By Charles Skorina
All professional investors want to make money. The question is, how and for whom?
In the for-profit world of Wall Street asset managers and retail mutual funds, the differences among managers reflect investor appetites, time horizons and risk tolerances. They must all serve their customers, or the customers will walk. But they are also profit-seekers, motivated by bonuses and the bottom line.
Most chief investment officers start their careers as traders, analysts, or consultants; working with spreads and price dislocations, capital structures and cash flows, or advising on asset allocations and manager selection. Ex-traders like Sam Gallo, CIO at the University System of Maryland, are particularly valuable now, because they know how to move large books quickly and cut transaction costs, topics of keen interest these days.
Eventually, some find their way into the family office and non-profit world of multigenerational, multi-asset investing, researching opportunities and managers in public and illiquid markets.
The best hedge-fund investors and Wall Street analysts don’t always turn out to be good fits as institutional or family-office CIOs. Their competitive edge came from being high-conviction market participants and relentless fact-checkers. They care more about getting the right answer and the right trade than being well-liked team-players.
Dedicated family office CIOs–between 800 and 1,500 in the US–invest in anything and everything; in stocks, bonds, loans, cold storage, tankers, and toll roads. But tax implications become a priority; and family preferences–rational or not–drive the portfolio.
CIOs work at the pleasure of a complex and opaque authority whose circumstances, mood, location, and needs are subject to change at any time. In the family office world, one often has no idea how much liquidity is required as family purchases can be large, lumpy and unpredictable.
Both Alice Ruth and Jason Perlioni jumped to endowment CIO positions this year after long stints at family offices; Ms. Ruth moving to Dartmouth after nine years at Willett Advisors (Michael Bloomberg) and Mr. Perlioni moving to Johns Hopkins after ten years at the Pritzker Group.
Working for a family office can be an attractive and rewarding experience, but all family office CIOs understand Leo Tolstoy’s famous line from Anna Karenina, “All happy families are alike; each unhappy family is unhappy in its own way.”
Managing assets for tax-exempt institutions differs from all the above.
Some institutions prioritize wealth creation while others prioritize transparency, political accountability, and risk minimization. Endowments, foundations, hospitals, cultural institutions, corporate and public pension funds can fall into either group.
In each case, however, the CIO job is what one makes of it; some are delegators, some are micro-managers, and some are just liaisons between a consultant and an investment committee.
Corporate and hospital chief investment officers structure their portfolios primarily to manage risk. Corporate CIOs are liability driven and have a financial mindset. They think in terms of payouts, terminal value, and matching durations. They care less about outperforming peers because absolute return is seldom their top priority or that of their boards. Bill Hammond, the CIO at AT&T and Jason Klein, CIO at Sloan-Kettering NYC, understand the mission of the institution; their job is to minimize liabilities and forestall surprises.
The “endowment model” of fund management prescribes a highly diversified portfolio of investments across public and private markets. Most endowment and foundation CIOs strive to earn the best possible risk-adjusted returns and grow the corpus over decades.
The classic endowment and foundation CIO is an asset allocator and manager. They’ve all read read David Swensen’s seminal book, “Pioneering Portfolio Management,” have an equity bias, and believe in the illiquidity premium. They understand that success means doing things that may look risky or foolish in the short-run.
But, how does one explain “different thinking” to the board and constituents? Or the media? Particularly when the payoff may be years down the road, when the board will be wearing different faces.
Most boards and trustees are there because they love the institution and its mission, but the reputational risks of sitting on a board can often outweigh the rewards. Members seldom get the credit they deserve for good performance, but always take the heat for any blowup. As a consequence, they seek consensus and institutional support.
John Maynard Keynes had investors in mind when he wrote that “it is better for reputation to fail conventionally than to succeed unconventionally”, but his observation succinctly describes the systemic dilemma facing board members.
Effective CIOs are consensus builders who understand that tone and trust matter. The best ones take complex investment ideas, simplify them, and build trustee buy-in. A CIO who confuses or alienates key trustees will fail to get even the most brilliant trades into her portfolio.
A great chief investment officer is much more than a good manager and savvy investor, although those are rare enough. He or she must be a good politician and know how to get the votes.
Charles Skorina works with leaders of endowments, foundations, and institutional asset managers to recruit Board Members, Executives Officers, Chief Investment Officers and Fund Managers. Mr. Skorina also publishes The Skorina Letter, a widely read professional publication providing news, research and analysis on institutional asset managers and tax-exempt funds. Prior to founding CASCo, Mr. Skorina worked for JP MorganChase in New York City and Chicago and for Ernst & Young in Washington, D.C.