(March 19, 2012) — Transitioning to the endowment world comes with more informed boards and quicker decisionmaking, says Peter Gilbert, the chief investment officer of Lehigh University’s endowment and the former CIO of the Pennsylvania State Employees’ Retirement System (PennSERS).
“It’s a very different environment compared to being at a public pension,” says Gilbert. “The investment committee at Lehigh are all Lehigh alumni, with day jobs in the investing world, so they’re doing this because they really care about the university.”
He adds: “That wasn’t true on the state board — they were bright people who learned quickly, but they didn’t have industry background, so it took longer to get things accomplished.”
In other words, while it may have taken Gilbert two years to convince the state to implement a specific investment strategy or allocation, Gilbert can do so at Lehigh’s just over $1 billion fund in a matter of months.
Gilbert came to Lehigh in August 2007 as an outlier in the public pension fund space. As a big fan of David Swensen’s endowment model, he built PennSERS to have the largest hedge fund allocation at any state pension fund — with a total portfolio allocation of 30%. Moving to Lehigh, he was charged with starting and growing the university’s first-ever investment office. “Little did I know what I was in for when the market collapsed,” he says.
Despite coming on board during one of the most rocky financial times in history, Gilbert has slashed the endowment’s public long-only equity allocation from 60% to 20% while lowering fixed-income from 25% to 10% following the crisis and increasing the fund’s alternatives allocation. While the fund declined from over $1 billion to below $900 million during the depths of the crisis, it has since regained money lost, partly by devoting a much larger than average allocation to emerging markets — a total of 19%-20%.
Furthermore, Gilbert says Lehigh’s endowment has obtained a more diversified portfolio by maintaining relationships with a wide spectrum of fund managers. “I think there’s one view that it’s better to go with few managers and to know them well, but no matter how well you know managers, business risk is a big threat,” Gilbert says. “Overall, we have about 80 managers but with a larger number in the hedge fund and private equity areas where I think there’s higher risk in terms of potential performance, volatility, and business risk.”
Gilbert says he earned his status as an innovative and sophisticated investor at PennSERS when it became one of the first public pensions to start investing in private equity, real estate, and commodities under his leadership. In 1999, he made the pension’s first investment in hedge funds. Compare that with New York City’s roughly $23 billion Police Pension Fund, which, in an attempt to further diversify its assets, approved its first hedge fund investment in March 2011. That same month, the State of Wisconsin Investment Board made its first-ever allocation to hedge funds.
Gilbert says he realized while at PennSERS that the investing structure that big public schemes are using is not effective. “Endowments and foundations typically pay out about 5% a year, so with a higher outflow, with more money going out than coming in, they’re challenged to be more innovate with how they get returns,” Gilbert asserts.
Over the long-term, the endowment model has outperformed during all market environments, Gilbert says, noting that public pensions, still struggling in a low-return environment, would be wise to seek investing acumen from endowments and foundations.
So what’s the solution for straggling public pensions?
“The biggest and most pressing problem for public pensions in the United States is not overall performance, but the fact that state and local governments are not funding them appropriately,” Gilbert answers. “Public funds would be better off with less politics and more investing freedom,” he adds, “but that’s not the reason public pensions have been underfunded for so long.”