Investing approaches for endowments

Rick Grand-Jean, left, and Sarah Stein
Rick Grand-Jean, left, and Sarah Stein

It is a challenging time to be an investment fiduciary for a charitable organization.

Investment committees today must evaluate investment objectives, asset allocations, staffing and structure against a backdrop of extreme market volatility, a wide array of investment choices and increasingly complex and time-consuming due diligence requirements.

As a result, investment committees are taking a fresh look at what investment decision-making mechanism will best serve their organizations.

Should an endowment appoint a chief investment officer or hire a consultant?

The primary role of a consultant is to provide thoughtful data and analysis to decision makers so that they can make more informed choices.

The primary role of a chief investment officer is to make investment decisions and then be held accountable for those decisions by the board.

According to the 2008 NACUBO study, 79 percent of the largest endowment pools (those valued at $1 billion or more) have a CIO and additional investment staff, whereas fewer than 11 percent of pools that are between $100 million and $500 million have in-house CIOs.

It is difficult to generate superior investment returns without a deep either in-house or outsourced investment team.

Many charitable pools are evaluating whether they would be better served by having a CIO (in-house or outsourced) or a consultant rather than an in-house team.

It is neither realistic nor practical for trustees, who typically have “day jobs,” to serve as CIOs making individual manager decisions.  Tactical portfolio decisions are not well suited to the typical quarterly schedule of investment committees.

Therefore, when investment committees want to have a direct impact on the day-to-day management of investment portfolios, a consulting model will be a better fit.  In the past four years, it is estimated that fully-outsourced assets have more than doubled.

What are the key characteristics to look for in an outsourced CIO?

  • Experience and judgment – The outsourced CIO should have a proven track record and a well-resourced investment team.
  • Accountability – CIOs should be willing to own investment results and act as CIOs, rather than act as data-providers. The CIO ultimately is accountable to the investment committee.
  • Transparency and partnership – The outsourced CIO should have open and ongoing communication with the Board as well as transparency into the advisor’s research and investment decision-making process. Clear reporting of manager performance, investment results, liquidity and other risk measures is essential.
  • Global scale and access – An outsourced CIO should have a deep history of global, multi-asset class investing with a proven ability to source top-tier managers.
  • Investment dialogue – The outsourced CIO and its research platform should be able to provide a robust investment dialogue that gives context to the portfolio – ranging from liquidity analysis to a particular investing segment or topic.
  • Customization – As assets grow, it is often preferable to have a CIO who also has the capabilities to build customized investment portfolios.
  • Advocacy – The outsourced CIO should be working to get access to top-tier managers, negotiating fees, determining responses to amendments, etc.
  • Risk management – The CIO should have deep experience in evaluating risk-management systems and in assessing the procedures in place at the investment managers utilized by the institution.
  • Due diligence and heavy lifting – An advisor should always be willing to do a complete and thorough job of investment diligence prior to investing capital.
  • Conflict-free – The outsourced CIO should have a clear fee structure and a conflict-free business.

How much discretion should be given to an outsourced CIO?

There is not a simple answer that will work for all investment committees.

A key piece of the solution is for the investment committee and the CIO to have clarity about roles and expectations.

Investment committees that prefer to give CIOs or investment advisors very limited discretion probably will be more comfortable with a consulting model, whereas committees that are comfortable allowing a CIO to have some discretion may be better served by full or partial outsourcing.

Allowing a CIO to have some discretion does not undermine the key fiduciary role of board members, rather it allows them to focus on the long-term issues facing the endowment rather than getting mired in the details of manager-by-manager decisions.
Investment committees in many cases find their ability to maintain a long-term, strategic orientation and to “dig deep” into the key questions of endowment investment policy enhanced by thoughtful delegation of “real time” decision making.

An outsourced CIO can also leverage the expertise of investment committee members. For example, the CIO might organize a “credit subcommittee” to leverage the insights and perspectives of those committee members that have experience and insights in that area.

Each charitable investment pool is unique; however, at the core of all investment committees’ task is how to manage the assets of an endowment to generate the best possible returns and fulfill the fiduciary duties assumed by the committee.

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Rick Grand-Jean and Sarah Stein are Managing Directors at Hall Capital Partners, an investment manager providing services for endowments, foundations and high-net-worth individuals. Hall Capital Partners is based in San Francisco.

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