The Skorina Report: A Look at the New Investment Crew at NYU

SkorinaNew York University opened its doors in 1831 and it’s now the biggest private college in the country by enrollment.

But their $3.4 billion endowment is relatively small for a large private US university (it’s only the 28th-largest) and its performance hasn’t been very impressive.

We’ve paid much more attention to their uptown rival, Columbia University, whose $9.2 billion endowment is bigger, higher-performing, and officially Ivy League.  We ranked Columbia and Yale tied for number one by 10-year performance in our annual review of Ivy and Alt-Ivy endowments.

It’s nothing personal.  Greenwich Village is one of our favorite places; and any school that could give the world both Woody Allen and Alan Greenspan must be taken seriously.

Now there’s been a changing of the guard at NYU and we think some attention should be paid.

Michael Steinhardt, who had led the school’s investment committee since 1996, resigned last June.  Tina Surh, chief investment officer since 2010, announced her own resignation six months later.  NYU’s president, John Sexton, who’s had a long but stormy run, is stepping down in January.  And, long-time board chairman Martin Lipton, sometimes described as the school’s real power-broker, will be succeeded in October by insurance executive William R. Berkley.

New Yorker Magazine featured a fascinating profile by Rachel Aviv of President Sexton and his NYU career.

Ms. Surh will be succeeded by Kathleen Jacobs, recruited from the investment office of New York-Presbyterian Hospital where she was a senior staffer.  Ms. Jacobs graduated from Bucknell University with a BA in 1998, and has held prior positions at J.P. Morgan, Goldman Sachs, and the Juilliard School’s investment office.  On paper she may not be an obvious choice to head up a major endowment, but she clearly must have impressed the NYU search committee.

Mr. Sexton’s successor will be Andrew Hamilton, Vice-Chancellor (equivalent to president) of Oxford University.  And we’re still waiting to hear who the new chair of the NYU investment committee will be.

That’s a pretty clean sweep.

One of the controversies swirling around outgoing President Sexton concerned his willingness to pay top dollar (including some very nice perks) for his senior administrators and star professors, and Ms. Surh seems to have been one of the beneficiaries.

According to the latest available data, her W2 in calendar 2012 was $1,649,465, which was more than President Sexton’s not-bad $1,240,614 in the same year.  Her pay included a $474 thousand base, plus a $1.18 million “other” item which is not further explained in the tax filings.  This was her third year as CIO and we suspect most of that “other” was performance bonuses carried forward from prior periods.  But that’s just our speculation.

Ms. Jacobs was a managing director under CIO Gloria Reeg at NY Presbyterian, and we estimate that her total comp there was not more than $500 thousand.  We think she will probably get at least a 50 percent bump at NYU (including bonuses), so it’s a nice step up for her in both visibility and pay.

The new team will surely be reviewing the performance of the endowment and considering whether changes in strategy are needed.

And we’re here to help!

1996-2002: A long goodbye to bonds:

In 1973, unable to make its payroll, NYU cut staff, closed its engineering school, and sold the university’s Bronx campus to City University of New York.  In 1977 they were in fiscal trouble again.  This time they sidestepped disaster by selling the university-owned C. F. Mueller pasta company for $115 million.

In the wake of these troubles Laurence Tisch (co-founder of the Loews Corporation and later CEO of CBS Television) became chairman of the NYU board.

The finances were stabilized by the mid-80s and the school had raised enough money to start modernizing its dilapidated downtown campus.  Most of the new cash went directly into bricks and mortar; not much into the endowment.

That was not necessarily a bad choice for donors, since the school’s ultra-conservative endowment was getting ultra-mediocre returns.  While other major endowments were diversifying into equities and alternatives, NYU stuck almost exclusively with bonds.

In 1997, Wall Street Journal columnist Roger Lowenstein wrote a piece pointedly titled “How Larry Tisch and NYU Missed Epic Bull Markets”.  It noted that: “…since 1982, a period in which the average mutual-fund duffer has discovered the joy of compound growth, NYU has sacrificed hundreds of millions of dollars in lost opportunity.”

Three years later Yale’s David Swensen published his widely-read book Pioneering Portfolio Management, wherein he took a swipe at NYU’s bond-hugging strategy: “By failing to understand the relationship between the permanent nature of endowment funds and equity investments, NYU’s endowment sustained long-lasting, if not permanent damage.”

Comments like that must have stung, but by then the NYU board was already shifting gears.

When Mr. Steinhardt arrived in 1996, NYU’s general endowment pool was about $800 million, mostly in fixed-income investments.  (Separate, smaller chunks managed by the Law School and Institute of Fine Arts had more diversified strategies.)

Mr. Steinhardt had been a hedge-fund manager described by Forbes as the “world’s greatest trader.”  He and his wife have also been major donors (NYU’s Steinhardt School of Culture, Education and Human Development bears their name) which may have helped cement his tenure and influence.

He and his colleagues recruited the school’s first CIO in 1998: Maurice Maertens, who had taken early retirement as manager of the giant Ford Motor Company pension fund.

The new team had a chance to feel good in 2002.  Transition from a bond-heavy portfolio had been slow.  With 38 percent still in fixed-income, they were well insulated when the S&P 500 dropped 18 percent in the Tech Crash of that year.

They earned a positive 0.9 percent in 2002 when the average big endowment lost 3.8 percent.  (Yale lost 0.5 percent; Harvard gained 0.7.)

2002-2009: Mr. Maertens diversifies… and dodges a bullet:

By 2007 the shift to a new-look portfolio was complete.

Bond allocation had dropped from 38 percent to just 15 percent.  Equities were up to 45 percent, including a substantial commitment to equity-oriented hedge funds.  (NYU was treading lightly in private equity, however; with just 5 percent of AUM.)  The remaining 32 percent was mostly in real assets (including real estate) and hedge funds aiming at low correlation with the stock market.

Over these five years they earned an annualized 12.0 percent, but this was still behind the 13.3 percent posted by the average big endowment in that period per NCSE.

They did, however, keep a significantly lower risk profile.  Their standard deviation in 2002-2007 was 4.6 percent vs. 9.3 for the average big endowment.

Then in the 2009 crisis they had another chance to feel vindicated.  The average big endowment lost 20.5 percent that year.  Up in Morningside Heights, Columbia lost 21 percent, while Yale and Harvard lost 24.6 and 27.3, respectively.  NYU’s modest 11 percent drop was, in context, a triumph.

How did they do it?

Looking at NYU’s allocations before the crisis (FY2007) we see public equities and fixed income at 45 percent and 15 percent respectively, which was not very different from Harvard (although they may have had lower exposure to emerging markets; most investors did).

But their allocation to opportunistic and credit hedge funds (excluding plain-vanilla equity long-short) was much higher, at 34 percent (vs. only 12 percent for Harvard).  Lacking more detail we surmise that NYU’s absolute return managers actually came through in 2008-2009 and maintained most of their value as public equities tumbled.

In the fall of 2009 Mr. Maertens retired for the second time.  He’d ridden out the market crash with minimal losses, but he hadn’t avoided some collateral damage from the Bernard Madoff affair.

In her thorough book, The Wizard of Lies, on the Madoff scandal, New York Times writer Diana B. Henriques recounts how, in 2008, Mr. Maertens rebuffed a prominent hedge-fund manager named Jacob E. Merkin who was urging NYU to invest directly in a fund run by Bernard Madoff.  Mr. Merkin conceded that Madoff cleared his own trades instead of using a custody bank, but he argued that was a small matter compared to the amazingly high and consistent returns he was achieving.

“NYU would never invest with any fund that ‘self-clears’,” the CIO told Mr. Merkin.

Although he dodged that bullet, Mr. Maertens didn’t realize that NYU was already bleeding.

Mr. Merkin’s “feeder” funds were already putting his customers’ money into Madoff’s scheme.  When the fraud unraveled, NYU found they were indirectly invested with Madoff to the tune of $24 million.

NYU filed a civil suit against Mr. Merkin, which is apparently still grinding on, and Mr. Maertens spent his last few months at NYU dealing with the legal and PR fallout.

2010-2014: Ms. Surh stays the (low-risk) course:

Deputy CIO Tina Surh was appointed acting CIO when Mr. Maertens left, then was bumped up to the permanent post in July, 2010.  Her credentials were solid, including a Harvard MBA and a hitch at the Princeton endowment under Andrew Golden before she was recruited by NYU in 2005.

In the five years 2010-2014 Ms. Surh’s investment office returned an annualized 11.7 percent.  That was a decent performance, although slightly below the 12.1 percent reported by NCSE for the average big endowment for the period.

On her watch, however, NYU also delivered less risk than the average big endowment.  By our calculations their 5-year standard deviation of returns was 4.6 percent vs. 7.3 for the other big Ivys.  According to her statements in recent endowment reports, low volatility and good risk-adjusted returns were prime objectives.

NYU did not disclose a 10-year annualized return in its 2014 endowment summary, but data we’ve pieced together indicates that it was about 7.0 percent.  Extending the period all the way back to 1998 doesn’t help.  Over that 17-year period they got an annualized 6.9 percent by our calculation.  (NYU has an unusual August 31 fiscal year, so its historical returns aren’t strictly comparable to others; but we doubt it makes much difference over a 10-year span.)

So, it appears NYU is falling slightly short of our hypothetical 7.2 percent long-term hurdle rate for big endowments.  (That’s based on a 4.7 percent spending rate, plus a 2.5 percent projected inflation rate.)

NYU’s official spending policy is 5 percent of trailing 3-year AUM.  On a year-by-year basis it’s been about 4.6 percent since 2005, similar to other big endowments.  In a low-inflation world a nominal 7.0 percent might be a barely adequate long-term return.  In a higher-inflation future it may be more problematic.

How about Ms. Surh’s announced emphasis on low volatility and good risk-adjusted returns?  She got that lower standard deviation on her watch, as we saw, but was it enough to offset their modest absolute return?

Their recent reports don’t answer that question very clearly, so we’ve tried to figure it out.

NYU’s Sharpe Ratio – a measurement of risk-adjusted return – was 2.6 over the five years 2010-2014, vs. 1.7 for the average big endowment as we calculate it.  So, on Ms. Surh’s watch it appears that she did get better risk-adjusted returns than her peers, and that’s commendable.  But over the ten years 2005 – 2014 we calculate their Sharpe Ratio as 0.5 vs. 0.7 for the average big endowment tracked by NCSE.  Over that longer period NYU’s lower volatility wasn’t enough to offset their not-great absolute returns, and their risk-adjusted returns were unexceptional when compared to their peers.

Bottom line: NYU’s absolute return fell short of the top-tier private and public schools in the last decade, but Mr. Maertens and Ms. Surh put up respectable numbers consistent with the relatively conservative, lower-risk strategy charted by Mr. Steinhardt and the board

The outgoing leadership made considerable progress in raising the global prestige of NYU.  The new president, chairman, and chief investment officer may need to consider how to raise their investment game to the same level.

 

Charles A. Skorina & Co is retained by the boards of institutional investors and asset managers to recruit chief investment officers, portfolio managers, and financial professionals.

Charles Skorina earned an MBA at the University of Chicago and began his professional career at Chemical Bank (now JPMorgan Chase), completing the management training program then working as a credit and risk analyst in New York and Chicago.  After a stint with Ernst & Young in Washington, D.C., he founded his own search firm headquartered in San Francisco, focused on the global financial services industry.

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