Who Is Holding the Purse-Strings at Foundations and Endowments?
By Gigi DeVault (Munich)
Endowments and foundations need to do well in order to do good. The funds of endowments and foundations did very well—prior to 2009. Now, Chief Investment Officers of these institutional funds must forge strategies that can get the funds back on track and safeguard their missions.
Reihan Salan, who writes a weekly column for Forbes and is a fellow at the New American Foundation, believes that women will play a leading role in the restoration of a healthy financial realm. Salan believes the shift of power to women has taken a revolutionary tack “dramatically accelerated by the economic crisis.” As the woman who is managing the clean-up of the Countrywide Mortgage mess for Bank of America, Barbara Desoer may be closer to the thrust of that revolutionary tack than most. She believes that men in finance suffer from “the bravado effect”—the excessive risk-taking, independent mentality of a trader.
Here we have three parts to a new equation: More women are taking the lead in the investment world; leaders are needed who understand the power of collaboration, coordinated communication, and studied, ethical decision-making; and endowments and foundations are lining up for more moderate pathways to future earnings.
The Challenge of Being Collaborative
During the plum years, endowments and foundations increasingly came to rely on their solid investment earnings to support operations. This meant that, inevitably, the world of the chief financial officer (CFO) and the investment officer (CIO) would be yoked to that of the chief academic officer (CAO); collaboration had not yet become the rule of the land, but the writing was on the wall. Many of the largest universities built investment management companies separate from their counterparts in the finance offices. Some endowment offices even moved off campus. Many schools now recognize that it is important to correct that separation and are looking for ways to promote information sharing and greater cooperation between their CFOs, CIOs, and CAOs. The CFO and the CIO may be the same person at smaller institutions.
That new ways of working together are in the forecourt is further evidenced by the partnership between the National Association of College and University Business Officers (NACUBO) and the American Council on Education (ACE) to launch the first-ever national profile of Chief Financial Officers/Chief Business Officers at U.S. institutions of higher education; the survey results will be shared at the 2010 NACUBO Annual Meeting, aptly titled Building Bridges.
With different world views, different goals and priorities, different language, and “different understandings of the levers and limits of their jobs,” misunderstandings among institutional business and finance officers are likely. Clearly, institutional partners are called for who can explore their differences, appreciating and acknowledging the other’s perspective and background.
At a recent Institute for New Chief Academic Officers, a marketing piece read: “At no time in the recent history of higher education has the relationship between the chief academic officer (CAO) and the chief financial officer (CFO) mattered more. These two key campus leaders must help their institution steer a course through an unpredictable economic environment while advancing the core mission. Together, they must seek ways to be financially prudent while taking advantage of the opportunities for innovation that present themselves during such challenging times.” If ever there was a carillon call to be answered by women, this certainly seems to be one.
In fact, many women are finding their way to fund management positions at endowments and foundations—and they are finding the fit to be a good one.
Women now manage 20% of the 50 largest endowments and foundations in the United States compared to 4% just ten years ago.” The financial arena has been primed to see these numbers grow. As we have seen, popular media has become increasingly vocal in its support of evidence-based research on gender differences relevant to the investment industry. Women, the research indicates, tend to consult with more people and spend more time on their decisions. In addition to being naturally collaborative, the experts point to other gender-influenced skill sets.
For years, as an economist at the University of Texas at Dallas, Catherine Eckel studied the relationship between gender and risk. Her findings underscore the commonly accepted gender risk gap with an added observation about the impact of competition on effort: “Men work harder if they’re competing with someone, while women work with the same intensity regardless.” Whether this heightened effort by men produces an effect that economists refer to as sunk costs is fodder for additional research, but men’s perceptions about their investment ability are measurably skewed. As Eckel says, “Men know nobody can beat the market—but they can.”
Sylvia Beyer, chair of the psychology department at the University of Wisconsin at Parkside in Kenosha, has studied the relationship between self-confidence and gender for 20 years. She says, “Girls are raised to be nice, not to be too full of themselves. Boys-they can brag.” Beyer has found that when asked to consider their “male task” skills (as in the fields of math and computer science) women tend to underrate their skills, while men tend to have inflated views of their abilities and overrate their skills. Given these findings, which have been widely popularized of late, it is not surprising that the number of women chief investment officers managing funds for endowments and foundations is increasing, fueled, it appears, by the demand for skills that women readily bring to this segment of the investment world.
Investment management professionals are everywhere trying to fit pieces into a puzzle that will restore some measure of fiscal stability and help to establish the big picture for institutional investing in the future. That picture has changed radically for endowments and foundations. In the fiscal year ended June 30, 2009, the average loss for college and university endowments was 19%; the largest funds were generally impacted the most. The richest university in the world, Harvard, lost $10 billion in fiscal year 2009 and Yale lost $5.6 billion. A combined total of $36 billion was lost by the ten largest U.S. endowment funds – predominantly because their allocations to alternative investments had reached unprecedented levels.
Individual investors are advised to identify how risk-averse they are and to choose investment styles that are a good match for their investment type profiles. Institutional investors accomplish the same thing through careful development of a well-documented, well-reasoned investment policy. An investment policy clarifies an institution’s fiscal objectives and serves as a fiduciary guide to prevent style drift or unintended changes over the long-term. However, an investment policy generated by an endowment or foundation does not necessarily translate into a good fiduciary practice for other types of institutional investors. Certain attributes of endowments and foundations make particular investment strategies viable, even preferable.
Endowments and foundations are mission-focused and have long investment timelines. Foundations are generally established for charitable purposes and begin with a discrete corpus, to which additional funds are generally not added; endowments typically fundraise continuously.
Generally, the time horizon for both foundations and endowments is perpetuity. Although they manage smaller asset bases than pension funds, the long-range perspective of endowments and foundations affords them the latitude for higher levels of investment risk and has acted as a catalyst for being early adaptors of new investment strategies and asset classes. On the fertile ground of a changing investment industry, sophisticated money managers were enabled to use advanced techniques, turning many foundations and endowments into investment powerhouses. Success breeds copycats; in the years running up to the current fiscal crisis, institutional investors looked to Yale and Harvard as models for their own investments.
Tombstones in Harvard Yard and New Haven Green
Yale was the frontrunner of a turn by endowments and foundations to go after outsize earnings by hiring the most promising money managers in the realm to run their portfolios. Yale lured David Swensen—a 31-year old whiz-kid—away from a potentially lucrative Wall Street career to manage their $1 billion portfolio of stocks and bonds. Swensen aggressively diversified the portfolio by employing arcane investment strategies like hedge funds and private equity. He sought out the best outside managers and exploited opaque segments of the market using what he termed absolute return strategies; in fact, they appeared to be just that. Harvard hired Jack Meyer, who managed to deliver Swensen-like double-digit returns for 16 years. At one time, Meyer managed 85% of Harvard’s assets in house.
Many money managers who followed the sirens’ song believe Swensen’s model is the best ever created. But a number of Swensen acolytes now question the highly diversified investment model he pioneered. More than a few chief investment officers left to start asset management firms of their own after bumping heads with conservative members of their institutions. Two primary reasons for the exodus appear to be residual discomfort with investment risk expressed by old-time investment committee members and the high salaries that investment officers were demanding—a practice not in conformity with relatively conservative academic standards for compensation. Investment professionals working on Wall Street draw considerably higher salaries than those employed by endowments and foundations. The good news for women gravitating to this arena is that unrest creates open positions.
In recent years, many more positions have opened up at non-profit and family-operated foundations. “There is a bull market for chief investment officers because of the amounts of money around,” said Rebecca Rimel, president of the Pew Charitable Trusts. “People are creating new foundations and new charitable vehicles on an almost daily basis.” And these positions offer a constellation of attractions that are gaining the attention of an increasing number of women who have earned CFAs. Endowments and foundations can grant flexible schedules and considerable control over one’s own travel schedule. Many women investment officers are drawn to the union of investing and philanthropy.
Women on Their Mark, Get Set, and Go
Women chief investment officers (CIO/CFO) of endowments and foundations, with what we’ve come to believe might be a “feminine” approach to investment management, rack up some of the highest earnings in their respective categories.
Five female CIOs, appointed to run university endowments between the years 2005 – 2008, outperformed the median annual return of 17.5%, and two women CIOs of foundations outperformed the universities’ benchmark 21.3% increase for the fiscal year that ended June 30, 2008. It is too early to know how funds managed by women will perform in, say, three to five years with a starting point of annual earnings for fiscal year 2009 having dropped to an average of -18.7%. The NACUBO-Commonfund Study of Endowments® (NCSE) released in February reported that “the top decile performers in this exceptional year achieved their investment results by following highly unorthodox strategies that are unlikely to be repeatable, much less prove successful over the longer term.” With 11 percent of their assets now in cash and nearly one-third in fixed income, these top performers, who previously championed high-risk investments, were manifestly conditioned to change their strategies.
A good role model in the foundation and endowment investment space is Sandra A. Urie, CEO and President of Cambridge Associates, a provider of independent investment advice and research to institutional investors and private clients worldwide. The firm serves over 825 clients who are, exclusively, the owners of assets. Under Urie, the firm’s client retention rate has averaged 95%, and the total collective assets of Cambridge Associates’ clients now exceed $2.1 trillion. The firm’s proprietary databases track thousands of managers and funds across traditional and alternative asset classes. Its U.S. Private Equity Index and U.S. Venture Capital Index are widely considered to be industry-standard benchmarks statistics for these asset classes.
Several women CIOs are very knowledgeable in alternative investments. Jane Mendillo, Harvard’s CIO, plans to reduce her endowments allocation to private equity, down from where it stood at 13%, and “bring more of the assets in-house to ensure greater liquidity and transparency.” As reported in the November issue of Institutional Investor magazine, Kristin Gilbertson, CIO for University of Pennsylvania, “moved slowly into alternative assets, largely because she thought they were overvalued, keeping extra cash on hand to protect against a downturn.” Endowments managed similarly to Penn’s have been positioned by their CIOs to use the cash crunch problems of other investors to advantage, and this at a time when money can be placed in private and public markets at attractive valuations.
When the Network is Deep and Broad
All institutional investors believe that they have unique investment needs but, categorically, endowments and foundations are the most likely to avow that their mission-based investment needs require special consideration by their fiduciaries.
In a recent survey by Pyramis, chief investment officers, treasurers, and executive directors at 109 of the largest U.S. endowments and foundations agreed that a major need was for “effective communication and coordination between the asset managers of each E&F and the operations at the organization of the endowment or foundation funds.” When endowments and foundations find a good-fit consultant, where communication and coordination work to support their mission in palpable ways, they are likely to stick and likely to refer. They tend to flock to two major consulting firms that have non-profit specialization: Cambridge Associates and Commonfund.
In Cambridge Associates’ most recent client survey, 90% of their clients said they would recommend the firm to others. Apparently these clients do actively refer. Cambridge Associates is the leading investment consultant for endowments and foundations, with clients’ assets representing more than 70% of higher education endowment assets and 40% of foundation assets in the U.S. Similarly, Commonfund currently manages funds for about 1,580 nonprofit educational institutions, foundations, healthcare, and other nonprofit institutions.
This tribal orientation of non-profit organizations is good news for women.
As in any business where our wealth or our health is involved, relationships take on heightened significance. Once investors might have settled for a landscape view of accessible networks; now they feel no compunction about taking a microscopic view for the deepest due diligence possible. Where networks were once measured by who knew whom, now the guiding principle is how well you know those you know. Research indicates that women managers are more likely than men to consider the ethical consequences of their acts and to make collaborative decisions. Men are more likely to make decisions on their own and have others carry out those decisions.
More of Cambridge’s clients are migrating from a traditional consulting format – with an investment committee, internal investment staff, and a consultant working together – to a comprehensive oversight model.
These clients are looking for day-to-day oversight and as an investment analyst at a large US endowment said, “In an environment like the industry has experienced this past year and a half, it can be appealing to have a significant decision maker.” All the better if that significant decision maker is a woman who is a skilled and willing collaborator, who does not overestimate her investment management skills at peril to her clients, and who tended to lean to the risk-averse side even before the 2009 fiscal crisis.