firms in different market scenarios, so we could make an intelligent choice.

Something else that’s important: How much does the firm depend on revenue from performance fees versus management fees? You don’t want to over-pay in an up-market. On the other hand, you don’t want them to crash in another down market because their revenue is cut in half and they can’t meet payroll.

Skorina: So, in your case, Agility was the last one standing?

Heck: Yes. There are other good firms out there, and I’m sure every client has their own point of view, but Agility/PWP scored high on all of our specific needs.

They seem to have the talent, the resources, and the process to deliver investment performance in changing market environments. They also were very receptive to building a process that complement our existing framework, integrating with an internal CIO, and supplying the specific resources that we could not build in-house. Our committee liked their investment philosophy and their organizational culture.

Skorina: Tom, I think this will really help people who are thinking about this. You’ve given them something to chew on. Thanks for taking so much time for me.

I hope you enjoy your big softball game tonight, back in muggy Muncie!

Heck: I’ve enjoyed it Charles. Let me know if you have more questions.

————————————————–

BSU, UND and Mount Holyoke: Compare, contrast and compute -Two virgin outsourcers and one veteran

The University of North Dakota Foundation also shifted to investment outsourcing this year, at about the same time as Ball State. BSU and UND are both mid-sized, mid-western public schools which, by the usual industry rule-of-thumb, aren’t big enough to justify a professionally-staffed internal investment office. Indeed, neither had a CIO until 2008.

UNDF has a CFO/Treasurer, but no chief investment officer and, since Treasurer Laura Block’s other duties don’t leave her much time to focus on their $122 million endowment, most of the load has fallen on the foundation’s volunteer investment committee and their advisor, Commonfund.

The committee meets four times a year (not in Grand Forks, North Dakota; but in downtown Minneapolis, which is more accessible to out-of-towners). Commonfund reps make recommendations on allocations and the hiring/firing of outside investment managers; the investment committee interviews the recommended managers and ratifies allocation recommendations.

Ball State University had a virtually identical setup for its slightly larger endowment until 2008, when their treasurer, Thomas Heck, was given his current CIO title and Jeffrey Lang got the Treasurer hat. So, Mr. Heck’s current compensation — about $170 thousand, including benefits – was a net increase in investment management overhead for the foundation. That’s about 0.1 percent of AUM.

The stock-market run-up in 2006-2008 had pushed the endowment over $200 million for the first time, and the foundation had even begun a program of direct investment in hedge funds. Their returns in this period were good and, in the fall of 2007 BSUF was even named “Small Non Profit of the Year” by Foundation and Endowment Money Management magazine, based on performance, investment decisions and use of managers/consultants. Their five-year average return at that point was 13.5 percent, vs. 10.7 percent for the S&P. They were also handily beating the 11.5 percent NACUBO five-year average for small endowments. Life was good in Muncie.

Unfortunately, BSUF’s Hammond-advised portfolio didn’t continue to perform as well in the storms of 2008/2009. By 2010 their five-year return was down to just 1.4 percent. They were still ahead of the S&P, but lagging their peers in the NACUBO small-endowment category, who averaged a 3.0 percent five-year return. In fact, they were below the 25th percentile: three-quarters of their peers were performing better.

The story at UNDF was similar, but worse. In 2006 and 2007 their yearly returns were just slightly behind the NACUBO averages. By fiscal 2010 their five-year return was close to zero, significantly lower than BSUF’s performance and also in the bottom quartile of the NACUBO universe. Those are all nominal returns, of course. The relevant inflation index was 3.4 percent in 2006-2010, so both funds were falling behind that absolute benchmark for all long-term investors.

We note that, of these two similar funds, the one with the in-house CIO did a little better. Even if it’s not statistically valid, Mr. Heck could argue that the 0.1 percent of AUM they paid to run his office bought them an additional 1.4 percent of return vis-à-vis UNDF. Hey, it’s an argument.

(UNDF doesn’t publish explicit investment-return figures. Our computations, based on their annual reports, 990 filings, and some information in investment committee minutes, suggest that their five-year average return as of the 2010 fiscal was somewhere between – 0.30 percent and +0.80 percent. We were unable to discuss the matter with Treasurer Laura Block before our publishing date.)

Even a lackluster five-year performance isn’t decisive for an endowment, which can smooth out performance over decades, but it certainly puts real-time pressure on the leadership. We suspect that performance anxiety had a lot to do with pushing both funds into outsourcing when they did.

We also note that neither school chose to give their outsourcing business to their longtime advisor. Both Hammond and Commonfund are marketing themselves as outsourcers (see our list of outsourcers, below) and both tried to retain their accounts. Both were cast off.

UNDF’s Process:

Although we weren’t able to speak at length with the UNDF staff, we did get a peek at their investment committee minutes for the last year, which give a pretty complete story of their outsourcing quest. Although it’s similar to what we heard from Mr. Heck in the interview above, it’s worth recounting, because in this case we can disclose the specific firms who were considered, which ones were passed over, and why.

Commonfund had been UNDF’s advisor since 2005, but in October, 2010, investment committee chair Jennifer Neppel pushed to do an RFP for a new firm, noting that there had been “issues” with a Commonfund real estate fund, and issues of due diligence going back to a freeze in a short-term money fund (presumably, in the panic of 2008). It was subsequently made clear that the committee was looking for “implemented” advice, specifically including a manager-of-managers capability. They couldn’t “outsource” the CIO they didn’t have, but they wanted, at a minimum, to outsource the manager-selection process, which weighed on the time of their committee members.

The names Cambridge, Commonfund, Northern Trust, Investure, Hammond Associates, JPM, SEI, Russell, TIAA-CREF (CoVariance) were all initially mentioned as possibilities.

In a January meeting, Cambridge and Investure were removed from the RFP list for no specified reasons. Four firms not previously mentioned were also deleted from an RFP: Buckingham Asset, Wilshire, Goldman Sachs and Fund Evaluation Group (FEG). Again, no specific reasons were given, except for Buckingham, which was said to have no active (as opposed to passive) investment strategies, offered no guidance to alternatives, and had only two nonprofit clients in UND’s AUM class.

In March, five of the eleven RFP respondents were eliminated: JPMorgan, Hammond, CoVariance, Morgan Creek, and TIFF. JP Morgan was criticized on price. Their fees were said to be 1 percent higher than others. Also, they provided no references and did not answer questions re fraudulent hedge funds [sic] and gave no current performance data. Hammond did not appear to have the outsourced CIO model UNDF was seeking, and their reporting was not AIMR-compliant. (AIMR = old name for what is now called GIPS, a set of performance-reporting standards widely used by institutional asset managers.)

The CoVariance unit of TIAA-CREF was just starting operations and “had no record to rely on.” Morgan Creek did not provide performance information, and their strong focus on alternatives didn’t look like a good fit for UNDF. TIFF also was thought to be too heavy on alternatives for the committee’s tastes. Also, they used commingled funds and might not have ability to structure a customized portfolio.

Four of the remaining RFP respondents were invited to interview: Commonfund, Northern Trust, SEI, and Russell. The minutes implied that the invitation to Commonfund was mainly a courtesy to their current advisor. Obviously, they were not satisfied with their performance, or they would not have initiated the search process but, as a practical matter, they would need their cooperation during a transition.

A key criterion for the finalists was their demonstrated “manager-of-managers” capability, which would alleviate the investment committee from having to interview outside managers.

Russell was said to have the focus, expertise and strong performance they wanted. They also liked Russell’s relationship manager, Chrissie Fortmeyer. They were impressed with SEI’s research strength and its performance history.

Commonfund, SEI, Russell, and Northern Trust were all interviewed in one day in April, and SEI was selected by a unanimous vote.

At the July meeting the SEI rep presented an analysis of the UNDF portfolio and their transition plan. The most notable changes in allocation seemed to be a proposed shift from ex-US equity to high-yield ex-US bonds; and a shift to a smaller (but supposedly more efficient) inflation-hedge allocation. Overall, the portfolio’s fixed-income allocation would nearly double, from 10 percent to 19 percent.

We’ve discussed two recent outsourcing decisions in some detail. For comparison, we could note another endowment which was an early-adopter: Mount Holyoke College, the toney private school in Massachusetts, moved to out-sourcing five years ago.

Mount Holyoke’s $540 million endowment sits just above the $100 to $500 million bracket occupied by BSUF and UNDF. Like UNDF, they have never had an on-campus investment office although they are (marginally) big enough to support one. Like UNDF they are not, strictly, CIO-outsourcing, but they are offloading more investment management from their board-members to their advisors and are certainly paying more for “implemented advisory services” beyond what Cambridge routinely supplies its clients. Judging by their recent performance, it’s been worth it.

Unlike UND and BSU, which both dropped their advisors, Holyoke chose to keep their previous advisor, Cambridge, but pay for more services. Cambridge billed them about $1.2 million in FY 2009, when the endowment pool stood at $499 million, or about 0.23% percent of AUM. By contrast, Hammond billed BSUF $170,000 for advising their $146 million endowment in 2010, about 0.12 percent for pure advisory services.

If these numbers are representative, then “outsource” means “we get twice as much.”

Although we can’t draw conclusions from anecdotes, and Holyoke’s superior performance can’t be ascribed just to the outsourcing model, it’s interesting to note that the outsourced Ivy-ish endowment in this group has run well ahead of its country cousins. At least in this one case, the premium paid for outsourcing seems justified by higher returns.

Five-year Investment Returns: FY 2006-2010:

BSUF: 1.4 percent

UNDF: 0.0 percent (estimated)

MtHol: 5.5 percent

NACUBO: 3.0 percent

S&P: -0.8 percent

Inflation: 3.4 percent

Different Strokes:

If any conclusion can be drawn from these mini-case-studies, it might be just that every fund is different on a host of dimensions. Culture, history and personal predilections have as much to do with whether you keep your CIO down the hall or across the country, or dispense with him/her altogether and rely on some smart, dedicated volunteers. Rules-of-thumb based on AUM are too crude to explain what’s going on.

In a future report, we’ll consider some counter-examples: small, un-outsourced funds which are doing just fine.

————————————————–

Skorina’s Ultimate Outsourcer List (45)

AUM is discretionary unless otherwise noted

Agility (Perella Weinberg), New York, NY, Christopher Bittman CIO, AUM over $2 billion.

Angeles Investment Advisors, Santa Monica, CA, Leslie B. Kautz Founder & Principal, AUM $35 billion total advisory, $1 billion discretionary.

Balentine, Atlanta, GA, Robert Balentine CEO, AUM $900 million.

BlackRock, New York, NY, Nancy Everett Managing Director – Head of U.S. Fiduciary Management Solutions, AUM $39 billion.

Cambridge Associates, Boston, MA, Deirdre Nectow Managing Director, AUM $107 billion total advisory, $5.7 billion total discretionary, many custom programs.

Clearbrook Financial, Princeton, NJ, Fred Weiss Managing Director, AUM $30 billion advisory.

Commonfund, Wilton, CT, Sarah E. Clark Managing Director, AUM $12 billion discretionary, $8 billion fully outsourced.

CornerStone Partners, Charlottesville, VA, Don Laing Sr Partner, AUM over $3 billion.

Covariance Capital Management (TIAA-CREF), Houston, TX, Shannon Morton Managing Director, AUM $1billion.

Fiduciary Management Associates, Chicago, IL, Robert L. Hudon, Jr. Chief Marketing Officer, AUM $2 billion.

Fund Evaluation Group (FEG), Cincinnati, OH, Gary Price Managing Principal, AUM $1.9 billion.

Fiduciary Research & Consulting (FRC), San Francisco, CA, John Boich, President and Chief Investment Officer, AUM $7 billion.

Global Endowment Management, Charlotte, NC, Stephanie Lynch Partner, AUM $3.5 billion.

Goldman Sachs, New York, NY, Chris Kojima, Managing Director, AUM not available.

Hall Capital Partners, San Francisco, CA, Richard (Rick) Grand-Jean Managing Director Institutional, AUM $22.4 billion total advisory, $2.7 billion institutional discretionary.

Hewitt EnnisKnupp, Chicago, IL, Stephen T. Cummings, AUM $13.4 billion.

HighVista, Boston, MA, Brian Chu Partner, AUM over $3.5 billion.

Hirtle Callaghan, West Conshohocken, PA, Nicole Kraus Director Institutional, AUM $20 billion.

Investure, Charlottesville, VA, Alice Handy CIO, AUM $8.5 billion.

JPMorganChase, New York, NY, Monica Issar Head of endowment & foundation strategic advisory group, AUM $1.2 trillion global discretionary.

Makena, Menlo Park, CA Eric Upin CIO, Bill Miller Partner & head of client relations, AUM $15 billion.

Mercer-Hammond, St. Louis, MO, AUM $51 billion.

Russ LaMore, Partner

Carla McGuire, Partner

Kimberly Wood, Partner, Chicago

Mangham Associates, Charlottesville, VA, Joel R. Mangham, Principal & Founder, AUM $2.3 billion.

Morgan Creek Capital Management, Chapel Hill, NC, Mark Yusko CEO & CIO, AUM $10 billion.

Morgan Stanley (Graystone Consulting), New York, NY, Halvard Kvaale Managing Director Portfolio Advisory Services (MSSB), AUM $22 billion.

NEPC, Cambridge, MA, Steve Charlton Partner, AUM $2.2 billion.

New Providence Asset Management, New York, NY, Lance Odden Managing Director, AUM $2.25 billion.

Northern Trust, Chicago, IL, Thomas R. Benzmiller Managing Executive – Program Solutions for institutions over $250 million, Kendall L. Kay Sr Vice President – Segment Head for institutions $250 million or less, AUM $38 billion discretionary.

Okabena Advisors, Minneapolis, MN, James A. Norungolo Managing Director, AUM 1.3 billion.

Partners Capital, Boston, MA, (London, UK), Will Fox, Head of North America, AUM $2.8 billion.

Post Rock Advisors, New York, NY, Carol B. Einiger President, AUM not available.

Pyramis Global Advisors, Smithﬁeld, RI, Michael Barnett EVP institutional sales, AUM $6.7 billion.

Rogerscasey, Darien, CT, Adam Tosh CIO and Robert Zeidman client relations, AUM $12.5 billion advisory.

Russell Investments, Seattle, WA, Joseph Gelly, Jr. Managing Director investment outsourcing solutions, AUM $75.7 billion.

Salient Partners, Houston, TX, David Hicks Partner, AUM$8.5 billion.

SEI, Oaks, PA, Paul Klauder Vice President institutional group, AUM $54 billion.

Spider Management Company, Richmond, VA, Srinivas (Srini) Pulavarti, CIO, AUM $2 billion.

Spruce Private Investors, Stamford, CT, John Bailey CEO, AUM $3.2 billion.

State Street Global Advisors (Office of the Fiduciary Advisor), Boston, MA, Kathleen Mann & Matt Kelley nonprofit outsourcing, AUM $41 billion.

Strategic Investment Group, Arlington, VA, Deborah D. Boedicker Partner, AUM $28.1 billion, 70% discretionary.

Towers Watson, New York, NY, Tom Brust Head of business development, AUM $50 billion.

The Fund for Foundations (TIFF), West Conshohocken, PA, Laurence H. Lebowitz president & CIO, AUM $8.2 billion discretionary.

UBS AG, Chicago, IL, William Drobny, Head of Institutional Marketing, AUM $12.8 billion.

Wilshire Associates, Santa Monica, CA, Julia K. Bonafede President of Wilshire Consulting, AUM $11 billion.

Wurts & Associates, Seattle, WA, Jeffrey MacLean CEO, AUM $1.2 billion.

The Skorina Letter No.28

charles — Mon, 08 Aug 2011 03:08:54 +0000

In this issue

Carnegie, GMO, CalPERS change horses

Leo de Bever – running $70 billion on the cheap

Ken Frier – a CIO looks ahead

————————————————–

Comings and Goings:

Ellen Shuman: A Swensen alumna leaves on top of her game

After twelve-and-half-years on the job, Ellen Shuman is calling it quits as chief investment officer of the historic Carnegie Corporation in New York.

Carnegie president Vartan Gregorian said on July 1st that she had resigned for “personal reasons” and that her departure date would be just two weeks hence, on July 15. Ms. Shuman reportedly earned $1,047,744 in the 2009 fiscal year for running the fund, which now has about $2.5 billion AUM.

I spoke to Ellen at her home in New Haven (from which she commutes into Manhattan every working day) and she pointed out that she’d actually given more than the two weeks notice implied by Mr. Gregorian’s statement.

“I’ve been here so long, that when I started talking about leaving, I don’t think they quite believed me at first. Then, when I started putting my personal stuff in boxes I guess they decided they better put out a press release,” she laughed.

And no, there was no complicated back-story. She’s feeling fine, but she’s been a portfolio manager for twenty-five years, counting both the Yale endowment and Carnegie.

“I just feel it’s the right time to take a break for some relaxation and reflection, and think about what to do next in my professional life. I have not had a summer off in twenty nine years.”

She said she was satisfied with Carnegie’s current allocations, especially their emerging-market positions.

“We’ve done really well with manager selection there,” she explained, “which is especially critical in that sector.” She mentioned Africa as a relative buy. Like China a decade ago, there is a growing consumer class, and the companies that serve them are going to do well for investors who get an early position.

Geoffrey Boisi, chair of Carnegie’s investment committee, will head up the effort to find a successor and oversee the investment office until then.

Ms. Shuman graduated from Bowdoin College in 1976 and got her MBA from Yale in 1984 (in the same class as Jane Mandillo, the current Harvard endowment head), then joined David F. Swensen’s team at the Yale endowment as he came aboard in 1985. She was a key player there for 14 years, until Carnegie recruited her (and, they hoped, her Yale-style investment mojo) in 1999.

While running the Carnegie fund, Ms. Shuman has remained a loyal acolyte of the Yale model, defending it even through the troubles of 2008/2009. In the ten years 2000-2009 (ending June 30), Yale returned earned an annualized 11.8 percent, net of fees. Carnegie’s ten-year return (ending September 30) was 8.4 percent, which was very respectable, but not quite up with her mentor.

But Carnegie isn’t an Ivy endowment. It depends on investment earnings to fund 100 percent of its operations, so stability of earnings is especially important. They returned an annualized 5.1 percent in the five years 2005-2009, versus just 3.6 percent for their peers, the private foundations surveyed by Commonfund.

And, if we zero in on the tough 2008/2009 period, Carnegie actually outperformed Yale with -6.5 percent annual return versus Yale’s -12.0 percent (with no adjustment for the slightly different fiscal years). Ms. Shuman did it with much less volatility, which her bosses probably appreciated, and with just a handful of investment staff vs. the 28 who work for Dr. Swensen.

This is a record to be proud of, and if Ellen needs some R-and-R, that’s fine with us.

—————————————

A salute to Carnegie:

We should also pause to salute the Carnegie Corporation on its 100th birthday. Andrew Carnegie, who had already given away staggering sums for schools, libraries, and other good works, put much of his remaining fortune into the Corporation in 1911, intending it to carry on his work in perpetuity.

Along with the Russell Sage Foundation (1907) and the Rockefeller Foundation (1913), Carnegie became the template for the professionally-staffed and innovative American private foundation.

We note that Carnegie, under its first generation of leaders, rode out the Great Depression with impunity. When the stock market crashed they were holding a highly undiversified (but very handy) portfolio of high-quality corporate bonds, mostly debt of the U.S. Steel Corporation, which Mr. Carnegie had largely created.

The endowment grew a cumulative 37 percent between 1929 and 1935. And, with 20 percent deflation in the same period, its purchasing power soared. The old Scotsman must have been smiling down from his Presbyterian heaven as the Corporation carried on his work without ever having to invade the principal.

Investment theory and practice move on, but Mr. Gregorian and Ms. Shuman have done their part to hand off Carnegie’s mission to the next generation.

—————————————

Brad Hilsabeck: An insider moves Up at GMO

Grantham Mayo Van Otterloo & Co (GMO), which manages $108 billion of institutional money in Boston, has shed its lightly-used, imported CEO and replaced him with a GMO insider.

Marc Meyer, the 32-year-old firm’s first-ever CEO, was recruited from AllianceBernstein in March, 2009. Now, after a little more than two years on the job, he is “leaving to pursue other interests.” LTPOI is, of course, the universally-recognized international symbol for: “we fired him and we’re not even going to pretend we didn’t.”

His successor is Brad Hilsabeck, previously their chief of global client relations, who came aboard in 2003. He was made a partner in 2005 and moved up to the top marketing position in 2006. He had been a member of the firm’s Executive Office, the troika of senior execs who traditionally ran the firm, until Mr. Meyer was hired in 2009.

GMO, which is primarily a manager of institutional stock mutual funds, didn’t take any more damage than their peers in 2008/2009. In fact, their value-stock bias seems to have brought them through better than most. Nevertheless, management was revamped in 2009. Mr. Meyer was hired in March, 2009; then six months later, co-founder and chief strategist Jeremy Grantham was replaced as chairman by Arjun Divecha, who runs GMO’s emerging markets strategy from San Francisco.

Having decided they needed a single-headed CEO, however, their decision to hire a senior investment officer from another firm was clearly fumbled. Instead of an outsider and asset-allocation expert, apparently what they really needed was an insider with marketing skills.

GMO didn’t say explicitly why Mr. Meyer left, but almost. Mr. Grantham, the Malthusian scold who is the firm’s most public face, said he had confidence that Brad Hilsabeck “knows our style intimately and has everyone’s trust,” clearly implying that Mr. Meyer had fallen short in both respects.

When a newcomer lasts barely two years and is ignominiously dumped, we have what we headhunters call technically a “bad hire.” It’s rarely because of inadequate skill or experience, rather it’s how well the new guy understands and fits with the organization’s culture – an issue of compatibility. Or, as Mr. Grantham put it: style and trust. Assessing cultural fit is hard, but getting it wrong can be very expensive.

—————————————

CalPERS loses its hedge fund boss:

Kurt Silberstein, the departing head of CalPERS twenty five billion dollars public equities and innovative hedge fund program, has left after twelve years to join U.S. Bank’s Ascent Private Capital Management. Craig Dandurand, his talented number two, will take over Mr. Silberstein’s responsibilities and report to Joseph Dear, the pension’s chief investment officer.

Working for CalPERS is seldom dull. In 2009, Mr. Silberstein made a decision to allow PAAMCO and UBS to continue to draw their management fees while new contracts languished in a bureaucratic morass.

CalPERS own website referred to “PAAMCO and UBS as a key “set of eyes” the pension system relies on to monitor their large hedge fund program, and said that “Silberstein’s hedge fund team rigorously monitors every aspect of the program with “questions, scrutiny, examination and thoughtfulness.”"

Alas, for making an “executive decision” and doing his job, Mr. Silberstein “was temporarily placed on leave and fined, according to people briefed on the matter. Silberstein was forced to forfeit 10% of his $222,249 annual salary for six months and was placed briefly on administrative leave.”

Such a fuss about a guy so straight and honest that when we went to lunch three years ago he would not even let me buy him a $6 dollar burrito at a local Mexican fast food stand.

I wish him all the best. He is a terrific guy with sound judgment, deep experience, and a global rolodex. He should be a great asset to Ascent Private Capital Management. Hasta la vista.

—————————————-

Current Events:

Après le deluge…more deluge?

It was another of those interesting weeks last week, and, as we watch the markets open today, down about three hundred points as I write this (August 8, 2011), and wait to see if Armageddon is truly at hand, we note how some pension and endowment investors have been coping.

In the Wall Street Journal on Saturday, Jason Zweig reports:

It isn’t just small investors who are fleeing the U.S. stock market. Pension funds have been net sellers of U.S. stocks for 11 quarters in a row, notes Charles Biderman of TrimTabs Investment Research.

A leading money manager who sits on the investment committees of several endowment funds tells me that at every meeting he has attended for the past year, the only major topic of discussion has been how to get out of U.S. stocks and into alternative investments like hedge funds and private-equity portfolios.

“Some of the biggest pensions and endowments in the country,” he says, “want nothing to do with risk and nothing whatsoever to do with U.S. stocks.” Meanwhile, corporate insiders have been selling roughly 10 times more shares than they have been buying, according to Mr. Biderman.

And, Reuters reported on Friday:

“I feel like I’ve been through the ringer,” says Joelle Mevi, the chief investment officer of the Public Employees Retirement Association of New Mexico.

Mevi says she’s become “less optimistic” about the U.S. economy and is moving to sell some of the $11.6 billion pension fund’s stock holdings to double the fund’s cash reserve to $200 million. She notes that normally her New Mexico pension fund keeps nothing in cash.

—————————————

Other Voices:

Tokyo Express: Is the U.S. on a bullet train to Japan 1990?

My friend Mebane Faber sent me a white paper last month that got my attention. Meb is co-founder and chief investment officer of Cambria Investment Management in L.A., and a very bright guy.

His paper “What if 8% is Really 0%? Pension Funds Investing with Fingers-Crossed and Eyes Closed” is all about…well, exactly what it says.

He asks if pensions and, by implication, everybody else, are really giving enough attention to worst-case scenarios. Specifically, what if the next decade for the U.S. starts to look a lot like the last decade for Japan? He crunches some numbers and shows what that scenario could mean for U.S. institutional investors.

Meb got some attention for this one. The Wall Street Journal talked about his thesis in early July, and he got an interview on CNBC.

Some people think the U.S.-as-Japan scenario is not farfetched. The Federal Reserve Bank of St. Louis President James Bullard recently proclaimed “The U.S. is closer to a Japanese-style outcome today than at any time in recent history.”

You can download a copy from SSRN:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1862355

—————————————-

Conversations:

A Dutchman on the prairie: A conversation with AIMCo’s CEO Leo De Bever

With just two-tenths of a person per square mile, Alberta may look big and empty, but it has plenty of oil, gas, and cowboys. Squint a little and it looks a lot like Texas, only colder.

In fact, by one measure it’s even richer than Texas: at $74,000 per capita, it has a higher GDP per-person than any other province or any U.S. state. It even has its own sovereign wealth fund to preserve a share of public oil-lease revenues for future generations.

But, like any commodities-based economy, Alberta has slumped or prospered, depending on world prices; and in slump years politicians were often tempted to raid the fund to cover current bills, or just “forget” to deposit any of those oil revenues. Finally, in 2008, voters decided to insulate their money from itchy political fingers by creating AIMCo, a semi-autonomous Canadian Crown corporation, and the new board hired Leo De Bever to run it.

Mr. De Bever was born in the Netherlands, where they have about 1,400 people per square mile. When he spoke to me one evening after a dinner engagement in Edmonton, I forgot to ask him if he was enjoying the elbow room.

As CEO (AIMCo has no chief investment officer, although they’re currently looking for one), Mr. De Bever’s job is to preserve and grow AIMCo’s US$74 billion (Can$71 billion) in assets. That includes the $15 billion Heritage (sovereign wealth) fund, plus almost $60 billion in public pension and other funds.

Mr. De Bever, a PhD economist (University of Wisconsin), has a distinguished resume as a manager of public money. He served ten years as a senior VP and head of risk management at OTPP, the Ontario teachers’ pension. OTPP was another early template of a pension organized as a Crown corporation, but Mr. De Bever didn’t get the chance to oversee the fund as chief investment officer. He resigned in 2006 to become CIO of Victoria Funds Management Corporation in Australia, hoping to create there the kind of independent pension-management entity he envisioned. Things in Melbourne didn’t work out to his satisfaction, so when he got an offer from the re-organized Alberta fund, he was receptive.

He seems to feel that he’s finally where he wants to be, building a cutting-edge public pension fund, and he’s not at all shy about explaining how he thinks it should be done. He’s a frank and engaging gentleman who, like most Dutchmen, speaks better English than I do, and was kind enough to take my call.

Skorina: Leo, it’s a pleasure to meet you.

De Bever: Good evening, Charles.

Skorina: Everybody looks at annual returns, and yours have been good. In your first full fiscal year at AIMCo – 2010 – you posted a 12 percent return. In the 2011 fiscal ending in March, you made 8.2 percent. You beat your benchmarks in each year, but you are still getting criticized for the compensation you and your managers get. Is that fair?

De Bever: What people should focus on is the total cost of running this fund and the returns we get, given the kind of marching orders we have. AIMCo’s clients are paying 0.3 per cent in fees for services versus the two percent they would pay in the private sector. And by the way, a lot of our assets are essentially cash accounts we manage for the province, and their returns are obviously low. If you look at just our $50 billion in investable pension and endowment funds, we earned over 10 percent.

Skorina: That brings up the subject of where the money should be managed. You’re on record as thinking that a major public fund like AIMCo should bring more management in-house. Why?

De Bever: Basically, internal asset management is much less expensive. The 80 percent of assets we manage in-house cost 40 percent of our total fee budget. The 20 percent of assets placed with outside managers cost us 60 percent of the fee budget. If we used outside managers for public equities, for instance, it would cost up to 200 basis points. We can do it internally for 40 to 50 basis points. All our public equities and fixed income is managed in-house, plus about half of our infrastructure and real estate, and one third of our private equity. For some PE deals in Europe and Asia we feel more comfortable investing with partners who know that territory.

Skorina: What are you saving by doing PE deals internally?

De Bever: A successful external private equity investment can cost 7 percent per year in fees and carry. We can manage it internally for around 1 percent. Of course, that presumes that we can afford to hire and retain qualified people. I believe we can.

Skorina: You personally made $1.4 million in the most recent fiscal, including a $900 thousand bonus. Some critics have suggested that’s too much. Is it?

De Bever: Our board sets the pay-scale, based on our performance over a four-year span. As I told a reporter, I don’t even make it into the Top 50 in Calgary!

Skorina: Does AIMCo’s status as a Canadian Crown corporation help to insulate you from political sniping?

De Bever: To a certain extent, yes. One of the essential tasks of a governing board is to set competitive compensation scales. When the governors of a public fund can’t do that, the result is often that they are just training managers who will ultimately go elsewhere.

Skorina: Chris Ailman is CIO of CalSTRS, the second-largest U.S. public pension fund. He recently told Paula Vasan at aiCIO Magazine

See: www.ai-cio.com/channel/NEWSMAKERS/CalSTRS__CIO_Ailman__Public_Pensions_Suffer_From__Outdated_Model_.html

…that funds like his might be an out-dated business model. They don’t run in-house private equity, for instance. He said he feels like an investment management company trapped inside a government entity, and speculated that the Crown corporation model might eventually filter down from Canada to the U.S. I thought that was pretty candid of him. What do you think?

De Bever: The U.S. public pensions don’t do things like in-house private equity for two reasons: governance and blame avoidance. The Crown corporation is a framework where that can be done, with significant cost savings. U.S. pensions are also hampered by their salary structures. In 2008, the CEO of the CPPIB [Canadian Pension Plan, another Crown corporation] made US$3.2 million, while the head of CalPERS made $500,000.

Skorina: And, as of 2010, CalPERS’ five-year return is 1.7 percent; while CPPIB earned 4.0 percent. That speaks for itself, doesn’t it?

De Bever: It does, indeed.

Skorina: Thanks again, Leo.

—————————————

A CIO for All Seasons: Ken Frier compares corporate and endowment portfolio management

Kenneth Frier spent ten years at Hewlett-Packard Company, including three years as chief investment officer of their pension plan. More recently, he served as CIO at the Stanford Management Company, which runs the Stanford University endowment. Earlier in his career, he held corporate finance jobs at the Walt Disney Company and Oracle Corporation; and was a consultant With Arthur Young & Co.

He was born in Cleveland, earned a BS in math and computer science at the University of North Carolina; then an MBA from Stanford University, where he was an Arjay Miller Scholar.

He recently stopped by my office in San Francisco for a chat, and I have to say he seems much too youthful to have so much experience under his belt.

Skorina: Ken, you’ve been congratulated for moving the Hewlett Packard pension fund out of equities ahead of the panic in the fall of 2008. You’re a math guy and very data-driven, so were you reading some internal alarms or following some indicators that told you that it was time to move?

Frier: Charles, I’d love to take credit for seeing around that corner, because it worked out well for us. But, the fact is I was just dealing with the situation in the plan when I took over.

When I was appointed CIO our defined-benefit plan had just been frozen. As you know, this has become a common event in the industry over the past decade as employers shift to defined-contribution plans.

When you’re frozen, all of a sudden your future liabilities become much clearer and more stable. We now saw that we were over-funded and by just how much. So, I felt it was time to de-risk the portfolio, while still earning enough to cover our future obligations.

I was thinking about the risks of market volatility and interest rates. As to the first, we were 70 percent in public and private equity, and I thought the stock market was over-valued. Starting from there, it seemed logical to reduce stock exposure, move into bonds, and then hedge interest rate risk, which is what we did.

We weren’t trying to time the market, but the timing did work out well for us. By “us,” I include the company and the employees whose money we were investing. There is a strong culture at HP that comes right down from our founders: do what’s right for the customers and the employees, even if it doesn’t necessarily seem like the most profitable move in the short run.

Skorina: You seem to take that seriously, Ken. My experience in the corporate world is that those lofty statements of principle sometimes get misplaced

Frier: Most people at HP really believe that, Charles, and I tried to hold up my end.

Remember, in corporate accounting, pension plan earnings above a required actuarial amount can be added to revenue on the income statement. So, it can be tempting for a company to “manage” them to goose their stated earnings in the short run. If you’re heavy in risky, but high-return assets, like stocks, projected earnings can be higher. Who’s to say what the correct estimate is? And that can give the company more “excess” pension earnings to help smooth quarterly income. No one is supposed to do it, but some companies push the envelope.

Of course, this catches up with you in the long run, when pension earnings swing the other way, but it can be a handy crutch when times are tough and people think they can get away with it.

That is not the practice at HP. My boss, the CFO, told me to do whatever I thought was in the best interests of the plan. Period.

Skorina: You’ve now worked with portfolios at both a major corporation and a big endowment, at Stanford. What are the differences?

Frier: I think the process of looking at risk and understanding the various factors that affect future earnings is probably more advanced in corporations, for obvious reasons. They have more money, bigger staffs, and they can piggy-back on all the analytical horsepower that’s been developed for the whole field of corporate finance.

Endowments are complicated entities. The liabilities are floating, at least in theory. If a school wants to reduce endowment spending from 5 percent to 4.5 percent this year, they can. Whereas, in a corporation, an actuary just tells you what checks you have to write, and it’s a hard number you can’t legally evade. But in practice, an endowment doesn’t really have that much leeway. Even a small cut in payout causes direct pain and suffering, and you will hear about it. Loudly.

Skorina: Given the uncertainty in the financial world, how do you construct an institutional portfolio for all seasons? Are there opportunities out there to help offset the risks? And how about interest rates? I know you’ve spent a lot of time in the bond market; you know that world.

Frier: Obviously, it’s a difficult time to make money. A frozen defined-benefit fund has a finite life. Endowments are supposed to last forever, so they must beat inflation and still cover their payouts. That isn’t easy. Currently, you need about a 7.5 percent nominal return to break even. To grow the endowment, you really need more, unless you want to depend entirely on donations. So, where are you going to get that with acceptable risk? Ten-year Treasuries are paying 3 percent, and the bull-market in fixed income seems over for now.

U.S. public equities at best are returning maybe 6 percent, and they don’t look cheap. Interest rates are bound to rise, so corporate margins, which are currently quite good, are bound to fall. This has already started in Europe. Up to now, we’ve had weak growth even with a boost from Fed stimulus, but they’re about out of ammunition.

There are still global opportunities, but how do you tune a portfolio to take advantage of them? Maybe establish a more conservative baseline for payouts and then go after alpha opportunities which public pension plans can’t get into. They’re the big, slow money, and if you can move faster, then you can often find some good deals. Endowments should exploit that strength.

For example, look at what has not recovered yet: residential real estate and private equity. Patient, long-term money should be looking at things like that.

Skorina: Any other thoughts about endowments?

Frier: I’ve spent the last year thinking about how to improve the endowment model. In the 2008 panic, endowments with very different-looking portfolios still fell in lock-step. The dispersion between the largest and smallest draw-downs was amazingly tight.

So, we need to look hard at what didn’t correlate with past crashes, hoping that they might remain less correlated in the future. That sounds obvious, but I’m not sure anyone has figured it out.

Skorina: What about the so-called risk-parity strategies which some consultants are recommending?

Frier: Moving to bonds and adding leverage may have worked fine in the past; but if you think, as I do, that we are headed for rising interest rates in the near future, it won’t work. No way.

Some kinds of momentum strategies are interesting. Also, perhaps, carry strategies in commodities. Long-term investors are moving into a period when simple answers won’t work. We need to take a very wide-angled view and look at everything with fresh eyes.

Skorina: Thanks for your time, Ken. It was great talking to you. And good luck with your next career move

Frier: Thanks, Charles.

—————————————-

Parting Shot:

Jailing the economists and other Argentine follies

I spend a lot of time down in South America, usually at a rural estancia a couple hours from wicked old Buenos Aires, and just across the Rio de la Plata in happy Uruguay.

See: www.estanciatierrasanta.com

We enjoy our rusticating, but we also keep an eye on turbulent Argentina just across the border, if only for entertainment value.

Recently, the government there threatened to throw Argentine economists in prison if they continue to issue independent (and accurate) inflation reports. Currently the economists are receiving heavy fines for failing to toe the line.

Real inflation in Argentina is running about 26 percent, but the government prefers to think of it as 10 percent, so that’s what the National Bureau of Statistics prints. No one believes them, of course, but that’s not the point. There’s an election coming up, and even the smallest, most transparent lies can help.

We tend to think of economists as annoying but essentially harmless creatures. And we would hate to see them behind bars like stray dogs in the pound, staring at us with their big, soft, sad eyes. No, not even Paul Krugman.

Ever since Evita became a big hit, people tend to think of Argentina as a sort of romantic, comic-opera nation, and that’s not too far off. But the Peronistas who still run things there have a dark side as well. If you sometimes feel exasperated with government malfeasance and over-reaching in the U.S., it’s sobering to come down here and see what government-by-edict can do to a potentially great nation.

The Skorina Letter No.27 CIO supply and demand

charles — Mon, 11 Jul 2011 05:04:43 +0000

Chief Investment Officers – supply and demand

By Charles A. Skorina

I am often asked just how many chief investment officer positions there are among U.S. tax-exempt institutional funds. How much turnover is there, and how tight is the market for these top-tier professionals?

Boards want to know how 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.

According to my research, the short answer is about 1,300 positions for full-time, professional CIOs at public, corporate and union pension plans; endowments; foundations; health systems; etc. And, I estimate the annual turnover rate at about 12 percent, or 160 openings per year.

That accounts for the demand side of the market, but the supply side is harder to enumerate. Most qualified candidates come from within the tax-exempt sphere, but many are also drawn from the broader ranks of investment and financial management. I can’t compute an absolute number of potential CIOs, but I have a pretty good idea where they have been coming from in recent years, and in what proportions.

I can say confidently that it’s a buyer’s market for CIOs, and I have the resumes and phone logs to prove it.

Let’s take a closer look at the numbers.

The demand side can be roughly quantified as a function of the number of funds over a certain size, adjusted for annual turnover. An estimate of the supply side will have to be more anecdotal than statistical.

In the U.S. there are approximately 1,300 endowments; foundations; healthcare organizations; corporate and public pension plans, etc, with funds big enough to justify a full-time, professional CIO.

As a rule of thumb, we can say that most funds over $1 billion AUM have a full-time professional CIO or equivalent, and most funds under $500 million do not. Of course, there are exceptions in both tiers. I know of some $300 million dollar endowments with CIOs and whose superior performance justifies funding the position. On the other hand, there are some billion-dollar funds with entirely outsourced investment management. The org chart doesn’t always seem to follow strict economic rationality. But what does?

For this analysis, I have assumed that all funds over $1 billion have a CIO and none under $500 million do. Then, averaging over the various sub-types of funds, I conservatively estimate that about one-third in the middle tier ($500 million to $1 billion) now employ a CIO, and two-thirds do not.

To keep the arithmetic tractable and the numbers round, I work my estimate this way:

First, for both public and corporate pensions (lumping multi-employer/union pensions and health systems into the latter), I use $800 million AUM as a cutoff and ignore the “transition zone.” That is, I assume all funds over $800 million have a CIO slot, and none under $800 million do. This yields about 800 U.S. corporate pensions and about 200 public pensions. I know, those numbers look suspiciously neat, but for a recent year they are, in fact, quite close. So: 1,000 CIO slots for pension funds.

Next, for endowments, foundations, and a nonprofit cats-and-dogs category I’ll just call “other,” I have counts for both the billion-plus and the half-a-billion-to-a-billion tier. I take all of the former and one-third of the latter as CIO slots.

So, we have:

Public pensions: 200 CIOs

Corporate pensions: 800 CIOs

Endowments: 100 CIOs (80 + 0.33 x 50 = 16.5 = 96.5 ~ 100)

Foundations: 80 CIOs (60 + 0.33 x 65 = 21.5 = 81.5 ~ 80)

Other tax-exempts: 90 CIOs (60 + 0.33 x 80 = 26.4 = 86.4 ~ 90)

Grand Total: 1,270 CIO slots

I have rounded liberally because the data do not justify more precision. Different sources count and classify the funds differently. And in any case the rise and fall of asset prices from year to year make a hash of the headcount within any AUM band. But I believe that 1,270 figure is conservative (i.e., a little on the low side).

As to turnover, I estimate that the typical CIO holds his job for five to eight years. That implies that one-fifth to one-eighth of the slots in the total population will turn over in any given year. That is: annual churn for the whole population will be between about 12.5% and 20%. Let’s be conservative again and use the lower number. That implies about 160 CIO openings per year. Close enough for search work.

How about the supply side?

First, and most obviously, CIOs are recruited from other tax-exempt funds. In my experience, about two-thirds of all CIO hires are tax-exempt to tax-exempt. So any of those 160 openings per year could be filled from among several hundred other CIOs and deputies looking to move up; typically either already CIOs at smaller funds, or second-tier portfolio managers at bigger ones. A billion-dollar pension might hire the CIO of a half-billion pension. Or a mid-sized college hiring its first CIO might be happy to get an experienced equities or fixed income manager from Yale or Princeton.

Lawrence Kochard, for example, moved from the billion dollar Georgetown University endowment to the $4.6 billion dollar University of Virginia endowment; followed by Michael Barry who left the $760 million dollar University of Maryland endowment to fill the vacant position at Georgetown.

Across categories things get more interesting. Notoriously, a billion-dollar endowment can lure away the manager of a much bigger public pension because salaries in the public pensions are lower. We just saw that happen when the USC endowment (about $3 billion) hired away Lisa Mazzocco, CIO of the $37 billion L.A. County pension fund.

Moves from corporate pensions to public pensions or endowments are not as frequent, but do happen from time to time. Bruce Zimmerman, for example, was hired away from Citicorp by the University of Texas System (UTIMCO); John C. Lane, Kodak’s former CIO, moved to the Ohio PERS state pension fund; Jim Williams, a thirty year Ford Motor Company veteran moved to the J. Paul Getty Trust and, of course; Ken Frier moved from HP to the Stanford Endowment.

Consulting firms are also a good source for CIO recruits. Pensions, endowments and foundations all use outside consultants to assist in asset allocation, recruitment, and supervision of outside managers. A half-dozen name-brand national firms dominate the market and their senior staffers are an obvious pool of talent. There is a slow, steady migration from Wilshire, Cambridge, Russell, Hewitt, Towers, Mercer, and the others; each with their own special focus, into CIO slots.

Everybody likes this. The tax-exempt gets someone who has been through a development program, has relevant experience, and may already understand its specific needs. And the consultant firm is not unhappy to see one of their alumni working on the “inside” of a client, because they will still need a consultant. The senior staffers among these firms comprise a pool of several hundred individuals with suitable resumes.

James Dunn, for example, the CIO at Wake Forest, was recruited from Wilshire Associates. And Cambridge Associates, the mother lode for endowment and foundation investment professionals, has populated dozens of CIOs slots including Kathryn J. Crecelius at Johns Hopkins, Cynthia Frost at Brown University, Pam Peedin at Dartmouth, Clarissa Hunnewell at Boston University, Nicholas Warren at Brandeis, and John-Austin Saviano at the University of California at Berkeley endowment.

I would guess that ten or fifteen percent of all CIO openings are filled from the consultant ranks every year.

That’s seventy-five or eighty percent of hires accounted for. The rest are sourced from what I can only inelegantly call “everybody else.” There are lots of outstanding analysts, traders and portfolio managers among hedge funds, institutional asset managers, investment banks, family offices, and even insurance companies. The fit may not always be as obvious or seamless, but there is no shortage of ambition and talent in the broader investment-management world.

A few that come to mind include Scott H. Richland, who joined Caltech as the CIO from Lunada Bay Investors, a private investment firm; Ashbel C. Williams, the executive director and CIO of the Florida State Board of Administration, previously a managing director at value hedge fund Fir Tree Partners; and last but not least, Larry Schloss, the CIO of the five New York City pension funds, overseeing about $100 billion, came from private equity firm Diamond Castle, where he was chairman, chief executive and co-founder.

Some of them feel unfulfilled running some specialized strategy and would prefer the challenge of crafting a full-spectrum portfolio, even a relatively small one. Some even feel that supporting the mission of a non-profit is more emotionally rewarding than earning a bonus on Wall Street.

The Skorina Letter No.26

charles — Tue, 28 Jun 2011 00:05:16 +0000

In this issue:

Comings and Goings: Many many moves

Risky business at Chelsea Piers: In pursuit of the unsinkable portfolio

Recruiter’s Notebook: CIO Supply and Demand

Peter Taylor, CFO University of California: On the art of board-membership

Everybody has a plan – until they get hit

– Joe Frazier

Some have the moves and the right combinations; but if you can’t take the punches, it don’t mean a thing.

– Warren Zevon

————————————————–

Comings and Goings:

Michael Barry: Georgetown gets a rising star

Georgetown University’s first chief investment officer, Lawrence Kochard, was clearly going to be a hard act to follow. He was an academic economist who could also make money, and he propelled Georgetown up into the select group of over-$1 billion endowments before he left for the University of Virginia in January.

Now they’ve tapped Michael Barry from the nearby University System of Maryland Foundation as their second-ever CIO. He was hired as USMF’s sole investment officer in 2003 at the tender age of 27, then appointed their first-ever CIO in 2005. The endowment now employs five full-time professionals and invests $761 million.

Dr. Kochard’s compensation at Georgetown was $702 thousand in the 2009 fiscal year and Mr. Barry earned $613 thousand at Maryland in the same year (both including bonuses).

I would estimate that Mr. Barry probably signed on at Georgetown for about $650K, including prospective bonuses.

The Maryland endowment prospered on his watch, but Mr. Barry had some on-the-job tutelage. USMF’s strong investment committee has included previous chairman Ken Brody (co-founder of the $10 billion Taconic Capital hedge fund) and current chairman David Saunders (one of Julian Robertson’s “tiger cubs,” founder of K2 Advisors fund of hedge funds, and a former lacrosse star at University of Maryland).

In the 2010 calendar year they delivered 15.1%, beating their own composite benchmark by 7.3% and matching the S&P 500. Even better, they did it with modest month-to-month volatility, earning equity-like returns with fewer thrills. The Q4 2010 report said: “we aim to mitigate our exposure to the downside but still participate in a reasonable percentage of the upside…We outperformed international developed equities by 7% and essentially matched the return of the S&P 500, but with a much smoother path.” Indeed.

See: http://www.usmf.org/usmf/wp-content/uploads/usmf-quarterly-letter-12312010-usmf.pdf

USMF’s hedge-fund and real asset allocations (including overlays) did a lot of the heavy lifting, beating their respective benchmarks by wide margins; while equities slightly underperformed. It’s all about the allocation. And it doesn’t hurt to know someone who can really pick hedge-fund managers, like Dave Saunders.

Maryland’s work was noticed way back in 2009, when Mr. Barry was dubbed a “rising star” by Foundations and Endowments Money Manager magazine. That worked out pretty well.

Mr. Barry majored in philosophy at Fairfield University in Connecticut, then learned about portfolio construction while working for Cambridge Associates in 2000-2003, and earned a CFA credential in 2005.

USMF investment staff works in DC, where Mr. Barry resides with his wife and daughter; so it’s a stress-free move involving no movers.

————————————————————————

Ken Frier: A surprise departure from Stanford

In a surprising move, Ken Frier has just left the chief investment officer post at the $14 billion Stanford University endowment (i.e., the Stanford Management Company).

No one is talking about why: not Stanford and certainly not Ken. He was kind enough to return my call after the announcement, but responded only that he had nothing negative to say about Stanford or about his boss, SMC chief John Powers. And he said he’s looking forward to his next professional challenge, wherever that might be.

Ken imparted nothing to me about the whys and wherefores, but we are all free to note certain obvious points.

One is that the Stanford CIO slot stood empty for a long time before Ken was hired: thirty long months elapsed between the departure of previous CIO Eric Upin in February, 2008 (to join VC firm Sequoia Capital, and now at Makena Capital Management) and the arrival of Ken Frier in August, 2010. It would have been a challenging job-search, but it shouldn’t have taken more than about six months. It shouldn’t, that is, if anyone was actually searching and doing it with any sense of urgency.

SMC’s CEO John Powers publicly rejoiced when Mr. Frier was hired, noting how he had skillfully maneuvered Hewlett-Packard’s pension portfolio through the 2007/2008 meltdown. Mr. Powers then permitted him to slip away after just nine months on the job.

It’s true that Stanford fared pretty well in fiscal year 2010, with the CIO office empty and Mr. Powers in charge. They returned 14.1 percent, surpassing peers Harvard (11%) and Yale (8.9%).

It’s also true that some comparable organizations have made do with a single boss who functions as both CEO and CIO. Jane Mendillo, President and CEO of the Harvard Management Co, has no CIO in her org chart; the various senior investment officers report directly to her. And at the University of Texas Management Co (UTIMCO), Bruce Zimmerman is formally designated both CEO and CIO.

But if Mr. Powers and/or his board wanted to follow that model at Stanford, then why was Mr. Frier hired in the first place?

I think anyone surveying these facts would wonder just what’s going on at SMC. Maybe the Stanford community and endowment supporters will be wondering, too.

——————————————————————

Jeff Scott and Max Giolitti: A Double-act heads back to Seattle

Jeff Scott, highly-regarded chief investment officer of the $40 billion Alaska Permanent Fund, is headed back to Seattle from whence he came two-and-a-half years ago.

On June 8 he informed his boss Mike Burns that he would be leaving in early August. Mr. Burns was clearly surprised, and maybe not very enthused about having to wear the interim CIO hat on top of his executive director duties.

Mr. Scott’s long-time wing-man Max Giolitti, APF’s director of asset allocation and risk, will be leaving with him. Both have landed jobs at Wurts & Associates, a consultant advising $34 billion in institutional assets. Mr. Scott will be the firm’s first CIO and Mr. Giolitti will be director of risk allocation.

Mr. Scott, who earned $348 thousand at APF, will probably make more at Wurts; but Mr. Burns told a reporter he didn’t think salary was the “proximate reason” for the move.

APF has earned 18.8% for the 2011 fiscal year to date (nine months); and an annual 2.6% for three years, which roughly corresponds to Mr. Scott’s tenure.

The Scott/Giolitti team managed a $56 billion absolute-return fund for Microsoft in Seattle, and then led their own hedge fund before going to Juneau.

Mr. Scott does the big-picture stuff, while Mr. Giolitti; with degrees in math, physics, and statistics; is the team’s quant. The results have been noticed: APF won aiCIO magazine’s Innovation award for sovereign wealth funds in 2010; and Institutional Investor handed Mr. Scott an Outstanding Contribution award this year.

We talked to Jeff back in September, and wrote about some of the innovations he was driving.

See: The Skorina Letter No. 18

Link: http://www.charlesskorina.com/287/

Wurts CEO Jeff MacLean clearly believes he’s acquiring more than just an asset-allocation team. He thinks he’s acquiring something that can be sold as a proprietary methodology, and which can give his firm an edge in the crowded outsourced-CIO niche.

Jeff has tried to explain to me (and others) his risk-factor-based approach to asset allocation. When he gets settled at Wurts we’d love to see a white paper setting this out in more detail.

Mr. Scott’s departure is a big problem for APF. It will take a lot more than six weeks (and some world-class headhunting) to find a successor of the same caliber at $350K, and who’s also willing to move to lovely but landlocked Juneau, Alaska (urban population:17,311).

——————————————————————–

Real Desrochers: CalPERS gets Real with private equity

California’s $230 billion CalPERS pension has hired a distinguished Canadian, Real Desrochers, to run its $49 billion private equity portfolio, replacing a tainted predecessor.

The slot has stood empty for nine months, since Leon Shahinian “resigned” last August. Mr. Shahinian had accepted gifts from Leon Black’s Apollo Global Management, and later recommended purchasing a 9% stake.

Mr. Desrochers’ resume includes ten years running PE at CalPERS’ cross-town sister-fund CalSTRS, where he generated an average 17% return in the 2000-2009 decade. He previously worked at Quebec ’s Caisse de depot, and even did a stint as chief investment officer at the Saudi sovereign wealth fund. CalSTRS reported his “retirement” in 2009, but apparently CalPERS boss Joe Dear has induced him to un-retire.

Mr. Shahinian was paid $500 thousand in 2006 and 2007 per state records. Given the inflexibility of public-pension compensation, I doubt if Mr. Desrochers could demand much more.

Our friend Leo Kolivakis, who blogs at PensionPulse.com, is a fellow Quebecer who’s known Mr. Desrochers for years and praises him highly.

Link: http://pensionpulse.blogspot.com/2011_05_01_archive.html

At CalSTRS, he supercharged the PE portfolio, moving beyond North America to invest globally, trading in the growing PE secondary market, and taking stakes in some PE management companies. In 2006, 2007, and 2008, the CalSTRS PE portfolio returned 28%, 32%, and 11.6%, respectively.

CalPERS has some excellent PE guys already on staff, although many of them are understandably demoralized, and some are looking for other jobs. It’s too bad that a fund of this size can’t seem to develop and promote the talent they already have, not to mention protecting the honest ones from politically-connected grafters. But, given their (entirely self-inflicted) PR troubles, it’s understandable that they might prefer to bring in a pristine outsider.

——————————————————————–

Li Keping and Gao Xiqing: The party line changes at China ’s sovereign fund

The chief investment officer at China Investment Corp, the PRC’s $300 billion sovereign wealth fund, is apparently on the way out, or at least up. Gao Xiqing, the golf-playing, Duke University-trained incumbent is due to be replaced by Li Keping, currently vice-chair of the smaller National Social Security Fund. But Mr. Gao, who is already CIC vice-chairman, will probably rise to the CIC’s influential chairmanship.

No official announcement has been made, but the opaque politics of the Communist Party seem to be favoring this change, according to sources talking to Reuters. It may happen ahead of the 2012 party congress, where top leadership jobs get reshuffled.

Sources say that Mr. Li will eventually displace Mr. Gao as both CIO and president, but Mr. Gao will get the top job as CIC chairman, displacing current chair Lou Jiwei.

Mr. Gao was the first Chinese citizen to pass the New York State Bar Exam and for two years after graduating from Duke Law he worked on Wall Street as an associate at Mudge Rose Guthrie Alexander & Ferdon (Richard Nixon’s former law firm). He currently serves on Duke University’s board of trustees.

The fund returned 11.7 percent in 2010.

Mr. Li’s job could get still bigger. The Financial Times has said that the government could hand CIC a further $200 billion in new funding, part of ongoing policy to reduce China’s exposure to U.S. debt and diversify its assets into riskier but higher-yielding investments.

————————————————–

Out and About:

Risky business at Chelsea Piers: In pursuit of the unsinkable portfolio

In May I attended two excellent conferences in New York: one was the aiCIO magazine event down at Chelsea Piers. The other was a name-brand conclave which (since the sponsor decided I was a quasi-journalist as well as a search guy), I agreed not to name.

It was fun to go down and look at Chelsea Piers along the Hudson River on the lower west side of Manhattan.

Long ago, this is where the great passenger liners docked and where the rich and famous embarked to cross the Atlantic in style. It’s where the Titanic was headed in April, 1912, when things went terribly wrong. The survivors arrived here at Pier 54 aboard RMS Carpathia. A lot of history.

Loss of Titanic was a human tragedy, but also the biggest marine insurance loss in history up to that time. Still, not a single insurer went broke. She was a $7.5 million asset on the books of the White Star Line (that’s 1912 dollars, of course; today, maybe a billion or more). $2.5 million was uninsured loss absorbed by the owners, the other $5 million was laid off on dozens of underwriters. Even without benefit of modern portfolio theory, they were properly diversified, with no single firm accepting more risk than they could handle. The system took the “impossible” event in stride.

Of course, they were just old-time insurance guys who knew what they were doing, not like the geniuses who ran Lehman, Fannie or Freddie.

Today, Chelsea Piers is a 28-acre development with pools, tennis courts, golf club, parks, and high-end venues like the one used by the aiCIO conference.

What I heard at both conferences was a lot of talk about “risk” and “uncertainty.” It sounded like a lot of people playing defense; not so many expecting calm seas and prosperous voyages.

I listened dutifully to what all the eminences had to say. But I’m not actually responsible for investing anybody’s money (except, of course, for the vast Skorina family holdings), so I often find myself listening more to the music than to the words. And, I was definitely not hearing a triumphant anthem in a major key.

They’re all pros and they’ve all navigated through a lot of financial weirdness. But they were worried. Equities were up in mid-May, but the economic “recovery” feels just barely ambulatory, and they’re all waiting for some very big shoes to drop. Someday soon Greece is going to stiff its creditors in some shape or form and the consequences are hard to foresee. Someday soon, too, Dr. Bernanke is going to stop buying all that Treasury debt and steer the good ship QEII into drydock. What then?

No doubt there are still opportunities out there, as always, but they won’t be found by following the crowd. The feeling was that the crowd is very likely going to take a beating.

Since they are pros, and this isn’t daytime TV, the conferees didn’t talk about their feelings. Instead they talked about new and better ways to deal with “risk,” “uncertainty” and lurking “Black Swan” financial shocks.

Vanessa Drucker, a writer for UK’s Fundweb, attended still another New York conference a couple weeks after I was in town: the Aberdeen Asset Management Forum. There, the hosts took the pulse of the attendees.

“How would you describe the US economic and financial positions relative to the rest of the world?” They asked. The (rounded) responses came back:

Getting Worse: 47%

Getting Better: 16%

Stable: 26%

In Permanent Decline: 11%

This pretty much quantifies what I was intuiting at my conferences. As the lady wrote: “Yikes!”

Oh, and how many did NOT expect American lawmakers to come up with a credible, sustainable plan for deficit reduction? Anyone? Bueller?

Their response was:

Don’t Expect a Plan: 79%

That sounds about right to me.

And now it turns out that our historical memory about financial crises is all wrong. When economists Rinehart and Rogoff mined the data, those “rare” events stood revealed like the rings in a tree-stump: regular occurrences which are almost boringly similar in all countries, in all ages. That’s why this year’s book is This Time It’s Different: Eight Centuries of Financial Folly.

So, what to do about all these perennial but newly re-discovered hazards? First, you de-risk just by being properly diversified. But everybody is already doing that, or at least their consultants say they are. What then?

If a meme like “tail-risk” (and the anxiety it connotes) gets traction, then someone will try to monetize it; in fact, several someones have done so.

There are several ways to do it; e.g., create a basket of derivatives that will perform poorly during normal market conditions but soar when markets plunge.

Mr. “Black Swan” Taleb himself was one of the first to cash in, as advisor to Mark Stiznagel’s Universa fund, which has grown to $6 billion. PIMCO oversees about $30 billion in similar accounts.

Investment theory takes us down some strange roads, but an asset engineered (as some of these are) to lose 15% a year when the market is “normal,” is one of the stranger things I’ve seen. Of course, you can argue that it’s not different from paying an insurance premium. Spending 1% of your assets every year to immunize it against the occasional bad year sort of makes sense. If the product works as advertised.

My friend Bill Ferrell of Ferrell Capital Management has been helping clients hedge against risk for years using a sophisticated strategy which I’m not going to try to describe here. He wrote several pieces for Pensions & Investments, the most recent on May 30^th, 2011, Pensions & Investments: Technology is Raising the Curtain on Risk describing his approach.

See: http://www.ferrellcapital.com

[Look for "In the Media" on top of the home page, then scroll down to "Press."]

Now it appears that Bill is going to launch his own “tail-risk” fund. He says that, because his approach is tactical, the client doesn’t have to lose money every year. He claims that in “normal” markets his fund will deliver normal fixed-income returns but when he sees risk on the horizon he will get busy hedging against selected equity benchmarks.

It’s not airborne yet, but if you want to talk to him I’m sure he’d be glad to hear from you.

Some endowments, foundations and pension plans have hired dedicated in-house risk officers to engineer better early warning systems, fine-tune the risks in portfolios, and devise strategies to soften future crashes. One survey from two years ago said that almost half of pensions, endowments, foundations and SWFs now have a chief risk officer. That can’t hurt.

Others are expanding their in-house investment capabilities to include derivatives and option trading to do their own risk-hedging.

At the aiCIO event I talked to Anjum Hussain, director of risk management at Case Western Reserve University. He and his boss, CIO Sally Staley, are now running a small derivatives book to hedge parts of their portfolio. One other big university endowment CIO I spoke to at the conference is doing something similar, but using an off-shore manager to execute the derivative moves.

Of course, if you’re going to start trading derivatives out of the investment office, you’d better know what you’re doing.

Over in the UK, a consultant named Trevor Robinson has published some excellent papers on how pensions can use options and derivatives to reduce some kinds of risk.

His Introduction to Derivatives, in convenient text format is here:

www.trim.co.uk/IntroductiontoDerivatives.doc

Some of his other papers are here:

http://www.derivativesforpensionfunds.com/

He’s aiming more at board members than investment staff. But, if you’re a little hazy on the uses of derivatives, or just want to be able to talk to the pros, this is a good place to get refreshed.

Having your own derivatives-trading book directly under the hand of the CIO has some obvious advantages. First, it gives you more tactical control.

Making fast, precise changes in allocations is hard; it involves time and transaction costs. Theoretically, if you run your own derivatives book, then you can, for instance, quickly reduce your exposure to a certain area (which suddenly looks less golden) by selling futures contracts on that market, while buying futures contracts on a more favored one.

You can thereby separate the stock-picking decision from the market decision. In theory. If you know what you’re doing.

As a bonus, you can even make a little money on the derivatives trades. Maybe even enough to cover the expense of the trader you hire to do this stuff.

Ms. Staley has said that she would rather hedge risk directly using derivatives than through an external long-short fund. It gives her more direct control, and she would rather allocate to global macro funds than to long-short funds, since she believes it reduces correlation to equity markets.

I look forward to talking to Ms. Staley and Mr. Husain in a year or so to see how this is working out in practice.

————————————————–

Q&A:

Peter Taylor: On the art of board-membership

Peter J. Taylor is chief financial officer of the University of California system; in fact he’s the first and only CFO since the job was created in 2009. Managing the $3.3 billion UC budget is a high-pressure job in these times, as state funding dries up, but Pete is a cheerful guy who seems to take it all in stride.

He comes from a 13-year stint in public finance at Lehman Brothers/Barclay’s Capital, and is also politically savvy, having served for several years as chief of staff to the Majority Leader of the state assembly.

He’s also a veteran of several non-profit boards, which is what I wanted to talk to him about.

Skorina: Peter, how are things on your side of the Bay?

Taylor: Fine, Charles, how are you?

Skorina: Excellent. Peter, I’m looking at a list of all the boards you’ve sat on: Currently you’re a director of the J. Paul Getty Trust, and also the Irvine Foundation. You previously were a member of the UC Board of Regents, and also President of the UCLA Foundation for a couple of years, so you were an ex-officio member of their board. I’ve been talking to people about board governance, especially about how the board and investment committee mesh with the investment office. As both a finance guy and a board veteran, what wisdom do you have to offer?

Taylor: Well, I have noticed some things that work and some that don’t. They’re pretty basic.

Skorina: Like what?

Taylor: All things equal, smaller boards work better. A six-member board works really well. You get up into two digits and it gets harder. I was once involved with a 25 plus-member board, which slows everything down to a crawl.

Skorina: Interesting you should hit on that number. I’ve got some academic research here that says the same thing. A psychologist at Harvard named J. R. Hackman says that a committee shouldn’t have more than six members; above that, productivity drops.

Taylor: Well, if he’s at Harvard, he must be right.

Skorina: Absolutely!

Taylor: It’s kind of an inverse relationship, I think. The bigger the board, the less each member feels personally responsible. You get some people who feel they don’t have to pull their weight, so they don’t.

Skorina: What else have you noticed?

Taylor: The board needs to maintain a little distance from the executive head of the foundation and the professional staff. They each have their job to do, but the board must have “alone” time for their considerations without the staff in the room, to maintain their independence.

Skorina: What makes a good chairman?

Taylor: It’s a real balancing act, but the chair is critical. On the one hand, he has to make sure that everybody gets a hearing so that you can arrive at a real consensus. On the other hand, he sometimes has to be tough about focusing on the agenda and moving things along.

Skorina: I’ve talked to some people about the division of labor regarding hiring and firing external portfolio managers. Some boards seem to be over-involved.

Taylor: The board should be concerned about methodology. They should define the process and make sure it’s working. They should leave the rest to the staff and consultants. In fact, that should be the general rule. They should focus on investment risk parameters and policy. That’s more than enough to absorb all the time they have. The board and investment staff have to develop enough mutual trust so that they can each do their jobs without stepping on each others’ toes.

Skorina: Thanks a lot, Peter.

Taylor: Thank you, Charles.

————————————————–

Recruiter’s Notebook:

CIO Supply and Demand

Since I practice my trade – executive recruiting – within a certain niche, I think it’s to everyones’ advantage to try to figure out how big that niche is, especially the sub-niche of tax-exempt chief investment officers.

I once worked out an estimate on the back of an envelope and left it safely in a desk drawer where I wouldn’t have to defend it. But sometimes people ask me just how many CIO jobs there are out there. Funds want to know just how hard it is to find good candidates and job-seekers want to know what their chances are.

I heard variants of those questions several times when I was in New York recently, so I decided to put my back-of-the envelope analysis on the record, for whatever it’s worth.

The short answer is: I think there are about 1,300 jobs for full-time, professional CIOs at tax-exempt funds. And I think the annual turnover rate is about 12 percent, so there are perhaps 160 openings per year.

The supply side is trickier and harder to enumerate, since candidates can be drawn from a wider sphere than just the core pensions/foundations/endowments world. While I can’t offer an absolute number, I have a pretty good idea where the candidates have been coming from in recent years, and in what proportions.

Bottom-line: It’s clearly a buyer’s market, with a half-dozen highly-qualified candidates for each opening, even at the smaller funds. Of course, the real art is matching specific candidates to specific jobs, which is much more than a numbers game.

I have a long version of my analysis showing the math, and I’ll be glad to share it. Just send me an e-mail request to: skorina@sbcglbal.net

————————————————–

Parting Shot:

Fred Buenrostro and CalPERS: Selling out in Sacramento

Skullduggery at CalPERS has been reported here in California for many months, but it struck me as just one more dull, pay-to-play muddle. The gambling at Rick’s Cafe may be going on unabated, but I couldn’t work up much indignation.

Then a recent report rekindled my interest. Even the shabbiest, run-of-the-mill influence-peddling, when closely examined, can be pretty entertaining. CalPERS sponsored a 75-page study by a white-shoe DC law firm which turned up many piquant facts which I had overlooked.

Link: http://www.calpers.ca.gov/eip-docs/about/board-cal-agenda/agendas/full/201103/srrr.pdf

Alfred Villalobos, the former CalPERS board member who profited from steering pension business to his clients, was the central miscreant and has been well-publicized, but the role of former CalPERS CEO Fred Buenrostro had been less clear to me. It’s now plain that he was a wholly-owned subsidiary of Mr. Villalobos who cheerfully sold his office and wasn’t even very clever about how he did it.

Item: Mr. Villalobos paid for Mr. Buenrostro’s lavish wedding at Zephyr Bay, Nevada , and paid his way at Vegas casinos.

Item: One day after Mr. Buenrostro’s departure from CalPERS, he stepped into a $300 thousand job with Villalobos. Compensation included the deed to a condo on Lake Tahoe . He referred to this as “pursuing exciting opportunities in the private sector.”

Item: Mr. Buenrostro sometimes absented himself from his CEO duties in Sacramento to work as a paid ski instructor at Squaw Valley, giving lessons to some of Mr. Villalobos’ employees. There is no evidence, however, that he washed their cars or picked up their dry-cleaning.

Item: Even after the board had – belatedly – stripped him of his CEO authority, he continued to sign documents to assist Mr. Villalobos’ schemes, using phony CalPERS stationery.

Item: After divorcing his wife (see “lavish wedding,” above), Mr. Buenrostro acquired a girlfriend who was employed by one of the private equity companies CalPERS did business with. This worked out poorly for Mr. Buenrostro when both the ex-wife and ex-girlfriend volunteered to tell the lawyers everything they knew about Mr. Buenrostro’s life and times. No subpoenas required.

How this corrupt hack, a bureaucrat with little relevant experience, managed to acquire the top job at CalPERS in the first place may be the most interesting question of all. Unfortunately, neither the lawyers nor his lady friends throw any light on it in this document. Still, it was a good read, and I recommend it to students of pension administration and human nature.