To Boutique, or Not to Boutique?

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“We were pitching a client in Florida W early on in our firm's life,” Mark Yusko, Chief Executive and Investment Officer of boutique firm Morgan Creek Capital Management—which specializes in endowment investment management outsourcing—told me recently. “It came down to us and a bulge bracket firm that did investment outsourcing for individuals. They sent their CIO down to give the final presentation. I went down and, since we knew the group well, they called us up beforehand and asked what type of questions they should be asking. Our response: ‘Ask one question. Ask if you'll see the bank's CIO again.’ When they asked, he was honest. He said ‘No.’ Their account wasn't big enough.”

Herein lies just one of the conundrums in the outsourcing of endowment assets. Is it better to be client #2 at a boutique or client #102 at a larger firm? Following from this: Are the resources of that large firm enough to compensate for less contact with the CIO? Are the often-customized products of a Goldman Sachs necessarily a better fit then the pooled vehicle favored by boutiques (of which, besides Yusko's Morgan Creek, there are many, including former Stanford endowment chief Eric Upin's Makena Capital, Alice Handy's Investure, and Hilda Ochoa's Strategic Investment Group)? Also, are the apparent conflicts of a bulge-bracket firm simply too difficult for a fiduciary to ignore?

One can imagine being in that Florida board room with Yusko and the unnamed CIO: subtle digs at their opponent's weaknesses while glossing over their own, a back-and-forth rehearsed many a time before in other investment committee meetings across the country. If we were, in fact, in the room, the following arguments likely would be voiced:

Relationship Management 

To the supporters of the boutique model— generally (but with some variance), a pooled investment vehicle that constructs an endowment model portfolio via external manager selection—Yusko's Floridian experience speaks volumes. Being passed off to some junior associate at a bank that oversees hundreds of millions of your capital is not an experience many want to stomach, and the basic mathematics of having more clients makes it so that this is more likely at bulge-bracket and big-name firms, the argument goes.

Not so clear-cut, the bigger players claim. “Each of our consultants maintains a small number of client relationships,” says Heather Myers, Director of Endowment & Foundation Strategy at Russell Investments. “We very carefully manage the number of relationships per client, depending on the type of relationship.” Myers also notes that the issue can flip the other way—that clients are by definition outsourcing, and thus may not want constant interaction with the vendor. “Investment committees need to think about how much time they really have to engage: Do they have time or staff to handle [investments] internally or would they rather retain fiduciary oversight, but find a partner to manage the portfolio on a day-to-day basis?” They're outsourcing for a reason, after all.

Customization vs. Pooled Vehicles 

Vendors talk about “solutions.” They have for years; they will for years. Few conversations make this more apparent than talk about the customization versus pooled debate—and, because of the opaqueness of the vendor verbiage, it is often difficult to discern what is marketing and what is meaningful.

However, focusing on what an endowment needs, and not what it is being sold, can help clarify the issue—and, not coinci-dentally, makes it clear that this debate is not the either/or that it is often made out to be. While bulge-bracket firms often can and do customize, boutique manager Upin notes, “Smaller firms customize and also often pool—just like a single university endowment would within its own institution.” (As those in this niche world will understand all too well, a single university investment management team can be constrained by stipulations from hundreds, even thousands, of smaller donation pools that, together, make up the total endowment, making a mockery of the idea that a university's capital pool is a homogenous entity).

The bulge-bracket firms that Upin speaks of tend to agree. While Chris Kojima, the man who co-leads Goldman Sachs Asset Management's endowment outsourcing and manager selection team, believes that “not all funds are alike, or have the same needs, and so one pooled vehicle doesn't always make sense,” he also agrees with Upin's assertion that the customization versus pooled debate “depends on the desires of the client.”

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