In this issue – comings and goings, aiCIO Summit, interviews, hedge funds in clover
“Even long-term investors have low tolerance for short-term underperformance. They’re long-term investors as long as it makes money in the short-run.” - Gary Brinson, Chairman and CEO of UBS Brinson
Comings and Goings:
Michael Abbott: another Brit bites the dust in Ithaca:
Michael Abbott, Cornell University’s chief investment officer, left his post abruptly last week after just four months on the job. That makes two British CIOs hired and fired within the last four years – a rather embarrassing situation for the historic Ithaca, New York school.
Mr. Abbott’s predecessor, James Walsh, was on the job when the endowment took big losses in 2008/2009, so his departure in 2010 was explicable. He is now back in London, running a hedge fund.
As to Mr. Abbott, on Sunday, May 2, the campus newspaper received a terse e-mail from a university spokesperson saying only that “…his style of conducting business is inconsistent with Cornell’s policies and expectations.” So, “it would be in everyone’s best interest to end the relationship.”
The doughty reporters at the Cornell Daily Sun hit every administrator in their rolodex, but nobody was talking.
Endowment performance was not an issue this time. Just three days later the school reported that the $5.3 billion endowment was up nicely for the third quarter of the current fiscal year, with earnings of 19.3% so far. That report cited interim investment officer A.J. Edwards, but made no mention of the guy who had held the job just five days previously.
Mr. Abbott, hired in late 2010 after a trans-national search, had been, like Mr. Walsh, a London-based hedge-fund manager. The most recent available salary figures for the Cornell CIO position are for Mr. Walsh in 2008, when he received $414 thousand base pay plus a $420 thousand performance bonus.
I spoke to someone close to the endowment who would only say that the whole story would come out within a few weeks, while again asserting that the endowment was doing fine. So we’ll have to wait a bit to learn exactly how Mr. Abbott got crosswise with his bosses.
Timothy Corbett: An insurance vet ends a brief sojourn with public pensions:
Mr. Timothy Corbett, who managed $25 billion at the Connecticut public pension (CRPTF) for less than two years, has been hired away by MassMutual.
CRPTF hired Mr. Corbett as chief investment officer in July, 2009, and, in the single fiscal year reported on his shift the pension earned 12.9%, raising fund assets from $20.4 billion to $21.9 billion. That beat the benchmarks for each of their three major components (12.3%, 12.6% and 11.8%, respectively), not heroically, but well enough.
It was a great time to take the job. The fund had just lost 17.4% in fiscal 2009 – their biggest loss ever – so any kind of win in 2010 looked pretty darn good. Timing, in careers as well as in markets, is everything.
Mr. Corbett was paid $324 thousand by CRPTF in 2010 according to state records. His compensation as MassMutual’s new CIO is, of course, not reported, but he is now handling a much larger portfolio ($91 billion), and Skorina’s Iron Law suggests that he would have required a very substantial salary bump, something in the range of $400 to $500 thousand to jump ship.
Mr. Corbett’s background made him a logical choice. He began his career with 20 years at health insurance giant Aetna Inc, then 6 years at Hartford Investment Management Company, a $160 billion asset manager (mostly fixed income). And, he’s an actuary as well as a CFA, so he can talk insurance like a native.
This is also still another example of talent poached from a public pension by a higher-paying private firm.
As the astute Canadian blogger Leo Kolivakis observed at PensionPulse.com:
“These high level departures should serve as a wake-up call to boards at these plans that something needs to be done to prevent more of an exodus from the public pension ranks. The success of any plan depends on its ability to attract and retain talented and experienced pension fund managers.”
Texas Tales, Part One: The Excoriation of the Money Managers:
Every society has rituals which baffle outsiders. Naked Finns beat each other with birch branches and Spaniards run with the bulls at Pamplona to honor St. Fermin, the occasional fatality notwithstanding.
Down in Texas they have the annual Excoriation of the Money Managers in which politicians publicly rebuke the people who are trying to keep the pensions and endowments solvent.
As our friend Paula Vasan points out in aiCIO, at the end of every fiscal year, endowment and pension performance is announced, followed by disclosure of bonuses paid to the portfolio managers. This disclosure is followed by…”tension,” as she thoughtfully puts it.
Since we aren’t respectable journalists like Ms. Vasan, we can say it more crudely: populist politicians turn around and bite the hands that feed them (and their constituents) for the entertainment of the innumerate electorate.
This year the $100 billion Texas Teacher Retirement System (TRS) turned in the best investment performance among all large U.S. pensions. In its fiscal year ended 31 August 2010, TRS earned 15.7%, crushing its custom benchmark return of 12.8%. In absolute dollars that means Britt Harris’ team earned $2.3 billion over and above what they could have obtained with a combination of passive, indexed investments. For this, Mr. Harris was awarded a bonus of $566 thousand on top of his $480 thousand base salary. Thirty of his colleagues shared another $7.2 million, with bonuses ranging from $100 thousand to $300 thousand per person. As a charge against the $2.3 billion value added the bonuses amount to about one-third of one percent.
In case some politician should stumble over our newsletter we can put it even more simply for their benefit: the TRS team earned an extra $1,500 for every retired teacher in Texas (over and above index returns), costing each retiree about $7 in bonuses for this performance, which sounds like a good deal to us.
According to the Dallas Morning News, Democrat Rep. Sylvester Turner said “I can’t justify it. I don’t care how well things have performed in their investment portfolio.” Republican Sen. Kevin Eltife said incentive pay should be ended, partly because it would inevitably cause the managers to take crazy risks to goose their pay. He offered no evidence that any such crazy risks were being taken. Mr. Tim Lee, director of the Texas Retired Teachers Association, said the incentives for TRS managers left him with a feeling of “almost, maybe disgust.”
Mr. Lee’s visceral feelings may or may not persuade you that a duly earned incentive bonus is reprehensible. But his “facts” don’t help much, either. He said that the TRS pension is “actuarially unsound,” which it is not. It is currently 82.9% funded (per TRS actuaries in 2010 annual report), which puts it safely over the 80% threshold generally considered adequate.
Eighty-three percent funding isn’t terrific, but it’s reasonably good in both relative and absolute terms, so long as the Texas legislature continues to kick in adequate annual contributions and the investment team is hitting their targets.
The politicians responsible for the first job are shirking. They paid in only 82% of the amount recommended by actuaries in 2010 (down from 99% in 2009). This shortfall amounts to politicians borrowing from the pensions to shore up current state expenditures; it’s money which will have to be paid back out of future budgets with (implicit) interest. The investment team, on the other hand, certainly held up their end in 2010, which is what those bonuses signify.
So whose performance should really be scrutinized, that of the investment pros who exceeded their targets, or that of the politicians who missed theirs?
Meet Skorina (and some other people) at aiCIO’s New York Summit:
Speaking of aiCIO, that excellent magazine (previously known as ai5000) will be holding its second annual summit for institutional CIOs in New York this month. Editor-in-chief Kip McDaniel will be playing host (and, I presume, his right-hand woman Paula Vasan will be somewhere close by). Top investment professionals from endowments, pensions, foundations, insurers, and sovereign wealth funds will be hashing out the hot issues of the day.
Even I, your humble scribe, will be there, and I hope I’ll have a chance to meet and greet some of my readers. It’s on May 19th and 20th, so get your reservation in immediately if you want to attend.
Note to our international readers: if you can’t make the New York conference this month, aiCIO will also be hosting CIO summits in London (in September) and in Sydney, Australia (in November).
You can check the list of distinguished speakers and topics here:
Reservations are available through Carol Popkins, of parent company Asset International:
Tel: +1 203-595-3282
Pension funding: The bad news keeps on coming:
When I spoke recently to Ken Goodreau, chief investment officer at the Rhode Island state pension (ESRI), I observed that his investment performance was good, but their funding level was a glum 59% (for 2009 per the latest Pew Center report). In fact, since the legislature recently acted to lower the discount rate, it’s now officially just 48%, even though they also stumped up the full $320 million required contribution in the latest fiscal year. I asked if this was impacting him.
With a little asperity (I suspect it’s not the first time he’s heard the question), he just said: “Charles, that’s not my problem. I generate the best risk-adjusted returns I can with the assets I control. The rest is somebody else’s job.”
On reflection, he’s exactly right. That’s the attitude and focus the investment office should have.
On the other hand…Funding levels and the political machinations that make them better or worse, form the context in which pensions operate. Indirectly, if not directly, they are going to influence the whole enterprise, including investment strategy.
That new Pew report, by the way, is worth a read. It’s the follow-up to last year’s report, which generated so many headlines. It’s titled The Widening Gap, which pretty much tells the story. It’s mostly based on fiscal 2009, but it includes 2010 data for a dozen states and later data don’t improve the picture very much. Overall, the funding gap grew from $1.0 trillion to $1.26 trillion. And that’s relying on the discount rates being used by the states. Some very respectable commentators think they are too high, and the funding gaps therefore much greater than the official numbers suggest.
The report is here:
Texas Tales, Part Two: Skorina Interviews Bruce Zimmerman:
Bruce Zimmerman’s University of Texas Investment Management Company (UTIMCO) office is just a mile down the road from the TRS office in downtown Austin. UTIMCO, at $27 billion, is only a quarter as large as TRS, but it’s the second-largest endowment in the country (after Harvard), and it’s one of the very few public university endowments managed by a semi-autonomous corporation like those at Harvard and Duke.
I just had a chance to talk with him about current goings-on at UTIMCO, but I thought a little back-story would be interesting. Mr. Zimmerman, like Mr. Harris, has had his baptism under fire by the Money Manager Excoriators (see Texas Tales, Part One, above).
He was appointed CIO late in the 2007 fiscal year, with a salary of $525 thousand and a $100 thousand signing bonus. UTIMCO earned 15.3% that year, although the wheels were starting to come off the economy by July.
In the first full fiscal year on his watch, the fund lost 3.3%, a relatively good performance. As a local reporter noted a few months later: “The UT System and Zimmerman have shown partiality to lower-risk, long-term investments that helped UTIMCO avoid much of the fallout from the subprime mortgage crisis.”
Then things got interesting. In early 2009 UTIMCO’s compensation committee voted a $2.3 million bonus to the investment staff for 2008, including $1.05 million to Mr. Zimmerman. ($700 thousand was paid to him in 2009, the balance vesting over three years at $100,000 per year.
By then the general economy had truly cratered, and Governor Rick Perry found it expedient to leap into the headlines with a “strongly-worded” and quickly-leaked letter to UTIMCO chairman Robert B. Rowling suggesting they reconsider the bonuses.
Mr. Zimmerman and Mr. Rowling soon found themselves under the hot lights of a state senate committee.
Republican Sen. Kevin Eltife, an ally of Gov. Perry, whom we met above (see Texas Tales, Part One), said the situation was “shameful.” There was even talk of abolishing the UTIMCO structure and tucking the endowment into the state’s pension management system. Coincidentally we think, Mr. Rowling, formerly a supporter of Gov. Perry, had recently shifted his support to a rival candidate for governor.
Mr. Rowling and Sen. Eltife engaged in some spirited exchanges, with Mr. Rowling threatening to resign on the spot. He then did so, saying “You can have my job.” When the committee reconvened, UTIMCO had a new chairman, an amiable Texas A&M regent who placated Sen. Eltife and argued it would be a bad idea to “emasculate” UTIMCO.
Mr. Zimmerman rode out the kerfuffle, collected his bonus, and went back to work. In fiscal 2009 the two major chunks of the UTIMCO portfolio lost 13.0% and 13.2% respectively. But both again handily beat their benchmarks, by 2.4% and 2.2%.
Last year, UTIMCO was back in the black, returning 13% and recouping all the 2009 losses. That’s in excess of their policy benchmark by a fat 4.3% — $640 million of “excess” earnings relative to a passive portfolio, and which didn’t have to be extracted from the taxpayers. Oddly, there was no letter of congratulations from Gov. Perry, and no press release from Sen. Eltife.
Our conversation focused on current matters, but I thought our readers would want to know that not everything about being a big-time CIO is in the job description.
Skorina: Bruce, in my job I spend a lot of time staring at resumes, and yours is pretty unusual for an endowment CIO. You were an all-around bank executive. Thirteen years at JPMorganChase, where I worked long ago, then three years at Citigroup. You did about everything a banker can do: retail marketing, mergers and acquisitions, building online systems, etc. It was only in your three years at Citi that you ran their corporate pension. Do you think your background gives you a different perspective from someone who’s just been a portfolio manager?
Zimmerman: Absolutely, Charles. Remember, at UTIMCO, I’m not just the CIO, I’m also the CEO. I don’t think of myself as just running a portfolio; I run a company with a staff of fifty, including twenty-four investment professionals. Hiring and developing people, building a team, is a high priority and takes a big chunk of my time. If you get those decisions right, you find a lot of other things take care of themselves.
Skorina: I’ve been talking to CIOs about board relationships: what they’re happy about, what they’re less happy about. I don’t really expect you to diss your board in public, but what can you say about the UTIMCO setup?
Zimmerman: UTIMCO was created 15 years ago, and I think they got it about right. On the one hand, there are enough university regents on our board to keep them focused on their fiduciary duty to the schools and hospitals we serve. But we also have four non-regent members with specific investment expertise which is very useful to me. We have a nine-member board, which is a good size. That’s big enough to get some diversity of opinion, but small enough to make efficient decisions. The structure is also supposed to give us a layer of insulation from state politics, and that helps, too.
Skorina: The schools you serve are public universities, not private institutions like Harvard or Duke, which means a lot of public attention. For instance, you got a lot of ink recently because you took a pretty big position in gold last year. In fact you took physical possession of a lot of bullion in a New York vault. Some commentators thought this was a kind of political statement, or a vote of no-confidence in the dollar.
Zimmerman: That’s just silly, Charles. But, as you say, we’re a public institution and we get a certain amount of attention. Our position in gold is just a hedge, and we’re certainly not the only ones doing it.
Given the current economic uncertainties, I think it makes sense as part of our strategic allocation. Like any such move, we will revisit it as necessary. Right now, it seems to be working pretty well for us.
By the way, some writers have suggested that the decision to make a gold investment came from the board. This is completely inaccurate.
I am sensitive to this point because it has been reported, also inaccurately, in other publications and one of the reasons I have made myself available to press and others is in order to attempt to correct this mistaken view.
Let me be clear: staff developed the strategy, made the decision based on the authority delegated by the Board, and completely implemented the gold futures and bullion positions.
We simply kept the Board apprised, as we do with all of our investment decisions.
No single Board member made an argument, championed the cause, or was overly instrumental in our decisions. Our entire Board voiced their support for our actions as we developed, decided and implemented them.
Skorina: Glad we could help make the point Bruce. Thank you for your time.
Zimmerman: Enjoyed it, Charles; you’re very welcome.
Hedge Funds: New and improved, now with transparency!
By one measure, the recession is now over for hedge funds. In April, their assets climbed past $2 trillion, finally exceeding the pre-recession peak of $1.93 trillion posted in 2008.
Remember back at the nadir of the recession, when the hedgies lost 30% of their money, all the way down to $1.3 trillion? Remember the pain, the anguish?
Okay, we had our own problems, and it’s hard to summon up a lot of sympathy for hedge fund moguls. Still, there must have been a lot of sleepless nights up in Connecticut as they watched their ranks literally decimated (the number of funds dropped by more than 10% before recovering).
The rebound has come partly from investment returns, but also from healthy new inflows. According to Hedge Fund Research, Q1 2011 inflows were the largest since 2007: almost $33 billion, counting both single funds and funds of funds.
Where is the money coming from? Well, mostly from you guys: the “real money” managers of pensions, endowments, foundations, and institutions generally. The long-term trend which has seen institutional money crowd out wealthy institutional investors just keeps on trending.
Many commentators think this change in the balance of power, along with new regulations raining down from Washington, will compel the hedgies to play nicer than they used to. Surely, they will now have to demonstrate stiffer internal controls, more flexible pricing and that elusive “transparency” that everybody seems to want.
As usual, most of the big money is going into the big funds, despite a lot of evidence that bigger funds lose their edge and can’t keep generating the kind of returns they made when they were small and nimble.
Not surprisingly, the rate of new fund startups is also getting perkier. Single-fund startups in 2010 totaled 1,184, up 51% from the 783 launched in 2009, according to data from PerTrac.
Christine Williamson had a nice piece in Pensions & Investments last week suggesting that some institutions are taking more interest in all of those smaller startups, despite the fact that their traditional advisers keep handing them the same vetted short list of big funds. For one thing, there is some good evidence that the little guys just make more money. Subscribers, see: http://www.pionline.com/article/20110502/PRINTSUB/305029910/1039/DAILYREG
According to Hedge Fund Research, smaller (under $50 million) funds earned an annualized 13.1% over 15 years. Funds over $1 billion returned only 11.6% on the same basis. Ms. Williamson points out that some big players, including both CalPERS and the New Jersey Pension System have put significant money into small and emerging funds in recent years.
Of course, $50 million is a rounding error for CalPERS. Connecting the micro-hedges and the big institutions requires the intercession of seeding funds-of-funds like Reservoir Strategic Partners, who obtained $200 million from the New Jersey pension. Fof Fs like Reservoir have a hybrid private-equity-like structure. As third-party marketer Don Steinbrugge, points out, an institution who takes an equity stake in a young hedge fund company can share in the profits as it grows, “you get two shots on goal: the investment outperformance of the hedge fund itself and then your share of the profits.”
I happen to know the manager of one of those thousand-plus new single-manager startups, so I thought I’d ask him how it’s going. Ed Bozaan runs Navigator Capital in New York.
Skorina: Ed, P&I says the big institutions are going to be opening their hearts and wallets to you smaller firms. Do you find that to be the case?
Bozaan: Well, I don’t think it’s going to be quite that easy, Charles. But I’m getting a lot more meetings with bigger firms than I would have expected. They are at least willing to hear our story.
Skorina: How about the stats that say you will make them more money? Does that really make a difference?
Bozaan: It’s a legitimate point, and it doesn’t hurt. But, really, Charles, what they want to see in a start-up is a manager with a strong track record. In that sense, the successful start-ups aren’t really new guys at all. They’re the same old guys doing business under a new name.
Skorina: And you think you have that working for you?
Bozaan: Yes, definitely. I’ve worked for two billionaires, investing money for their family offices; had my own firm for several years; then was a senior manager with Passport Capital, a very successful $4 billion global macro fund. Now I’m back again with my own firm. As they say, this isn’t my first rodeo.
Skorina: Thanks Ed, and good luck!
Managing the board: CIOs speak off the record:
I asked some of my CIO readers about how they’re getting along with their boards. What would they say to their board and investment committee members if they could do it candidly and off the record? How could governance be more effective from the point of view of the investment office?
I’ve been gratified by the quantity and quality of the responses. It’s going to take a while to sort through and assimilate all that wisdom, but I will share some in future newsletters.
For the benefit of any board people reading this, I can say that a clear majority of responders are happy with their current governance setup; they respect and appreciate the work done by their boards. But, of course, there are some board/CIO marriages out there which are less happy.
As Tolstoy said, all happy families are alike; each unhappy family is unhappy in its own way. So, I will be paying attention to the outliers. And, unfortunately, Mr./Ms. board member, that may include you.
Today, just a sneak preview, focusing on one issue that drew some comment: to what extent, if any, should the board and/or investment committee be involved in the hiring and firing of external investment managers?
This is part of the larger, central issue of board governance: what is the proper division of labor between the board or committee and executive management?
Keith Ambachtsheer, who runs the International Centre for Pension Management at the Rotman School/University of Toronto, knows as much about this issue as anyone. He says, flatly: “the board should have an oversight role, not implementation.”
As to hiring/firing external managers, the median situation in the happy families I’ve heard from seems to be that the process is, and should be, run by the investment office and consultants. The committee/board, of course, must ultimately ratify those decisions, but their involvement should essentially be oversight, not direct involvement in the hiring/firing process.
One CIO for a major public university endowment said:
“Board members should focus on what moves the needle, and not on what doesn’t…leave those areas to the staff. E.g., spending any time on an outside manager that is 1% of the portfolio makes no sense when they should be debating whether or not to increase bonds or equities.”
Another endowment manager wrote:
“They don’t get overly concerned about temporary manager performance issues and deal mainly with policy issues (asset allocation, spending policy, etc.). They still approve the hiring/firing of investment managers, but defer the selection to staff and consultant. We issue requests for proposals and interview firms, then bring a finalist recommendation to the Committee.”
Still another endowment CIO put it succinctly:
“My committee is now laser focused on the things that matter: Translation: strategy. Not tactics, not outside managers.”
More next time.