In this issue
|Hedge fund cures for sick pensions|
|Comings and goings|
|Two CIOs are better than one|
|Traits of top money managers
Ken Frier: A short trip to the Stanford endowment
The CIO office at Stanford Management Company has stood empty for two-and-a-half years, ever since Eric Upin left for Makena Capital in Menlo Park. It’s finally time to dust off the desk.
The $12.6 billion SMC has tapped Ken Frier, head of Hewlett-Packard’s $15 billion corporate pension (and headquartered just a few minutes away), to fill the slot. Gillian Wee at Bloomberg News got the story before the ink was dry on the press release.
Mr. Frier happens to be a Stanford MBA, more important, he has a ton of experience managing cash-flow in corporate treasury functions (including 9 years at the Disney Company) before he became a pension CIO. Recall that Stanford got jammed up badly in the 2008 meltdown. They found themselves unable to liquidate private investments on decent terms to meet their cash obligations and ended up issuing bonds to fill the gap.
No salary figure is available, but John Powers, president of SMC and Mr. Frier’s new boss appears to make (including incentives and three year rolling bonus payout) between $3 and $4 million a year. Depending on how the negotiations went, I suspect that Mr. Frier may have signed on at about $1.5 million including incentives.
Only days after Ken Frier departed from H-P, Gretchen Tai, who was a direct report to Mr. Frier as a director of investments, was given the CIO job. I mention this just as an example of good succession planning. They had someone groomed and ready to pick up the reins. A striking contrast to the 30-month hiatus at the Stanford endowment.
Ms. Tai will take over officially in September. Some choppy waters at H-P HQ last week as CEO Mark Hurd departs under a cloud, but I’m sure she’ll at least be keeping the pension afloat.
Timothy Walsh: Another Hoosier heads east
Timothy Walsh, CIO of Indiana’s Teachers pension, has been named director and chief investment officer of the New Jersey Division of Investment, which runs the 10th-largest public pension in the country, investing $68 billion.
His predecessor, William G. Clark, stepped down to take a position with the Federal Reserve, as CIO of the Fed’s own $11 billion retirement plan, a much smaller fund than the one he was leaving. (but I’m guessing at a much better salary)
The search for a new CIO began back in January, as new Republican governor Chris Christie was sworn in. Since 2005, Mr. Clark had pushed to diversify the fund and invest with outside private equity and hedge fund managers. It will have to be seen whether a new CIO operating under a new state administration will follow the same trend in allocations.
Mr. Walsh, a Northwestern University MBA, is moving up from an $8.5 billion to a $68 billion fund. He has a broad investment background, including trading fixed-income and currencies at major banks; running his own investment advisory firm, Walsh Financial Services; and a stint at Chicago hedge-fund Vara Capital as an investment relations exec.
Mr. Walsh is the second Indiana pension manager to depart recently. Shawn Wischmeier, CIO of the larger PERF fund, left to become North Carolina’s pension CIO in June.
The NJ public pensions are among the most seriously underfunded in the country, and they are going to need all the investment firepower they can get. We wish him luck.
Michael Trotsky: Mike Travaglini’s successor gets his job, but not his salary
In a previous issue, we highlighted the stormy departure of Michael Travaglini, who resigned as executive director of MassPRIM, the agency which runs the Massachusetts public pensions. Mr. Travaglini was unhappy with impending legislation which would limit bonuses for pension managers and, as he put it, “voted with his feet.” He is now a managing director at Grosvenor Capital in Chicago, a hedge fund of funds, where he markets the firm to public pensions.
Grosvenor, coincidentally, is one of five firms that were picked to manage MassPRIM’s $3.2 billion in hedge-fund assets last fall, per a report by the State House News Service. Michael Trotsky, the executive director of the Massachusetts Health Care Security Trust (a pot of money obtained by suing tobacco companies), has now been appointed to the job. He will earn a base salary of $245 thousand, 24 percent less than the $322 thousand (not including a $63 thousand bonus) paid to Mr. Travaglini in 2008. Mr. Trotsky is a University of Pennsylvania, Wharton MBA and previously worked for Boston hedge fund PAR Capital Management.
MassPRIM’s administration committee reportedly recommended CFO Karen E. Gershman for the job, per the Boston Globe. Ms. Gershman, who served as interim CIO, then allegedly took herself out of the running.
MassPRIM invests $41.3 billion and has reported a 12.8 percent return in fiscal 2010, the period ending just as Mr. Travaglini left for Chicago. But in the previous fiscal they lost a painful 23.6 percent — nearly $13 billion – which prompted all the rumblings in Boston about pension managers’ compensation, and Mr. Travaglini’s subsequent resignation.
Doug Wynkoop: Gators get a Houston pension pro
University of Florida Investment Corp (UFICO) in Gainesville, with $1.6 billion in assets, has hired Douglas Wynkoop as CIO. Mr. Wynkoop was running a city pension fund in Houston until he landed the UFICO job.
Mike Smith, who was the UFICO CIO for six years, left in March to join Global Endowment Management, which already employs several of his colleagues from his days at Duke University, including former Duke CIO Thruston Morton.
Mr. Wynkoop’s salary was not disclosed, but Mr. Smith’s last known compensation was $260 thousand, with bonus potential up to 100% paid in various tranches over three years.
Laurence Lebowitz: A new chief in Conshohocken
The Investment Fund for Foundations, which invests $8.5 billion for 750 U.S. charities, has turned over its top job.
Laurence Lebowitz, a Harvard MBA and former chair and managing director of HBK Capital Management in Dallas, will take over as president and chief investment officer at TIFF in Conshohocken, Pennsylvania. He succeeds TIFF founder and president David Salem.
The TIFF board features some high-profile endowment CIOs, including Seth Alexander of MIT and William McLean of Northwestern University.
Tina Surh: Up from the ranks at NYU
I’ve spoken several times to Tina Surh while she has been acting CIO at New York University and am gratified to see that she got the permanent appointment, replacing Maurice Maertens, who retired last year.
Promotion from within isn’t the rule at endowments, but in this case it’s well deserved. Ms. Surh, at 39, is highly qualified and has done a good job in the interim with the $2.5 billion endowment. She is a Harvard MBA with an undergrad degree from Tufts and has been at NYU since 2005 as, successively, director of investments and deputy CIO.
Congratulations, and good luck, Tina.
Position opening: Casey Family Programs – Director of Investments
I have been retained to find a Director of Investments for Casey Family Programs, the nation’s largest operating foundation focused entirely on foster care. ($2 billion in assets under management)
The Director of Investments will work with the Chief Investment Officer on selection and management of the foundation’s entire private markets portfolio. We are looking for someone who has sound, independent judgement and the tenacity for deep research on current and future investments in private equity, real estate, hedge funds, commodities, real assets, etc.
Please call or email me, Charles Skorina (415-391-3431) email@example.com for particulars.
New York City Pensions, part I: The Bloomberg Gambit: Can a new super-CIO improve NYC pension performance?
Last week, New York City Mayor Michael Bloomberg, who recently began his third term in office, inserted still another player into the five-ring circus of the city’s pension administration, which controls about $100 billion in assets.
He announced that Ranji H. Nagaswami will become the city pensions’ “chief investment advisor” at a salary of $175,000. Ms. Nagaswami is a Yale MBA with an undergrad degree from Mumbai University in India, and an excellent resume.
She has experience in both fixed-income (at UBS, where she dealt extensively with pensions and other institutional players) and in equities (at AllianceBernstein, as chief investment officer in their Blend Strategies Group, running $100 billion in retail mutual funds). And, as one of the eleven outside members of the Yale endowment’s investment committee, she’s worked close-up with Dr. Swensen’s legendary investment machine.
(The management of this newsletter is sorry to note that the search for this position was run out of the Mayor’s office, instead of by hiring a reliable — and cost-efficient! — recruiting firm like, say, mine.Politicians should politick; headhunters should headhunt. See Adam Smith on the benefits of the division of labor.)
Ms. Nagaswami will not be a chief investment officer, since the city already has one of those, and the mayor can’t appoint a new one. The CIO is appointed by and reports to the City Comptroller, John Liu, who is an elected official in his own right. Mr. Liu is, formally, custodian of all pension funds and chief investment advisor to their boards
We note that Mr. Liu, when he appointed Lawrence Schloss as CIO back in January, at a salary of $224 thousand, said in a press release:
“Larry Schloss is the seasoned professional whom the people of New York will be able to count on to improve the investment performance of our pension funds and to burnish the public image of our City’s pension investments, the organization of which has been characterized as a “cluster$&*$.”"
We think that last word may have been a misprint, but the sentiment was clear enough.
In fact, four of the five funds performed below the median for their U.S. peers over the seven years they were overseen by former Comptroller William Thompson, according to Wilshire Associates. Mr. Thompson ran for mayor against Mr. Bloomberg last year, and lost in an unexpectedly close race.
Mr. Schloss, formerly head of Credit Suisse’s global private equity division, brought his own impressive resume to the pension system. As head of the Comptroller’s Bureau of Asset Management, he is now charged with development of overall investment policies and improving investment performance, notwithstanding the appointment of Ms. Nagaswami to do the same thing.
Now, if you have an organization with overlapping authorities, unclear lines of responsibility, opaque decision processes, and mediocre performance. If, for instance, you have the Byzantine Empire, the Department of Homeland Security, or New York City Pension System, what do you do with it?
Obviously, you add another layer of authority reporting to another political office-holder! And that is what Mayor Bloomberg has just done.
Ms. Nagaswami will have a very broad mandate. She will not just be whispering advice into Hizzoner’s ear, rather she will be out meeting and greeting potential investment partners and evaluating deals. She will have a role in the selection and termination of outside investment managers. And she will make recommendations on asset allocation and investment strategy. All of this, the Mayor says, she will be doing by “working with the Comptroller’s Bureau of Asset Management,” i.e., Mr. Liu and Mr. Schloss, the people nominally in charge of these matters.
A spokesman for Mr. Liu says the office “welcomes Nagaswami to city government,” although we can’t imagine that he is thrilled about this incursion onto his turf.
The Mayor’s office insists that the appointment of Ms. Nagaswami, with her search for “new ways to manage the funds’ portfolios” should not be construed as a swipe at Mr. Liu or Mr. Schloss. Absolutely not! In fact, they said “the creation of the new job was not a sign that the administration lacked confidence in Mr. Liu’s oversight of the pension system or his appointment in January of Lawrence M. Schloss as chief investment officer.”
On the other hand, the semi-reliable but always pungent New York Post has reported that: “The move signals Bloomberg is fed up with the city paying fat fees to poorly performing money managers – and he’ll step on Liu’s toes to change things, insiders say.”
The timing of this appointment, in Mr. Bloomberg’s 9th year in office, is not readily explained, but the rationale is straightforward.
This year, the city will have to kick in $7.6 billion to top up the funding of the pensions. That’s about 20% of the city’s general fund, and it’s blowing a gaping hole in the municipal budget.
Using the standard actuarial notion of pension funding, all of the city’s pensions are 100 percent “funded,” and have been for years. However, they only get topped up to that 100 percent each year AFTER the city kicks in enough money to make up for any shortfalls.
Much of the shortfall is caused by investment losses in 2008/2009, but the funding formula guarantees that those losses will be spread forward, causing the city’s contribution to keep climbing. The city will be on the hook for an escalating pension bill unless and until investment performance improves dramatically and very soon. And Mr. Bloomberg has at least three more years in office.
Unlike the situation in many state-level pensions (run by legislatures who can sometimes tweak or re-interpret their own laws), the city is bound by statutes passed above their heads. And those statutes (engineered by public unions who wield immense power in Albany and keep their own contributions firmly fixed) make the city’s gap-filling contribution mandatory.
Mayor Bloomberg can’t say, “Oh, well, the budget’s tight, so we’ll settle for just an 80% funding level for now,” as some states have done. Which would save them a billion or two per year out of a $40 billion city budget. Nope, they have to top it off to 100 percent without fail every year.
If Mr. Bloomberg’s new hire can increase investment returns, even moderately, then every additional dollar she generates is one less dollar that he will have to come up with. It’s that simple. And, even if Ms. Nagaswami can’t perform miracles, or is trapped in a game of dueling CIOs, Mr. Bloomberg can point to her as evidence that he’s doing all he can to attack the problem.
This is after all, politics, where optics are as good as economics, at least in the short run.
New York City Pensions part II: Testing the hedge fund waters:
Even before Ms. Nagaswami was added to the management mix, three of the five city pensions, with funds totaling $65 billion, were weighing their first move into hedge funds. The City Comptroller’s office has issued RFPs for consultants for a three-year contract.
They’re looking for advice on formulating strategy, identifying new investments and monitoring portfolios, according to the RFP. Proposals were due last week, and a contract may be awarded as early as October.
Are hedge funds the cure for sick pensions?
Howard Eisen and Don Steinbrugge are two veteran third-party marketers who connect hedge-fund clients to institutional investors. They recently argued that the underfunded condition of many U.S. public pensions will inevitably drive them further into the arms of the hedge-fund industry.
Of course, hedge-fund marketers will tend to find arguments to support their endeavors. But it doesn’t mean they’re wrong.
We have played with similar arguments ourselves in this newsletter and we think they’re at least plausible. Mr. Eisen and Mr. Steinbrugge connect the dots pretty forcefully as quoted by FinAlternatives reporter Mary Campbell.
Some credible estimates say that U.S. public pensions may have shortfalls totaling as much as a $3 Trillion when assets are properly matched to anticipated liabilities. Add another $450 billion for private-company pension underfunding. Then consider the outdated and over-optimistic rate-of-return goals the public funds must struggle to achieve. Finally, note that many of the states and municipalities who run the public pensions are too broke to bail them out.
But larger allocations to suitable hedge funds could help pensions gun up their risk-adjusted returns; in fact, it’s argued, the trend is already well in motion.
Mr. Steinbrugge points out that U.S. pensions currently allocate about 3% to hedge funds (with some of the larger funds up to 20%). He looks for the average allocation to rise to 10-20% over the next decade.
“Right now, the defined benefit marketplace in just the U.S. is between $5 and $6 trillion, so a 3% allocation, you’re looking at somewhere between $150 and $180 billion [in] assets, which is roughly 10% of the hedge fund market place. And if you look at that allocation over the next 10 years going from 3% to somewhere between 10% and 20%, it’s going to drive a significant percent of the growth of the hedge fund industry even before you take into consideration pension markets around the globe.”
Mr. Eisen notes that pensions are looking for ways to insulate themselves from the kind of stock-market debacle they recently endured:
“You can’t have a year like 2008 when the average global equities index was down something in the neighborhood of 40% to 45% …those kinds of shocks, when you’ve got a 40% to 50% to 60% allocation to equities, broadly defined…cannot be sustained.”
Hedge funds, he says: “…provide some degree of insulation to a core equity portfolio or a core fixed-income portfolio against really, really sharp beta shocks like we saw in ‘01, ‘02, and ‘08.”
He notes that the inverse is also true: “…when you get a sharp beta move up, that part of a portfolio that is exposed to hedge funds is typically not going to move up quite as much. I think that’s fine for a pension fund. A pension fund applies an actuarial rate of return objective-say 7% or 8%…if the S&P 500 is up 35% that year, that’s great, but that’s not what they’re shooting for.”
Jeff Holland, managing director of London-based Liongate Capital Management, is also quoted, noting that hedge funds: “…when they’re run properly, are conservative vehicles that offer better risk-adjusted return for investors. That’s something that European pension investors-in the U.S., Europe and elsewhere-desperately need because they’re underfunded.”
Finally, Mr. Eisen describes how the world looks from the pension manager’s desk, and how a hedge fund can connect with him:
“These are not highly paid individuals, yet they are given the massive responsibility of safeguarding…billions of dollars of pensioner money. They don’t share in the glory when things do really, really well but they do share in the blame if things go really, really badly…they don’t get paid to take career risks. They need to be made to feel that they’re being listened to and that the hedge fund that’s requesting their allocation understands what their needs will be, what their objectives are and has a strategy that will address both of those.”
Traits of top money managers, continued…
We’ve asked our readers what they look for when evaluating an outside investment manager. That is: apart from what you expect to see in the paperwork (professional credentials, investment performance vs. benchmarks, etc) what are the less-measurable attributes that seem to distinguish the winners from the losers?
Here is another thoughtful response, from Peter Carl of Guidance Capital, a veteran hedge fund and fund-of-funds manager in Chicago:
It’s a great question, Charles, and a very difficult one. Tangible things such as process, backgrounds, staffing, infrastructure, etc. are easier to understand, even though their correlation with subsequent returns is unclear.
I recently attended a dinner with CIO’s of endowments and pensions where the mood was dire. Many, it seemed, had exited at the bottom of the credit crisis and had no way to get back in to enjoy the liquidity recovery. My own take was that they were too far away from their investments to understand how and why value was being destroyed and where real, generationally-large opportunities were presenting themselves.
Charles, you mentioned one CIO who regularly briefs his non-investment-savvy board-members on the appeal of managers and strategies. Your CIO would have had to explain the mysteries of a liquidity squeeze in convertible bonds that were money-good in three months but trading at below thirty. That’s difficult, given that he has to start with “what’s a convertible bond?”
Some people seem to be good at evaluating successful managers. Julian Robertson comes to mind. Although I haven’t met him personally, his ability to identify “Tiger Cubs” and their subsequent success is well documented. The specific characteristics that he (and you) is looking for, on the other hand, are less well-defined. I note, however, that the things I mentioned as “tangible” earlier are not typically mentioned in published interviews with him.
It’s clear that Robertson has a penchant for detail. He’s very close to the portfolio, he interacts with the managers regularly, and he listens closely to what they say. He seems to find value in people who clearly demonstrate that they have an information advantage and can establish credibility by describing how they got it. So, as people who select managers, we might think of those attributes as things that are valuable for us to do.
I’ve been re-reading “Reminiscences of a Stock Operator,” and would note that Livermore wondered about and struggled with some of the same questions. I’m not saying that I have an answer, but some of the less tangible things I look for in managers include:
* Clear specialization and a concentration on that specialty;
* Deep experience and a background that suggests that they could be successful;
* Intellectual honesty, and an ability to learn and adapt from mistakes;
* A thorough understanding of what kind of environments they can in, which ones they can’t, and why;
* A penchant for calculated risk-taking within the context of a portfolio;
* A repeatable edge that can be improved on with constant process refinement;
* Capability to managing a team and a business in a way that minimizes business risk for investors; and
* Respect for his or her investors.
One might complain that these characteristics are “squishy” and hard to hold onto. I would argue that they can be discerned and evidence accumulated, if you just listen for them as the manager tells you what he does.”
Our thanks to Carl and the other thoughtful responses. We will run more “Traits” comments in future newsletters.