Punching above their weight: The Skorina Top 20 Midsize Endowments

Stalking the DOI: Some observations from the field

In our top 20 lists we've sometimes identified a director of investments in lieu of a chief investment officer.

That title (or some near-equivalent) doesn't always convey the substance of the job. Some DOIs are essentially CIOs, with all the usual credentials and perquisites, but without the formal title. In other cases, the DOI function is more administrative than managerial, with an emphasis on coordinating and liaising between the various parts of the investment management machinery. Still others fall somewhere between those poles.

We've concluded that these organization-specific nuances, while interesting, are less important than the fact that some individual has been specifically tasked with minding the endowment store on a full-time, in-house basis. These tasks can be, and often are, parceled out on a catch-as-catch-can basis among the staff of the Treasurer or VP-Finance, but we think this is usually less effective.

No matter how brilliant the investment committee members may be, they assemble and deliberate as a body only a few times a year. Most have day jobs that take priority. Consultants are fine but, at the end of the day, they are hired guns and serve multiple clients. To see that the investment plan is actually being executed, it's highly desirable to have someone in-house focusing on it full time, even if it's a humble DOI who may not have all the credentials (or compensation) of a full-bore CIO.

Of course, every organization has its own specific needs and its own unique cast of characters, and must use the governance set-up with which it's comfortable.

I had a chat with a real, live DOI recently, and he put these points better than I could

Ryan Tidwell at Oklahoma State University Foundation. Mr. Tidwell is a young man with a BBA in finance (summa cum laude) from Baylor University and a CAIA credential. He was working at the University of Alaska Foundation in 2011 when he applied for a new DOI job at OSU in Stillwater. The OSU Foundation invests about $450 million in endowment funds.

Skorina: Ryan, why did the OSU Foundation decide to create a DOI slot and put you in it?

Tidwell: OSU was consultant-driven (using a regional consultant) until 2012. Up till 2008 it worked pretty well. But after the crunch the board realized that there was a lot they didn't understand about what was going on. We also had some concentrated positions in funds associated with a major donor, which hit some strong headwinds in that period. And they realized that some of our largest external managers were not even aware that OSU was the investor. Their relationship was strictly with the consultant.

Skorina: So, when did they decide they needed you?

Tidwell: Well, they decided in 2010 they needed somebody full-time. They got 80 resumes, but when they started talking to people they realized that a lot of them weren't even clear about where Oklahoma is, let alone Stillwater. They literally didn't know. I was working as an analyst at the University of Alaska Foundation when I sent in my resume. But I had gone to Baylor University in Waco, Texas, so I had a pretty good idea where Oklahoma was, and my wife graduated from OSU, so even better.

Skorina: Home-field advantage. Amazing how often it works.

Tidwell: Yep. I was hired in March of 2011 and spent the next nine months learning about our investments and managers and bringing the board of trustees fully up to speed on what we owned.

Skorina: You've been there two years now. Is the DOI set-up working the way they expected?

Tidwell: Yes, I believe so. Outside of the formal quarterly board meeting, consultants just don't have the time to spend with board members on nights or weekends. With me in-house, they can take as much time as they need to get up to speed on investment matters. Part of my job is to be available whenever and wherever they need me. The board now gets much more attention with me on staff and they like that.

Skorina: Everybody likes attention.

Tidwell: Yes, they do. But don't get me wrong. Our trustees are very capable, savvy people. We're lucky to have them. It's a matter of time. None of them can spend all day, every day minding the store. That's my job.

Skorina: So, you and the board are still happy with each other?

Tidwell: So far, I think everyone is pleased with our arrangement.

Top 20 Methodology

To get bullet-proof top 20 lists we would have had to rank all 73 of the midsize endowments listed by NCSE, then skim off the 20 high-performers for three and five years.

Our SSME dataset includes performance figures on a subset of the NCSE: 60 of them, or about 82%. 

For each of them we started with either "hard" (official, publicly disclosed) or "soft" (estimated by us) returns for the five fiscal years 2008-2012.

Those estimated returns are approximations, but good enough for our purposes. After cutting the bottom half of the list, we scrutinized the remaining high-performers for which we had only estimates, and cajoled official people into giving us official numbers to confirm or adjust our estimated returns.

The difference between the NCSE and SSME sets — 73 vs. 60 — consists of three Canadians, which we omitted; and 10 others for which we had neither official returns nor plausible estimates. They are mostly public colleges that issue only consolidated GASB financial statements and do not park all or most of their endowment in a legally separate foundation.

It's possible that some among those 10 did very well. If we have omitted any such, then we regret it, and can only respectfully suggest that they should have told the world about their performance if they wanted it to be celebrated.

The power of FSP 117-1

It's not a dietary supplement. It's an accounting rule. The FASB, bless them, unleashed it in 2008. If you're someone who needs to know why they did that, then you probably already do.

Among other things, it requires certain additional disclosures in FASB-audited financial statements that permit us to roughly estimate return on investment for endowment funds. Most private colleges started making those disclosures in 2009, but in many cases they did it retroactively to 2008. The latest version of the IRS Form 990, in its Schedule D, requires a very similar reconciliation of endowment funds from 2009 onward. These are based, ultimately, on the same accounting numbers.

Public colleges, whose financials are audited per GASB standards, can choose to opt out of recent FASB rules, including FSP 117-1, and, apparently they all do. That's why those public college financial statements are unhelpful to us, as we explained above.

So, as of fiscal year 2012 we have, for the first time, five-year data on a uniform basis with which we can estimate many five-year (and three-year) annualized endowment returns even if officially calculated returns aren't readily available. While these yield only approximations of the "real" returns, they are good enough to tell us pretty definitely whether they are high, low, or medium performers compared to their peers, especially when annualized over several years.

Any estimates based only on annual dollar amounts will necessarily diverge from official rates of return. Internally, institutions keep their books on a monthly basis, and their consultants hand them attribution analyses with month-by-month returns. Annualizing those 12 monthly numbers gives a more theoretically correct time-weighted rate of return than a single-period yield. But, since we know the error range, this blunt instrument is still useful, as long as we handle it carefully.

We used the so-called Midpoint Dietz algorithm (AKA "simple Dietz," "original Dietz," etc.) to compute annual returns from financial data. It does nothing to help with time-weighting, but it does partly correct for so-called "external flows" and gets a little closer to a GIPS-style return.

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About the Author
Charles Skorina

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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