(March 19, 2012) — Corporate and public pension chief investment officers are seeking positions within the nonprofit sector for greater perceived opportunities and less investing constraints, sources say.
The reasons for their departure are largely attributable to the opportunity of managing a more diverse portfolio within the endowment and foundation world. “If you look at pure performance over the long-term, endowments have outperformed public and corporate plans. They have less of a need for immediate liquidity, so they can be more flexible,” said Pete Keliuotis, managing director of San Francisco-based consulting firm Strategic Investment Solutions.
“I’ve talked with so many CIOs, and this trend has become more obvious,” said Heather Myers, managing director, non-profits, at Russell Investments. Myers noted that as defined benefit plans continue to be shut down and public plan CIOs are limited with intense political pressure and cut in greater numbers, investors may see “more opportunity to spread their wings in the endowment and foundation space”. Myers added that many corporate CIOs have increasingly felt restricted with the increased use of liability driven investing dominating their portfolios.
Within the public pension space, compensation is a big factor explaining the exodus of investing talent. “It is becoming more difficult for the public sector to compete for talent as the demand for investment professionals with multi-asset class experience continues to grow,” Lee Partridge, San Diego County Employees Retirement Association’s (SDCERA) outsourced portfolio strategist and CIO at Salient Partners, told aiCIO last year. From the departure of Massachusetts Pension Reserves Investment Management Board’s (MassPRIM) Michael Travaglini to the more recent departure of San Diego County Employees Retirement Association’s (SDCERA) Lisa Needle, examples of investment heads leaving the public pension arena for the more profitable private sector are numerous.
Examples of the transition from the corporate / public pension space into the endowment world are evident from Peter Gilbert, who oversaw investments and policy for the Pennsylvania State Employees’ Retirement System for 14 years was named chief investment officer for Lehigh University’s Endowment Fund in 2007.
In June 2009, the University of Chicago named Boeing’s CIO Mark Schmid as its new chief investment officer.
In 2006, Kimberly Gayle Walker was named chief investment officer at Washington University in St. Louis, coming to the university from her position as president and chief investment officer of Qwest Asset Management Company, where she oversaw $14 billion in retirement and other assets.
“In terms of creativity and innovation at endowment versus corporate pensions, I think liability-driven investment solutions is a trend that makes it less interesting for a CIO to manage a plan,” said one public pension CIO who refused to be identified. “Liabilities hedging is no fun (or at least less fun than building a portfolio of alternative investments). In the public space, funding ratios are also a huge hurdle to overcome. Low funding ratios make liquidity constraints more acute and therefore limit the type of investments and/or the size of the allocation to illiquid investments, which in turns potentially lowers expected returns, and thus the attractiveness of the job.”
Meanwhile, according to Myers at Russell, the nonprofit world of endowments and foundations remains a relatively cloistered one. “It has become more challenging to become a non-profit CIO without prior non-profit investment management experience,” therefore making it more difficult to transition from the public and corporate spaces.
Industry sources note that more interesting challenges and freedom to implement a wider variety of investments with less constraints, more creative boards (on average), and better compensation make endowment and foundations the target of choice for CIOs, and as public and corporate pensions continue to face dysfunctional boards, growing liabilities and thus a constraint on the types of assets CIOs can pursue — sources do not foresee this trend of slowing down.