Michigan State University Hires its First Chief Investment Officer

Michigan State University Hires its First Chief Investment Officer
By Charles Skorina
Michigan State University announced the appointment of Philip Zecher as Chief Investment Officer on Friday, December 18th, 2015.
Philip Zecher has just been appointed MSU’s first-ever chief investment officer, reporting directly to Dr. Lou Anna K. Simon, MSU’s president. The trustees announced the appointment on Friday and Phil called me up to give me the official word.
Phil is a low-profile guy with an impressive background, but he’s now moving up into a more prominent position: running $2.3 billion of the school’s $2.7 billion endowment. ($400 million resides in the MSU Foundation and will continue to be run by that board.)
So, this letter may help to introduce him to the foundation and endowment community and to the asset managers who will be doing business with him.
A conversation with Philip Zecher:
Skorina: So, Phil, big congratulations on your appointment.  I suspected something like this might be brewing, but apparently all the stars finally lined up.
Zecher: Thanks, Charles.  As you’ve pointed out, most endowments over $1 billion have a professionally-staffed investment office, even more so when you get above $2 billion.  So, it was pretty likely they were going to pull the trigger on that sooner or later.  I’m really honored that they picked me; but it’s also a big challenge and responsibility.
Skorina: We helped recruit Nebraska’s first head of investments, Brian Neale, and Maryland’s current chief investment officer, Sam Gallo; so that left just MSU and Rutgers in the Big Ten without a CIO, or at least a director of investments.  I believe Rutgers just opened a search for their first investment head, and now your appointment rounds out the whole conference.
But, you’ve actually been working with the endowment for quite a while on a volunteer basis, haven’t you?
Zecher: Yes. I served for four years on a subcommittee that advised the trustees on investment strategy, along with some very good colleagues.  So, I’ve become kind of a known quantity around here.
Skorina: You’re an alumnus and also a professor, aren’t you?
Zecher: Yes and no.  I earned my doctorate from MSU, but I’m not a career professor.  I had an appointment last year as “executive-in-residence” and taught a finance course in the business school.  That is very interesting, getting face-to-face with students and having a chance to talk to them about how investing works in the real world.  I hope they got as much out of it as I did.
Skorina: Your PhD is in nuclear physics and you wrote a bunch of papers in that field, so shouldn’t you be counting quarks or something instead of running an endowment?
Zecher: Well, things change.  I loved science and math and still do.  But when I got my doctorate in 1996 it was the peak for hiring quants on Wall Street.  The models they were using were new, complex, and very challenging.  Compared to being an assistant professor of physics somewhere, it was an exciting place to be.
Skorina: Also, it didn’t pay too badly.
Zecher: [Laughs]. Yes, that too.
Skorina: You specialized in risk analysis and had your own company for a while, didn’t you?
Zecher: Yes.  I co-founded a firm called Investor Analytics, which I sold in 2006.  Then, I joined a hedge-fund manager called EQA Partners as a partner and chief risk officer and worked there until 2012.
Skorina: So, more excitement than academia; but a lot less tenure.
Zecher: Definitely much less.  Recently I’ve been consulting with other funds and developing textbook materials for risk models and portfolio analytics.  I’ve also gravitated back to campus.  In addition to working with the endowment I’ve sat on the board of the MSU Foundation which is involved in science and technology issues, technology transfer and so forth; where science, academics and finance kind of come together.
Skorina: MSU’s investment performance over ten years has been around the median for over-$1 billion endowments.  That’s pretty decent, but not outstanding.  Do they expect you to do better?
Zecher: Well, that’s always the plan, isn’t it?  But you know better than most, Charles, how hard it is to for an institution to get consistently above-average returns.  It takes time to build a team and a strategy, and there are a lot of people involved besides the CIO.  But if I didn’t think I could contribute something I wouldn’t have taken the job.
Alternatives are increasingly important to institutional investors and I’ve been there.  It’s risk-adjusted returns which really count; and risk-management is something I’ve been studying and applying for twenty years.
Skorina: I think they made a good choice, Phil.  Full disclosure: I spent part of my undergraduate years at MSU and my grandmother taught piano in the music department there for decades.  So I’m glad to see their money being handled by someone as well qualified as you are.
Before we go, I just have one question.  You’re a math guy.  So how come there are fourteen schools in the Big Ten?  How does that work, anyway?  When they kept adding schools shouldn’t they have made it the Even Bigger Fourteen, or something?
Zecher: Charles, there are some mysteries that even science shouldn’t pry into.
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  1. Brad Case
    August 15, 2016 at 3:33 pm

    Just a question, Charles: you say that “Yale, incidentally, has been cleaning Harvard’s clock in private equity for years,” but how do you know that? I’ve looked at Yale’s endowment reports, and they report only the 10-year IRR and the 20-year IRR. Long-horizon IRRs are famously susceptible to manipulation by “realizing” a strong positive gain very early in the investment horizon, since the IRR implicitly assumes that such an early gain will be sustained over the remainder of the investment period no matter how long it is.
    Phalippou [2009] noted that “IRR is probably the worst performance metric one may use in an investment context. It exaggerates the variation across funds, exaggerates the performance of the best funds, can be readily inflated and provides perverse incentives to fund managers.”
    In a different paper Phalippou [2013] pointed out that “an investor with a long and ‘average’ track record in venture capital computing its return (using since-inception IRR) would display a 30% return over a long horizon and…this number would hardly change in any year from 2000 to 2010, which is similar to what is shown in the annual reports of Yale Endowment.”
    In short, I have seen no actual empirical evidence that David Swenson’s approach has been as successful as you (and many others) have asserted and/or assumed. On the other hand, I’ve seen a collection of carefully done empirical analyses of actual investments in illiquid alternatives (buyouts, venture capital, private real estate) that collectively suggest that institutional investors have done WORSE with them than they would have with equivalent investments in public equities, considering the costs and risks associated with their illiquidity.
    I’m afraid that an analysis such as yours–recommending, in effect, that the candidates for an extremely high-paying job should be selected from among those people who have made the most effective use of the performance-obfuscating opportunities presented by IRR–will help to perpetuate the tyranny of high fees, mediocre returns, and illiquidity risks from which Harvard has already suffered.
    With a private equity investment manager as Chairman, of course HMC will choose a new CIO who will keep the fees flowing to other private equity investment managers. (My own alma mater, Williams College, has done the same thing and has refused to acknowledge its own poor results relative to equivalent public investments.) But a collection of private equity managers using HMC to maintain the flow of management fees won’t actually help the students who should be getting scholarships. And that’s a shame.

  2. Nancy Morris
    August 15, 2016 at 11:39 pm

    A great deal of responsibility for the University’s financial mess should be laid at the feet of the silver-tongued University Treasurer Paul J. Finnegan ’75, a member of the Harvard Corporation and of the search committee that picked Blyth, and chair of both HMC’s board and the Corporation’s finance committee, who said at the time of Blyth’s appointment that the search committee “had a very strong pool, and Stephen rose to the top.” Setting aside the issue of what floats to the top of some pools, how Finnegan avoids seeing the current mess as not requiring his own prompt resignation is frankly beyond my understanding. What does he think his job really involves if this doesn’t constitute a career-ending screw-up? Book-keeping? Indeed, almost the entire current Corporation is quite clearly in way over their heads and should leave soon, long before their terms expire.

  3. Mary Ann Cotton
    August 16, 2016 at 8:58 pm

    @ Brad Case

    The Wall Street Journal reported on April 7 of this year:

    “Yale University provided an unprecedented glimpse into how investments in startups such as Airbnb Inc. and Uber Technologies Inc. have shaped its endowment’s venture capital portfolio, which earned 92.7% per annum over the past 20 years.

    “The Ivy League school’s endowment, with $25.57 billion in assets, recently split its private equity holdings into venture capital and leveraged buyouts. The move allowed returns to be captured separately in its latest public annual endowment report for the first time since at least 2001.

    “Yale’s venture capital portfolio earned an annualized return of 18% for the 10 years ended June 30, outpacing the pool tracked by Cambridge Associates by 6.5% a year, according to the report. Leveraged buyouts generated an annualized 13.4% return over the decade, also outperforming the pool of such managers tracked by Cambridge.”

    FORTUNE magazine carried a similar report the following day.

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